Theresa May says the UK’s Brexit “divorce bill” will be roughly £39 billion. But add in perhaps two more years “transition” and various costs identified by National Audit Office (NAO) and the bill could be much higher.
Here’s how the maths adds up.
The big hidden cost will be extending the transition period. The EU has confirmed they would ask for a contribution from the UK of somewhere between £9 billion and £13 billion for each year of extension – in return for access to the single market.
The EU has also suggested we might want an extra two years, taking us to the end of 2022. If we did, that would be another £18-26 billion.
And the chance is that we’ll need a few more years because we’ll struggle to strike an ambitious new trade deal by the end of 2020. At that point, we will have a choice: an extension, or triggering the Irish border “backstop”.
The transition period sees us following EU rules without a say, but also benefiting fully from the EU’s single market. The “backstop” still has us following many of the rules, but whole swathes of our economy will suddenly find their access to the EU restricted. What’s more, we can’t pull the plug on the backstop without the EU agreeing. That’s why May – and plenty of other politicians – never want to see it triggered.
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Thanks to the leverage of the backstop, the EU will be in a strong position to get what it wants per extra transition year. There are “goodwill” clauses in the withdrawal deal which will stop the EU demanding extortionate amounts, but the definition of what’s fair will undoubtedly be made in Brussels. The UK won’t get anything cheap.
But the cost of the extension is just the tip of the iceberg. Back in April, the National Audit Office, the independent body responsible for auditing government departments, identified extra billions on top of what the government was then estimating: up to £3 billion in EU budget contributions and £2.9 billion in commitments to the European Development Fund. It also spotted £7.2 billion of payments from the EU that would go directly to the private sector, but were nevertheless included in the Treasury’s calculations.
Put all this together and you are probably in the £60-70 billion range. And that’s before taking account of other risks including £35 billion of loans the EU has given to other countries, which could hurt us if they turn sour; and the possibility that our divorce bill (which is officially in euros) will rise if the pound continues to fall.
The prime minister’s deal is setting us up for some miserable options in the future. Now the public can see the reality of May’s Brexit, they should be able to reject it in a People’s Vote.
Edited by Hugo Dixon
This is a very small point but could we have some variation on the term ‘miserable’ to describe the deal or the options, as it appears in every post and is getting a bit worn out and monotonous. How about horrible, dreadful, ghastly or plain unacceptable ? No shortage of adjectives to describe the abominable thing.
Implicit in your article is taking the option of a “Peoples Vote,” (aka second referendum) which would be the rational outcome since the available outcome which May has delivered, appears so unpalatable. And that that (new referendum) process is politically deliverable within the timescale and in the midst of the current chaos, Im personally sceptical.
As a market analyst (macroeconomic) I find no surprise in whats been delivered. In fact think Mays done quite a good job. The UK never had any real leverage., and the nature of the EUs single market framework has never allowed the the flexibility imagined by the Leave lobby.
So where next? Well, remains to be seen if the Westminster Dog & Pony Show will now endorse the “deal”, and even if it does, the so far silent EU27, will, as Spain has just done, begin to examine the text and find their own list of discontents.
However I expect that these will be subdued in the interests of the delivery of a clean legally secured exit agreement, and the real claws of individual EU27 self interest will be reserved for phase 2 – the negotiation of the promised post Brexit relationship and customs union agreement.
Useful to consider this phase 1 – the Exit phase, as the part that will be legislated and legally secured. while Phase 2, to come, will be secured by little more than a “letter of intent”. At that point the real tragedy for the UK of this botched deal and the entire economic disadvantage of the policy will become apparent.
What will be interesting if the UK electorate sentiment continues to swing away from Brexit. Be ironic if next March, an irreversible Brexit is delivered as a fait accompli to an electorate thats since decisively changed its mind.
Ooops.