LONDON — The British government has ditched its long-standing target for overseas aid in order to finance other spending priorities in the year ahead as the pandemic caused the deepest recession in more than three centuries.
In a statement to lawmakers today, Treasury chief Rishi Sunak said that the target to allocate 0.7% of national income to overseas aid will be cut to 0.5%. The move is widely expected to free up about 4 billion pounds ($5.3 billion) for the Conservative government to use elsewhere.
He said “sticking rigidly” to the target “is difficult to justify” to people. “At a time of unprecedented crisis, government must make tough choices,” he said.
He insisted that the government aims to return to the target introduced by the Labour government of Tony Blair around two decades ago but that even with the new target, the U.K. will still be the second biggest aid spender among the Group of Seven leading industrial nations.
In a sobering assessment, Sunak sought to balance ongoing support for the economy with a longer-term commitment to heal pubic finances after a stark deterioration.
“Our health emergency is not yet over and our economic emergency has only just begun,” he said.
Sunak said the government’s independent economic forecasters are predicting that the British economy will end up 11.3% smaller this year than where it started, the “largest fall in output for more than 300 years.”
The Office for Budget Responsibility also said the economy will grow by 5.5% in 2021 and 6.6% the following year and that as a result the output lost during the pandemic won’t have been recovered until the final quarter of 2022.
Sunak warned that the pandemic’s cost will have long-term “scarring” with the economy 3% smaller in 2025 than predicted in the budget in March.
The massive fall in output this year has led to a huge increase in government borrowing as the government sought to cushion the blow. He said borrowing this fiscal year is set to rise to 394 billion pounds, or 19% of national income, “the highest recorded level of borrowing in our peacetime history.”
He warned that with borrowing at this level, underlying public debt is rising towards 100% of annual GDP.
“High as these costs are, the costs of inaction would have been far higher,” he said. “But this situation is clearly unsustainable over the medium term.”
Sunak said the government would continue to support the economy for now and that day-to-day spending by government departments will increase 3.8% next year, which he said is the fastest rise in cash terms in 15 years.
He said the government doctors and nurses in the National Health Service will get a pay rise next year but that others in the public sector will not.
Sunak also announced extra money to support Prime Minister Boris Johnson’s program of investments in infrastructure across the U.K., particularly in the north of England, where the Conservatives won seats during the last general election.