To support the self-employed through the coronavirus outbreak the Government has introduced the Self-Employment Income Support Scheme (SEISS).
Today (Tuesday 13 July), the House of Commons will vote on whether to restore international aid levels to 0.7% of gross national income (GNI).
This has been a controversial issue ever since the Chancellor announced in the 2020 Spending Review that aid levels would fall to 0.5% of GNI until “the fiscal situation allows.”
This Insight looks at the new tests the Chancellor proposed yesterday, and what each outcome of today’s debate would mean for aid spending.
The scale of the aid cut
Gross national income (GNI) is a measure of the size of the whole of the UK economy, currently well over £2 trillion. The difference between 0.7% and 0.5% of GNI is therefore significant. Based on the most recent forecasts, it means a difference in aid spending of about £4.4 billion in 2021.
There has been a lot of discussion over what the scale of these cuts will mean for the recipients of UK aid – much of this is discussed in our briefing Reducing the UK’s aid spending in 2021, along with international comparisons of the UK’s aid spending.
The Chancellor’s proposed tests
In the 2020 Spending Review, the Chancellor said that the Government would return to spending 0.7% of GNI on aid “when the fiscal situation allows.” It wasn’t clear what this meant until 12 July, when the Chancellor set out the rules for determining when aid would go back up to its previous level, in a written statement.
It said the Government committed to spending 0.7% of GNI on aid when official forecasts from the Office for Budget Responsibility (OBR) show that, on a sustainable basis:
- The country is not borrowing for day-to-day spending (the country is not running a current budget deficit)
- The ratio of underlying debt to GDP is falling.
Both tests would have to be met, and there is no clear definition of what it means for these to be “on a sustainable basis”. However, once aid had gone back to 0.7% in one year, it would then stay at that level and the tests would no longer apply. The statement also says that the debate in the House of Commons on 13 July will allow MPs to approve the plan.
What would the vote mean?
If the House of Commons votes against the plan, the Chancellor’s statement says the Government would return to spending 0.7% of GNI on aid “in the next calendar year”, that is, 2022. Based on the most recent OBR forecasts, this means aid would rise to around £16.2 billion next year.
If the Commons accepts the plan, the return to 0.7% would be dependent on the official economic forecasts published this autumn. If they are similar to the most recent forecasts (published in March), we could expect aid not to return to 0.7% for at least the rest of the current Parliament, which will likely end in 2024. This is because existing forecasts run to 2025/26 and in no year is the current budget forecast to be in surplus. Net debt is also not forecast to start to fall until 2024/25.
There is a possibility that the economy could recover more strongly than currently predicted. If so, these tests may be met sooner, particularly as the forecast current deficit for 2025/26 is relatively small at £0.9 billion. However, given how unusual it has been recently for governments to run a current budget surplus in any year (the last time it happened for more than one year in a row was between 1998/99 and 2001/02), it may still be some time before aid levels went back up to where they were.
Library briefing: Reducing the UK’s aid spending in 2021
Library briefing: The 0.7 percent aid target
About the author: Philip Brien is a researcher at the House of Commons Library, specialising in public spending and international development.
Image: UK aid logo © DFID – UK Department for International Development – licensed under CC BY 2.0
International Inflation: Harmonised Index of Comsumer Prices data on international inflation rates.
Data and latest developments on interest rates and quantitative easing policy from the UK (Bank of England), Eurozone (European Central Bank) and the US (Federal Reserve).