Westminster Blog

Ambassadors living in elegant period mansions, supping vintage wines and enjoying banquets at taxpayers’ expense – this is one common caricature of Britain’s diplomatic service.

Among the public the impression of the Foreign and Commonwealth Office is not one of financial austerity. Nor do visitors to the Whitehall ministry get any such impression, with its ornate corridors, grandiose stairways and gilt-edged internal dome.

Yet there have been growing concerns within Whitehall for many years that the FCO is seen by successive governments as an area ripe for spending efficiencies.

The new-found stringency can be seen in several ways. Middle-ranking diplomats are now limited to an “entertainment” expenses budget of just £200 a year, for example.

Cuts to the “overseas allowance” have even led to recent employment tribunal cases, supported by the PCS and Prospect trade unions, although these were withdrawn after a settlement was agreed.

Meanwhile embassies are still advised to buy UK cars as a marketing opportunity but only if this ensures strict “value for money”.

And now the foreign affairs select committee has warned that fresh cuts could have a “serious effect” on Britain’s international relations “out of all proportion” to the sums involved.

Lord Malloch-Brown, a former minister in the department, said that cuts under his own Labour government fell “astonishingly disproportionately” on the Foreign Office because its expenditure consisted mainly of staff and buildings.

“The whole model of Treasury-driven cuts over the previous government cut into the bone of the Foreign Office,” he told the committee during its hearings.

Financial damage was then wreaked on the FCO through a botched attempt to hedge currencies that left it with a hole of up to £150m. The department had given up its “overseas price mechanism”, which protected its budget from falls in sterling, just before the pound plummeted.

Then when the coalition carried out its spending review in 2010, ministers spared the Department for International Development from the knife, but not the FCO. Its budget is falling from £1.6bn to £1.36bn over this parliament, while Dfid’s is rising from £8.2bn to £10.8bn.

The department has struggled with the cuts because a large proportion of its spending is inflexible, as it does not administer large programmes, unlike most other departments.

Instead it is cutting local staff and merging administration across regions while slashing junior postings abroad.

The biggest cost-cutting exercise is the sale of £240m of buildings to shave £34m from the annual budget. Officials describe the process as a simple “recycling of capital” to pay for new properties as the department moves its strategic priorities towards developing countries.

The FCO is expanding in Brazil, Turkey, Mexico and Indonesia and establishing new embassies in Sudan, El Salvador, Madagascar and Somalia. Large contingents of staff are being deployed to India and China – though the speed of these changes depends on the security situation in Iraq and Afghanistan.

But the upshot is likely to be the sale of hundreds of historic properties and large numbers of job losses in areas now seen as less of a priority, such as “subordinate posts in Europe”. Friday’s report by the foreign affairs select committee warns that there is now an “unwelcome incentive to sell historic or prestigious buildings”.

In Brussels the UK diplomatic corps is only half the size of the French and the German contingents. In Greece at some points during the financial crisis, there were only two FCO diplomats along with some local staff.

Some fear the cuts could inevitably damage David Cameron’s attempts to use the FCO as a support agency for the UK in its attempts to increase trade overseas.

He is not the first prime minister to have sought to place a commercial emphasis on the FCO: Joseph Chamberlain in 1896 said the department should be “chiefly engaged in finding new markets and in defending old ones”.

But Mr Cameron went about the process with particular relish – he appointed Simon Fraser, a former mandarin from the business department, as permanent secretary and called for an overhaul:

“I want to refashion British foreign policy, the Foreign Office, to make us much more focused on the commercial aspects … making sure we are demonstrating Britain is open for business.”

That ambition is now being undermined by the squeeze on funding, according to the foreign affairs select committee, whose report comes out as Mr Cameron arrives in Myanmar.

Richard Ottaway, chairman of the committee, warned that the budget cuts would have a “very damaging effect” on the FCO’s ability to promote and safeguard British interests overseas. The 2010 spending round would “exacerbate long-term problems” caused by years of cost-cutting, he added.

And there could be more subtle consequences, for example, the loss of “soft power” because of plans to put the British Council on a more commercial footing.

The FCO responded to the report by saying it was encouraged that the committee had recognised its performance as “impressive” despite successive budget cuts.