Foreign Aid FAQs – #2 “Foreign aid should be cut to pay for public services”

In any given episode of Question Time, especially during episodes in which the NHS funding crisis is discussed, there is a high chance that at some point someone will suggest that a simple way to raise money for public services would be to cut the foreign aid budget.

For one thing, the foreign aid budget isn’t the eye-wateringly large amount of money which people seem to think it is. For 2015 it stood at £12.1 billion. That’s just 1.6% of government spending, about the same as what the government spent on the railways.[1]

Secondly, it doesn’t seem right that reducing assistance for the world’s poorest people is always the first suggestion for where we should source extra public money. The UK’s aid budget is portrayed as this vast, wasteful sum of money that is inexcusable given the cutbacks in other areas of public spending. What is hardly ever mentioned is the enormous amount of money which the UK government spends on corporate assistance, or which is lost through cuts to corporation tax and corporate tax avoidance. Below are some examples:

  • £44 billion in corporate tax breaks.[2] For example, capital allowances which allow businesses to write off billions spent on machinery, vehicles, IT and office equipment against corporation tax.
  • £35 billion on legacy costs of the bank bailouts.[3] Much of this cost is interest payments on long-term borrowing which was used to fund the bailouts following the 2008 financial crash. The government is effectively retaining the ‘bad’ parts of the banks taken into public ownership following the crash, and selling off the ‘good’ parts at a net loss. Furthermore, the banks are protected somewhat from regular market mechanisms and assessments of risk because the UK government effectively guarantees to underwrite these risks.
  • £16 billion in wage subsidies.[4] In-work tax credits effectively subsidise businesses by allowing them to pay their workers less than they need to live, safe in the knowledge that the government will top up their wages. Similarly, housing benefit allows landlords to charge rents far above what their tenants can afford, inflating the rental market.
  • £15 billion in hidden transport subsidies.[5] Airlines do not pay tax on fuel, corporation tax on their ‘economic activity’ within the countries they operate in, or VAT on ticket sales. Train companies enjoy lower duty on fuel.
  • £15 billion lost through procurement from the private sector.[6] The government spends a total of £238 billion (one third of total spending) on procuring services from the private sector. It has been estimated that it could save £15 billion if some services were instead run by the public sector. This is due to the costs involved in drawing up contracts, monitoring projects, project overruns, and picking up the pieces when private sector companies fail. The government also has to pick up additional costs in benefit payments and/or tax credits when workers are laid off or paid less when private companies take over the running of a public service.
  • £14.5 billion in subsidies and grants.[7] These include subsidies to agriculture, train companies (separate from the hidden subsidies mentioned above), the nuclear industry, and the defence industry. Additionally, grants are given to businesses to encourage them to invest in a certain area or to prevent them from collapsing.
  • £12 billion lost to corporate tax avoidance.[8] This is technically legal, as opposed to tax evasion which is illegal, and almost exactly matches the UK aid budget.
  • £5.4 billion lost from cuts to corporation tax since 2010.[9] These tax cuts mean that businesses are paying nearly £8 billion less in corporation tax per year. This could potentially result in more inward investment, but it has been estimated that it will result in a net tax loss of £5.4 billion. The UK already has by far the lowest corporation tax rate in the G7.
  • £3.8 billion in energy subsidies.[10] These subsidies benefit providers of electricity, gas, and oil. They also include legacy nuclear costs – primarily post-production clean-up.

This is not to claim that all of the spending mentioned above should immediately be scrapped, or that none of it has any beneficial impact. The aim of this is to illustrate that there are far more areas of government spending than just foreign aid which could be reviewed when considering what, if anything, should be cut to generate more money for public services.

For those who benefit from the aforementioned subsidies – and for the politicians who represent them – it suits their interests to divert public attention away from the huge amount of financial assistance they receive from the public purse. Much better to encourage people to criticise the relatively small amount of money spend on the foreign aid budget. It’s a classic diversionary tactic, as cynical as it is effective.

So next time a public figure is eager to highlight the foreign aid budget as an easy source of money to pay for public services, ask people to think about if they have any vested interests and if they are trying to divert attention away from the vast sums of money which the UK government spends on corporate assistance. Why are the poorest always the first to pay when money is tight?

[1] www.ukpublicspending.co.uk/uk_budget_detail_16bt12015n_306065#ukgs303
[2-8] www.speri.dept.shef.ac.uk/wp-content/uploads/2015/07/SPERI-Paper-24-The-British-Corporate-Welfare-State.pdf
[9] www.ft.com/content/c0afbfc4-02af-11e4-a68d-00144feab7de
[10] www.theguardian.com/politics/2015/jul/07/corporate-welfare-a-93bn-handshake


The views expressed in this article are those of the author and do not necessarily represent the views of Development in Action.

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