Julian Jessop // 8 September 2017

The Sunday Times has claimed that the Prime Minister is ready to approve a financial settlement of ‘up to £50bn’ when the UK leaves the EU. As it happens, this estimate is based on similar principles to those the IEA Brexit Unit has proposed in the past. But rarely have the two words ‘up to’ been so important. £50bn is almost certainly too high.

Let’s begin by recapping a few points. First, the UK probably could, as a matter of law, walk away without paying a penny. In the words of a House of Lords committee, “the strictly legal position of the UK on this issue appears to be strong. Article 50 provides for a ‘guillotine’ after two years if a withdrawal agreement is not reached unless all Member States, including the UK, agree to extend negotiations. Although there are competing interpretations, we conclude that if agreement is not reached, all EU law – including provisions concerning ongoing financial contributions and machinery for adjudication – will cease to apply, and the UK would be subject to no enforceable obligation to make any financial contribution at all.”

However, the UK has made it clear that it is willing to be flexible. David Davis has emphasised the importance both of the strict legal position and what is fair and reasonable given the desire to remain on good terms. Again, the precise wording is helpful: “it is fair to say, across the piece, we have a very different legal stance. But as we said in the Article 50 letter, the settlement should be in accordance with law and in the spirit of the UK’s continuing partnership with the EU, and I repeat the phrase, in accordance with the law and the spirit of the UK’s continuing partnership with the EU.”

So, what’s reasonable? The EU hasn’t actually put a specific number on the bill, but it has listed some ‘essential principles’ that have allowed others to estimate that the gross cost could exceed €100bn (£92bn at current exchange rates). The net cost would be lower, perhaps €75bn (£69bn), once repayments such as the UK rebate and EU spending in the UK are taken into account. Either way, though, this is clearly unacceptable. Indeed, reports suggest that the UK negotiating team has already taken this approach apart.

Back in June we suggested a much simpler principle. It seems fair to ask the UK to continue to make its annual contributions until the end of the EU’s current multi-year budget period, which runs from 2014 to 2020. This is consistent with the EU’s demand that the UK must honour its share of the financing of all the obligations undertaken while it was a member. If we also include a few smaller one-off items, notably a contribution to pension payments for EU officials, the total bill might then come to around €30bn (approximately £27bn).

So how does this compare to the (‘up to’) £50bn figure? There are two main differences. The first is that the period needed to get to £50bn is longer – covering a notional transition period of three years, rather than less than two (April 2019 to December 2020). The second is that to get £50bn you need to apply the multiple of three to a high estimate of the UK’s annual contribution, namely £17bn, which is a gross rather than net number.

On both counts, then, this looks too high. It only makes sense to continue making the full contribution after 2020 if the UK is still fully participating in all EU activities. Even under Labour’s proposal that the UK should remain a de facto member of both the Single Market and the Customs Union for an extended period, this would not stack up, because even then, we would no longer be a member of the ‘EU proper’. Either way, it is hard to see why a Conservative government should agree to this.

As to the appropriate net number, the OBR has assumed that the UK will divert £12.7bn from EU transfers to domestic spending in 2019-20, followed by £13.1bn in 2020-21 and £13.7bn in 2021-22. (See Table 4.16 of the latest ‘Economic and Fiscal Outlook’). If these sums continue to be paid to the EU instead, the bill would come in under £40bn – though even this assumes we get benefits in return to justify paying more than we need to.

It is possible that a payment of this size could be good value for money as part of a transitional deal. What’s more, it would not be a ‘cost’ of Brexit that we could save by remaining in the EU, as it would be money that the UK would have paid anyway as a member. But all this is conditional on us getting something meaningful in return.

This post appeared first on the IEA’s blog.