Exiting the EU: The financial settlement

20 Apr 2018 01:38 PM

The total amount the UK will pay in the financial settlement on leaving the EU remains uncertain and could differ to the £35 billion to £39 billion that government has estimated, says the National Audit Office (NAO).

The NAO has reviewed HM Treasury’s estimate of the cost of the financial settlement. In its report, published today, the NAO has explained that while the figure is a reasonable calculation, HM Treasury has based its estimate on a number of assumptions because future events are likely to impact the total cost.

The total cost of the settlement cannot be defined until there is greater certainty around future events such as: the UK’s economic performance in 2019 and 2020; how much EU funding UK organisations will continue to receive after the UK leaves; the future cost of the EU pension liability; and potential changes to the exchange rate, as the UK will settle its payments in euros.

Relatively small changes to some assumptions about future events could push the cost outside of HM Treasury’s £35 billion to £39 billion range.

The NAO has identified uncertainties in HM Treasury’s estimate which will impact the final amount the UK will be liable to pay:

• The UK will pay towards the EU’s annual budgets in 2019 and 2020, as if it remained a member state, but the amount still needs to be calculated based on the UK’s future economic performance. These contributions will partly determine what share of the EU’s outstanding commitments and liabilities the UK will pay after 2020.
• Some settlement payments are expected to extend far into the future, in particular the UK’s contribution to the EU pension scheme, which may last until at least 2064. The government can choose to pay off these commitments earlier in a lump sum, however this presents risks and opportunities to the total value the UK may be liable to pay.
• The UK could have to pay towards other costs, which are not in the estimate, such as potential liabilities that may depend on future events, and a guarantee for the European Investment Bank, although HM Treasury and the EU consider the risk of these liabilities crystallising to be remote.
• The Joint Report states that the UK will honour its commitments to the EU’s overseas aid instrument, the European Development Fund (EDF), which would cost a further £2.9 billion. HM Treasury has not included this in its estimate because the EDF is not established under the EU treaties.
• The terms of the settlement, which mark 31 December 2020 as a key date for determining the UK’s share of liabilities, mean the EU Commission could skew future decisions and impact the total value the UK will have to pay back.

The estimate takes into account income the UK private sector receives from the EU directly. These receipts, worth around £7.2 billion, will not go into the government’s accounts.

The government is dependent on information it receives from the EU to calculate the final settlement. The UK government can appoint auditors to review that information. The NAO has recommended that HM Treasury carefully considers what information it needs to make accurate and informed decisions on future payments, and how it will update Parliament with revised estimates as new information becomes available.

“We have reviewed the Treasury’s estimate of how much the UK will pay the EU under the draft withdrawal agreement. The estimate reflects a number of moving parts, so the range of costs in it could have been wider than £35 billion to £39 billion. But overall we think it is a reasonable estimate.   “As the vote on the draft withdrawal agreement approaches we expect that government will provide a substantial amount of material for Parliament to consider. We will support Parliament in this scrutiny by providing independent assurance.”

Amyas Morse, the head of the NAO, 20 April 2018

Notes for Editors

1. The National Audit Office has looked at the estimate of the financial settlement as part of its programme of work examining how the government is taking forward implementation of the UK’s exit from the EU, and to support Parliamentary scrutiny. This is the NAO’s first report on the financial settlement. The NAO has not assessed the value for money of the settlement itself, nor how effectively HM Treasury negotiated the principles of the settlement.
2. In September 2017, the Prime Minister said the UK would honour commitments it made whilst a member of the EU.
3. In December 2017, the government and the EU published a Joint Report setting out the principles underpinning the financial settlement. This included agreeing to the UK continuing to contribute to the EU’s annual budgets until December 2020 as if it had remained a member state. The UK will also bear a share of the EU’s outstanding commitments and liabilities at that date, which it will not pay off before they fall due, unless it requests to make earlier payments. The joint report states that “nothing is agreed until everything is agreed”. The commitments detailed in the report will not be enforceable until the UK and EU agree the final withdrawal agreement at the end of all negotiations over the UK’s withdrawal.
4. On 24 January 2018, the Chancellor of the Exchequer wrote to the Chair of the Treasury Select Committee setting out a ‘reasonable central estimate’ of the settlement’s value of between £35 billion and £39 billion.
5. On 19 March 2018, the government and the European Commission published a draft withdrawal agreement. This translated the commitments in the Joint Report into a draft legal agreement, as well as providing further details on how the UK’s settlement will be calculated and the timing of payments.
6. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
7. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services. Our work led to audited savings of £734 million in 2016.