24 March 2017

How much will the Brexit divorce cost?


When Article 50 is triggered next Wednesday, it is said the EU is going to ask the UK to pay a “divorce bill” of up to £50 billion.

So far, commentators have been mulling over what the EU is said to be asking for, and the political viability of either side backing down. But what about the rights and wrongs of the said demand: ought we have to pay anything, and if so, what?

Presumably, the simplest set of payments to consider are those we want to pay because we get something in return. For example, if we want to continue to fund research via certain EU programmes, we’ll continue to pay for it. That isn’t a “divorce bill” per se, but if someone found it politically convenient to dress it up as such, we might either find it politically useful – or damaging – to go along with.

A second set of payments might be for things we don’t think we ought to have to pay to get, but that we might pragmatically accept contributing towards. For example, suppose that the British Government did not believe it was necessary for EU inspectors to check the customs compliance of goods being exported from the EU to the UK because UK inspectors would look at these anyway.

But suppose, also, it became clear that the EU felt this absolutely necessary and would not accept a trade deal with the UK without it. Suppose that every other country with which the EU had a trade deal was treated in this same way, and that the EU and trade agreement countries shared the costs of such EU inspections.

Then we might feel it was worth paying for such inspections as a quid pro quo of a new trade deal. It wouldn’t be a “divorce bill” but perhaps politics meant it was being described as such.

Add to these the costs strictly incurred (not simply undertakings made) while we were members. For example, if the EU bought a building in 2010 and if it had paid cash, the UK would have paid for that building out of its contributions.

If, though, the EU had bought that same building with a mortgage, then the obligation to pay would still exist but would, instead, be spread over time. The UK shouldn’t object to making such payments.

Another variant of an ongoing obligation would be financial guarantees provided against loans other member states or member state institutions took out. If we have made a guarantee, that guarantee may well outlast our membership.

Yet another variant would be the pensions of those working at the Commission or Parliament while the UK was a member. If we were working, say, in 2015 for an institution with a pension scheme, part of our remuneration would come in the form of a commitment to pay a pension later, say in 2030. That is not really a “2030 expense”. It is a 2015-incurred expense.

If the pension had been fully funded, the UK’s contributions to the EU would have been used, at the time employees were working, to create a pension fund. But the EU’s pension scheme (like the UK’s civil service scheme) works on a pay-as-you-go basis. So instead of paying at the time, the UK has built up an obligation to pay in the future.

Moreover, this sort of payment is not restricted to the UK employees of the EU institutions. The UK contributions would apply to all the staff working at the time even if none of them were British. The nationality of the employee is neither here nor there as far as the notional obligation is concerned.

But just as the UK might have ongoing liabilities, it might also have an ongoing stake. If, for example, the UK’s contribution funded certain EU buildings, the UK should own a share of those as well as having a share in any “mortgage” on them.

The next category of liabilities are those within the budget framework running from 2014 to 2020. This was a political agreement, embodying anticipated contributions and payments each year. The UK signed up expecting to remain a member of the EU.

Even so, leaving the EU was a possibility under the EU’s own rules — under Article 50. So it is in no way a violation of the agreement that the UK ceases to be a member during a budget framework period. But how much of the 2014-2020 budget framework will the UK have to contribute to?

If the UK had triggered Article 50 three months after the 2014-2020 budget framework had been agreed,  there would have been no question of asking the UK to make all the contributions to 2020.

If we leave in 2019, the EU could of course commence its next framework a year early, or it could make other arrangements for the final year of the framework. But either of those options is an enormous political headache.

It would make much more sense for the UK to continue to make much the same contribution, for the period to 2020. The question, then, is what the UK would be getting in return.

What the UK gets for its money is oversight by the Commission and the courts, the opportunity to help boost the economic development of less developed member states, and various other things.

The UK could continue as a member of the EU for an extra year and leave in 2020. With a bit of common sense and goodwill all round, that is probably what should have happened from the start. An alternative at this stage might be for the UK to continue as a member of the Single Market for an extra year, perhaps with some special no-free-movement provision.

But the UK should not be obliged to pay those monies allocated in the 2014-2020 framework. It should pay that money for pragmatic reasons, because it gets something pragmatically and visibly attractive in return.

Finally there is the suggestion that the UK should somehow be liable for general political understandings or expenditures that the EU hasn’t yet got around to. This is for those EU member states who joined the EU in anticipation of receiving financial support from the rest of the EU, and the UK agreed to that. It’s suggested that the UK should pay even if it is no longer in the EU.

Or say the EU said it wanted to spend £10 billion in some member state in the year 2016 but has only got around to spending £5 billion of that, and is insisting the UK should still pay “its share” of the other £5 billion whenever that expenditure finally happens.

These claims seem entirely bogus. If the UK wants to provide financial assistance to, say, Cyprus after it leaves the EU, that might or might not be in our national interest to do so. But that is our business.

If we leave the EU, the EU changes. Since there are fewer net contributors, it may be less attractive to be a member. That is not our problem. If EU member states want to provide financial assistance to other EU member states, good on them. Once we are out, that’s nothing to do with us.

Overall, then, there are various categories of financial obligation the UK will have (as well as various assets it can claim). There will also be certain other financial contributions there may be good pragmatic reasons we should consider making. And we might pragmatically choose to go beyond what we really ought to pay and even what we would consider ourselves benefiting from.

But we should attempt first, to distinguish for ourselves what are our true obligations (and assets), and what are not.

Andrew Lilico is an economist and political writer