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Britain says that the Brexit bill it agreed with the European Commission at dawn on Friday will cost a net €40bn-€45bn. But also included in the text are guarantees that could ramp up the total significantly in decades to come.
UK officials spent days in gruelling talks with the European Commission to ensure Brussels did not explicitly challenge the UK’s net estimates, which are lower than the €60bn mentioned at the start of talks by some senior EU officials.
For the EU the net estimates were of secondary importance to a British offer that broke a months-long impasse: to honour the country’s share of up to €100bn of EU-defined liabilities when they fall due.
“The UK will honour all the engagements made during its membership,” announced Michel Barnier, the EU’s chief negotiator, at an early morning press conference. “No member state will have to pay more or receive less because of Brexit.”
Officials in Brussels describe the UK offer as a guarantee that ensures the EU bears zero risk on the financial settlement, because Britain will pay exactly what is necessary, rather than following potentially inaccurate estimates to calculate a lump-sum payment.
While the commission says the UK uses reasonable assumptions to reach its €40-€45bn figure, the method used by the Treasury may produce lower estimates in some respects than EU standard practice.
The commission was unwilling to offer its own net estimate, even though this would make no difference to final payments.
“The UK will not pay any more or any earlier than if it was a member state,” Mr Barnier said.
One notable omission from the UK range is contingent liabilities such as EU loans to Ukraine and Ireland. British officials insist the risk of default on these loans is remote. But the total of €11.5bn in such liabilities underlines that the maximum payments the UK may face are much higher than the headline figure.
Another Treasury assumption decreases the estimated total bill by assuming that planned investment projects are cancelled at a higher rate than the commission usually assumes. The Treasury uses a rate of 6-8 per cent, which it bases on recent EU budget documents
British negotiators were able to produce a more substantive decrease by arguing down the UK’s share of budget payments after 2020 from around 13 per cent to 12.7 per cent.
This revised method takes account of the recent fall in the value of sterling, but could still increase if the pound rallies over the next two years. Similarly, the UK used a slightly lower discount rate than the commission would strictly apply in estimating potential pension liabilities.
In arriving at its estimates, the UK used assets to offset some liabilities. This included the return of €3.5bn in capital from the European Investment Bank over the next decade or so. Since this is an off-budget item, this was not included in some other net estimates of the Brexit bill.
One final methodological difference is the UK treatment of EU budget contributions in 2019. Whereas some estimates used the end of 2018 as a cut-off date, the UK took full account of its final three months in the union before Brexit takes place on March 29, 2019. It also assumed that many of its payments will be front loaded. That increased the total sums it would pay as an EU member, while decreasing the net Brexit bill.