Exchange Rate Movements (FCO)

Oral Answers to Questions — Leader of the House – in the House of Commons at 11:30 am on 21st January 2010.

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Photo of David Lidington David Lidington Shadow Minister (Foreign and Commonwealth Affairs) 11:30 am, 21st January 2010

(Urgent Question): To ask the Foreign Secretary if he will make a statement on the impact of exchange rate movements on Foreign and Commonwealth Office programmes.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

I am grateful for this opportunity to make a brief statement. The total Foreign and Commonwealth Office budget comes in at roughly £2 billion, of which only £830 million is discretionary spend, as £1.1 billion is spent on subscriptions to international organisations, peacekeeping and counter-conflict funding, the BBC World Service and the British Council. There are significant challenges to the Foreign and Commonwealth Office budget, not least because 50 per cent. of it is spent in foreign currency, and exchange rate volatility has made it difficult for the Foreign Office.

My right hon. Friend the Foreign Secretary said in a reply to Mr. Hague on 7 December 2009 that the estimated impact, including that relating to the overseas pricing mechanism, comes to over £100 million in the financial year 2009-10. There has been quite a lot of speculation about what this means for counter-terrorism. The FCO's overseas counter-terrorism budget has increased significantly in recent years. In 2008-09, it was £35 million; in 2009-10, we will be spending £36.9 million, and we are projected to spend around £38 million in 2010-11.

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Photo of David Lidington David Lidington Shadow Minister (Foreign and Commonwealth Affairs)

What the Minister failed to confirm-I hope he will do so in a moment-was that his noble Friend Baroness Kinnock explained to the House of Lords yesterday that the Foreign Office was cutting its expenditure on counter-terrorism programmes in Pakistan and on anti-narcotics programmes in Afghanistan, not through any reassessment of strategic priorities but because of the movement of exchange rates and the Government's overall debt crisis. That is not the way to run an effective foreign policy. It is appalling that, yesterday, we had the spectacle of the Prime Minister standing in the House of Commons talking about fighting terrorism, while at the same time in the House of Lords, his Minister was admitting that debt and exchange rate problems meant that the Government were cutting the very counter-terrorist programmes to which they attach such importance in their public statements. That suggests that we have a Government-and, in particular, a Prime Minister-who are indifferent to the point of negligence towards the global interests of the United Kingdom.

I have three questions for the Minister. First, can he explain how the Government got themselves into this mess? We know that the problem started with the decision to end the overseas price mechanism and to transfer exchange rate risk from the Treasury to the Foreign Office. Did Ministers not understand what harm might be done to Britain's international interests as a consequence of that decision, and why did the present Foreign Secretary allow it to happen on his watch?

Secondly, what is the scale of the damage done so far? Can the Minister confirm the figure given to the Foreign Affairs Select Committee by his permanent secretary-namely, that the cost to the FCO in 2008-09 was £60 million, and Baroness Kinnock's statement yesterday that the shortfall has risen to £110 million in the current financial year and is set to rise further in 2010-11? Will the Minister also confirm that that figure adds up to about a quarter of the budget for the FCO's core activities, once the ring-fenced budgets for the British Council and the BBC World Service have been stripped out?

We know from the permanent secretary's evidence that, as a consequence of this, the FCO has now "stopped most training" and put some staff on involuntary unpaid leave or four-day weeks. We know from what Baroness Kinnock said yesterday that there have been reductions in conflict prevention work in Africa and in climate change programmes-again those to which Ministers have said publicly that they attach great importance. Is it not time for the Government to come clean about what they are doing and to make public a full list of the cuts they are imposing as a result of the debacle of their exchange rate policy?

Thirdly, what are Ministers' intentions for the future? I have seen an internal FCO memorandum from December last year that says

"further cuts could and should not be achieved by salami slicing", but instead by stopping activity, closing posts and reducing staff numbers. Officials have apparently been instructed to work up contingency plans for substantial cuts, which

"could be implemented soon after the election".

