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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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The UK and EU have reached an agreement on how to settle their financial commitments to each other after Brexit. The financial settlement (the settlement) sets out the financial commitments that will be covered, the methodology for calculating the UK’s share and the payment schedule. The commitments arise from the UK’s participation in the EU Budget and broader aspects of the UK’s EU membership. The media have labelled this as an ‘exit bill’ or ‘divorce bill’, the EU see it as a matter of ‘settling the accounts’.

The UK Government estimates that the settlement – which includes the UK’s participation in the EU Budget during the transition period – will have a net cost of around £35 billion-£39 billion. Definitive figures of the settlement can’t be calculated as it depends on future events. For instance, it is exposed to changes in the exchange rates as payments will be calculated and paid in euros. The UK will also not begin making payments under the settlement until the UK has left the EU.

What has been agreed?

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

The agreement reached on the settlement means 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 United Kingdom should pay based on the actual outcome of the budget, 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 – expects that relatively small payments (of around €100 million) will still be made in the 2060s. However, they expect around 73% of net payments to have been made by 2022.

OBR estimates of the financial settlement

OBR estimates of the financial settlement, chart

The OBR’s estimate was made before Article 50 was extended and the UK’s withdrawal delayed. The delay impacts on estimates of the settlement’s cost. By not leaving on 29 March 2019 some of the payments the UK was expected to make through the financial settlement (during the transition period) will now be made through its contributions as an ongoing Member State.  

Turning the political agreement into a legal agreement

The Withdrawal Agreement (WA) sets out, in legal terms, how various elements of 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 will only be legally binding once agreed by the UK and European Parliaments.

Legislating for the financial settlement   

The UK Government intends to introduce the EU (Withdrawal Agreement) Bill to implement the final Withdrawal Agreement in domestic law. A White Paper was been published – Chapter 4 sets out a potential legislative approach for making the payments required under the settlement to the EU. It also proposes an approach for scrutinising these payments. Broadly speaking, the approach proposed is similar to that used for the payments the UK currently makes to the EU.

Commons Briefing papers CBP-8039

Author: Matthew Keep

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

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