The Withdrawal Agreement and the Brexit ‘financial settlement’

MPs are today debating the economic impact of the Withdrawal Agreement - day 3 of the 5 days allowed in the run up to the vote on Tuesday 11 December.  The House of Commons Library - an independent research and information service giving politically impartial briefings to MPs of all parties and their staff – published an economic impact update for them.

The financial settlement, or ‘Brexit Bill’ – is currently estimated at a cost of between £35-£39 billion. This is based on a political agreement on the principles that was reached in December 2017 – which, if MPs vote to accept the Withdrawal Agreement next week, becomes law.

What does the financial settlement cover - and when will the UK be expected to pay?  

The financial settlement sets out: the list of commitments, the calculation method, and the timing of payments to be made.  

It does not set out the actual amounts that the UK will pay.  The UK and EU agreed three underlying principles for the settlement:

  • the UK’s withdrawal from the EU shouldn’t make any member states financially worse off;

  • the UK should pay its share of EU spending agreed to whilst it was a member;

  • the UK should not pay any more, nor earlier, than if it had remained a member state. 

Broadly speaking, the settlement has three components:

  • During the transition period, until December 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 UK will contribute towards the EU’s outstanding commitments as 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 liabilities as at the end of 2020 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).

Around 75% of the UK’s net payments are expected to be settled by the end of 2022.

Some payments, e.g. for EU-staff pensions, will continue until 2060 and beyond.

If the transition period is extended a committee - made up of UK and EU representatives - will decide the size of the UK’s contributions to the EU.

What will happen if the Withdrawal Agreement isn’t ratified?

If the Withdrawal Agreement isn’t ratified, the financial settlement will not become legally binding – and it isn’t clear what then happens to the outstanding financial commitments.

It seems probable that politics and economic considerations will lead to the UK and EU negotiating an alternative settlement.  The UK Government’s view is that it has financial obligations that it will meet - and that not doing so could see the UK portrayed as an unreliable partner.  Future collaboration between the UK and EU could be difficult if the EU feels that the UK hasn’t settled its account.

From a strictly legal perspective, a House of Lords Committee heard a range of views, but concluded that without a Withdrawal Agreement, under EU law, the UK could leave without accepting any liability for outstanding financial commitments.  They added that the political and economic consequences of doing so “are likely be profound.”  

HM Treasury has suggested that the issue would either have to be settled through a negotiated settlement - or through the courts.  The Lords Committee and the Institute for Government have both said that the EU could seek redress through international courts if the UK refuses to make payments, but the process may be slow and outcome hard to predict.


John ShuttleworthComment