EU Budget: Could a continuing UK contribution buy time or access?

Before the election, the Secretary of State for Exiting the EU, David Davis, threatened to walk out of the proposed EU Budget negotiations if the EU negotiators demanded the UK pays a €100 billion exit bill.

But it’s not only in the UK that the prospect of a post-Brexit bill is controversial. Recent minutes of the College of Commissioners on the prospects for the Brexit negotiations describe the risks on the EU side of an early impasse over the immediate impact on the EU Budget. Put briefly, chief EU negotiator Michel Barnier warns that if early agreement on the approach to a financial settlement is not possible, “the risk of failing to reach an agreement on an orderly withdrawal of the United Kingdom would become real, since none of the 27 member states wished to contribute more to the current multiannual financial framework or receive less in projects financed under the framework.”  

That bears out the warnings of the former UK Permanent Representative to the EU, Sir Ivan Rogers who, while giving evidence to Parliament in February, said that the EU would regard the UK as “having exploded a bomb” under their financial framework – and that leaders will “care passionately about this”.  

So how much is at stake?

How much of a problem for the EU is losing the UK’s contribution?

Much of the big bill is long-term liabilities (pensions, loans to Ukraine etc). But the problems are also short-term commitments, already made – and a longer-term gap in funding, as one of the EU’s net contributors leaves.

Although it was hard to tell in the fog of the referendum war, the EU Budget is, in total, tiny, at 1% of total EU-28 gross domestic product (GDP). But in 2015, the UK was the third highest contributor, paying in (after rebates and adjustments) €18.2 billion – or 15.4% of the Budget. Losing a sixth of your income overnight is potentially quite serious.

But of course, revenue is only one side of the equation: the other side is spending. In 2015, the UK was allocated €7.5 billion. So the UK’s departure leaves a potential gap of around €10.5 billion a year.

Filling the gap

As Barnier rightly points out, there are two ways to fill that gap in the long-run: to raise contributions or to cut spending. The EU Budget for 2014-20 was already reduced from levels between 2007-13. But EU spending accounts for a big GDP contribution in some member states – those that are resisting cuts: in 2015, the European Commission estimated that EU spending accounted for 6.4% of Gross National Income in Bulgaria and 5.2% in Hungary, compared to less than 0.5% in Germany and the UK and 0.65% in France. Covering the disappearance of the UK’s contribution would require each of the 27 member states to swallow a 7% cut in the money they receive from the EU, potentially quite big chunks out of the domestic budget in some countries.

The other option would be for everyone to pay a bit more. To make up €10 billion from a non-UK resource base of just over €130 billion would require the other member states to make up the difference and an increase of contributions to fill the 8% gap. That would require Germany to pay around €2 billion more.

Options involving both cuts and revenue raising are available.

An incentive for transition?

It is clearly much easier to settle this by asking the UK to continue to pay for a period at least – postponing a wrangle within the EU-27 over money. And indeed, meeting short-term commitments under the current financial framework, is one component of the much larger exit bill being talked about. For the EU, the attraction of a transitional deal with the UK is that the UK would go on contributing for longer.   

It is often said that in the end most EU negotiations come down to money. Money may prove the unsquashable fly in the Brexit ointment – or be the lubricant for a deal.