Brexit negotiations will involve three separate but inter-related deals: a ‘divorce’ settlement, a transitional arrangement, and a deal on the UK-EU’s long-term relationship.
Currently the UK makes annual contributions to the EU budget. Those will stop when we leave, although the Prime Minister has made clear the Government’s willingness to make “appropriate” payments to the EU for participation in “specific programmes”. What those payments might be and which EU programmes we want to participate in will be part of the discussions on a transitional arrangement and the UK-EU’s long-term relationship.
The divorce bill settlement is theoretically separate. The European Commission expects the UK will pay an exit bill when it leaves. The Commission is expected to insist that this one-off financial settlement must be agreed upon before any further negotiations can begin on a possible transitional arrangement or the UK-EU’s long-term relationship.
Why do we face a ‘divorce bill’ for leaving the EU?
The EU is an organisation with assets and liabilities. When the UK leaves, European negotiators are expected to argue that the UK pays off its share of the liabilities: this is referred to as the Brexit ‘divorce bill’ or exit bill. It will be reduced from any repayments to the UK.
In November the Financial Times reported that the European Commission was seeking an exit bill of €60 billion. However, in February, the same author writing for the Centre for European Reform (CER) estimated that the bill could range from €25 –73 billion.
How can we work out the figures for this divorce bill?
The CER calculates what we can expect to pay based on what we owe, and what we can offset. It estimates something between €25bn (based on honouring commitments made in annual budgets and maximising UK receipts), and €73bn (maximum obligations, minimum receipts).
The CER has worked this out by categorising Britain’s financial obligations to the EU into three main areas:
1. Outstanding budget commitments
The EU budget operates through a multi-annual spending structure, which means projects are paid for over a period of several years. As a result, EU budget payments are back-loaded and many will be paid out post-Brexit. For example, a key element of EU spending allocations consists of cohesion fund payments, aimed at raising living standards in the 2004 Accession countries. According to the CER, only 25–30% of the biggest cohesion fund payments will actually have been spent by the time Britain is expected to leave the EU in 2019.
The EU may argue that the UK should honour the obligations it signed up to for this budget period even after we leave. The UK may seek to use our exit date as a cut-off.
2. EU officials pensions.
Like the UK civil service pension scheme, the Pension Scheme of European Officials (PESO) is an unfunded scheme and operates on a ‘pay-as-you-go basis’, with costs being covered by the annual EU budget as they arise. The EU may argue that the UK should make a payment now to cover future liabilities incurred while we were a member.
It may also argue that we should pay our share of the total cost of all European Commission staff pensions rather than simply meet the lower bill for UK nationals in the Commission – the difference coming from the under-representation of British officials. The sum could either be met out of future payments- or converted into a lump sum on departure of between €5–10 billion.
3. Contingent liabilities
The EU incurred contingent liabilities during UK membership. These liabilities effectively constitute payments that would be triggered in specific circumstances only, for example, Ukraine defaulting on its EU loan. When the 2015 EU accounts were drawn up, outstanding loans to Hungary, Ireland, Portugal and Ukraine collectively amounted to €49.5 billion. The EU may seek either a commitment from the UK to meet possible future liabilities – or an upfront payment in case they materialise in the future.
Don’t we get anything back from the EU when we leave?
It’s not all negative. The CER argues that Britain’s exit obligations should be partly offset by its share of EU assets, rebates and budget receipts. In the EU’s accounts, the EU’s total assets amount to €8.6 billion of property, plant and equipment, and €13.9 billion of assets available for sale. The UK’s share of this is estimated at €2.7–3.4 billion. However, the UK could seek a revaluation of its assets to capture their present market value, which would likely be higher than the current EU account figures.
Other recent reports suggest that the Prime Minister may seek repayment of the UK’s capital subscription to the European Investment Bank. In addition, there may be payments still due to the UK after we leave.
Could we walk away without paying a Brexit ‘divorce bill’?
The Lords’ EU Financial Affairs Committee reports that the “strictly legal position of the UK on this issue appears to be strong”. If negotiators fail to agree on a financial settlement, the case is likely to end up in the International Court of Justice in The Hague. The result of such a court case would be hard to predict.
Ultimately, it will be politics not legal arguments that determine the outcome. Failure to agree a suitable divorce bill could produce a political stand-off, potentially resulting in a complete breakdown of Brexit talks and the UK leaving on a “cliff-edge”. This scenario will undoubtedly influence the positions of the UK and its EU-27 counterparts during divorce bill discussions.
Has the Government already made provision for any payment?
In its latest forecast issued at the time of the Budget, the Office for Budget Responsibility assumed that any savings on our annual contribution would be recycled into UK public expenditure. No explicit provision was made for any exit payment.
So what is the Government’s position on paying the divorce bill?
There is no mention of any exit payment in the Brexit White Paper, so we are forced to rely on the public statements of ministers.
Liam Fox, Secretary of State for International Trade, and Boris Johnson, Foreign Secretary, have both publicly dismissed paying an EU divorce bill, referring to it as “absurd” and “not reasonable” respectively.
At the EU spring summit, Theresa May emphasised that “I am clear, when people voted to leave the European Union, they voted for us in the future not paying huge sums of money into the EU every year. Of course, when we leave the EU that will be the case.”
On the Andrew Marr Show, Chancellor Phillip Hammond stressed: “We are a nation that honours its obligations and if we do have any bills that fall to be paid, we will obviously deal with them in the proper way.”