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28 Jun 2017


Relationship with the EU

During the referendum campaign, the main debate around public finances was about whether leaving the EU would release £350 million a week to be spent on the NHS. Even on the most favourable assumptions, the claim – which influenced many voters – was repeatedly shown to be exaggerated. There were also concerns that any downturn in the economy as a result of Brexit would reduce tax revenues in a way that could worsen the UK fiscal position.

The EU’s finances are set in a seven-year Multiannual Financial Framework (MFF), currently covering 2014-20 and formally enacted in a 2013 Council Regulation. The MFF is a hard fought bargain, invariably agreed after much acrimony and brinkmanship. As with many EU accords, the ministers concerned usually claim victory at home, while bemoaning in Brussels how much they have conceded. The advantage of the seven-year deal is in allowing the annual budget to proceed relatively smoothly, precisely because the MFF is where all the big compromises are settled.

What has changed since the referendum?

The subsequent emergence of the “divorce bill” rapidly became a new and potentially divisive issue in the Brexit negotiations. It arises mainly because many EU programmes, principally for research and for EU regional policy, are multiannual in character. In both cases, the aim is to avoid piecemeal projects and to look instead for coherent programmes delivering results greater than the sum of the parts. It does, however, mean that contracts signed in one financial year will often not fall due for final payment until several years later – known in EU circles as RAL, from the French expression reste à liquider. Against this backdrop, the departure of the UK (assuming April 2019), will be seven quarters before the end of the MFF.

An immediate end to British payments would leave a hole in the budget that would have to be filled by other member states. For the likes of Germany or the Netherlands, the additional payments would be manageable, but the political fallout would be open to exploitation by anti-EU populists. Others, such as Greece, Italy, Spain or even France, already struggling to consolidate their public finances, would need to make cuts in other spending programmes at a time when austerity is already having damaging political effects.

What happens next?

A financial settlement has been put forward as one of three key areas on which the EU side wants to see significant early progress. Reports suggest the demand from the EU could exceed €100 billion, close to the gross amount (after deducting the UK rebate) the UK was expected to pay into the EU budget over the entire span of the 2014-20 MFF. Unsurprisingly, messages from the UK side dismiss these claims which, it has to be emphasised, no-one on, EU Brexit negotiator, Michel Barnier’s team has formally made.

An arguably rather vindictive proposal in an EU briefing document published at the end of May 2017 suggests the UK may also be asked to pay for relocating EU agencies from the UK, such as the European Banking Authority, as well as the salaries of teachers at the European Schools in Brussels.

The Bank of England can, however, look forward to recovering its paid-in capital from the European Central Bank. If €100 billion is fanciful, as researchers from Bruegel imply, what is realistic? Despite a House of Lords Committee’s verdict that there is no legal obligation to pay, British ministers have been careful not to rule out some payment, using language such as “obey our legal obligations” [David Davis]. Even so, the UK is reluctant to countenance an early agreement, for fear of a negative public reaction.

What sort of compromise could be envisaged?

As explained in an earlier paper, the main elements of a financial settlement are not unduly complex. They turn on: the extent to which the UK accepts that it is bound by the commitments made for the full duration of the MFF, and not just up to the date of Brexit; the share of total commitments the UK should bear; and on apportioning the assets and liabilities(notably pensions) of the EU. The EU position is to use the total transferred by the UK from 2014-18 as a proportion of the total transferred by all member states. Extrapolating from the data for 2014-16, this would mean a ratio of around 12%.

A neat answer might be to allow the 2014-20 MFF to play out as part of a broader transitional deal, implying the UK continues to pay in until the end of 2020, while continuing to receive its share of EU funding for agricultural support, regional development and research. This solution has the pragmatic advantage of enabling the Government to fulfil the promise to maintain funding until the end of 2020 to UK beneficiaries from these EU programmes.

For the EU side, higher payments to Brussels or cuts in EU programmes would be avoided for the 2014-20 MFF, although the issue will return with a vengeance when the next MFF has to be negotiated, most probably while Brexit negotiations are heading towards a conclusion in late 2018. Using Treasury projections, the net cost to UK taxpayers would be of the order of £18 billion (€22 billion) from April 2019 to the end of 2020.

RAL would still be a problem because, under EU rules, claims for EU regional programmes are allowed up to three years beyond 2020; as would the balance of assets and liabilities. The amount of RAL changes from year to year as projects are completed and new multi-year commitments are contracted, but is typically in the range of €200- 300 billion. Whether the UK should be liable for a proportion of RAL is negotiable: the UK could argue there was already a stock of RAL from the previous MFF and it should only be liable for a share of the change in RAL, whereas the EU side could insist the UK pay its share of the full stock. Similar bargaining could be envisaged for EU pension liabilities and assets.

Best guess? Around €30 billion

By Professor Iain Begg, senior fellow at The UK in a Changing Europe. You can read the full report ‘EU referendum: one year on’ here.


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