This Blog looks at the financial bill that the UK faces following its departure from the European Union (EU). The latest estimate is that the UK owes the EU over €47 billion; according to the EU’s Consolidated Accounts 2020 published earlier this month. This estimate is disputed by the UK authorities according to reports in the UK media. In the case of the Financial Times, it had the headline – “UK and Brussels clash over £40bn Brexit divorce bill”.
On 31 January 2020, the UK withdrew from the European Union. The terms of its departure are defined in the Withdrawal Agreement. A precise set of obligations were agreed, by the EU and the UK, as part of the Agreement.
These obligations are not a one-way street. There are liabilities and receivables which are calculated and reflected in the EU’s annual accounts. The 2020 annual accounts show these amounts for the first time, as this is the year the UK left the EU. It is important to recognise that, during the transition period, the UK continued to contribute to and benefit from the EU budget, as if it were a Member State. After the end of the transition period, the UK continued to contribute to the EU budget.
There are eight main areas where the EU and the UK agreed as part of the Withdrawal Agreement there would be obligations to make payments. They are:-
- Own resources (Article 136)
- Outstanding commitments (Article 140)
- Competition fines (Article 141)
- Union Liabilities (Article 142)
- Contingent financial liabilities and financial instruments (Articles 143 & 144)
- Net assets of the European Coal & Steel Community (Article 145)
- EU investment in the European Investment Fund, EIF (Article 146)
- Contingent liabilities concerning legal cases (Article 147).
The Withdrawal Agreement lays down the manner in which these obligations will be dealt with each year. In summary the EU will report twice a year to the UK on the amounts due and the UK will pay these on a monthly basis. The reporting will be updated each year based on actual figures.
The latest estimate is that the UK owes the EU €47.5 billion. This is according to the EU’s Consolidated Accounts 2020 published earlier this month. The breakdown of the estimate is presented in Table 1.
Table 1: Amounts UK owes EU
In January 2018, Philip Hamell, the then UK Chancellor of the Exchequer, informed the UK Treasury Committee that the total cost of the settlement would be between €40 billion and €45 billion. The higher limit is €2.5 million below the latest estimate from the European. Commission.
However, the UK Government has not yet published an updated estimate that could be compared with the July 2021 estimate published by the European Commission. For comparison purposes, we have taken a detailed estimate published by the UK Office for Budget Responsibility (OBR) in November 2018 (this organisation provides independent analysis of the UK’s public finances). The Office based its estimate on three main components:
- the period up to 2020, in which the UK continued to contribute to the EU budget as if it had remained in the Union;
- outstanding commitments at the end of 2020, which have been agreed but not yet paid by the time the current Multiannual Financial Framework (2014-2020) ends; and
- other actual and contingent liabilities and corresponding assets, which includes pension liabilities, fines, and financial assets.
The UK OBR estimated that the UK cost would be €42.2 billion (£38.7 billion) – see Table 2:-.
|Different Estimates of UK Obligations|
|EU Estimate (July 2021)||47.5|
|UK Estimate (Nov 2018*)||42.2|
|* UK Office for Budget Responsibility|
Why the difference?
The difference between the two estimates is significant. The UK estimate is over 11 per cent lower than the EU estimate. There are a number of areas that need to be to be evaluated to weigh-up the differences. For example:-
- Different timings: It would be preferable if there were an up-to-date estimate from the UK Treasury that would allow detailed comparisons to be made;
- Future commitments: The payment of pensions and sickness insurance of retired staff in the EU have to be estimated. It would be useful to confirm the UK’s share of those estimated obligations.
- Legal Costs: There are amounts to be paid out by the EU in relation to legal cases. In this regard, the European Commission pointed out in the text accompanying its recent accounts that – “The estimate of the UK’s share of legal cases…is not payable by the UK until and unless the cases are settled and a payment is first made by the EU”.
Given the different estimates that have emerged, the relevant officials in the European Commission and in the UK Treasury should, it is suggested, be in more regular contact in order to narrow down their differences. The basis for the UK’s debts was agreed in detail as part of the Withdrawal Agreement. Too often the UK commitments are presented as a “divorce bill”. Much more trust is needed from both parties in handling this matter. Megaphone diplomacy is not the way forward.
Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and blogs regularly for PAI. He was formerly the Senior Economist at the Department of Transport.