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Analysis

Budget row could torpedo Brexit talks

by Luke Lythgoe | 17.03.2017

The EU wants to hit the UK with a steep leaving bill of perhaps 60bn. Theresa May has indicated she will reject “paying huge sums” after Britain leaves the EU. Her foreign secretary Boris Johnson has gone further, invoking the spirit of Margaret Thatcher getting “her money back”. This has the makings of an almighty row that could torpedo the entire Brexit talks.

EU’s case

The European Commission has not yet named its price. Its chief negotiator, Michel Barnier, first wants to agree a formula for calculating how much Britain will owe the bloc after it leaves. But a Centre for European Reform report by the FT’s Brussels bureau chief Alex Barker shows how the EU could calculate a sum anywhere between €25 billion and €72 billion. There are six main elements:

  • Commitments made in previous budgets which won’t be paid out before we quit the EU (€29-36 billion). Known as the “reste à liquider” (RAL), this payments hangover is caused by the way Brussels allocates funding over multiple years.
  • Commitments that don’t yet feature in an EU budget (€17-22 billion). The EU has made legal promises to pay for specific projects several years into the future. This money has not yet been formally budgeted. Britain, which has been a leading champion of investing in poorer EU regions, has approved these commitments.
  • Pensions of EU officials (€7-10 billion).
  • Other legal obligations (€5-6 billion). Things like the Galileo and Copernicus satellite projects.
  • Guarantees and loans from the EU. The biggest are loans made to Ireland and Portugal to help them with their financial crises. The sticking point will be how, and when, the UK should cough up if these turn sour. The most reasonable method would be to pay its share of the burden if and when a loan failed.
  • Payments due to the UK (€9 billion). This includes the UK’s share of physical EU assets, such as those Galileo satellites and the Commission’s Berlaymont headquarters, its budget rebate due in 2019 and its promised share of future EU spending. Such payments could be subtracted from what we owe the EU to produce a net figure.

UK’s possible counter

May won’t accept such demands without a fight. She has three possible approaches.

One is to reject the idea that we owe any money. The prime minister could argue that there’s nothing in the EU treaties saying departing members have to pay a share of its liabilities. Given that the EU is a separate legal entity, it should fulfill its own financial obligations. She could use the analogy of a golf club: it would be preposterous to demand a member continue to pay fees after it had left.

The House of Lords’ financial affairs committee has given some support to this view, saying “the UK will not be strictly obliged, as a matter of law, to render any payments at all after leaving”.

A second, less aggressive, option would be to argue that it would be unreasonable for Britain to pay for some of the items on the list above – for example, the commitments that don’t yet feature in an EU budget. After all, in the EU treaties, the word “binding” only appears once in the reference to the EU budget and that relates specifically to the annual budget.

The UK could also try to cut its pension bill by offering to pay just for British officials’ pensions. The EU would undoubtedly object on the grounds that its civil servants don’t work for their country of origin and so we should pay our share of all the officials’ pensions.

The third option would be to claim £9 billion (€10 billion) for our share of the European Investment Bank’s capital, as argued by the pro-Brexit Lawyers For Britain. This didn’t figure at all in the CER report, in part because the UK might want to remain a shareholder of the bank.

Poisonous relations

It’s clear that both sides will have a lot to argue about. It’s also clear that the discussions could get pretty heated. Every step is likely to be broadcast via the media.

It’s not just the British Brexit press that could get angry if we are expected to pay a large exit fee. Electorates in the other 27 EU countries could be whipped up by arguments on the lines that Britain is leaving the restaurant after ordering an expensive meal without paying its share of the bill. This could get nasty given that either richer countries such as Germany will have to pick up any money the UK doesn’t pay – or payments to poorer countries such as Poland will have to be cut.

Indeed, a budget row is probably the single biggest reason why the Brexit talks could break out without any deal. This would be bad for the EU and terrible for the UK. But that doesn’t mean it won’t happen.

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Edited by Hugo Dixon

3 Responses to “Budget row could torpedo Brexit talks”

  • The poisonous and toxic Tory Party is determined to poison our relations with our friends and neighbours in the EU.

  • The quality of the EU case is almost irrelevant (though in practice, I understand that David Cameron &/or his predecessors agreed to all of the claimed monies). The problem for Britain is that the EU have already hinted that there needs to be agreement on this before the talks proceed; saying you won’t pay is likely to mean that you go home with absolutely nothing. That may well give Theresa May a warm inner glow of self-righteousness, but it will almost certainly screw the UK economy. It needs to be remembered that more than 40% of the UK’s exports go to the EU, that much of the UK’s exports are services (banks, insurance, education) , and that these will be dead in the water without the passport. Pragmatism says you need to pay up, Theresa May.

    Oh, and I nearly forgot. Many of the UK’s manufactures are produced by foreign-owned businesses (cars and pharmaceuticals come into this category). What chance they will hang about if the customs union is dead, the free flow of goods is dead and the banks are all based over the water? A steady diet of potatoes and Brussel Sprouts may well be what Theresa May likes best, but I suspect that many of her voters will have a different view