What’s next for international climate spending in the UK under the new fiscal rules?

This short report recommends adjusting the treatment of guarantees as a fiscally efficient way of supporting the UK to expand its deployment of development guarantee instruments, with the aim of better managing potential exposure in the event of a default. This will help to both improve management of the in-year official development assistance (ODA) budget and encourage the Foreign, Commonwealth and Development Office (FCDO) to expand its use of guarantees for climate investment.

The UK Government’s plan to cut the development budget will place pressure on international climate spending

• The UK Government has committed to increase defence spending at an estimated additional annual cost of £6 billion. To create the space to do so, it has chosen to cut ODA. This will, in turn, impact its international climate spending at a time when it is vital to prioritise the mitigation of emissions and adaptation to a changing climate.

The Government should adapt its fiscal treatment of guarantees for international development to partially address this problem

• This would enable the Government to use guarantees for international development more strategically and at scale, for positive international development outcomes, including in relation to climate change action.
• An explicit policy is recommended whereby the UK would seek to recover the payout on its deployed loan guarantees, in line with international peers and its own best practice.
• This would encourage the UK, including the FCDO, to expand its use of guarantees for development, which can be a highly effective instrument for mobilising investment in decarbonisation and climate change adaptation, and for broader international development outcomes.

Expansion of the use of guarantees should be accompanied by the development of a dedicated architecture around their use

• The UK Government should make clear in the upcoming Spending Review that it will expand and enhance its utilisation of guarantee instruments to support international development and climate outcomes, on top of the 0.3% of gross national income (GNI) earmarked for the ODA budget.
• Development of a dedicated architecture around the use of guarantees for international development would allow the Government to set out how much support it will be able to provide in this way.