Another year, another budget that singles out foreign aid for cuts. This year, future growth of the aid budget has been reduced by $303 million, with that money redirected toward ‘other priorities’. These reductions come on top of past cuts to the aid budget, which has declined in real terms by over 30% since the Coalition came to power.

The government claims to be supportive of a strong aid program. But how can that be if it keeps cutting foreign aid in order to spend money in other areas? How to explain the most recent diversion of funding?

It is clear that there is a consensus within the Coalition party room that Australia’s foreign aid program should be assigned a lower priority and given less resources. What is behind such thinking?

Below I list the three most commonly made arguments for lowering the foreign aid budget, and explain why these arguments are fundamentally flawed. I conclude with my own sombre conclusion as to why I think foreign aid has been targeted (yet again).

  1. The budget emergency

The rationale first given by the Coalition government for cutting the aid program was that Australia’s budget was in crisis. The narrative was that too much spending by the previous government had forced the Abbott government to take drastic action. Foreign aid had to play its part.

That argument has been made again and again by the Coalition.

Julie Bishop, speaking at the Australasian Aid Conference in 2014, stated that:

“Now we have had to make some pretty tough decisions this year. We inherited a deteriorating budget from the previous government – cumulative deficits of $123 billion…. So the government was borrowing from overseas to pay our bills and our aid program – borrow overseas to send overseas.

So we have to get our budget under control, and this means that the aid program, like every other government program, had to be put on sustainable footing. Our domestic budget outlook meant that I had little choice but to reduce this year’s aid budget and I did so by reducing it by about $100 million over last year.”

Scott Morrison noted several years later, as he oversaw further cuts (in 2016-17) to foreign aid, that:

“It’s regrettable, it grieves me, I know it grieves [Foreign Minister] Julie [Bishop].” [But] “when I gave that [maiden] speech, we had $40bn in the bank and Labor blew it all. They blew it all, with reckless policies that set fire to the budget.”

The budget emergency argument doesn’t stand up to scrutiny when the cuts to foreign aid are viewed in their broader context. Foreign aid comprises less than 1% of federal government spending (far less than Australians commonly think). Even abolishing foreign aid would do little to put the government back in the black.

More importantly, it is clear that the Coalition has singled out foreign aid for cuts. Government spending since the Coalition took power has climbed over 10% after inflation. Over the same period, foreign aid has declined by more than 30%. The figures speak for themselves. This is not about foreign aid pulling its weight. Aid has been singled out for cuts that are disproportionate relative to other areas of spending. Clearly cutting the aid budget is about priorities for the Coalition, not about fiscal restraint.

  1. Charity begins at home

A second related argument for reducing the foreign aid budget is that the needs of Australians should come first. Jacqui Lambie is the Member of Parliament who has most forcefully made this case. In 2015, Lambie’s new political party called for foreign aid to be halved, with savings to be redirected to universities, as part of its platform. In the lead up to 2016-17 budget, she called for the same reduction, although this time argued that the funds should be redirected to age pensions. In making her demands, she has claimed:

“I make no apology for putting poor Tasmanians and Australians first — before any other country’s people.”

This argument clearly holds some sway within the Coalition, although it is (generally) not taken to the extreme pursued by Lambie. The ‘problem’ of borrowing from overseas to fund aid has been mentioned by the Foreign Minister and two successive Treasurers (despite borrowing being a standard element of fiscal management). Just last week, Liberal National MP George Christensen called for foreign aid to be suspended in the aftermath of Cyclone Debbie. In his words:

“People had their homes blown to pieces, flooded, and left without electricity for more than 10 days but have been denied disaster relief funding. Meanwhile, they hear on the news that Australia has just committed another $320 million in foreign aid to Afghanistan.”

At its heart, the ‘charity begins at home’ argument is about portraying spending on foreign aid as an either/or—either you spend money on the poor and needy in Australia, or you spend it on the poor and needy overseas. That simply isn’t the case. The budget is far more complex. Australia could afford to increase spending in education, to increase the aged pension, and to respond to domestic disasters while not reducing aid. But the government would need to increase taxes, or to cut spending in other areas.

