How much money will the EU have to pay back to the UK after Brexit?
Nothing. Zero. Zip.
Mobile Phone Contracts
When you have a mobile phone contract, say for 24 months, at £25 a month and you leave it early, say after 12 months, you are expected to pay the remaining 12 months or an early termination fee, if your contract has one of those (the majority don’t, but the termination fee is about the price of the remaining portion of the contract — basically, there is no practical difference). The total value of the contract, your commitment, over the two years is £600. Leaving in 12 months means you’ve paid one year’s worth, which is 12 months and you have to pay the remaining portion of the contract. i.e. 12 months worth, which is another £300.
This is the bill Juncker is presenting to the UK. It is the remaining commitments that the UK made to the EU. It isn’t a punishment bill. Indeed, if they wanted to claim the full value, and wanted to make it a punishment bill, they would be entitled to more than double that.
Why do I say this? You have to understand how the EU “contract” works and crucially, how it’s funded.
The EU use 7 year budget cycles formed from 3 portions.
- The membership fee
- 80% of all import tariffs into the EU from outside it (the remaining 20% goes to the member state as a referral fee for the “introduction”)
- 0.3% of the VAT charged via a member state (for every £100, we pay 6 pence).
This is to confer the work the EU do on our behalf in managing imports, negotiating trade, making regulations etc. Note, this is on our behalf, which means we don’t have to do it, not a challenge to sovereignty. It’s like outsourcing or delegating operations, rightly or wrongly.
Front Loaded Costs
The EU will have spent money from the last budget cycle in this one. Like a mobile phone company pays for your phone up front, sends it to you for free, and charges a proportion of it within the monthly charge (often 50:50). So in our example, it may be that £12.50 a month of the £25 charged is actually to pay for the phone.
The EU has done the same. They’ve spent money from the last budget cycle on development projects, including the ERDF (European Regional Development Fund) which has regenerated vast swathes of the UK, including a £60 million per year dependency in Cornwall and some very large parts of Birmingham, Manchester, Leeds, Sheffield and rural areas, albeit spread out. Like the phone after 12 months, the company can’t do anything nor reclaim the remaining value of the phone by selling it.
Like the phone operator, this means that the EU need to be somehow reclaim the money they spent on the UK as well as the costs of budgetary responsibility in this cycle and arguably, if they want to be harsh, lost income (but they’re not).
The last budget cycle covers the period of 2014–2020 inclusive. Our membership fee, net of rebates is around £11.8 bn (the rebate is paid as an offset against current funds — i.e. the rebate money doesn’t leave the UK in the first place and won’t even need to be reviewed for 7 years — it’s not even allocated to the EU at UK level either). Hence our total balance sheet commitment is 7 x £11.8bn = £82.6bn.
We are 2 full years in. So have paid 2x £11.8bn. The remaining costs are thus 5 years of around £11.8bn which is £59 billion.
This excludes the loss of trade, loss of future incomes etc. this IMO, having crunched the numbers is an exceptionally fair deal. It is exactly the same as terminating a phone contract. You finish early, you pay you commitments, you go. It is not a punishment.
Jurisdiction and Bad Debt
This seems to me like pretty much the least understood part of the process by David Davis and most, if not all Leavers. They imply that if we leave the EU, and don’t pay the debt, then the EU can’t chase us, because there is not legal framework in which to do so…
The logic is simple:
- If we fail to reach a deal in 2 years and negotiations are not extended, then we trade under WTO rules. This is understood by everyone.
- The WTO have dispute resolution procedures, including sanctions, which they can and will place on countries that fail to address the dispute. They already apply them to Iran and many other countries.
- All EU countries are members of the WTO, the EU is a member of the WTO and so are we. Membership of the EU is a subset of the WTO rules.
- So we are subject to the same dispute procedures as any other country. 27 members of the 168 members immediately engage their 100 trade partners and you suddenly have a majority of 127 countries to vote on the UK receiving sanctions, if we didn’t resolve it after the first 2 stages. We’d be done for in a heart beat. We couldn’t trade with anyone, including the USA.
The UK’s position in this is not strong at all. The UK is not entitled to any cash back. May et al are going into the negotiations having presented to the public the idea they can get back £6 billion or something. If they want to play the “counterclaim” game then I suspect they’ll resort to fraud, but in the worst case, it still leaves a court of arbitration to conclude that the UK will still have to pay £53 billion even if we win that portion of the argument. Dead in the water in two years.
The only way we would get any money back is to last the entire term, since this returns this period’s rebate. Having seen snippets of the notice letter, it seems this may be what May is going for. If we are aiming to be out of the EU by 2022, we’re probably going to get asked to contribute in the next budge cycle for 2 years, then be due whatever rebate is due then. Since we will have paid another proportion to our membership then.
A few fair follow-up questions:
Did this not go to show the huge expense that the EU is to the UK?
And if most of this money was to be given back in rebates anyway, surely if we are still paying liabilities we should also still receives our rebate.
Nope. Is your phone an expense to you? What do you get back from your phone?
Think about the phone contract example and what happens in that process. It’s a close enough model to reason with.
Think about the rebate. If you’re arguing the case for a rebate, think of the direction of the money flow. I’m going to beat that argument using that very argument (which is the trouble with Leave. EU style math. It doesn’t stand up even on it’s own). It isn’t how it works, but just to humour you… and myself.
UK membership fee to EU £18 billion. Rebates only apply to it and is worth £6.2 billion, which remember, doesn’t leave the UK. 5 years of that is £43.4 billion in rebates (direction, EU to UK — it doesn’t ever leave our shores, as I point out in my answer).
When the UK doesn’t pay £18 billion any more. The EU is due to the rebates from the previous years’ budget cycles (the rebates are given by the EU to the UK). Hence, the UK would still pay £43.4 billion to the EU for the rebates in the previous years, covering in this budget cycle, with the UK.
The UK is about to learn that there isn’t any way whatsoever that the math would result in the UK ever getting any money back, nor getting out of some commitment to the EU. If you believed we would, you’ve been duped or have some desperate agenda.
It isn’t punishment and Leavers are already bricking it. So imagine what it would be like if it was punishment?!
Misunderstanding the rebate as the value of money we get back from the EU for infrastructure and economy.
No, that’s not the rebate. The rebate is for the over-contribution of the funds to the EU coffers in previous budget cycles. The other funds which come back from the EU are for UK infrastructure and economy. That isn’t the rebate. The rebate doesn’t leave the UK’s shores. It’s an immediate rebate. After that, the UK gets more money from the EU, and because we’re net contributors, the spare cash built up goes into a pot which then becomes the rebate for next budget cycle (2021–2027). As it stands the UK net contribution is £7 billion every year.
What we can’t forget is that the membership fee also allows us to garner tariff free access to the single market which we trade £500 billion with and hence, save about £20 billion (net of exports) in tariffs that otherwise would be charged
So even if we get into a position where we save £7 billion, we are going to lose £20 billion year on year in trade (although I suspect this will decrease before the next budget cycle). Hence, for several years, imports through the EU will cost a consistent £13 billion more.
This is why the economic arguments of Brexit have to be considered in the round. This is something we do chronically badly here in the UK.