What is the ‘EU divorce bill’?
Brexit negotiations will involve three separate but inter-related deals: a ‘divorce’ settlement, a transitional arrangement, and a deal on the UK-EU’s long-term relationship.
Currently the UK makes annual contributions to the EU Budget. Those will stop when we leave, although the Prime Minister has made clear the Government’s willingness to make “appropriate” payments to the EU for participation in “specific programmes”. What those payments might be and which EU programmes we want to participate in will be part of the discussions on a transitional arrangement and the UK-EU’s long-term relationship.
The divorce bill settlement is a separate issue from any continuing contributions. The European Commission expects the UK will pay an exit bill when it leaves the EU. In its recently published negotiating mandate, the Commission outlined that an “orderly withdrawal…requires settling the financial obligations” and that “the methodology for the financial settlement…has to be established in the first phase of the negotiations”. Therefore, the principles of the divorce bill must be settled before further negotiations can begin on the UK-EU future relationship.
Why do we face a divorce bill for leaving the EU?
The EU is an organisation with assets and liabilities.The EU has been clear that when the UK leaves, it is expected to pay off its share of the liabilities: this is referred to as the Brexit 'divorce bill' or exit bill. There have been no official estimates published of the size of the bill. In the opening negotiations both sides will seek to agree on the methodology for calculating the bill, and the actual figure will be finalised at the end of negotiations. The Commission has now published its opening methodology, although as expected this does not give a figure for the bill's size.
How much might this be?
The Financial Times in November 2016 originally reported that the European Commission was seeking an exit bill of €60 billion, based on comments by Michel Barnier, the EU’s chief negotiator on Brexit. In February, the same author writing for the Centre for European Reform (CER) estimated that the bill could range from €25–73 billion. Bruegel have given a similar range for the bill, at €25.4–65.1 billion. Most recently, Alex Barker, writing again in the Financial Times, put the net bill at €55–75 billion, based on a €91–€113 billion gross figure.
The Commission's methodology appears to align with the higher-end estimates (and indeed includes other items that these earlier estimates did not take into account).
How did they work out the figures for this divorce bill?
Calculations are based on what we owe, and what we can offset. The quoted figures have a large range due to varying methodologies of calculating the bill. The lower band €25 billion represents minimal obligations to the EU and maximum UK receipts, while the top-end €75 billion comes from maximising the UK’s obligations and minimising its receipts. The gross figures of €100 billion includes some extra obligations and does not take any account of any receipts owed to the UK.
The UK’s obligations can be categorised under various headings:
1. Outstanding budget commitments
The EU Budget operates through a multi-annual spending structure, which means projects are paid for over a period of several years. As a result, EU Budget payments are back-loaded and many will be paid out post-Brexit. For example, a key element of EU spending allocations consists of cohesion fund payments, aimed at raising living standards in the 2004 Accession countries. According to the CER, only 25–30% of the biggest cohesion fund payments will actually have been spent by the time Britain is expected to leave the EU in April 2019.
The current EU Budget period runs from 2014–2020, finishing a year after the UK’s exit date. A key point of legal uncertainty is the status of financial commitments scheduled for 2019 and 2020. The UK has indicated that it only expects to fund its budget commitments up until April 2019. However, the Commission's methodology is clear that the UK should meet the full schedule of obligations up until 2020.
2. EU officials’ pensions
Like the UK civil service pension scheme, the Pension Scheme of European Officials (PESO) is an unfunded scheme and operates on a ‘pay-as-you-go basis’, with costs being covered by the annual EU Budget as they arise. The Commission outlines that the UK should make a payment to cover the costs associated with this scheme, as they appear in the EU's conslidated accounts at the time of the UK's withdrawal. There have been suggestions that the UK could push for this liability to simply cover the costs of UK nationals working for the Commission, lowering the bill due to the under-representation of British officials. The Commission's methodology suggests that the EU would contest such an approach.
3. Contingent liabilities
The EU incurred contingent liabilities while the UK was a member state. These liabilities effectively constitute payments that would be triggered in specific circumstances only, for example, Ukraine defaulting on its EU loan. When the 2015 EU accounts were drawn up, outstanding loans to Hungary, Ireland, Portugal and Ukraine collectively amounted to €49.5 billion. The EU’s latest approach asks the UK to make a lump-sum payment upfront to cover these liabilities, in case they materialise in the future. This increases the upfront divorce bill by €9–12 billion. However, these upfront liability payments would be reimbursed over the coming years, enabling the UK to recover some of this money.
4. Other costs of withdrawal
The Commission’s negotiating mandate also includes the “specific costs related to the withdrawal process”. This would cover the relocation of the two London-based EU agencies after Brexit; the European Banking Authority and the European Medicines Agency. Other costs include the decommissioning of the Joint Research Centre nuclear sites and funding British teachers seconded to European schools until 2021.
Do we get anything in return?
The divorce bill could be offset partly by the UK’s share of EU assets, rebates and budget receipts. Some could be immediate deductions from the bill, while others could be longer-term payments over the next decade or more. Potential issues are:
- budget receipts: money that the UK would have got from the EU Budget
- rebate credits: repayment of outstanding credits from earlier contributions
- asset shares: this is likely to be most contentious, with arguments about whether the UK is entitled to shares of the value of buildings and a share of the capital of the European Investment Bank (EIB).The Commission's methodology outlines that the UK's paid-in capital to the EIB will be returned, but only after the EIB's loan book is balanced.
Could we walk away without paying a Brexit ‘divorce bill’?
The Lords’ EU Financial Affairs Committee reports that the “strictly legal position of the UK on this issue appears to be strong”. If negotiators fail to agree on a political financial settlement, it could become a legal case in the International Court of Justice or the Permanent Court of Arbitration, both located in the Hague. The result of such a court case would be hard to predict. However there have been suggestions that this international arbitration solution would be preferable to a political settlement.
Has the Government already made provision for any payment?
In its latest forecast issued at the time of the Budget, the Office for Budget Responsibility assumed that any savings on our annual contribution would be recycled into UK public expenditure. No explicit provision was made for any exit payment.
So what is the Government’s position on paying the divorce bill?
In Theresa May’s Article 50 letter to EU President Donald Tusk, she simply said that both sides “will need to discuss how we determine a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of the United Kingdom’s continuing partnership with the EU.” This contrasts with the EU’s position of progressing with the withdrawal negotiations (including the divorce bill), before moving on to the future relationship arrangements.
The Government has been silent on any figure. However, speaking on ITV in May, the Secretary of State for Exiting the EU, David Davis, insisted that the UK “will not be paying €100 billion” [€100 billionn being the recently quoted gross figure, amounting to the higher end €75 billion net bill].
How will this end up being settled?
It remains to be seen whether the agreement will be political or legal. But the divorce bill is seen as one of the areas which could get in the way of any deal being agreed.