Britain’s €100bn Brexit bill in context
How EU demands compare with public debt, current contributions and economic impact
The negotiations over Britain’s Brexit bill are about to begin, even as debate flares up about what kind of exit from the EU Britain will seek after a general election in which Theresa May’s Conservative party failed to win a majority.
As it forges ahead with the divorce process, the European Commission has sent London its formal position papers for the negotiations. These outline its view that Britain will need to make a gross financial settlement of up to €100bn to “respect in full the financial obligations resulting from the whole period of the UK membership in the union”.
Brussels has not made public its estimation of the final sum but wants substantial progress on the bill before negotiations can move on to discussing future trading relationships between the EU and UK. It is also willing to discuss the timing of payments in a second stage of the negotiations.
For Britain, an important question is whether it has a legal obligation to make a settlement. Philip Hammond, chancellor, has often said that he thinks any bill would be small, but promised that Britain is “a nation that honours its obligations”. The more combative Boris Johnson, foreign secretary, thinks Brussels’ negotiating position is “absurd”.
More to the point, as Theresa May’s government seeks to regroup its Brexit policy, is a simpler question — just how big is the Brussels bill?
Is Brussels really asking for €100bn?
By one count, yes. The principles the negotiating teams have outlined provide a good basis to estimate the amounts in question. FT calculations show that the gross amount requested is likely to be about €100bn, but there are assets the UK will be able to claim to offset that amount.
Depending on the exact calculation the net bill to be presented to the UK is likely to be in the region of €55bn to €75bn, reflecting Britain’s share of the EU’s property and cash assets, some elements of Britain’s budget rebate negotiated by Mrs Thatcher in 1984 and the UK’s share of spending in the current budget period running to 2020.
Previously undisclosed commission estimates suggest that €64bn in gross terms (€40bn net) might at the end of the day be enough for Brussels, since they would prevent adjustments to the EU’s current budget (which runs until 2020) and cover Britain’s less contentious longer-term commitments.
Call it €60bn. Is that a big or small number?
A number six with 10 noughts on the end is huge for any individual and enormous if you think the financial settlement should be zero. But in sterling terms it is £53bn, which is only 2.5 per cent of Britain’s annual economic output.
If the UK borrowed the money today, public sector debt would rise from 86.6 per cent of national income in 2016-17 to 89.2 per cent. Compared with the damage wrought by the financial crisis, which raised Britain’s debt to its current daunting levels from 35.5 per cent in 2007-08, it is a drop in the ocean.
And Britain would make some savings through Brexit, right?
Britain’s annual net contributions to the EU budget vary year-by-year but over the past five years, once account is taken of Britain’s rebate and EU spending programmes in the UK, the country contributed an average of £7.75bn. That works out at £150m a week, far below Vote Leave’s misleading campaign figure of £350m a week.
If Britain were to stop making any net contributions to the EU, it could pay off the net bill in seven years. After that, in 2026, the pure budgetary maths says there would be net savings to the exchequer.
But that is not the whole story is it?
No. The big question for the public finances is not the size of a one-off bill, but whether Brexit harms or improves Britain’s economy and tax receipts in the longer term. Each 1 per cent hit to the economy from Brexit would cost roughly £14bn every year in perpetuity, so any hit to the UK economy more than roughly 0.5 per cent will wipe out any budgetary savings from Britain’s current EU net contribution.
On cautious assumptions the Institute for Fiscal Studies calculated the Brexit hit to the public finances was likely to be between £20bn and £40bn every year. A big hit to the economy would produce even larger estimates of the financial damage of Brexit.
In these circumstances, a £53bn bill to leave the EU would be the least of Britain’s worries.