External views on the possible scope of Brexit negotiations

The UK currently makes a substantial net financial contribution to the activities of the European Union. This contribution may not be eliminated entirely when we leave the EU, as some non-member countries choose to contribute to the EU financially in exchange – for example – for preferential access to the single market or funding for university research. Commentators also expect the EU to argue that the UK will have an ongoing responsibility for some EU liabilities.

The size and scope of any ongoing financial flows between the UK and EU will depend on the outcome of the negotiations over our future relationship. Neither the UK Government nor the EU have set out their negotiating positions. As we know neither the Government’s negotiating stance, nor its chances of success, we have not attempted to predict what the outcome of the negotiations will be and therefore what the financial flows will look like after we leave. As described in paragraphs 4.130 to 4.131, we have instead made the fiscally neutral assumption that any reduction in the net expenditure transfers that we would make to the EU if we remained a member will be recycled into other domestic spending – either to compensate private or public sector recipients for the loss of EU funding or to meet other spending priorities.

Financial flows that already form part of our forecast include our net expenditure transfers to the EU. The Government has said it wishes to negotiate a bespoke arrangement with the EU. That may or may not include agreeing to contribute to the EU budget to retain some of the benefits that it has enjoyed from membership. Among existing relationships, members of the European Economic Area (EEA) contribute grants to poorer parts of the EU in exchange for preferential access to the EU single market. Norway, which provides the vast majority of EEA contributions, paid around £586 million (gross) in 2014.^a Switzerland, which has limited access to the single market, provides grants to those countries that have joined the EU since 2004, which amount to around £900 million in commitments over five years (with payments spread over ten).^b

Issues that some officials, institutions and MEPs are reported to be arguing that the UK should pay a share for include:

• EU pension liabilities: total liabilities relating to pension rights of EU staff amounted to €63.8 billion (£46.9 billion) at the end of 2015;
• 2014-2020 MFF: EU spending is set over a seven-year Multiannual Financial Framework (MFF) through which annual budgets are negotiated. Over the current 2014-2020 period, total spending is expected to reach around €1 trillion. Some of this expenditure will not have been financed by the time the UK leaves the EU, which could result in a shortfall for the EU. For some areas of the budget such as structural funds, there is also a routine lag between commitments and payments from the EU budget; and
• European Investment Bank (EIB) capital contribution: the UK has a 16.11 per cent shareholding in the European Investment Bank, which makes long-term loans to support innovation, small business, the environment and infrastructure. At the end of 2015, this corresponded to a €39.2 billion capital subscription, of which only €3.5 billion was paid in and the remainder callable if the EIB’s Board of Directors requires it. Following the EU referendum, the EIB said “at present the UK shareholding in the EIB remains and the EIB’s engagement in the UK is unchanged” and it expected “that the EIB’s shareholders, the 28 EU Member States, will discuss the EIB’s engagement in the UK as part of broader discussions to define the future relationship of the UK with Europe and European bodies. At present, the EIB’s shareholders have not requested the Bank to change its approach to operations in the UK”.

The Chancellor announced in August that the Treasury would make good any loss of EU funding for structural and investment fund projects signed before Autumn Statement 2016, any loss of Horizon research funding granted while the UK remains a member of the EU and any loss of agricultural funding until 2020. In October, the Chancellor extended these guarantees to the point at which the UK departs the EU, for those projects that it deems good value for money and consistent with domestic strategic priorities. These guarantees cover elements of the existing spending by the EU in the UK, which include:

• payments received via central government and the devolved administrations: the UK received an estimated £4.4 billion from EU structural funds and rural policy channelled through government departments or agencies in 2015. The largest flows from the EU were via the Common Agricultural Policy (£2.5 billion from the European Agricultural Guarantee Fund and £0.6 billion from the European Agricultural Fund for Rural Development) and £1.2 billion from the Social and Regional Development Funds. The allocation of EU receipts varies across the nations and regions of the UK. For example, England has been allocated €6.9 billion (£5.9 billion) from structural funds alone across the 2014-2020 budget, Wales €2.4 billion (£2.0 billion), Scotland €0.9 billion (£0.8 billion) and Northern Ireland €0.5 billion and (£0.4 billion)^c; and
• payments received by the private sector: the EU also makes some payments directly to private sector programme participants, for example to finance research at UK universities. These payments can be volatile from year to year, but they averaged £1.3 billion a year between 2010 and 2014. For example, funding so far awarded to UK organisations under the ‘Horizon 2020’ programme – for research and innovation in the areas of science, industrial leadership and societal challenges – amounts to £1.1 billion in total between 2014 and 2020.

Overseas aid spending could be affected too. The UK has legislated to spend 0.7 per cent of its gross national income on Official Development Assistance (ODA). In 2015, the UK spent an estimated £12.1 billion or 0.70 per cent of UK GNI on ODA. This was achieved in part by attributing around £0.9 billion of EU ODA spending to the UK, some 7.7 per cent of the total UK spending. On the basis that the UK will maintain UK ODA spending at a given level after leaving the EU, the part channelled through the EU and therefore financed via the UK’s net expenditure transfers to the EU would need to be replaced by domestic UK spending.

We will keep our assumption that the Government will recycle any reduction in the net financial contribution it makes to the EU into domestic spending under review in future forecasts.