Brexit

The case for not paying the EU a £39bn exit bill

BY Peter Lilley   /  7 January 2019

It is right and proper that the UK should pay any sums it legally owes the EU – if any.  In my latest paper, co-authored with Brendan Chilton of Labour Leave – “30 Truths about leaving under WTO terms” – we consider how the UK could benefit from not paying £39bn that the Prime Minister would give away for nothing in return.

A Lords committee concluded that in the absence of a Withdrawal Agreement we had no financial obligation to the EU. City lawyers reached the same conclusion. The amounts indicated in the draft agreement negotiated between the UK and the EU have been offered in the expectation of a positive trade deal on the basis that “nothing is agreed unless everything is agreed”.   It would be almost unprecedented to pay for a trade deal or for “access to the EU market”. The Canadians have not paid, the South Koreans have not paid – why should the UK?

The normal “payment” for tariff free access to another country’s market is allowing that country tariff free access to one’s own market.  A “zero for zero” trade deal would mean the UK foregoing £13 billion tariffs on the EU’s much larger exports to the UK versus the EU foregoing £5-6 billion tariffs on UK exports to the EU. So, it would be particularly strange for the UK to pay for that.

According to the NAO estimates (from Exiting the EU: the financial settlement, National Audit Office report 20 April 2018) there are four main components:

Annual net contributions

Nearly half the expected £39 billion would have represented the UK’s net annual contributions to the EU during the 21-month transition period, which will not arise without a Withdrawal Agreement. No-one contests that we would keep this if we leave with no transition period.

Reste à liquider

The EU authorises some spending commitments on programmes extending several years ahead.  Britain’s net share of these outstanding commitments is put at about £18bn. There is no precedent for a country leaving an international organisation being expected to contribute to ongoing programmes initiated when it was a member (see The Withdrawal of the UK from the European Union: analysis of potential financial liabilities, by Charlie Elphicke MP and Martin Howe QC, Sept 2017).

Organisations whose income declines, whether as a result of their membership base shrinking or some other reason, have to readjust their budgets. When you leave a golf club you don’t pay for financial commitments it has made to buy lawnmowers in the future.

Pensions

The remainder is largely a contribution to the accrued pension liabilities of civil servants (net of repayment of our contribution to EIB capital).  But the EU has always chosen to finance its pension liabilities on a pay-as-you-go basis, not on the basis of accrual of entitlements. New member states therefore pay for the actual pensions of civil servants who retired before the new country joined.

Indeed, the UK has been paying towards pensions earned before we became members. To apply the pay-as-you-go principle while the UK was a member state but then to apply the accruals basis in respect of pensions payable after we leave, is manifestly unjust.  Again, there is no precedent for an organisation which funds its pensions on a pay-as-you-go to charge a leaving member on an accruals basis.  When you leave a bowling club you don’t continue to pay anything for the greenkeepers’ pensions.

EIB capital

The only significant positive item is the return of the UK’s initial capital contribution to the European Investment Bank. However, the EU proposes to withhold the UK’s share of the bank’s accumulated capital which logically only built up because of the UK’s initial investment. Is that just?

To smooth the EU’s ruffled feathers, we should agree to submit the EU’s claims to arbitration by an appropriate international tribunal – with every confidence of winning.

One thing is certain, there is no hard case to pay out £39 billion to the EU, with or without a trade deal.

Lord Lilley served in the UK government as Secretary of State for Trade and Industry from 1990 to 1992 and as Secretary of State for Social Security from 1992 to 1997.