Equipping the Government for Brexit Contents

1Funding the FCO after Brexit

FCO budget and capacity

1.In October 2015, we published a report in which we noted that, in an increasingly unstable world, the Government relies on the Foreign and Commonwealth Office (FCO) “to have the necessary infrastructure in place so that it can make critical decisions at a moment’s notice.”1 Concerned about the potential impact of any spending cuts on an already under-funded FCO, we urged the Treasury “to protect the FCO budget for the period covered by the 2015 Spending Review, with a view to increasing rather than cutting the funds available to support the diplomatic work on which the country’s security and prosperity depend.”2 We therefore welcomed the Chancellor’s November 2015 announcement that the budget of the FCO would be protected in real terms up to 2019-2020.3

2.In our unanimously-agreed April 2016 report on the implications of the referendum on EU membership for the UK’s role in the world, however, we considered that a decision to leave the EU would require the Government to boost the FCO’s capacity significantly.4 In addition to the practical need to hire teams of skilled negotiators to manage the EU withdrawal process and pursue new international agreements, we judged that a major injection of resources into the FCO would “send a strong signal of the UK’s commitment to an outward-looking, globally engaged foreign policy, thereby helping to reassure our allies and to mitigate the reputational risk associated with EU withdrawal.” We also considered that leaving the EU and its institutions would require the FCO to reverse the recent trend of down-sizing its European network as bilateral relations with EU Member States take on a new importance in the short, medium and long term.5

3.In oral evidence to the Committee immediately after the referendum, former FCO Permanent Under-Secretary Sir Simon Fraser agreed that the decision to leave the EU would require “a major diplomatic set of initiatives” to build relationships with both traditional and new partners around the world. He said:

I agree with the view that the budget of the British diplomatic service has been reduced very dramatically in recent years. When I was permanent secretary, we cut the operating budget by 25% while expanding the diplomatic network. That means that the embassies were very thinly stretched, which obviously affected their operational capability. So I do think we have got to thicken it out. We have got to build up the capacity within our embassies. […]

I would not put a precise figure on what the figure would be for that budgetary increase. Obviously, you need to spend the money as you can spend it. You have got to get the right people with the right training into the jobs. You can’t just do it overnight. But a very considerable uplift in the Foreign Office budget would be appropriate.6

Sir Christopher Meyer, former Ambassador to the USA, agreed with Sir Simon and said he would “welcome” a serious increase in FCO resources.7 Sir Simon cautioned, however, that it was important to be “realistic” about the potential future level of Government spending, since he believed the economy was likely to be weakened in the short-term by the decision to leave the EU.8

The Foreign Secretary’s view

4.We put these arguments to the Rt Hon Philip Hammond MP, the then Foreign Secretary, on 7 July. He said that the UK will now “have to pedal a bit faster in order to make sure that our voice is heard and that our influence still counts in the world.”9 He agreed with us that the FCO will now need to re-examine its allocation of resources with respect to the European Union and its Member States, but implied that this would be financed using efficiencies identified in preparation for the 2015 Spending Review, rather than by a new injection of funding. He said:

I think we will need to look again at the way we have configured our lay-down in the European Union, and fortunately, as the Committee is aware, we are in the process of seeking to harvest at least some of the savings that we identified during the spending review process last year but were ultimately not required to deliver to the Treasury, with a view to reinvesting them in the frontline. If you had asked me the question a month ago, I would have envisaged that they would have been invested in a variety of ways, probably not including reinforcement of our platforms across the European Union capitals, but I suspect that we will now want to look again at the level of resource that goes into those European Union posts.10

5.Asked whether he was bidding for extra resources and for his sense of the scale to which the FCO will need to be reinforced, however, the Foreign Secretary was unwilling to commit to advocating a substantial increase in the FCO budget. He asserted that Government resources are likely to come under further pressure as a result of the decision to leave the EU, contending therefore that doubling or trebling the FCO budget—as we recommended in our April 2016 report—is “a wildly unrealistic aspiration”.11 Instead, he emphasised the flat real-terms settlement that the FCO received in the 2015 Spending Review and conceded only that the FCO “may indeed need to bid for additional resource to deal with specific pressures that arise.”12 We were disappointed with the Foreign Secretary’s attitude, given the scale of the challenge that leaving the EU will pose to the UK’s international role and diplomatic network.

Over-reliance on Official Development Assistance

6.We also note that the flat real-terms settlement the FCO received in 2015 was made possible by a large increase in the proportion of FCO spending classifiable as Official Development Assistance, and a concomitant 10% decrease in non-ODA core spending.13 Professor Malcolm Chalmers of the Royal United Services Institute told us that at present about 50% of FCO spending is ODA-able, and that the Spending Review projects that this proportion will rise to about 73% by 2020.14 As ODA cannot be spent in any of the European Union’s Member States, it is unclear how the Foreign Secretary plans to upgrade FCO diplomatic capacity in Europe without serious re-consideration of the current imbalance between ODA and non-ODA funding in the Department.

Conclusions: towards a fully-equipped Foreign and Commonwealth Office

7.The FCO is already one of Whitehall’s smallest Departments in terms of funding. As Sir Simon Fraser told us, the entire annual FCO budget is only twice the sum spent every year on aid to Ethiopia alone.15 The decision to leave the EU provides both an opportunity and an obligation to re-consider the Government’s spending on the FCO and related activities.

8.We were deeply disappointed by the Government’s apparent unwillingness to recognise the urgency and importance of equipping the FCO to manage the most significant re-adjustment of British foreign policy in over 50 years, including a period of intensive diplomacy. We recommend that the new Government commits to a substantial increase in the funding available to the FCO commensurate with the enormity of the task it now faces. The FCO should be able to use this additional funding wherever in the world it deems necessary, on the programmes or personnel it considers essential to support the country’s reputation, security, values and prosperity through this period of transition.

1 Foreign Affairs Committee, First Report of Session 2015-16, The FCO and the 2015 Spending Review, HC 467, para 38

2 Foreign Affairs Committee, First Report of Session 2015-16, The FCO and the 2015 Spending Review, HC 467, para 39

3Comment on FCO and 2015 Spending Review”, Foreign Affairs Committee press release, 26 November 2016

4 Foreign Affairs Committee, Fifth Report of Session 2015-16, The Implications of the Referendum on EU Membership for the UK’s Role in the World, HC 545, para 33

5 Foreign Affairs Committee, Fifth Report of Session 2015-16, The Implications of the Referendum on EU Membership for the UK’s Role in the World, HC 545, para 33

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9 Oral evidence taken on 7 July 2016, HC (2016-17) 552, Q51 [Mr Baron]

10 Oral evidence taken on 7 July 2016, HC (2016-17) 552, Q13 [Chair]

11 Oral evidence taken on 7 July 2016, HC (2016-17) 552, Q17 [Chair]

12 Oral evidence taken on 7 July 2016, HC (2016-17) 552, Q16 [Chair]

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14 Q7

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20 July 2016