Like the ‘budget emergency’ argument, the ‘charity begins at home’ argument is about budget priorities. The underlying premise of calls to cut aid is that every other form of spending (or tax concession) should be accorded higher priority than foreign aid—be it MP perks, tax breaks on negative gearing, on income from superannuation, funding for private schools. That’s a value judgement, and the likes of Jacqui Lambie are entitled to their view, though I doubt she or any other politician would be willing to defend all public spending as being a higher priority than foreign aid. But it is a misrepresentation to portray cuts to aid as a choice between prioritising spending on poor and needy people in Australia as opposed to those overseas.

  1. Aid doesn’t work

A third argument for cutting the foreign aid budget relates to effectiveness. The argument can be summed up as follows: ‘trade, not aid, pulls people out of poverty; aid can actually harm growth by undermining economic incentives.’

This argument is also flawed, but at least it contains an element of truth. Trade is more important than aid for reducing poverty, or to be more specific, it has been over recent decades. That’s hardly a surprise. Total aid in 2016 was $140 billion—one-third the amount of remittances that workers from developing countries sent home from employment in developed countries, and less than one-fifth that of foreign direct investment to developing countries. In PNG, a country often portrayed by the Australian press as aid dependent, total aid per person each year is about $90. Does anyone really expect $90 per person to pull people out of poverty en masse?

That isn’t to say that aid doesn’t help recipients, nor that it can’t alleviate poverty. Macroeconomic evidence suggests that aid reduces poverty and increases economic growth. Indeed, people generally forget that countries like South Korea and Taiwan, before they were wealthy, received considerable foreign aid. It is often more meaningful to look at what aid does on the ground, given challenges in measuring small changes at the macro level. Here again, at the micro level, the evidence is clear. Foreign aid reduces poverty. It enables children to go to school where they otherwise wouldn’t. It facilitates access to markets, enabling people to sell their produce. Australian aid literally saves thousands of lives every year through access to immunisation and to medicines.

That said, the effect of foreign aid depends on what is given. The Coalition in its four years of office has slashed the foreign aid budget. In doing so, it has damaged poverty alleviation efforts.

The political cost has been minimal—and in my view, this is important. It would not be unreasonable to argue that a political calculus is behind the targeting of foreign aid. The primary beneficiaries of foreign aid live overseas and don’t vote; NGOs might protest, but their staff would in all likelihood vote Labor or Greens anyway (or so the calculus would go). Furthermore, there is political support to be gained by cutting foreign aid, especially among those who might otherwise vote for One Nation. This would be a cynical basis on which to target foreign aid. But it would be logical. The other arguments don’t stand up to scrutiny.

Matthew Dornan is Deputy Director of the Development Policy Centre.

Matthew Dornan

Matthew Dornan is Deputy Director of the Development Policy Centre. He heads our program of research into Pacific development. His research focuses on aid flows, regional integration, energy, and broader infrastructure challenges in the Pacific islands region. Matthew has a PhD from ANU, and previously worked for the Australian aid program in the Pacific.

4 Comments

  • Thanks for asking this question Matt: Why has the Coalition cut foreign aid (again)?

    I think it is because it can, and because it makes life easier for the Coalition.

    No government is ever going to fall, nor be elected, on the basis of their aid policy. It is too small a part of the budget and too remote in its impact for most electors, even sympathetic ones, to see it as crucial to their vote.

    Although aid is a tiny part of the total budget it can make a significant difference to the level of the all-important budget deficit and it is one of the few areas the government has free rein to cut at will. If the Coalition had not cut aid and had followed the Labor timetable the aid budget would be $5bn higher this year (at 0.5% of GNI) – that would add 17% to the 2017-18 projected deficit.

