The UK and EU agree they have financial commitments to each other that need to be settled following Brexit. If the UK leaves the EU with a Withdrawal Agreement, the outstanding financial commitments will be settled through the negotiated ‘financial settlement’.

It sets out the commitments to be settled,
how payments will be calculated and when payments will be made. It does not say
how much the UK will pay. Nor can it, as the actual payments will be dictated
by future events.

Both the Treasury and Office for Budget Responsibility estimated that the settlement could cost the UK around £39 billion by the time the final payment has been made, potentially in the mid-2060s. These estimates were based on the UK leaving the EU on 29 March 2019. Here we explain how delaying Brexit – through Article 50 extensions – impacts on the potential cost of the financial settlement and the possibility of future costs.

The UK will make larger payments as a Member State…

The UK will continue to be a Member State during
the extended Article 50 period. As a result, it will be obliged to contribute
to the EU Budget on a monthly basis, as it currently does.

The current extension to Article 50 ends on
31 October 2019, so as it stands the UK could continue to make financial
contributions for up to seven months after its original departure date.

…which will reduce payments through the financial settlement

Any additional payments the UK makes as a
Member State will decrease the payments it makes to the EU through the
financial settlement. The EU will still receive the same total amount from the
UK (so long as the UK leaves with a Withdrawal Agreement). However,  the Brexit delay changes how the UK’s total
payment will break down between payments made as a Member State and payments
made through the financial settlement afterwards.

The transition period is important for understanding why this is the case. If the UK leaves with a Withdrawal Agreement it will enter a transition period that ends on 31 December 2020. The delay to Brexit doesn’t change this end date.  During this period, the UK will contribute to the EU budget as if it were a Member State, making payments into what remains of the 2019 EU budget and the 2020 budget. If the UK contributes more to the 2019 EU budget as a Member State, it will need to contribute less during the transition period, through the financial settlement.

What if the transition period is extended?

The Withdrawal Agreement allows for the
transition period to be extended. The UK and EU could agree to extend the
transition period beyond December 2020, for a period of up to two years. An
extension will mean the UK makes further payments to the EU, but these will not
be part of the financial settlement. The settlements deals only with past
financial commitments made by the UK largely under the EU’s 2014-2020 budget
plan.

If the transition period were extended
beyond December 2020, the UK would make an (unspecified) ad-hoc financial
contribution to the EU budget, which will be determined by a Joint Committee of
UK and EU representatives. The size of payment will be based on the UK’s status
during the extended transition period and will sit outside of the financial
settlement. The potential cost isn’t quantifiable but is likely to be
substantial.

Extending Article 50 does not necessarily
mean the transition period will also be extended, although the Article 50 extension
does reduce the limited time available to negotiate a new UK-EU trade agreement
by the end of the initial transition period in December 2020. This could make
it more likely the Government will request an extension of the transition
period, necessitating an additional financial contribution on top of the £39
billion financial settlement.

What does this mean for the £39 billion estimate?

The OBR will update its estimate of the
financial settlement in its next forecast, which is likely to be in autumn
2019. Its last estimate – produced in March 2019 – was a little lower than £39
billion, at £38 billion. Because of the Brexit delay we can expect the OBR to
lower its estimate of the financial settlement and increase the size of the
UK’s actual Member State contributions to the EU.

Other factors affect the estimate of the
financial settlement. Since the OBR began estimating the settlement in March
2018, changes to exchange rates, the implementation of the EU budget, the UK’s
relative contribution, and revisions to past economic data have all resulted in
(relatively small) revisions to the estimate. We can expect the Brexit delay to
have a larger impact on the OBR’s next estimate of the financial settlement
than any other factors.  

Should the transition period be extended, the overall amount the UK pays to the EU will increase because of the need for a supplementary financial arrangement on top of the detailed £39 billion financial settlement. The OBR will not estimate this hypothetical scenario unless it becomes a reality.

Of course, all of this relies on the UK leaving with a Withdrawal Agreement. If the UK leaves without a deal the UK Government believes that some form of alternative financial settlement will need to be negotiated. At this stage it isn’t clear what form an alternative settlement might take and how similar it would be to the agreed financial settlement. An EU proposal for continued UK contributions in a ‘no deal’ scenario was put on hold after the UK asked for a further extension of the Article 50 period.

Further reading

About the author: Matt Keep is a Senior Library Clerk at the House of Commons Library, specialising in public finances.

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