Not cleared from scrutiny; further information requested; drawn to the attention of the Committee on Exiting the EU, the Public Accounts Committee and the Treasury Committee
Proposal for a Council Regulation on measures concerning the EU budget for 2019 in relation to the withdrawal of the UK
Article 352 TFEU and Article 203 EURATOM; special legislative procedure; unanimity
(40348), 5933/19, COM(19) 64
6.1The EU budget amounts to roughly 1 per cent of its Member States collective Gross National Income each year, with individual EU countries contributing to meet expenditure demands proportionate to their economic size. As a result, the UK is currently a substantial net contributor to the EU budget. According to released by the Treasury in March 2018, in 2017 the UK made a gross contribution of £18.6 billion, or a net public sector contribution of £8.9 billion. This last figure takes into account the UK rebate—which was £6.5 billion that year—and EU funds that are managed domestically by the UK public sector before being disbursed, such as agricultural subsidies and structural funds (£4.1 billion). However, it excludes EU funding received by UK-based private sector recipients directly from the European Commission, such as research grants to universities.
6.2The legal obligation for the Treasury to make payments into the EU budget will exist for as long as the UK is an EU Member State. That means its withdrawal from the European Union, scheduled to take place on 29 March 2019, will automatically remove the ‘EU obligation’ to make payments into the EU budget under the Treaties. However, it has been clear from the very start of the Brexit negotiations that the EU wanted the UK to pay for a share of financial commitments undertaken by the Union with Britain as a Member State. The European Commission issued a to that effect in June 2017, and in her in September 2017 the Prime Minister affirmed the UK’s position that none of the remaining Member States would have to make higher contributions to the EU budget as a direct result of the UK’s departure.
6.4The total cost to the UK taxpayer of the financial settlement in the Withdrawal Agreement has been provisionally at £39 billion. However, to make the overall settlement legally binding from the moment the UK’s membership of the EU ceases (whether 29 March or following any extension of the Article 50 negotiating period), the Withdrawal Agreement must be ratified by both sides. At present, it is unclear that the necessary majority for this exists in the House of Commons.
6.5In a ‘no deal’ scenario, i.e. where the Agreement is not ratified before the UK ceases to be an EU Member State, there is no clear legal basis for further UK payments into the EU budget. Indeed, the Treasury has already to remove EU budgetary law from the UK statute book in a ‘no deal’ scenario. The Government has also established an , which will provide financing from the Treasury to ensure that “UK organisations […] will continue to receive funding over a project’s lifetime if they successfully bid into EU-funded programmes before the end of 2020” if the Withdrawal Agreement is not ratified.
6.6For the EU, an immediate cessation of the British contribution would be a significant disruption, given the UK is one of the largest net contributors. Under the Treaties, the EU’s revenue and expenditure must be matched: it cannot run a deficit. Therefore, without British payments EU expenditure would have to be reduced, or other Member States would have to pay more to make up the shortfall (or a combination of both).
6.7In late January 2019, the European Commission therefore issued an in the form of a Council Regulation that effectively invites the UK to continue making payments for the remainder of 2019 even as a non-Member State. The essence of the proposed Regulation is that, rather than amending the 2019 EU budget to reduce planned expenditure to take into account the potential lack of a UK contribution from April onwards, the Treasury has been asked to make its planned gross contribution for all of 2019— (£14.9 billion)—even if the Withdrawal Agreement is not ratified. The Government would need to signify its agreement to this arrangement by 18 April, unless the Article 50 period—and therefore the UK’s EU membership—were extended beyond 29 March.
6.8Given the exceptional circumstances that have led the Commission to make this proposal, the legal basis for the draft Regulation is of the Treaty on the Functioning of the European Union. This is a fall-back mechanism that allows the EU to take exceptional measures for which no explicit legal basis is provided elsewhere in the Treaties. Because of this, the proposal requires unanimous agreement of the Member States in the Council, and the consent of the European Parliament. As a consequence, the UK Government also needs to vote in favour of—or abstain on—the Regulation for it to be adopted while the UK is still a Member State. The proposal, like the Withdrawal Agreement, would only take effect from the date the Treaties cease to apply to the UK, whether on 29 March 2019 or following any possible extension of the Brexit negotiation period under Article 50 of the EU Treaty. (During any such extension, the UK would remain a full Member State including the obligation to make payments to the EU budget.)
