Report: UK’s global standing threatened by Foreign Office finances

21 March 2010

On top of successive tough spending rounds, the Treasury’s decision to expose the Foreign and Commonwealth Office (FCO) to the effects of currency fluctuations and the subsequent fall of Sterling have forced the FCO to make cuts which represent a "serious reputational risk to the Department and the UK, and thus a threat to the FCO’s effectiveness," warns the cross-party Foreign Affairs Committee.

The report notes that the FCO’s financial situation is so difficult that in March 2010 it was forced to seek a £90 million cash advance from the Treasury to be able to pay suppliers before the end of the month.

The report explains that the FCO’s difficulties are largely the result of the Treasury’s withdrawal in 2007 of the Overseas Price Mechanism, which had previously protected the FCO’s purchasing power in local currencies from the effects of exchange-rate fluctuations. The change came into effect at the start of the 2008-09 financial year, and was quickly followed by the major fall in the value of the Pound.

Commenting on the report, Committee Chair Mike Gapes MP said:

"For reasons largely beyond its control, the FCO’s financial situation has come to represent an unacceptable risk to the Department’s ability to perform its functions. The cuts that the FCO has been forced to make have led to unacceptable disruption and curtailment of operations at some key overseas Posts.

"Exchange rates should not drive UK foreign policy. At a time when globalisation is acknowledged as the key phenomenon of our times, it is incongruous that the position of the only government department with a global reach is threatened with erosion. There continues to be a vital need for the FCO to have sufficient resources to enable it to carry out its traditional policy-making functions.

"The new Government should carry out a comprehensive foreign policy-led review of the structures, functions and priorities of the FCO, Ministry of Defence and Department for International Development."

The Committee’s report also comments on the creation of the European External Action Service under the EU’s Lisbon Treaty, as a development with potentially important implications for the Foreign Office.

Mike Gapes said:

"It will be good for the UK to have seconded national diplomats well-represented in the European External Action Service. British officials may be in a strong position to take important jobs there. However, much about the new Service remains unclear.

"We are pressing the Government to provide more information, and especially to set out how it plans to ensure that the Service does not take over the functions of national foreign ministries.

"We also want the Government to send us as soon as it is available Baroness Ashton’s detailed proposal on the future operation of the Service, since we would wish to have the option of commenting on it before the dissolution of Parliament."

Image: PA/Johnny Green

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