Brexit negotiations involve three separate but interrelated deals: a ‘divorce’ settlement, a transitional arrangement and a deal on the UK-EU’s long-term relationship. The first two will be agreed in the withdrawal treaty – the text of which is currently partly agreed.
Currently the UK makes annual contributions to the EU budget. Those will stop when it leaves the EU, although the Prime Minister has made clear the Government’s willingness to make “appropriate” payments to the EU for participation in “specific programmes” after Brexit. What those payments might be and which EU programmes we want to participate in will be part of discussions on the UK-EU future relationship.
The divorce bill is the amount we have agreed to pay in settlement of our outstanding liabilities when we leave.
The EU is an organisation with assets and liabilities. The EU has been clear that the UK is expected to pay off its share of the liabilities when it leaves the bloc. The initial discussions have covered both contributions due under the current multiannual financial framework (EU budgets are in seven year chunks, and the current one ends in December 2020); amounts outstanding from earlier commitments but due after the end of the multiannual financial framework (so-called reste à liquider); and contributions to future liabilities of the EU – in particular, pensions to EU civil servants as well as some loans the EU has made, for example, to Ukraine.
On the assets side, the most notable asset was the UK’s capital share of the European Investment Bank. The EU initially asked that the UK settle upfront in a lump sum. The detail of all the headings that the EuropeanCommission has put on the table is set out in its working paper Essential Principles on Financial Settlement, published on 24 May 2017. Reports from Brussels have suggested that the Commission’s original position was toughened up by the EU member states in internal discussions to include, for example, continued support for Common Agricultural Policy payments.
The December joint UK-EU report showed that both sides had agreed a methodology for working out what the UK would pay – and that those payments would be made in advance as they fell due rather than settled in one go.
The deal in December did not contain an exact figure, though at the time, UK officials estimated a potential bill of £35–39 billion (bn).
The UK’s Office for Budget Responsibility (OBR) set out detailed estimates of what the UK would pay in its Economic and Fiscal Outlook report, published alongside the Chancellor’s Spring Statement. That set out a total bill of €41.4bn (£37.1bn), extending out to 2064 as pension liabilities fall due.
But it also makes clear that around half consist of payments the UK will make during the transition phase. The OBR estimates net payments under the financial settlement of €18.5bn (£16.4bn) in 2019 and 2020, during the transition, followed by net payments of €7.6bn in 2021, €5.8bn (2022) €3.1bn (2023) and €1.7bn (2024) before falling away to €0.2bn in 2028. The liabilities, net of assets, that then remain to be paid amount to a total of €2.7bn over the period 2021–45.
The OBR makes it clear that the UK payments under the divorce settlement are significantly lower than the UK’s continued net contribution would have been if we had remained a member. But it also notes that these numbers do not tell the whole story, because:
- Ministers have committed to replace funding where there are currently receipts from EU programmes: the UK currently receives £3bn from the Common Agricultural Policy but also money from structural funds and science research programmes. Those commitments are time-limited but are unlikely to cease completely once the UK has left the EU.
- The UK has said it may participate in EU agencies and programmes after Brexit. Those would come at a price yet to be negotiated. The OBR notes that in 2016 the cost of UK participation in Erasmus (student exchange), Creative Europe and Horizon 2020 was £2bn.
The UK will incur other costs as a consequence of Brexit:
- The UK will incur continuing costs of running the new post-Brexit regimes for customs and EU migration. The Chief Secretary to the Treasury announced an allocation of £1.5bn for Brexit preparations in 2018–19, the bulk of which was to prepare the border.
- If the UK decided not to participate in EU agencies, it would bear the costs of setting up new agencies – though most of the running costs would be recouped from business.
As the OBR notes, the final factor is that any deterioration of economic performance as a consequence of Brexit will have a significant impact on the public finances. The Government’s own sectoral analyses, published by the Commons Exiting the EU Committee, suggests that an agreement to an European Economic Area-style relationship would lead by 2033–34 to an annual deterioration in borrowing of £20bn rising to an £80bn borrowing increase if the UK was trading with the EU on World Trade Organization terms.
The financial deal is an integral part of the withdrawal settlement that also includes the agreement on transition, so reneging on the financial deal would mean leaving the EU with no transition arrangements in place. Future UK compliance will be overseen by the governance arrangements agreed as part of the withdrawal treaty.
If negotiations broke down later this year, and the UK refused to pay, the EU might seek redress through 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.