Home > Economic policy > What I wrote on Budget Day: Aid

What I wrote on Budget Day: Aid

May 12th, 2010

I’ve changed this a bit to be clearer on points that I hadn’t sorted out in the lockup. It was a long day

One of the more intriguing items in the budget estimates is a saving of $1 billion over four years in foreign spending attributed to “Overseas Development Aid – GNI methodology change”. To complicate matters further, the Treasurer explained in his press conference, that this was the wrong way around. Actually, the amount recorded was an additional expenditure avoided by not changing the methodology. Confused? Then read on, there’s plenty more like this in the aid budget.

The story behind the $1 billion is that Australia has promised to increase development aid to 0.5 per cent of its Gross National Income (as I explain here (link to critique of Henry Review from last week), National Income and not the more commonly used Domestic Product is the right basis for most calculations. Unfortunately for the government (at least in this instance), a recent agreement by statistical agencies has changed the way GNI is calculated. Australia’s statisticians were the first to implement this change, and the result was to increase our GNI by 4 per cent, or about $50 billion.

Over four years, 0.5 per cent of $50 billion a year adds up to $1 billion more on the forward estimates. So, the government has decided to use the old estimate of GNI, and avoid paying the extra billion.

More than any other component of the budget, the aid budget is full of puzzles of this kind, which make it almost impossible to determine whether the government is delivering on its commitments. Consider one of the few clearly positive outcomes of the Copenhagen process, the agreement by developed countries to contribute $30 billion in funding from 2010 to 2012 to support mitigation and adaptation in developing countries.

Since we account for around 2 per cent of world income, Australia’s share amounts to around $600 million, and the Budget papers contain a list of projects which, added together, total up to about this sum. But many of them have been announced before, and the period over which the money is to be spent is unclear. Moreover at least some of the new money appears to have come at the expense of other aid projects. So, is Australia meeting its commitments? Almost certainly not, but the Budget accounting is so opaque as to make this very hard to determine.

The same point can be made about progress towards the target. The Budget papers make the point that aid is projected to increase slightly as a share of GNI this year, from 0.32 per cent to 0.33 per cent. But last year’s budget promised 0.34 per cent, a target that was not reached. So, if we have a comparable shortfall this year, aid may actually decline.

As is commonly the case, the aid budget shows very modest changes this year, with a projection of much bigger increases in the out years, so as to meet the targets by 2015. But sad experience suggests that these projections will be derailed by some crisis or another.

If we, and other developed countries, thought hard about our own long-term interest we would realise that well directed foreign aid is about as good an investment as we can make. But the realities of politics ensure that there are many more votes to be had from tax cuts or parochial pork. Until this changes, the likelihood that we will meet our international commitments remains low.

Categories: Economic policy Tags:
  1. May 12th, 2010 at 23:53 | #1

    Thank you for these articles, John.

    Australia is probably not the only nation fudging the books on aid and Copenhagen commitments. Not surprising with the cost of the GFC to various nations. I understand at least some countries are switching their ‘normal’ aid to represent part of their Copenhagen commitment. I’m not sure whether this is acceptable or not.

    I agree that investment now is even more urgent or we’ll be dealing with higher costs down the track. But politicians are not very good at looking beyond their immediate term in office. (It was good to get a longer term view in this budget – even if the presentation and content wasn’t all to my liking :D )

  2. Darryl Rosin
    May 13th, 2010 at 08:24 | #2

    John, I think you have left out a link:

    “(link to critique of Henry Review from last week)”

    As always, I appreciate your efforts on this blog.

    d

  3. Tony G
    May 13th, 2010 at 10:41 | #3

    Some interesting comments by costello here

    http://www.smh.com.au/opinion/politics/futuristic-budget-is-devoid-of-reality-20100512-uxy5.html

    Re the forecast surplus

    “Swan made the absurd claim the government would balance the budget three years ahead of schedule. What schedule? The one in last year’s budget which dumped the schedule of the year before. In 2008, we were going to have surplus as far as the eye could see. In 2009, we were going to have deficit as far as the eye could see.

    The 2008 forecast was complacent. The 2009 forecast was a counter reaction. Neither represented reality. Since both were out of date after six months, logic suggests we should be careful talking about outcomes for 2013.

    “For the record, government spending will exceed revenue in the next financial year – a deficit of $40 billion – which will be financed by new debt. In dollar terms, it is the second highest deficit on record and in percentage terms about the level we had in the recession of 1983 and the recession of 1992. Except we’re not in recession, but in the middle of the greatest mining boom since the gold rush.

    We definitely have a big spending big taxing government with spending exceeding revenues by $40 billion this year with more tax rises to come.

    Labour = spend, spend, spend, new tax, new tax, new tax, spend, spend, spend, spend new tax, new tax, spend, spend and then borrow, borrow, borrow, borrow, recession we have to have.

  4. Doug
    May 13th, 2010 at 11:47 | #4

    Above comment has nothing to do with the specifics of the aid spending which was the point of John’s posting. should have gone on the general budget thread.

    On the issue of aid: There are some risks with the profile that the Government is adopting to get to its .05 commitment as John notes. An additional risk is that Bob McMullan will not be there to push things along with all his experience.

    On the upside the change of the accounting convention on GNI means that if the Goveerment actually delivers on the .05 commitment the actual dollar value will be higher than under the previous accounting conventions.

    Conclusion: community sector needs to keep on pushing the Government on this. 1,000 young people in Canberra this week lobbying Parliament on the issue (Oaktree Foundation I think). Micah Challenge the churches arm of Make Poverty History will be here with several hundred community reps in late June on the same issue.

Comments are closed.