by Anthony Foley, Associate Professor of Economics, Dublin City University Business School.
The question of the financial settlement is looming large over the Brexit negotiations. At its December summit, the European Council must decide whether ‘sufficient progress’ has been made on this question (along with citizens’ rights and the Irish border) in order to proceed to the next stage of the Brexit talks. Here is a short introduction to the UK’s contribution to EU finances, the likely effect of Brexit and the possible contours of the ‘divorce bill’.
Brexit will have a significant negative impact on EU budget and finances
Brexit will have a significant negative impact on the EU budget. The UK is a large contributor to the budget in both gross and net terms. The scale and timing of the impact will depend on the terms of the divorce financial settlement. If there is a substantial financial settlement covering future expenditure commitments and liabilities there will be limited effects on the remaining part of the current budgetary period up to 2020, with increasing negative effects going beyond 2020. However, if there is no deal, the effects will be immediate. Moreover, even if there is a financial settlement deal, it is not going to fully replace what the UK would have contributed as a member.
The UK financial contribution to the EU budget: facts and figures
The impact of the UK on the EU finances is illustrated by the 2016 data sourced from Annex 2C of the 2016 EU Financial Report. The EU revenues are divided between the national contribution and “traditional own resources” collected on behalf of the EU by national states. The national contribution is a small proportion (0.3%) of national VAT receipts and a small percentage of each member’s Gross National Income (GNI). “Traditional own resources” refer to customs duties collected by national states on behalf of the EU. Other small revenues arise from, for example, fines and tax on employees. Overall, annual own resources must not exceed 1.2% of EU GNI.
The national financial contribution is the gross contribution because member states also receive payments from the EU programmes and activities. For example, Ireland in 2016 paid €1.9598 billion to the EU and received payments of €2.0377 billion.
The UK is a large net contributor to the EU finances. In 2016 it paid €15.9207 billion in national contribution and customs duties revenues and received €7.0516 billion in payments from the EU, giving a net contribution of €8.8691 billion. These figures include the impact of the rebate or “correction”.
The UK €15.9 billion contribution is the third highest after Germany €27.4 billion and France €21.1 billion. Italy is closely behind the UK, at €15.7 billion.
The detailed UK 2016 contributions were €3.3 billion related to VAT, €15.3 billion related to GNI and €3.2 billion from customs duties and sugar levies. The UK rebate or correction was €5.9 billion.
The main net national contributors to the EU finances are (2016 data)
- Germany €17.3 billion
- France €9.8 billion
- UK €8.9 billion
- Netherlands €4.4 billion
- Italy €4.1 billion
The main net recipients from the budget are
- Poland €6.5 billion
- Romania €5.9 billion
- Greece €4.1 billion
- Hungary €3.4 billion
Impact of UK exit on the EU budget
The UK 2016 national contribution (including customs duties) was 12.0% of the total national contributions of €132.1743 billion. The €132 billion own resources total includes the UK rebate impact. In 2016 this involved payments from the other 27 members to fund the rebate of €5.9 billion. With Brexit there is no longer a need to fund the rebate. Will members continue to pay these sums into the overall budget or will they cease with the rebate?
In 2016 the 27 members excluding the UK paid €116.3 billion into the EU budget. This included €6.5 billion in UK rebate payments (the 2016 individual contributions exceeded the UK rebate). If these rebate- related payments ceased, the 27 members would pay €109.8 billion. The EU 2016 budget own resources would drop from €132.2 billion to €109.8 billion, a decline of 16.9%. Of course the EU would save on part of what would otherwise have been paid to the UK.
Exit financial settlement
Assuming a broad continuation of the 2016 UK contribution, over five years the UK gross and net contributions would be €79.5 billion and €44.5 billion respectively. These figures give a perspective of the necessary scale of the financial settlement. There have been various estimates for the financial settlement, ranging from €100 billion to €10 billion. The eventual figure will depend on negotiation because there is not a clear objective valuation basis.
Is Brexit a cancellation of membership or a divorce? In the case of “divorce”, both assets and liabilities would have to be considered.
A 2017 Bruegel working paper estimated that the long-run net Brexit bill could range from €25.4 billion to €65.1 billion. Upfront UK payments could reach €109 billion. The upfront payment includes cover for loans which will eventually be repaid and reimbursed to the UK. Hence the difference between the upfront cost and the final long run cost. The estimates include:
- All planned budgetary commitments and payments made while the UK was a member including where payments will arise after Brexit
- EU pensions
- Borrowing to finance financial assistance programmes
- Contingent liabilities
- Share of assets
Summary
Brexit will leave a large hole in the EU budget. The UK is a large gross and net contributor. In determining the next Multiannual Financial Framework the usual budgetary difficulties will be significantly increased by Brexit. The financial settlement, if there is one, will partly ease these financial difficulties. Over the medium and longer term the financial impact of the settlement will wane and the EU will have to deal with the full effects of the loss of the UK gross and net contributions. This will involve the usual difficult public financial considerations of revenue, expenditure and efficiency.