The Foreign Affairs Committee has reaffirmed its long-standing practice of carrying out an annual inquiry into the FCO's most recent Departmental Annual Report. Our present inquiry has focussed on the FCO's financial situation and the implications of the Spending Review 2010 for its work and performance, and that of its associated body, the British Council. (We will report separately on the implications for the BBC World Service.)
The FCO is one of the major departmental 'losers' in the Spending Review, certainly compared to the MOD and DFID, although the 'core FCO' function has to some degree been shielded from the full ferocity of the cuts falling on the overall 'FCO family' budget, with a greater share of the pain being borne by the other 'family' members, the British Council and the BBC World Service.
Reductions in spending on the FCO, if they result in shortfalls in skilled personnel and technical support in key countries and regions, can have a serious effect in terms of the UK's relations with foreign countries, out of all proportion to the amounts of money involved, especially in relation to the UK's security and that of its Overseas Territories. It follows that cuts to the core FCO budget of even 10% may have a damaging effect on the Department's ability to promote UK interests overseas. We note that these will come on top of previous cuts to the FCO's budget in the very recent past, and a regrettable long-term trend for the FCO to lose out relative to other departments and agencies in the allocation of government spending.
The FCO will also face cuts of 55% to its capital budget. For the next four years capital spending is likely to be focussed on security-related spending, to the neglect of other improvements to the FCO estate. The target of raising £50 million per year through selling existing buildings may be difficult to achieve, and may not secure savings in the long-term. It may create a unwelcome incentive to sell historic or prestigious buildings which have a potential long-term value to the FCO greater than any immediate monetary benefit likely to accrue from their sale.
The FCO's 'localisation' policy has brought benefits, but we do not believe that it is capable of indefinite extension. A further reduction in the opportunities for more junior UK-based staff to serve in overseas posts, and a consequent diminishing of experience and morale among FCO employees, could over time have a damaging effect on the quality of British diplomacy and the effectiveness of the FCO.
We comment on the possible implications of the creation of the European External Action Service for the FCO's global network of posts, and call on the present Government to reconfirm its predecessors' undertaking that "the establishment of the EEAS will not lead to our Embassies being replaced with Union Delegations".
We welcome the introduction of the Foreign Currency Mechanism, which will protect the FCO against the effects of fluctuations in foreign exchange rates, but are concerned that it does not make allowance for differential inflation rates.
We welcome the Government's commitment to meet the international obligation to spend 0.7% of gross national income on Overseas Development Assistance. However, there is a danger that the drive to reclassify FCO spending as ODA spending provides a cover for meeting the 0.7% target without increasing the money actually spent on ODA. We note that the removal of funding of peacekeeping operations from the FCO's baseline will reduce the overall financial risks faced by the Department.
The 25% and 16% real-terms cuts to the budgets of the British Council and BBC World Service respectively will pose severe challenges to those two organisations.
The British Council faces great strain on its budget over the next four years. It will need to maximise its commercial income without compromising over its primary purpose as a promoter of cultural exchange. We recommend that the Council should give us detailed information on its strategy for implementing a 25% cut in spending, which may well trigger fundamental rethinking of the role and work of the Council.