FCO Performance and Finances

Letter to the Chair from Rt Hon William Hague MP, Secretary of State for Foreign and Commonwealth Affairs

Spending Review 2010: FCO Settlement

Thank you for your letter of the 21st October. Following the Chancellor’s statement on the CSR of 20th 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]




2014-15 [1]

Resource DEL for FCO family





Capital DEL for FCO family





Of which BBCWS (capital & resource)





British Council (capital & resource)





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 (£227m 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 .

[1] Includes a transfer of £212m from RDEL and £15m from Capital DEL for World Service funding from the FCO to the BBC.