6 September 2017

The Brexit ‘divorce bill’ is nothing of the sort


Now that Polly Toynbee is weighing in with wails about the size of the Brexit bill, we know two things about the process. It’s a good thing to do and it’ll be remarkably good value. Every political compass does require its butt end after all.

However, one thing everyone must understand is that we’re not being asked to pay a divorce bill. Instead, what is being made clear to us is the cost of staying in. All those little bits that we weren’t told about in more normal times, the bits over and beyond the £350 million a week that we may or may not spend on the NHS.

Some of what is being demanded is entirely ridiculous, various loan guarantees for example. These stem from when the EU decided it wanted to have more money but no one was willing to hand it over. So it was borrowed instead, with the national governments agreeing to cough up if, and only if, the loan could not be repaid.

But we’re being asked to pay up on the guarantees as we leave, rather than when that failure happens. Admittedly, we’re all pretty sure that loans to Ukraine aren’t going to be repaid any time soon, whatever the schedule says on paper. But then that’s just evidence that they weren’t really loans in the first place.

Then there is the insistence that we continue to pay up for the period after we leave. The basis for the request is that we’ve agreed to pay into the budget for a certain period and we should honour that, whether or not we’re members. As we’re not going to be in for this last year or so of the current budget period then we probably shouldn’t be paying in now either.

That leaves us with the parts that are only mildly ridiculous, like the demand that we pay the pensions. Basic public choice theory would tell us that any bureaucracy will act in this manner. People do indeed protect their own economic interests where they can. Which is why the negotiators on the EU side are insisting, very loudly, that their comfy pensions will continue to be paid and the interests of everyone else be damned. We can’t even talk about the Germans continuing to sell us cars until this matter is sorted.

However, the most important thing we’ve got to understand is that this isn’t a divorce bill. The EU’s entire basis for the amount being demanded is that it is simply insisting on us paying what we’ve already agreed to pay – which we would have to pay if we stayed in. We would have to pay into the budget, we would have to make good on those loan guarantees, we would have to pay the pensions.

So, when some number like €100 billion is floated out of Brussels that’s how we should read it. If you Brits decided to stay in the EU, then it would cost you €100 billion. Or €50 billion, €30 billion, whatever digits have been selected today. Indeed, we’re being told the full cost of remaining, not the more palatable nonsense about thruppence ha’penny per person per day for peace in Europe.

This also means that whatever the bill ends up being, it is a sunk cost. We’d definitely have to pay if we stayed, we’re going to have to pay – preferably a figure at the lower end of the range – if we leave, thus the bill has no effect whatsoever on the decision to stay or go. That’s what we mean by sunk cost.

To put this another way, to remain would be to sign up to a never ending series of those €100 billion payments, to leave is to draw that line in the sand beyond which we can indeed spend the cash on the NHS if we so wish. Or even not tax ourselves and leave the money fructifying in our pockets.

There simply isn’t a Brexit divorce bill at all, there’s only a clarification of how much continued membership would cost us.

Tim Worstall is senior fellow at the Adam Smith Institute