As always, the difficult decisions are postponed.

The memorandum also states that this plan was discussed with the Foreign Secretary and his ministerial team on 21 December 2009. Did the Minister and his colleagues approve this strategy? In particular, how far has work now proceeded on a contingency list of British posts overseas that now face closure? How many of our embassies face the axe because of the Government's decisions on exchange rate risk, and when will Ministers finally come clean to the House and to the British people about what they are planning?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

I shall respond first to the hon. Gentleman's questions about counter-terrorism, which I think is accepted by all Members as the overriding and single most important element of the work we have to do. The total amount of money we are spending on counter-terrorism is rising each year and the percentage of the amount we are spending on Pakistan has increased. Pakistan now receives 28 per cent. of the total amount of counter-terrorism spending; Afghanistan 13 per cent.; Saudi Arabia 7 per cent.; east Africa 7 per cent.; and Yemen 5 per cent. We believe that those are the appropriate priorities.

The total spend on Pakistan has therefore gone up from £3.7 million in 2007-08 to £6.2 million in 2008-09, £8.3 million in 2009-10 and we project it to be somewhere between £9 million and £9.5 million in 2010-11. I gently point out to the hon. Gentleman that we have been able to increase that funding because we have taken the right economic decisions for this country. I have never heard from any shadow Treasury Ministers that they would even protect the Foreign Office budget, let alone increase it as we have over the last few years.

The hon. Gentleman referred to the overseas pricing mechanism. We have been completely open about the existence of a problem here, and I think that the hon. Gentleman must have written his comments before he heard what I said. I said quite clearly that the Foreign Secretary had replied to the right hon. Member for Richmond, Yorks, to whom I presume the hon. Gentleman occasionally talks. My right hon. Friend wrote to the right hon. Gentleman in December last year, saying that "the estimated impact" was going to be more than £100 million in 2009-10. The hon. Gentleman is absolutely right to say that the permanent secretary at the Foreign Office spoke openly and clearly on this matter when questioned by the Foreign Affairs Committee. At no point has there been any element of trying to obfuscate or hide the situation we face from the House or the public. No final decisions have been made about next year's budget. There are ongoing discussions with the Treasury and I hope that they will be fruitful.

Finally, the hon. Gentleman asked whether there is a list of posts that are going to be closed, whether some embassies are not protected and whether some work is going to come to an end. No, we believe it is vital to maintain our presence in the world, with Britain, as a great nation, making a significant difference around the world. We also believe that the overseas aid budget is an important part of the work we do in Pakistan. We are the second largest donor in the world, and will give £665 million over the period from 2009 to 2013. The hon. Gentleman can huff and puff as much as he wants about this, but unless he is prepared to make commitments about the Conservative party's funding after a general election, I do not think that anybody will take him seriously.

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Photo of Edward Davey Edward Davey Shadow Secretary of State (Foreign Affairs), Liberal Democrat Spokesperson (Foreign Affairs)

How does the Minister square what he has told the House with what his ministerial colleague Baroness Kinnock said in the House of Lords yesterday? She said:

"Counternarcotics programmes in Afghanistan, capacity building to help conflict prevention in Africa, and counterterrorism and counter-radicalisation in Pakistan have all been cut".-[ Hansard, House of Lords, 20 January 2010; Vol. 716, c. 992.]

In the light of the figures that have been given, is it not the case that the budget for counter-terrorism and counter-radicalisation in Pakistan was much higher at the beginning of this financial year? Why did the Foreign Secretary not demand that the Chancellor and Prime Minister make good any funding gap to secure such important programmes?

What representations have the British Government received from the United States or other allies in Europe and beyond about the impact of such dramatic cuts on our diplomatic efforts with them? If beating terrorism is the Government's top priority, they are clearly too shambolic to be trusted with the task. The country is at war to make Britain safe from terrorists. To do that, every military, political and diplomatic sinew should be strained. Our troops are risking their lives. If we do not put in the investment to counter the terrorist threat in Pakistan, we betray their efforts.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

The hon. Gentleman mischaracterises the situation. As I have made clear- [Interruption.] He can point to House of Lords H ansard as often as he wants, but it will not make any difference to the facts. As I have articulated already, total counter-terrorism spending on Pakistan was £3.7 million in 2007-08, £6.2 million in 2008-09, £8.3 million in 2009-10, and we project next year's spending to be between £9 million and £9.5 million.

