The Brexit bill: How much will Brexit cost the UK?

With the UK due to formally exit the EU by March 2019, there is much speculation and concern surrounding the potential ”divorce bill” or net exit charge of leaving the EU.

Estimates wildly differ – ranging from a colossal €100bn to a perhaps optimistic scenario of paying nothing at all.

The ICAEW has published a report, “Analysing the EU exit charge”, which calculates the possible charges, and has streamlined its estimates into three possible scenarios: low (£5bn), central (£15bn), and high (£30bn). Even the high scenario of £30bn is far lower than average projections, which the ICAEW has labelled “extreme”.

In the central scenario, ICAEW predicts the UK would be asked to pay a gross amount of £55bn, but that the net cost would be closer to £15bn after rebates and UK spending have been deducted. A further deduction is likely to come through the UK’s investment in the European Investment Bank.

The final figure of the central scenario equates to around £225 per person expected to be living in the UK in 2019, or the approximate amount the UK public sector spends in a week.

EU balance sheet & budget

The ICAEW has predicted these figures through analysing the EU’s accounts and assuming that the UK will pay its 16% share of the EU’s balance sheet and committed expenditure up to March 2019, including committed funding and authorised spending not yet incurred.

According to most recently published financial documents in December 2015, the EU’s balance sheet was a net liability position of £60bn, of which the UK’s share is £10bn. Adding another £1bn for other net liabilities, this brings the UK’s share to £11bn.

Of the EU budget, the UK’s annual share generally comes to £8bn-£10bn after deducting the estimated rebate and UK spending. The UK will continue to be involved in setting the EU budget until the year 2020.

The ICAEW notes that the largest component of the final exit charge will be the portion of unspent EU budget, a large part of which is planned funding for multi-year EU programmes such as those relating to agriculture, security and aid. Extrapolating from the 2015 accounts, the ICAEW determines the authorised spending not yet incurred to be £174m, of which the UK’s portion will be £10bn after subtracting the estimated rebate and UK spending.

Costs for remaining period of membership

As the EU operates in a multi-year financial framework (currently in the midst of the 2014-2020 framework), some uncertainty surrounds which costs for the remainder of the period the UK will be liable to pay. The expected cost of the 2019-2020 gross EU budget is £23bn and is only included in ICAEW’s “high scenario”.

Under current arrangements, the UK is entitled to a rebate on its contributions. It is uncertain whether the UK will be eligible for a rebate from the final period of membership after leaving the EU in 2019. If granted, the ICAEW estimates that this would return roughly £6bn to the UK. This is likely to be a point of discussion during negotiations.

Another likely point of contention is whether or not the UK is liable to pay for its portion of unspent budget amounts at the date the UK officially exits the EU, such as for EU multi-year programmes. It is likely the EU will argue for the UK’s accountability as legal commitments have been made. The UK’s share of potential net amount payable would be £10bn.

European Investment Bank

The European Investment Bank (EIB) is a separate legal entity and therefore not consolidated within EU accounts, despite calling itself the “EU bank”. The UK has a 16% share in the EIB and its share of net assets in December 2015 was £8bn. This is expected to rise to £10bn by March 2019.

As it is a requirement for shareholders to be EU member states, it is likely that the UK will have to sell its share to other EU members unless rules are amended to permit the UK’s continued participation. There are a few other scenarios that may unfold with regards to the EIB, such as converting the UK’s shareholding into interest-bearing debt to be repaid over time. It is also conceivable that the UK could forfeit its investment if no deal is reached with the EU.

Conclusion

The ICAEW’s cost scenarios range between £5bn, £15bn and £30bn, but of course the final figure will hinge upon negotiations.

Further to costs incurred as an exit charge, Brexit negotiations will also largely revolve around the nature of the future relationship between the UK and EU – particularly the UK’s participation in and contribution to EU programmes and agencies such as Europol and the European Defence Agency.

Negotiations will also determine whether the UK will continue to work with the EU on joint development funding or choose to create its own programmes. Currently the largest portion of the UK’s net contribution to the EU goes towards development funding, particularly in eastern Europe. Trade will also play a central role in negotiations.

The ICAEW also stresses that paying less to the EU after 2019 does not necessarily equate to savings for the UK, as administration costs may accrue and participation in EU programmes are likely to cost more.

With the general election results casting uncertainty on the government’s position, it is likely that Brexit negotiations will be held off until the dust settles. Once they begin, the UK is up against the clock to strike a deal with the EU before the two-year deadline. Nearly three months have flashed by since Article 50 was triggered back in March, and neither time nor the EU will be lenient on the UK’s late arrival to the table.