I am grateful for the opportunity to have this debate on the finances and capabilities of the Foreign and Commonwealth Office. As we know, last week the financial health of the Foreign Office was put in the spotlight by the Minister of State, Baroness Kinnock, when she revealed cuts to FCO operations, including the counter-terrorism programme in Pakistan-facts that many of her colleagues in recent days have been trying to airbrush out. However, over the past three years my colleagues in the Shadow foreign affairs team, particularly Chloe Dalton, have been assiduous in uncovering the extent of the black hole in the FCO's finances. We welcome this debate, which will help to give the issue the wider attention that it merits.

The Foreign Office has obviously been under financial constraints for several years. As a result, from May 2007 onwards the FCO has closed 34 high commissions, embassies and consulates, including in Honduras and El Salvador and on the island of Madagascar. We have opened new offices in places such as Banja Luka, Basra and Kirkuk-but offices ain't the same as embassies. The FCO also withdrew funding from the UK defence attaché network, not understanding the huge value added there. It ended its contribution to scholarships for some Commonwealth students, which will be a huge long-term downer for the UK. It shut the FCO language school, cut the number of civil servants from 6,000 to 5,600 and downgraded 115 positions in embassies that used to be performed by UK diplomats, passing them instead to no doubt able locally employed nationals of the host state. It also began making the argument for virtual embassies and laptop diplomats in parts of the world where this country felt it could no longer afford permanent missions.

Therefore, even in November 2006 the UK's former ambassador to the United Nations, Sir Jeremy Greenstock, warned the Select Committee on Foreign Affairs of

"a progressive decline in the capacity of the Foreign Office to cover every aspect of diplomacy."

One head of mission reports cutting 40 people from the payroll. The Committee concluded in its report in 2008 that the pressure on the FCO budget risked

"jeopardising the FCO's important work"- a warning that has been raised on many occasions by Members of both Houses. That trend alone, amounting to a creeping erosion of the FCO's clout overseas, was a matter of serious concern.

But then, in the autumn of 2007, the Treasury decided, in negotiations with the Foreign Office over the 2007 spending round, to withdraw what was known as the overseas price mechanism. Let us be clear: the OPM was a system that ensured that the Foreign Office, which has to spend more than half its budget overseas, was neither worse off nor better off as a result of overseas inflation and movements in currency exchange rates. That is a pretty sensible thing, one would think. Crucially, the OPM ensured that the Foreign Office, which, unlike any other Department, including the Department for International Development and the Ministry of Defence, operates in more than 120 currencies worldwide, could-I quote from the FCO's resource accounts from 2007-08-

"maintain its purchasing power at a level equivalent to that of Home Departments", which do not have to spend the bulk of their budgets overseas. When sterling rose and the FCO could buy more foreign currency with the pound, the excess was returned to the Treasury. Conversely, if sterling dipped, the Treasury compensated the FCO. In the last three years before the OPM was withdrawn, albeit in different economic circumstances, the FCO returned more than £20 million to the Treasury's coffers.

In short, the mechanism allowed the FCO to plan its activity overseas with confidence over a number of years. A glance at the FCO's responsibilities, which include countering terrorism and weapons proliferation, shows why such continuity matters. Also, 69 million British citizens travel overseas each year and, according to FCO figures, 12 million British citizens were living overseas in 2007. For British tourists and expats alike, the embassy can be the first port of call when they get into difficulty. It is estimated that 100,000 people will go to the World cup in South Africa this year, and obviously our mission or missions will have to deal with any problems that arise. It is therefore very surprising that Foreign Office Ministers did not stand up to Treasury officials when they sought to strip away this important protection, and that the implications of the change were either brushed aside or, even worse, not realised.

The timing was almost as good as when the Prime Minister decided to sell our gold reserves-at completely the wrong time in the market. Within six months of getting rid of the OPM, sterling plummeted. According to Sir Peter Ricketts, the pound fell by 25 per cent. against most currencies over the following period, wiping away a significant proportion of the spending power of local FCO budgets.

Parliament was not informed of the planned change, and not a squeak of protest has been heard from the Foreign Secretary or his colleagues. Repeated written parliamentary questions from my right hon. Friend Mr. Hague, asking what position Ministers took on the proposed change and how many times it was discussed, have been rebuffed. It is worth noting here that the Foreign Secretary has had 14 different Ministers since he got the job. Such upheaval has coincided with the most difficult period in the FCO's finances, which prompts the question whether FCO Ministers were too busy fighting for their jobs to stand up for this critical mechanism.

The only explanation we have to date is the rather bizarre statement by the Secretary of State for Work and Pensions, Yvette Cooper, who said that the FCO lacked the "incentive" to take currency movements into account and needed to be brought in line with practice in other Government Departments. That completely disregards the fact that no other Government Department has a fraction of the foreign currency exposure of the FCO.

Ministers are now trying to brush aside the issue, implying that the FCO's difficulties are merely the product of the tough financial environment and ignoring the fact that this was an own goal, a self-inflicted wound. If Ministers believe that this change was right and was in the interests of the country, why will they not come out and say so? I hope the Minister will state clearly whether he believes that this new arrangement is appropriate and give a full account of the reasons for it.

It would help if the Minister said whether he is aware of any major UK ally that requires its Foreign Office to bear the full brunt of foreign exchange movements, or whether the UK is alone in that respect. The US State Department, for example, has a buying power maintenance account to ensure that it does not suffer from adverse currency fluctuations.

The fact remains that the change happened on the Foreign Secretary's watch, and I hope he will be prepared to come to the House at the earliest opportunity, in Government time, to address the concerns about the state of the Department over which he presides.

