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Britain prepares case to cut Brexit divorce bill

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Britain prepares case to cut Brexit divorce bill

Brexit

Britain prepares case to cut Brexit divorce bill

By winning every argument, the cost in theory could come down to net €32bn

The domestic political imperative to reduce the bill is clear for Prime Minister Theresa May © FT montage; PA

The haggling over the UK’s Brexit bill is about to begin. After months of legal jostling, British negotiators have signalled their readiness to discuss specifics of the EU’s demands for a financial settlement.

At a Brussels meeting last week, the UK side asked what the basis for calculations would be “if” Britain were to pay a share of EU financial liabilities. One senior EU official says the conversation is moving from whether Britain should pay, to the question of “what is fair”.

For progress at a vital summit next month, the two sides need to close the gap between the €20bn offered so far by London and the EU’s estimate of British liabilities — about €60bn net and up to €100bn gross.

But any agreement to pay the EU billions of euros will prove hugely sensitive in Britain. The domestic political imperative is clear for Theresa May, prime minister, to reduce the bill. To do so will require difficult, potentially lengthy negotiations. Every day it takes jeopardises the prize Britain seeks: a transition deal agreed early enough to be useful for the private sector.

Here the Financial Times looks at how Britain could reduce the Brexit bill, basing its calculations on confidential European Commission estimates circulated this year. These are the issues set to become battlegrounds in the weeks ahead. If Britain were to win every argument, it could in theory bring the bill down to about €32bn in net terms. But even British officials doubt they will prevail so comprehensively.

The starting point

The EU wants Britain to pay its full share of the union’s long-term budget.

By March 2019, when the UK is scheduled to leave, the EU estimates there will be €582bn outstanding EU commitments along with €83bn of long-term liabilities such as pensions — leading to a total of €665bn.

The demand is for Britain to honour its share — estimated to be 13 per cent, or €86.4bn gross — and offer assurances over a further €11.5bn of additional contingent liabilities, such as EU loans to Ukraine. Britain has so far offered to make transition payments — worth about €20bn net — for 2019 and 2020, since during those years it wishes to retain most membership rights.

Reducing overall liabilities

Stop the clock on commitments when Britain leaves the EU
Settle unpaid bills in 2019, not 2021

Gross reduction

€133bn

Residual EU commitments

€532bn

Reduction in UK share

€16bn to €17bn

In terms of getting the bill down, Britain’s most important argument is about the date. Despite Mrs May’s goal of a transition of “about two years” after March 2019, the UK does not want to take on any further EU liabilities after that date. It would not cover any EU commitments signed off in annual budget rounds after Brexit takes place.

This amounts to paying the so-called reste à liquider — the overhang of unpaid EU bills — in 2019 rather than 2021. It makes a net difference of about €10bn to the UK bill and could bring the gross bill down by €16bn-€17bn.

Assume a higher proportion of outstanding bills are cancelled
‘Decommitments’ to be excluded

Gross reduction

€7.8bn

Residual EU commitments

€522bn

Reduction in UK share

€1bn

Not all budget commitments made by the EU are actually paid. So-called “decommitments” — obligations that the bloc ultimately decides not to fulfil — ran at about 2 per cent in the previous long-term budget. The EU says it takes account of this figure in its estimates. The UK argues the real decommitment rate is actually closer to 5 per cent. The higher the decommitment rate, the lower the Brexit bill.

Pension discount rate
A ‘fairer’ valuation of liabilities

Gross reduction

€34.9bn

Residual EU commitments

€487bn

Reduction in UK share

€4.5bn

Pensions are one of the most contentious areas of the financial settlement. Britain argues that EU accounts use a misleading discount rate, which is used to calculate the present value of employer pension obligations. A big fall in the discount rate (because of low interest rates) has seen pension liabilities almost double from around €35bn in 2007 to €76bn in 2019.

If a historical average is used for the discount rate — similar to the one the EU uses to calculate staff contributions — the UK believes its share of liabilities would fall from around €9.9bn to around €4.4bn

Reducing Britain’s share of the budget

A forward-looking UK share factoring in sterling’s slide
Reducing number from 13 per cent to 12.5 per cent

UK share

€63.5bn-€61bn

UK saving

€2.5bn

One point of contention is the method for calculating Britain’s share. At present the EU has taken the UK’s average share over the 2014 to 2018 annual budgets: about 13 per cent. Britain argues that it is wrong to use past rates to calculate future contributions. Since the Brexit vote, the sharp fall in the value of sterling has made the UK economy appear smaller compared with other EU states, reducing its contributions in euro terms. Officials are pressing for a method that brings the share to 12.5 per cent or lower. 

Receipts and getting the net figure lower

The calculations so far have not taken account of what Britain will receive from planned EU spending, or from its share of the collective wealth of the EU.

Investment projects and agriculture in UK
Excluding spending in UK from the exit bill

Receipts

€20bn

Taking net exit bill to as low as:

€41bn

UK beneficiaries stand to receive about €12bn in funding from commitments made in the EU budget before 2019. The EU and UK could agree to continue those programmes after Brexit, or remove them from the Brexit bill (leaving the UK to fund them separately). Further receipts could come from planned agricultural spending in 2019-20 (about €8bn).

Assets (buildings and cash)
UK share of EU wealth

Buildings

€1.4bn

Cash reserves

€2.6bn

Taking net exit bill to as low as:

€37bn

Germany has been adamant that Britain has no claim on the EU’s assets. But Britain sees such a claim as logical should it be expected to pay a share of EU liabilities. The UK share of buildings and satellites stands at about €1.4bn, but the property is not reflected in accounts at market prices. Britain is also eyeing a €2.6bn share of the EU’s cash pile.

The final rebate
A year late but every little helps

Abatement from 2018

€5bn

Taking net exit bill to as low as:

€32bn

The final element is Britain’s budget rebate, secured by Margaret Thatcher and long resented by other EU states. The calculation of Britain’s 13 per cent share takes account of the rebate. But the rebate is paid a year late, meaning a refund of about €5bn is due in 2019 from the 2018 annual budget. But the commission does not see this as part of the Brexit bill calculation. 

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