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Brexit: the financial settlement

Published Tuesday, October 22, 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 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. It forms part of the Withdrawal Agreement (WA) negotiated between Theresa May’s government and the EU. No changes were made in the WA negotiated between Boris Johnson’s government and the EU. The WA 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.

Underlying principles

The principles underlying the agreed methodology for the settlement are that:

  • 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. This means that the UK will make payments based on the outturns of EU budget.

 

What is included in the settlement?

Broadly speaking, the settlement can be split into three components:

  • During the transition period, until 2020, the UK will pay into the EU budget almost as if it were a Member State. The UK will also receive funding from EU programmes– such as structural funding – as if it were a Member State.
  • EU annual budgets commit to some future spending without making payments to recipients at the time. The commitments will become payments in the future. The UK will contribute towards the EU’s outstanding commitmentsas at 31 December 2020. Recipients in the UK will also receive funding for outstanding commitments made to them.
  • The UK will share the financing of some EU liabilitiesas at the end of 2020, and any materialising contingent liabilities, and will receive back a share of some assets. The pensions of EU staff are likely to be the most significant liabilities for the UK, while the most significant item being returned to the UK is the capital it paid into the European Investment Bank (EIB).

Not everything in the settlement fits neatly into these three components. For instance, the UK has agreed to continue to contribute to the EU’s main overseas aid programme – the European Development Fund – until the current programme ends. This programme is funded directly by Member States, rather than through the EU budget. The UK’s contribution counts towards its commitment to spend 0.7% of national income on overseas aid.

The Office for Budget Responsibility (OBR) – the UK’s public finances watchdog – expect that the UK will make payments into the 2060s, with around 70% of the cost coming in the first 4 years.

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.

Legislating for the financial settlement

The EU (Withdrawal Agreement) Bill 2019-20 sets out how the Government expects to implement the financial settlement in the UK. The Bill authorises the Treasury to make payments directly out of the Government’s current account (the Consolidated Fund) until March 2021. From that point onwards, the Government will need to raise the money through annual votes in Parliament, just as it must for most departmental spending. 

The Government hasn’t explained why the payment method will change in March 2021.

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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