The hon. Gentleman is right in one sense: of course we would like to be more ambitious, but we have had to curtail our ambitions in this field. On burden sharing in counter-terrorism, the work that we do in Afghanistan and the work that we have done in Iraq, the truth is that this country bears a substantial burden. We have received no representations or criticism from other countries in that regard.

I find it a bit difficult to accept the hon. Gentleman's comments about the protection of people in this country, because his party has systematically opposed every measure that we felt necessary in that respect.

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Photo of Keith Vaz Keith Vaz Chair, Home Affairs Committee, Member, Labour Party National Executive Committee

As the Minister knows, Lord West, the counter-terrorism Minister, has said that the budget for the security services has increased to £3.5 billion, a 250 per cent. increase. What concerns me about Baroness Kinnock's comments is the possible impact on the joint visa operation between FCO and Home Office staff. Abdulmutallab was denied a visa to come to this country to attend a bogus college because of the good work of our entry clearance operation. Will the Minister assure the House that that will not be affected by suggestions concerning changes in the rate of exchange, as it is an important way of preventing from coming to this country people who should not be here?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

My right hon. Friend is right to say that the Foreign Office budget, and the £2 billion under discussion, is not the only budget that affects our relations with different countries. The UK Border Agency budget and the overseas development funding to Pakistan are also significant. We want to ensure that such funds are protected for aid and development, and are not siphoned off, as other parties have suggested, to deal with security issues. The figure does not include the funding of the Secret Intelligence Service, which is protected.

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Photo of Patrick Cormack Patrick Cormack Chair, Northern Ireland Affairs Committee

Will the Minister calmly and clearly tell the House whether Baroness Kinnock's comments were accurate or not?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

As I have said to Mr. Lidington, Baroness Kinnock was right that the amount of money that we have spent on counter-terrorism in Pakistan has increased and will increase next year. There is not a cut; we will not spend less next year. However, we will be spending less than we had an ambition to spend.

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Photo of Denis MacShane Denis MacShane Labour, Rotherham

Is this not an artificial hullaballoo? Obviously if the exchange rate goes down, things will cost more abroad-every one of our constituents finds that out after taking the Eurostar to Paris. During my eight years as parliamentary private secretary and a Minister, we were constantly closing and opening posts and reallocating budgets.

I was shocked to learn that the actual real spend of the Foreign Office, as announced today, is £830 million, less than 1 per cent. of Government income. I think we should be spending more. However, the Conservatives have an answer: if they win power, they will shut everything down by isolating us from Europe and the rest of the world.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

My right hon. Friend is right. Ultimately, overall spending on our Foreign Office budget and, for that matter, all the budgets that affect our relations with other countries-including the budget of the Department for International Development-is a question for the whole of Government; and given the Conservatives' deliberate intention to cut budgets now, I do not think they have a leg to stand on.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

The Minister has now acknowledged that we are going to spend less than was intended. Let me remind him what the Prime Minister said yesterday:

"The action that we are taking to counter terrorism at its source in the Afghanistan-Pakistan region and elsewhere is a central part of our wider counter-terrorist strategy."-[ Hansard, 20 January 2010; Vol. 504, c. 303.]

May I ask the Minister why he did not include the information that there would be a real-terms cut in spending because of the exchange rate problem?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

I think that the hon. Gentleman is confusing himself. He refers to a real-terms cut, but there will not be a real-terms cut.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I applaud my hon. Friend's robust answers to Mr. Lidington.

