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Brexit: the financial settlement

Published Thursday, March 14, 2019

The financial settlement - often labeled the 'exit bill' or 'divorce bill' - sets out how the UK and EU will settle their outstanding financial commitments to each other.

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In the financial settlement (the settlement), the UK and EU have set out how they will settle their outstanding financial obligations to each other, which arise out of the UK’s participation in the EU budget and broader aspects of the its EU membership. The media have labelled the issue the ‘exit bill’ or ‘divorce bill’, the EU see it as a matter of ‘settling the accounts’.

The settlement sets out the financial commitments that will be covered, the methodology for calculating the UK’s share and the payment schedule.

The settlement was agreed politically by the EU and the UK in a joint report following the first phase on withdrawal negotiations. It was then turned into legal text in the Withdrawal Agreement (WA), which will become legally binding only once approved by the UK Parliament and the European Parliament.

Definitive figures of the settlement can’t be calculated as it depends on future events, such as future exchange rates and actual EU budgets, but estimates have been produced. The latest estimate is that the settlement could cost the UK around £33 billion, based on an exit date of 31 October 2019. This is lower than the widely cited estimate of
£39 billion, which was based on an exit date of 29 March 2019. Delaying Brexit means that the UK makes more payments to the EU as a Member State but fewer through the settlement. The net effect for UK payments to the EU is zero.

What has been agreed?

The settlement sets out that the UK will:

  • contribute to and participate in the 2019 and 2020 EU budgets, as part of the transition (or implementation) period;
  • continue to receive EU funding from EU programmes that are part of the 2014 – 2020 budget plan;
  • contribute towards the EU’s outstanding budget commitments at 31 December 2020 (these are budget commitments that have been made, but not yet paid);
  • contribute towards some of the EU’s liabilities – obligations to pay for certain items – incurred before 31 December 2020. EU staff pensions are the main source of such liabilities;
  • remain liable for the EU’s contingent liabilities – potential liabilities that may occur depending on the outcome of an uncertain event – which relate mainly to financial guarantees given and to legal risks;
  • receive back the €3.5 billion of capital it has paid into the European Investment Bank in 12 instalments from 2019, and will receive back the relatively small amount of capital it paid into the ECB on withdrawal;
  • remain liable for EIB liabilities approved before the WA comes into force, and will provide a guarantee to the EIB for its stock of outstanding loans which will decrease as EIB loans associated with it decrease;
  • continue to participate in some of EU’s overseas programmes, such as the European Development Fund, until the current round ends.

The UK and EU agreed some principles for the settlement:

  • no EU Member State should pay more or receive less because of the UK's withdrawal from the EU;
  • the UK should pay its share of the commitments taken during its membership; and
  • the UK should neither pay more nor earlier than if it had remained a Member State. 

The last of these principles implies that the UK should pay based on the actual outcome of annual EU budgets, which means that payments arising from the settlement could continue well after the UK has left the EU. The Office for Budget Responsibility (OBR) – the UK’s public finances watchdog – expect that the UK will make payments over a 46-year period ending in the 2060s, with much of the cost coming in the near future.

Financial settlement, by component

Path of the financial settlement

Turning the political agreement into a legal agreement

The Withdrawal Agreement (WA) sets out, in legal terms, how the financial settlement will be calculated and administered. It also sets out the practicalities for payments between the UK and EU after 2020.

The WA allows for the transition period to be extended. If this happens the Joint Committee overseeing the WA’s implementation – made up of representatives from the UK and EU – will decide the UK’s financial contribution during the extension. Any extension would not impact on the financial settlement, which would continue as agreed. 

The WA – and consequently the financial settlement – will only be legally binding once agreed by the UK and European Parliaments.

What if there is no deal?

In the event of no deal, it is likely that politics and the appetite for an ongoing EU-UK relationship will largely dictate the extent to which the two parties honour the agreement reached over the financial commitments. Both sides recognise it likely that negotiations would take place aimed at reaching an alternative financial settlement.

The EU has established a contingency measure that, should the UK agree to it, would leave the 2019 EU budget largely unaffected by no deal. The UK would have to agree to continue to pay into the budget and in return would continue to receive funding from it.  The contingency is seen by the EU as a way of minimising disruption and facilitating an alternative financial settlement between the EU and UK.

 

Commons Briefing papers CBP-8039

Author: Matthew Keep

Topics: EU budget, EU external relations, EU grants and loans, EU institutions

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