    The importance of the budget balance to aid budget levels can be seen in the evaporation of the bipartisan 0.5 commitment when the budget surplus disappeared. Fore more detail on the impact of debt and deficit on the aid budget see: http://devpolicy.org/achieving-larger-australian-aid-program-will-require-broader-budget-changes-20160307/

    I’m with Peter Graves here. Those who want to see more aid need to ensure that this major disincentive to aid expansion is removed. This means ensuring that the Government has adequate resources to fund our international commitments AND balance the budget. This involves making sure that adequate levels of taxation are collected and that middle class welfare is contained. Aid advocates would have a very strong campaign working for this with our natural allies – the many groups working for greater domestic welfare and equality in Australia.

  • Thanks Matthew for this analysis which is spot on. Interestingly politicians always seem to find aid funding problematic whether the budget is in deficit or not. When we have good growth and the budget is getting larger they say they can’t increase aid sufficiently because the growth is too great, and it would be too big an increase (wait for this one when we do return to surplus!) . I think Peter Graves’ reminder that the Tobin Tax could have a win-win outcome – reducing speculative money transfers and increasing budget revenues – but we’d still have to win over politicians that such revenue should be directed to aid. Matthew Dornan is right – there is almost no political cost to cutting aid. The poor leadership in this country is a major problem. Good leaders do what is right & bring the people with them. We see little or no attempt to do this from leading politicians. Instead they mostly kowtow to the opinion polls, having done little or nothing to reshape those opinions, or do the right thing despite them..

  • Thanks for this comprehensive rebuttal and demonstration of why Australia gives aid.

    Unfortunately, economic advice in Australia prioritises balanced budgets and the acts of “government” have become a simple annual accounting exercise. No-one seems to have innovative advice about finding new sources of revenue, after the negative outcomes of the “mining tax”.

    An alternative is a new (Tobin) Tax of about 0.01% applied to high-frequency foreign exchange transactions. Several years ago, the Chairman of the Australian Securities and Investment Commission (ASIC) claimed that “Australia is being picked off by highly-leveraged, online foreign exchange brokers”. [http://www.smh.com.au/business/markets/currencies/asics-greg-medcraft-says-foreign-exchange-brokers-are-picking-off-australia-20150322-1m499a.html]

    The Reserve Bank calculated FOREX trades in April 2013 averaged US$182 billion each day. By contrast, the Australian Department of Foreign Affairs and Trade reported Australia’s two-way trade in 2012 was $623.8 billion, or about 4 days FOREX trading.

    This suggests over 90 per cent of these trades are speculative. Taxing the speculators also means extra revenue for health care, aged care, education and our aid budget, for child immunisation, clean water and education.

    In 2015, The Australia Institute estimated that a Tobin Tax (on a different source) could raise about A$1 billion each year: “While many designs are possible, tax of between 0.01 per cent to 0.4 per cent on all wholesale capital market secondary transactions would discourage excessive speculation and market manipulation without distorting the primary function of the market. The rate could depend on the instrument in question and would be adjusted every five years in response to changing market conditions. A well designed Tobin tax could significantly reduce costs for workers with superannuation accounts and retail investors, as well as improving the functioning of capital markets and raising significant government revenue”. http://www.tai.org.au/sites/defualt/files/P134%20Australia’s%20Tobin%20Tax%20arguments%20and%20evidence_0.pdf

    The very traditional argument against a Tobin Tax is that it would distort the free markets.

    Yet other revenue sources have so easily disappeared into Panamanian companies and the banks are now being held to account by ASIC for distorting the market in interest rates:“The Australian Securities and Investments Commission (ASIC) launched a Federal Court action against Westpac for unconscionable conduct in relation to the bank’s involvement in setting the bank bill swap reference rate (BBSW) over a two-year period between April 2010 and June 2012. The action followed similar charges bought by ASIC against the ANZ Bank last month”.http://www.abc.net.au/news/2016-04-06/asic-hauls-westpac-into-court-on-rate-rigging-regulations/7302340

    While many arguments are put forth first about the decline in aid, then the need to increase it (eg your reasons above), few seem to address the need to increase federal Government revenues – innovatively.

    Taxing unproductive financial speculation seems a good start ?

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