Foreign aid makes good macroeconomic sense

This is a preview from the Quarterly UK Economic Outlook, August 2021.

On 25 November 2020, the UK government took the decision3 to reduce the budget for foreign aid from 0.7 to 0.5 per cent of gross national income (GNI) in 2021. On 13 July 2021, Parliament voted in favour of maintaining these cuts, following the Chancellor’s Statement4. This reduces the amount of aid available in 2021 by approximately £4.5billion compared to what otherwise would have been the case. The announcement does not meet commitments in the main party election manifestos. Nor does it meet targets set in the 2015 International Development Act (although this Act allows for deviations in a single calendar year under certain fiscal circumstances).

The aid cut fails to take into account macroeconomic spillover effects. Holland and te Velde (2012) simulated the effects of aid on both donor and recipient  countries using the NiGEM model. They modelled the empirical effects of aid on growth and productivity by applying historical social rates of return from infrastructure spending (Briceño-Garmendia, Estache, and Shafi k, 2004) and econometric estimations of the effects of Aid for Trade on reducing trade costs (Cali and te Velde, 2011).

The analysis in this Box has been prepared by NIESR's Dawn Holland and  Dirk Willem te Velde from the Overseas Development Institute. You can download the full analysis clicking on the pdf document.