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The Commons Public Accounts Committee publishes its 48th report of this session, on the basis of evidence from the Foreign and Commonwealth Office (FCO), and a report by the National Audit Office

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, recently said:

"The FCO spends around half its budget in foreign currencies. Until 2008 the Treasury protected the Department against exchange-rate fluctuations. Removing that protection made the FCO budget vulnerable to a fall in the pound’s value.

To make matters worse, the Treasury stopped the Department's managing that risk effectively by, for example, only allowing the FCO to buy foreign currency in advance on one single day each month.

Following a decline in the value of sterling in 2009, the FCO was faced with an overspend of £91 million, Although the Department did well to reduce its spending quickly in response, it did so mostly through short term cuts, which were achieved by delaying or stopping expenditure, rather than genuine efficiencies, and switching some of its capital budget to revenue. The danger of this approach is that it leads to increased expenditure further down the line.

The FCO is required to achieve sustainable reductions in its running costs of £100 million over the next four years. These reductions must represent genuine and long-lasting efficiencies. The Department needs to evaluate properly where its spending is most effective and select cuts on that basis. The impact of cuts must be closely monitored.

The FCO wants to raise income and find efficiencies by sharing its overseas offices with other departments, but the high charges set by the FCO have actually led to departments like the UK Border Agency moving out. This is completely counter-productive. The Department has now developed a new charging agreement and we look forward to seeing whether it is more successful.

Recent events in the Middle East demonstrate that the FCO cannot always predict where additional resources may need to be directed. The Department should develop contingency saving measures so that it can respond to unexpected worldwide events without derailing its plans to reduce spending."

Margaret Hodge was speaking as the committee published its 48th Report of this Session which, on the basis of evidence from the Foreign and Commonwealth Office (the Department), examined why it needed to make such drastic cuts to its budget, the action it took to reduce its spending, and the lessons for the Department and government more widely on balancing the need for short term spending reductions with longer term efficiency gains.

Background

Around half of the Department's budget is spent in foreign currencies. As a result of a decline in the value of sterling, in September 2009 the Department faced an overspend of £91 million on its 2009-10 budget (£72 million centrally and £18.8 million overseas), out of its total budget of £1.6 billion.

Findings

The committee recognises that the Department did well to reduce spending so quickly, which enabled it to live within its budget. However, many of the spending cuts the Department made were short term in nature, and involved simply delaying or stopping some activities, rather than making lasting efficiency improvements. The Department did not do enough to monitor and measure the impact of its cuts and there is a risk that such short term cuts can lead to increased spending in the future.

In 2008, the Treasury removed the protection it had previously provided to the Department against exchange rate fluctuations. The committee is concerned that the Department did not have the expertise or experience to effectively manage the risk of a fall in exchange rates, and that the Treasury imposed poor value for money conditions on forward purchasing foreign currency which further limited the Department's ability to do so.

The Department told the committee that it needs to achieve sustainable reductions in running costs of £100 million over the next four years. The Department regards its overseas estate as a potential source of these efficiencies and income, but in the past, high charges have had the unintended consequence of discouraging other government departments from sharing premises with the Foreign and Commonwealth Office overseas.

The committee looks forward to seeing whether the Department's new charging agreement with users of its premises abroad successfully encourages other government departments to share its premises. A cross-government approach is important if government as a whole is to achieve the savings required to reduce the deficit.