6.9Although the Commission proposal, if accepted by the UK, would notably prevent acrimonious negotiations with Member States about increasing their contributions to the EU by keeping the UK’s payments in place, its offer is, however, not entirely one-sided. In return for UK contributions to the EU budget for the remainder of 2019 even as a non-Member State, the Commission has proposed that:
6.10Continued flows of EU funding to the UK in 2019 as if it were still a Member State would be conditional on payments being made in a timely way, and the UK accepting the “controls and audits” which apply to EU spending programmes (including oversight by the European Commission, the European Court of Auditors and the EU’s anti-fraud body OLAF). The EU could suspend payments to UK recipients if the Government did not make the agreed payments or if “significant deficiencies” were observed in the way the funding was implemented (especially in areas of ‘shared management’, like Structural Funds, where EU funding is allocated to a public authority which then disburses it to the final recipients). The exceptions to this would be the provision of EU funding for UK students on an on ‘exit day’, and the continuation of the EU’s . For those funding commitments, the Commission has proposed separate ‘no deal’ contingency measures that are not directly dependent on the Government’s agreement to pay into the 2019 EU budget, although they are built on an expectation that it will.
6.11For other EU funding programmes, the precise scope of what UK entities could receive in return for the Treasury making the full payments for the 2019 financial year is unclear. Under article 2 of the proposed Regulation, UK persons or entities “shall continue to be eligible [for EU funding] in 2019” (emphasis added). That appears to mean that any payments due from 1 January 2020 would not be covered, even though much of EU funding awarded in 2019—for example for research projects or regional development—may not be due for disbursement until 2020 or later. That would limit the benefit the UK would derive from its continued eligibility. Moreover, UK entities would be barred from EU funding related to programmes with a ‘security’ component, including notably the and the . Similarly, the UK would only qualify for investment by the European Investment Bank as a ‘third country’, which translates into a far smaller share of investment. It is also unclear if the Commission proposal means UK farming subsidies in 2019 would be paid from the budget for the Common Agricultural Policy, under the terms set out in the relevant EU Regulations.
6.12As noted, in terms of the financial cost of this arrangement, Article 2 of the draft Regulation stipulates that the UK’s payments in return for continued eligibility for EU funding in 2019 would be based on the UK’s share of the for this year. In December 2018, this was set at €148.2 billion in payment appropriations. The gross UK contribution for 2019 would be €17.4 billion (£14.9 billion). That figure includes the estimated rebate the UK would have received in 2019, presumably added by the Commission as a political sweetener (although inclusion of the rebate to reduce the UK’s overall contributions even as a non-Member State is now reportedly the subject of acrimonious negotiations in the Council). The actual net contribution the Treasury would to the EU until the end of 2019 would be less than this, after EU funding flowing back to the UK over the year as a whole is also taken into account. According to a on 25 February 2019, the estimated net UK contribution for 2019 under the proposal would amount to roughly €7 billion (£6 billion).
6.13A separate element of the Commission proposal aims to protect funding streams to recipients of EU funding in one of the remaining 27 Member States, whose successful application for financial support was predicated in some way on cooperation with UK institutions (article 6).
6.14For example, many types of EU research funding are granted only to consortia of researchers representing at least three EU Member States. Following the UK’s withdrawal, and absent ratification of the Withdrawal Agreement, a consortium which currently meets this requirement by virtue of a British participating institution could abruptly cease to be eligible for EU funding on 30 March 2019, once the UK no longer count towards the minimum number of participating EU countries. To avoid an abrupt cessation of funding for the EU-based recipients in such cases, the Commission’s proposal would keep their eligibility to receive funding in place until the end of 2019. This element of the proposal would take effect irrespective of whether the UK continues to make payments. However, UK-based entities would have to be paid by the UK Government because British participants would only continue to receive funding from the EU directly if the UK Government accepts the conditions for payments into the EU budget for the remainder of 2019.
6.15The Chief Secretary to the Treasury (Rt Hon. Elizabeth Truss MP) submitted an Explanatory Memorandum on the European Commission proposal for continued UK contributions on 4 March 2019, over a month after the Commission document was first published. The Memorandum summarises the thrust of the proposal—namely continued UK contributions in return for continued UK eligibility to receive EU funding in 2019—but does not put a figure on the likely cost to the British taxpayer. As has been stated publicly by various Ministers in the past, the Chief Secretary also reiterates that “the UK has [financial] obligations to the EU, and the EU […] to the UK, that will survive the UK’s withdrawal and that these would need to be resolved”.