It is obvious that when our currency depreciates overseas costs go up, but does my hon. Friend agree that we must retain that degree of flexibility in our currency for broader economic reasons? Had we been stuck in the euro, we would now be in a disastrous situation, rather like that of Ireland. The Prime Minister must be congratulated on keeping us out of the euro all those years ago.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

I had a sneaking suspicion that my hon. Friend might refer to this matter. I know from conversations with my counterparts in other Ministries of Foreign Affairs that they are experiencing similar difficult circumstances, because their currencies also vary in relation to other currencies in the world. The exchange rate between the US dollar and the euro has fluctuated significantly over the last two years, which has made things difficult for foreign affairs departments in other countries as well.

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Photo of Douglas Hogg Douglas Hogg Conservative, Sleaford and North Hykeham

Is not this matter another example of the Prime Minister's lack of candour? Yesterday he said:

"We and our allies are still clear that the crucible of terrorism on the Afghan-Pakistan border remains the No. 1 security threat to the west." -[ Hansard, 20 January 2010; Vol. 504, c. 305.]

He went on to detail what he was seeking to do, but what he omitted to say was that projected spending-anticipated and desired spending-on that very matter was to be cut, as Lady Kinnock has now made plain. Why did the Prime Minister fail to give the House that information?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

I reject that charge. We have been very open throughout the process. The Foreign Secretary answered questions before the Foreign Affairs Committee, and the permanent under-secretary answered specifically on the issue of the overseas pricing mechanism.

No final decisions have yet been made about next year's budget, but we are engaged in discussions with the Treasury, which has been immensely helpful in trying to examine the issues with us. We want to ensure not only that we meet our absolute priorities, but that all our spending is clearly devoted to those priorities. That is what we are focusing on.

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Photo of Tony McNulty Tony McNulty Labour, Harrow East

I thank my hon. Friend for confirming that the counter-terrorism spending of the Foreign and Commonwealth Office has risen and will continue to do so, especially its spending on Pakistan. Does he agree that the current events are occurring in the context of the largest ever spend by this country-domestic and foreign-on the intelligence and security services, and the largest ever significant spend on developmental and military activities in both Pakistan and Afghanistan, at a time when the Pakistan Government are themselves finally getting to grips with counter-terrorism? In the narrow field of counter-terrorism, at least, the Opposition's charges are irresponsible partisan drivel.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

My right hon. Friend is right. Elements of the work we have done have not been as effective as we would have liked, and of course we constantly review the question of which are the right things to do. However, it is worth bearing in mind the fact that much of DFID's work in its overall £665 million spend in Pakistan has been focused on education programmes and support for better economic management in Governments, which, I would argue, has had an effect on counter-terrorism as well.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

I am sure the Minister would agree that anxiety has been caused by the apparent contradictions between Baroness Kinnock's statement, his statement today on rising budgets, and the reported shortfall of £110 million. However, he did say that he wishes to be open, so can he arrange for a root-and-branch review to be carried out of the FCO's foreign currency exchange operations, including a very close look at how-and, indeed, whether-they hedge against losses? It seems ridiculous to me that a Government the size of this one cannot take the necessary simple steps to minimise the losses from foreign exchange movements.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

Significant elements of Government spend have, in fact, been assisted by the fluctuation in the value of the pound-my hon. Friend Kelvin Hopkins referred to that. It has also made it much cheaper for foreign visitors to come to the UK. The hon. Gentleman is right, however, to suggest that we have to keep this process under constant review. We must also make sure we get the best value for money around the world by balancing how many UK staff we have in different overseas posts, and how many locally employed staff we have, while still maintaining a core team effort across the whole of our presence.

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Photo of Shailesh Vara Shailesh Vara Shadow Deputy Leader of the House of Commons

I appreciate that there are sensitivities in providing detailed information on the impact of exchange rate fluctuations on British expenditure on counter-intelligence and security measures. However, will the Minister undertake to provide a full list of other areas where exchange rates have an impact, such as staffing? Will he place such a list in the Library for everybody to look at, detailing which countries, embassies and high commissions will be affected?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

To be honest, I think that would be very burdensome to produce, and it would be a constantly changing document anyway. I am more than happy to be open with the hon. Gentleman, but I am not sure that what he suggests would be helpful. A lot of the British Council's spend is also overseas, so it has faced a difficult time in relation to currency fluctuation as well, whereas the World Service, the vast majority of whose spending is in this country, has not met these problems.