Let us look at what we know of the consequences. In 2008-09, the first year without the OPM, the FCO budget for embassies took a hit of £59.2 million. In the current year, the hit on embassies is estimated to be £80 million. In the next financial year, according to Sir Peter Ricketts, the hit will be £120 million out of a budget of £830 million for the UK's embassies overseas.

In fairness, 190 British missions have had to receive extra money to compensate for the reduction in the spending power of their local budgets, but one head of mission complains that their local budget has been effectively cut by 25 per cent. The Minister of State, Baroness Kinnock, said last week that

"budget constraints have led to staff redundancies, cuts to travel and training, and reduced programme funding including our work on counterterrorism and climate change."

She described

"staff redundancies in Argentina, Japan and across the United States."

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.]

Sir Peter Ricketts said:

"We have had to stop a lot of activity this year...we have stopped whatever programme activity was not committed, stopped most of our training and cut into our travel and our hospitality...local staff have not had overtime payments, or in some cases pay rises, and some are on involuntary unpaid leave or four-day weeks. We have a real problem within the budget".

It seems staggering that the work our embassies can do in a particular country depends not on our intent but on the strength of the pound against the local currency. That must affect morale and make consistent planning exceedingly difficult. Is there not a risk that diplomats are being posted overseas without the important training they would normally have? Is that not likely to have a knock-on impact on the effectiveness of British diplomacy? Ministers have been extremely coy about saying what training has been stopped and how many diplomats have been affected. It would be a matter of particular concern if the language training that has distinguished our diplomats for so many centuries were being affected. I hope the Minister is in a position to assure us that that is not the case.

Such is the incoherence that the cuts are eating into the new priorities established by the Foreign Secretary himself. In January 2008, he rewrote the FCO's strategic priorities, identifying four new policy priorities on which the FCO would focus. Three of those priorities were counter-terrorism, conflict prevention and climate change-the very programmes that have been cut.

The Foreign Secretary said that

"we will be increasing substantially the overall level of resources the FCO puts into counter-terrorism and counter-proliferation; climate change; Afghanistan and other conflict regions...All these areas will receive additional staff and money."-[Hansard, 23 January 2008; Vol. 470, c. 53WS.]

However, according to Baroness Kinnock, jobs and funding in those areas are now being cut.

The FCO has stopped its contribution to peacekeeping and conflict prevention in Latin America entirely and cut back its contribution in nearly every quarter of the globe. That must cause serious concern, and it seems likely to affect our international reputation, especially given that our major ally, the United States, is dramatically increasing its spending in those areas. It must also distract FCO staff from the business of diplomacy, which is supposed to be the FCO's core function. FCO senior management must now oversee highly complex hedging operations, receiving advice from HiFX Financial Services costing £41,000 a year.

What of the future? Sir Peter Ricketts has warned starkly that

"the budgetary pressures...put a question mark over whether we can maintain the number of people we have abroad", and that the closure of British embassies overseas cannot be ruled out. It is time for the Government to tell us.

I hope the Minister will answer the questions I have raised, respond to the following specific points and write to me with any answers he cannot provide today. First, the Foreign Secretary took over in June 2007, and the OPM was withdrawn that October. Will the Minister clarify once and for all whether that was a decision overseen by him, an act of his outgoing predecessor or just an oversight?

Secondly, did any FCO Minister oppose the decision to remove the overseas price mechanism? If not, why not? My right hon. Friend the shadow Foreign Secretary has tabled a written parliamentary question on the subject to the Foreign Secretary, but has been stonewalled. Which Minister oversaw the decision? Did the Foreign Secretary personally raise the issue with the Treasury? Was he briefed on it by his officials?

Thirdly, will the Minister account for the discrepancy between what Baroness Kinnock said to the House of Lords last week-that FCO counter-terrorism programmes in Pakistan have been cut-and what the Foreign Secretary said in a letter to my right hon. Friend the Member for Richmond, Yorks yesterday? The Foreign Secretary said that there had been and would continue to be a rise, year on year, in his Department's spending in Pakistan.

Fourthly, why is the FCO budget still taking such a huge hit from adverse currency movements-over £100 million by the end of the year, according to Sir Peter Ricketts-two years after it implemented its own mechanism to hedge against currency movements? Are Ministers satisfied that the new system is working sufficiently well? If not, what are they doing about it?

Finally, Sir Peter Ricketts said in December that the FCO was in discussion with the Treasury about the budget crisis. What was the outcome of those discussions? The hedging strategy is clearly not enough to compensate fully for the absence of the OPM, and the permanent under-secretary is warning that embassies may have to be closed as a result. Are Ministers asking the Treasury to step in and fill the gap, or are a string of UK embassies about to be axed?

It really is not a sensible proposition to run foreign policy on the basis of exchange rate movements. The nature of the threats that this country faces requires pre-emptive diplomacy in extremely dangerous and volatile parts of the world, where it tends to cost more to intervene and where the exchange rate risk is likely to be much higher because the place is riskier. There is a risk that the FCO will have to bear that in mind as a pre-eminent condition in determining whether diplomacy is feasible, rather than as a cost that must be borne as a matter of course in the pursuit of this country's national interest.

Sir Peter rightly described this country's overseas network as

"the Crown jewels of the FCO".

It is a valuable human and physical resource, a significant factor in our country's ability to continue to punch above its weight and a platform used by every Department overseas. That network, or parts of it, really is in jeopardy, and we need the Government to explain how cuts to it can be prevented and how the vital skills and training of UK diplomats can be preserved. We need Ministers to reassure Parliament and the public that the country's ability to project its influence overseas is not being limited. In today's challenging environment, the Government should be working to build our influence in selected areas, not presiding over its decline.