6.16Put differently, the Government is of the view that the UK would somehow have to make contributions to the EU budget beyond 29 March 2019 even in a ‘no deal’ scenario. Maintaining the Government’s usual studied ambiguity about its Brexit preparations, the Chief Secretary’s Explanatory Memorandum declines to specify how the Government’s position compares to the EU’s proposal for continued contributions in 2019. The Treasury has not said what it considers the size of the UK’s financial obligations to be in the event of a “no deal” Brexit; how it would want to agree the modalities of payment with the EU; or what conditions it would attach to what would undoubtably be a significant transfer of UK taxpayers’ money. The Memorandum notes vaguely that the Treasury “is currently analysing the Commission proposal”, but adds that the proposal “is without prejudice to negotiating an agreement with the UK on a [comprehensive] financial settlement” (i.e. one that would cover financial obligations between the UK and the EU beyond just the 2019 financial year, like the settlement contained in the Withdrawal Agreement).
6.17Although the Chief Secretary says the Commission proposal is still being analysed, on 25 February 2019 the Daily Telegraph that the Cabinet had signed off on a draft Statutory Instrument enabling the Treasury to continue making payments to the EU in a ‘no deal’ scenario. Such a legal instrument would be necessary because the Government’s current statutory authority to make payments to the EU out of the Consolidated Fund under the European Communities Act 1972 would have fallen away, and without being replaced by new powers under an Act of Parliament to implement the Withdrawal Agreement. The press reported that the Statutory Instrument for payments in a ‘no deal’ scenario would be made under the European Union (Withdrawal) Act 2018, potentially even under the negative—rather than affirmative—procedure.
6.18However, as noted, it is unclear if this means the Government accepts the thrust of the Commission proposal in terms of its mix of obligations, conditions and rights (also taking into account the fact that the remaining Member States can make changes to the amount requested and the conditions attached, and therefore no definitive offer from the EU to the UK about the 2019 budget can be made until all the EU’s national governments are happy with the proposed Regulation setting out what is being asked of the UK Government). The Chief Secretary has informed us that the formal EU Regulation establishing the legal framework for continued UK contributions in a ‘no deal’ scenario is due to be adopted by the remaining Member States in the Council on 8 April 2019, giving the UK ten days to respond to the offer (unless its EU membership is extended under Article 50 to provide more time for ratification of the Withdrawal Agreement).
6.19As expected, the European Commission has made a request for the UK to continue paying into the EU budget for the whole of 2019, even if it leaves the EU without a Withdrawal Agreement in March. In return for a gross contribution of nearly £15 billion, British public and private sector entities would have continued eligibility to receive previously agreed EU funding until 31 December 2019, and bid for new funding for the rest of the year. That would, for example, temporarily prolong the UK’s access to European regional development and structural funds while the Government decides on the shape of the new ‘Shared Prosperity Fund’ to replace it domestically. Clearly however, the Commission is mainly attempting to prevent a significant shortfall in the EU budget in 2019 or having to engage in tortuous negotiations between the remaining Member States about increasing their contributions to cover what would have been the UK’s payments.
6.20As the House of Lords EU Committee pointed out in its now well-known report on the UK’s financial commitments to the EU after Brexit, under a ‘no deal’ scenario the “UK would be subject to no enforceable obligation to make any [EU] financial contribution at all”. Moreover, in a strict financial sense, it is unclear what benefit the UK would derive directly from accepting the Commission’s proposal given it is a net contributor to the EU budget. Unilaterally covering EU funding commitments for UK recipients from April 2019 would be cheaper for the Treasury than continuing to cover a share of the EU budget.
6.21However, it is clear that any continued UK payments into the EU budget for the rest of 2019 even in a ‘no deal’ scenario would depend on wider political considerations, rather than the strict financial cost to the Treasury and the UK taxpayer. In particular:
6.22Indeed, no doubt conscious of these potential ramifications, various former and present Cabinet Ministers have indicated that the Government could pay towards the financial settlement even in the absence of a formal Withdrawal Agreement. The Chief Secretary has reiterated this position in her latest Explanatory Memorandum. So far, however, those statements have been couched in oblique or ambiguous terms, and without putting a detailed figure on the likely cost to the UK taxpayer or the conditions for such a transfer. Accepting the general aim of the Commission proposal, which the press has reported is the Government’s position, would render void the argument that one of the benefits of a ‘no deal’ scenario would be the retention of the full amount of the estimated £39 billion Brexit financial settlement.
