Budget support is aid provided directly to a partner government's central budget and spent using the partner government's financial systems. It aims to reduce poverty by helping to fund the poverty reduction strategy of the recipient country. The Department for International Development's (DFID) use of budget support is part of a broader move by donors away from traditional project-based aid. DFID and many other donors consider that budget support can help to strengthen government capacity in developing countries, increase harmonisation between donors, expand service delivery and ultimately assist in poverty reduction. At the same time, it also carries the risk that the aid will not be used effectively because, to deliver results, DFID relies on developing country systems, which are often weak.

In 2006-07, DFID spent £461 million on budget support to 13 countries. This sum represents nearly 20% of its bilateral expenditure. DFID has been a key player in developing and using budget support, which is now the Department's preferred method of delivering financial aid where country circumstances are suitable. DFID expects to increase its use of budget support further in the future.

Budget support has been designed to improve aid effectiveness by reinforcing developing country policies and systems, and reducing transaction costs. Despite having provided budget support in some countries for many years, however, the Department has not established whether it is in practice cost-effective.

DFID's main criterion for providing budget support is that benefits must outweigh the risks, a judgement which is assessed subjectively by country teams. DFID assesses weaknesses in financial systems but rarely estimates the associated risks of corruption or waste of UK funds. DFID's monitoring has basic weaknesses in specifying suitable indicators and tracking progress against objectives.

Bodies such as Parliaments, State Audit Offices and civil society organisations can provide effective challenge to governments and ensure that the poor benefit from budget support funding. DFID has not historically paid sufficient attention to strengthening domestic accountability. DFID also has a responsibility to UK stakeholders to demonstrate that funds have been spent effectively.

On the basis of a report by the Comptroller and Auditor General,[1] we examined what budget support has achieved to date and how well DFID manages its budget support programmes.