Now that the new UK government has made its deal with the Democratic Unionist Party and looks set to stay in power for the coming months, the negotiations over the UK’s departure from the European Union have started in earnest. Prime minister Theresa May’s opening salvo on allowing the UK’s three million EU residents to stay was countered with accusations about the UK’s lack of generosity but such public posturing was inevitable. What matters is what is happening behind the scenes where serious negotiations are taking place.
A critical element of those negotiations will centre on the financial aspects of the relationship and what the UK has or has not legally committed to pay. Just as happened in the run-up to the European referendum with exaggerated pronouncements about the cost of EU membership, there is now wild conjecture about the size of the exit bill. This has ranged from claims that the UK will have to pay as much as €100bn (£88bn) to assertions that we will be able to walk away without having to pay a penny. All this speculation is anathema to chartered accountants and so we decided to see what information was available – quite a lot as it turned out – and to analyse the numbers to work out what the net exit charge from the EU might look like.
We discovered that not only is there plenty of published information about the EU’s spending plans, we even know what elements are subject to legal commitment. There is a balance sheet with assets and liabilities. There are investments in European institutions – the UK has a 16% shareholding in the European Investment Bank, for example – and we have explicitly guaranteed, along with the 27 other member states, to pay our part (estimated at £10bn by 2019) towards the £63bn pension and sickness scheme liability for current and former EU employees.
In coming to our conclusions*, we had to make certain assumptions. We assumed, for instance, that, as the UK’s approximate share of EU spending is 16%, this should be applied to commitments the EU has entered into up to March 2019 and to the EU balance sheet. We also assumed that the EU will continue to apply the rebate mechanism to contributions made by the UK. Clearly, there are many different potential outcomes to the exit charge negotiations, but we highlighted three potential scenarios, high (£30bn) and low (£5bn), both of which are possible but unlikely, and a central one (£15bn) that might occur.
For the central scenario, we calculated the UK could be charged a gross amount of £55bn; however, the net cost would probably be around £15bn once rebates, spending in the UK, and the realisation of the UK’s investment in the European Investment Bank have all been deducted. This works out at approximately £225 per person expected to be living in the UK in 2019 or roughly the amount that the UK public sector spends in one week.
It is conceivable, given the time pressure, that the UK and the EU could decide on a transitional arrangement. This would benefit the UK as we would have more time to negotiate a better deal while ensuring the exit goes as smoothly as possible. It would also benefit the EU because the UK would continue to make financial contributions to the EU budget, quite possibly at the same level as now.
And it would stave off the arguments between member states that are net contributors to EU funding and those that are recipients about how to bridge the gap in funding left by the UK.
In this scenario, we worked out that net transitional contributions would be in the order of £20bn (assuming the rebate mechanism continues) up to the end of 2020, but that the headline exit fee would consequently reduce by £10bn for elements that would then be covered by transition contributions. This would push our central scenario up to a net cost of £25bn.
The exit bill is just one component of far wider negotiations but discussions about it will be both challenging and coloured by political ambition. Perceptions will play an important part and we must guard against allowing them to drive sub-optimal decision-making. Our exit charge project may have started out with the intention of helping our members to understand the issues better but if, by bringing a bit of practical reality to the financials, it ends up helping those negotiators come to a sensible settlement more quickly, then it will have more than served its purpose.
*Analysing the EU Exit Charge, an ICAEW brief
Michael lzza, ICAEW chief executive