26 June 2017

Should Britain pay the Brexit bill?

By Julian Jessop

One of the key elements of the Brexit negotiations will be to decide how much the UK will have to pay the EU to settle financial obligations undertaken while it was a member. Some EU officials have suggested that the bill should be €100 billion. Many Brits would counter that the right figure is “zero”.

A compromise might be acceptable – provided the UK gets something in return. A figure of around €30bn (£26bn) could be justified based on obligations until 2020. But if the two sides fail to agree a good deal on their future relationship, including any transitional arrangements, the UK can, and should, walk away without paying a penny.

Stepping back a bit, the term “divorce bill” is actually a little misleading. The EU existed before the UK joined and will (probably) last long after the UK has left. It is not, therefore, simply a matter of dividing up assets and liabilities in the same way as a divorcing couple might sell the family home or fight over custody of the dog.

A better analogy is leaving a club. The UK agreed to pay membership fees in return for access to the services provided by the EU and now needs to close its account. What’s more, these are sums that the UK would have had to pay anyway even if it remained a member. As such, the exit bill would not be an additional “cost” of leaving (as many like to claim).

This, however, doesn’t answer the question of why the UK’s contributions can’t simply cease in March 2019 and, especially, why the UK should continue to pay towards EU spending that will take place after the UK’s departure. Indeed, the House of Lords has concluded that, on the basis of Article 50, the UK would be on strong legal ground if it declined to pay any divorce bill at all.

But this approach could backfire. A more flexible stance should increase the chances of getting better terms on other aspects of the negotiations which will ultimately be more important – including a bespoke free trade deal. Rather than sticking to the letter of the law, the UK could earn some goodwill (and tangible benefits) by focusing on the spirit of the past and future partnership.

In particular, the EU made long-term financial commitments during the period of the UK’s membership, (mostly) agreed by the UK, and on the assumption that the UK would continue to contribute. Given this, there is a decent case for arguing that the UK should make its usual payments until the end of the EU’s current Multiannual Financial Framework (MFF), which runs from 2014 to 2020. To return to the club analogy: if you have signed up to a long-term subscription you might still be liable for the whole amount even if you decide to leave early.

My back-of-the-envelope calculations suggest this would imply a divorce bill of around €25bn (net of the UK’s rebate and EU spending in the UK), to cover the period from March 2019 to the end of 2020. I would add a few smaller one-off items, notably a contribution to pension payments for EU officials, which would take the total bill to around €30bn (approximately £26bn).

This would be equivalent to less than three years of the UK’s current annual contributions – arguably a small price to pay to secure a better relationship with substantial advantages long into the future. Depending on how the negotiations play out, it could also cover an interim period after March 2019 when the UK is benefiting from some transitional arrangements.

However, the EU is asking the UK for a lot more, including large contributions to spending which will take place after 2020. The calculations here become hugely complicated, but the Bruegel think tank has made heroic efforts and the FT’s Alex Barker is good on the politics.

In a nutshell, EU officials have demanded that the UK contribute its full share of the following: current spending up until at least 2020, including on the Common Agricultural Policy and EU running costs; long-term capital spending, including structural funds; and money allocated in current and past MFFs that has not yet been paid out (known by the French term ‘Reste à Liquider’). There is some overlap between these categories, but the key point is that the UK’s usual annual payments would not be enough to cover all of them.

Frankly, this is going too far. The EU needs to adjust its spending to reflect the fact that the UK is leaving and a grace period until the end of 2020 is surely long enough.

The EU is also asking the UK to make large upfront payments for contingencies that may never arise – and then wait years for a repayment. The main item here is guarantees on loans made by the European Investment Bank. It would make more sense to adjust the paperwork so that the UK can remain a counterparty on the current terms rather than require large payments back and forth.

Altogether, the EU’s demands add up to a gross bill of around €100bn. And on this basis, the net bill would still be at least €60bn, even after allowing for the UK’s rebate (itself in doubt), EU spending in the UK, and future refunds on contingency payments.

However, negotiations have only just begun and there is surely room for compromise. My figure of €30bn would be consistent with meeting the EU half-way between their net €60bn and the UK’s fall-back position of zero. But if there is “no deal” by March 2019, the UK should be ready to start saving money straightaway.

Julian Jessop is Chief Economist at the IEA