Letter to the Chair of the Committee from
Rt Hon William Hague MP, First Secretary of State, Secretary of
State for Foreign and Commonwealth Affairs
SPENDING REVIEW 2010: FCO SETTLEMENT
Thank you for your letter of 21 October. Following
the Chancellor's statement on the CSR of 20 October, I would like
to take this opportunity to provide details of the settlement
for the FCO.
I am determined that the FCO should play its part
in helping to reduce the large budget deficit left by the last
government. The Settlement does that. It also provides a secure
basis for the FCO to lead the Government's distinctive and active
foreign policy. And it allows the FCO to maintain a strong global
network, which is key to building our prosperity and strengthening
our security, as set out in the National Security Strategy (NSS).
THE SETTLEMENT
The FCO's Settlement is a 10% real reduction in funding
for the FCO family by 2014-15. Taking account of the transfer
of BBC World Service funding to the BBC in 2014-15, our baseline
falls by 24% overall. This is the figure the Chancellor used in
his speech.
While 10% real is at the lower end of cuts across
Government, it is still a significant reduction in the FCO budget,
coming on top of the unplanned purchasing power reduction of 10%
resulting from the previous government's removal of exchange rate
protection in 2008. Higher inflation overseas than in the UK and
the rising costs of operating abroad (such as security) will increase
the impact of the Settlement on FCO's operations.
In addition, the Settlement increases the FCO family's
contribution to UK Official Development Assistance (ODA) in line
with the Government's commitment to devote 0.7% of Gross National
Income to ODA by 2013.
| £m nominal[1]
| 2011-12 | 2012-13
| 2013-14 | 2014-15[2]
|
| Resource DEL for FCO family | 1,497
| 1,461 | 1,427 | 1,165
|
| Capital DEL for FCO family | 107
| 102 | 102 | 98
|
| Of which BBCWS (capital & resource) |
253 | 242 | 238 |
0 |
| British Council (capital & resource) |
180 | 171 | 162 |
154 |
IMPLICATIONS FOR
THE FCO
This is a good settlement for the FCO in the circumstances, although
it will require a continuing drive for savings and efficiency.
Firstly, the FCO has greater budget certainty. The Settlement
restores exchange rate protection through a new Foreign Currency
Mechanism (FCM). This is a major improvement and an outcome to
which the Committee has attached great importance, as have I.
Neither the FCO budget nor British foreign policy will be again
at the mercy of foreign exchange rate markets. The new mechanism
will be less bureaucratic and more transparent than the previous
Overseas Price Movements Mechanism (OPM). Unlike the previous
OPM however, it does not cover differential inflation—the
impact on FCO's purchasing power of different overseas inflation
rates.
Like the OPM, it will be symmetrical, increasing FCO's cash allocation
if Sterling weakens below the baseline rate (October 2010), reducing
it if Sterling strengthens.
Secondly, the Settlement also separates funding for the Government's
international peacekeeping responsibilities and the financial
risks that accompany them from the FCO's baseline. The FCO will
continue to report this expenditure to Parliament.
And third, the Settlement allows the FCO to fulfil the National
Security Strategy priorities: using agile and energetic diplomacy
to protect our country's interests, building connections for Britain
in a networked world and leading foreign policy thinking across
government.
We will be able to maintain the global reach of the UK's diplomatic
network that is key to delivering Britain's security, economic
growth and prosperity. We will ensure that the network and the
FCO's global and programme expenditure are aligned with this role
and the new Foreign Policy Priorities I have set out: safeguarding
Britain's national security, building Britain's prosperity, and
supporting British nationals around the world. We will engage
early to tackle emerging threats and exploit opportunities—a
key focus of FCO's increasing contribution to UK ODA. And we will
inject a greater commercial focus into our work.
But the Settlement is also a tough one. The FCO will not need
to undertake drastic urgent restructuring. We will need
to make real choices about what we do; to continue to reduce the
overall size of our workforce; to streamline our structures and
working methods; and to pursue rigorous efficiencies and even
better value for money.
BRITISH COUNCIL
AND BBC WORLD
SERVICE
In September I emphasised to the Committee my strong commitment
to the World Service and British Council. I believe that both
organisations are fundamentally important parts of Britain's presence
in the world. Like all public bodies they must play their part
in reducing public expenditure.
The Settlement maintains the FCO's grant relationship with the
British Council and restores the Council's Grant as a share of
the FCO family's budget to historic levels. It also reflects the
Council's ability to generate significant income and make a contribution
to deficit reduction. A headline reduction of 25% real is equivalent
to the Council's own efficiency plans and around one third of
the surpluses on the Council's projected rising income.
I am asking the Council to devote a proportion of new surpluses
to activities in support of their charitable objects and the FCO's
international priorities in order to maintain their reach and
impact. I am also asking the Council to meet an ambitious ODA
target, and I expect to start a strategic dialogue with the Council
quickly to agree how best to maintain the Council's significant
global impact, and target it to greatest effect in these new circumstances.
Your letter of 21 October sought clarification of the interim
funding arrangements for the BBC World Service. From 2014-15,
the BBC will provide World Service funding from the Licence Fee,
and the amount I had allocated (£227 million for resource
and capital) will be cut from the FCO's baseline. If the BBC provide
funding to the World Service at the anticipated level in 2014-15,
the overall reduction in World Service funding will be 16% real
over four years. This includes additional funding for the World
Service's element of the BBC pensions deficit. This transfer of
funding responsibility will enhance and safeguard the World Service's
vital role, and allow the BBC as a whole to maximise efficiencies.
Until then the FCO will continue to fund the BBC World Service
in line with the settlement figures in the above table.
I have agreed with the Chairman of the BBC Trust and the Director
General of the BBC that governance arrangements for the BBC World
Service will remain as now, safeguarding World Service quality,
reach and impartiality. The BBC will continue to set the objectives,
priorities and targets for the World Service with me, and will
obtain my written approval for the opening or closure of any language
service.
I believe that the British Council and World Service will be able,
through efficiency and other measures, to absorb these cuts and
maintain their important global reach and activities.
We will work closely with both organisations to ensure that they
can.
I should be happy to discuss the Settlement and its consequences
further with you and the Committee.
27 October 2010
1
Figures exclude depreciation. Back
2
Includes a transfer of £212 million from RDEL and £15
million from Capital DEL for World Service funding from the FCO
to the BBC. Back
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