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Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

There is also the important question of the hedging of the risk. Can the Minister tell us whether any hedging has taken place since the abolition of the mechanism in 2007, and if so, how much of the 50 per cent. foreign exchange expenditure has indeed been hedged and how it has been hedged? If it has been hedged properly, the gains on the hedge should offset the losses outlined by Baroness Kinnock yesterday.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

The process of hedging happens within financial years, and I am very happy to write to the hon. Gentleman about it. My right hon. Friend the Foreign Secretary wrote to the shadow Foreign Secretary about this before Christmas.

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Photo of Paul Goodman Paul Goodman - Shadow Minister, Communities and Local Government

As the Minister knows, some of the programmes in Pakistan are anti-radicalisation programmes; they are essentially extensions of the Prevent programme here. Has an assessment been made of the effectiveness of these programmes, and whether or not that is the case, will they be cut?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

We always have to review the success of such projects. One of the difficulties is that some of the elements of them deliver outcomes only over a sustained period. Consequently, it is difficult at one snapshot moment to assess the precise value and the impact they are having, but the hon. Gentleman is absolutely right to say that that is one of the things we need to do, and if elements of the programme do not work, we should cut them back and find other ways of engaging that are more effective.

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Photo of Andrew Pelling Andrew Pelling Independent, Croydon Central

Will the Minister respond to his Front-Bench counterpart in respect of the description of the exchange policy as a debacle? It is, in fact, especially well timed to have a devaluation when there is excess capacity, as we get low inflation. Also, if there has indeed been hedging, as the Minister said in response to Mr. Hands, does he not accept that it is his responsibility to ensure that money is recouped into this budget and is fully protected?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

In the Foreign Office, we also have to do a bit of good housekeeping. We are reviewing, and discussing with trade unions, the allowances paid to UK staff based abroad and those working for the Foreign Office in the UK. Where savings can be made that are consonant with ensuring there is a high level of morale in the Foreign Office and we deliver value for money, we will make them.

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Photo of Bill Cash Bill Cash Conservative, Stone

As the Minister will know, the debates on fiscal responsibility that took place in the last few days have demonstrated the fiscal irresponsibility of what he describes as a great nation. He and his Government have brought this country to its knees.

In the context of the issue before us now, the results of setting up European embassies, and also Europol, in Afghanistan, which were discussed in the European Scrutiny Committee only a couple of days ago, are part of this problem. There has been a failure there because we are putting money in the wrong places. We should be using British money for British purposes, and not spending money on completely pointless operations that are not working effectively.

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

As much as I like the hon. Gentleman, I completely and utterly disagree with him. I believe that if we had not taken the necessary financial steps that we took over the last 18 months, and instead had taken his advice and that of his political party, this country and others that have followed similar routes would have ended up in a slump or a depression. I believe the decisions we have made have put us in a stronger position for the future, and I think we will be seeing precisely that over the coming days. I should just say, too, that across the whole of Government, spending on counter-terrorism in Pakistan increased by 50 per cent. from the last financial year to this one.

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Photo of Philip Hollobone Philip Hollobone Conservative, Kettering

Can the Minister confirm whether in times past, when exchange rates were the other way round, the Treasury clawed back any surplus? If it did so, does that not go straight to the heart of the argument and suggest that the Treasury should come to the rescue this time?

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Photo of Chris Bryant Chris Bryant Parliamentary Under-Secretary (Europe)

Well, it does not quite work like that, but the way it does work was set out by my right hon. Friend the Foreign Secretary in a letter to the right hon. Member for Richmond, Yorks, and I think it would help the whole House if I were to lay a copy of that letter in the Library of the House.

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