6.23There are likely to be long-term financial implications if the Government accepts the EU’s offer, that go beyond the current financial year. It is clearly the EU’s intention, and obviously in its own interest, to extract the full amount it considers is due from the UK as set out in the financial settlement contained in the Withdrawal Agreement. It is likely to use other political pressure points in the wider economic negotiations with the Government to seek to achieve this. The Commission proposal therefore clearly opens the door to further similar arrangements for continued UK payments to the EU beyond 2019, for example to guarantee previously agreed EU funding to UK recipients where payments fall due in 2020 or later. This means the gross €17.4 billion ‘no deal’ contribution in 2019 could rise substantially further in the coming years, even though the Treasury will no longer be involved in the establishment of the annual EU budget.
6.24We have also taken note of press reports that the continued inclusion of the UK rebate—to decrease the size of the UK’s contribution even as a non-Member State—is not yet set in stone. According to the Financial Times, the continued application of the rebate in the ‘no deal’ proposal is the subject of tense debate among the remaining Member States. The discussions have centred on the fact that according to the European Commission, the system underpinning how the UK rebate is paid for by the other Member States—which provides a secondary rebate to the largest net contributors, to limit in turn how much they pay towards the UK discount—would automatically fall away at the UK’s withdrawal from the Union. That means that, even though the UK would keep its rebate under the ‘no deal’ offer, these countries would pay more for the 2019 EU budget, while those Member States who do not have a “rebate on the rebate”—like France—would pay less. The draft Regulation as proposed by the Commission does not contain any provisions to keep the current system for financing the rebate in place if the UK agrees to pay.
6.25According to the Minister, these points of disagreement notwithstanding, the Member States are due to reach formal agreement on the ‘no deal’ budgetary offer to the UK in early April (with the UK’s response due by 18 April 2019, unless the Article 50 period is extended). We have not seen any revised version of the Council Regulation following the negotiations. As such, the finalised EU offer made in April could be different from the original Commission proposal, and conceivably demand a different sum from the UK taxpayer, for example by stripping out or reducing the applicable rebate. Given that the abatement would have continued to apply in full to UK budget contributions for 2019 and 2020 under the Withdrawal Agreement, that would be a perverse outcome for the UK public purse.
6.26Irrespective of the final shape of the EU’s offer, there is clearly a large cost to the Exchequer if the Government accepts the Commission’s basic proposition of continued payments to the EU budget in 2019 even in a ‘no deal’ scenario. The Government’s position is therefore of major political importance to Parliament and the wider public. It is extremely disappointing that the Treasury was unable to use its Explanatory Memorandum, submitted more than a month after the Commission published the draft Regulation, to provide us with its concrete position on the ‘no deal’ financial settlement for 2019.
6.27In light of the lack of this clarity about the Government’s view of the proposal, given its view there will be ‘surviving’ UK financial commitments to the EU in a ‘no deal’ eventuality, we wrote to the Chancellor of the Exchequer on 7 March 2019. In this letter, we requested more information on the Government’s approach to securing parliamentary scrutiny and approval of any UK legal act permitting the Treasury to make payments to the EU if its current authorisation to do so under the European Communities Act 1972 lapses at the point of EU exit, without ratification of the draft Withdrawal Agreement having occurred (and therefore in absence of a standing service provision in place under an Act implementing that Agreement, which would have allowed the Government to meet its obligations under the overall financial settlement described in paragraph 3 above).
6.28We are awaiting the Chancellor’s response, which we will report to the House in due course. Should it become clear that the Government has indeed prepared legislation to continue payments to the EU in a ‘no deal’ scenario, further substantive questions will need to be answered by the Treasury without a delay. In particular, we will continue to press the Government on the following issues:
6.29We note that it remains an option for the Government to reject the EU’s offer and cease making payments to the EU as of 29 March. As we have discussed above, that would have wider political ramifications for the future UK-EU relationship and would also seem to contradict earlier Government statements about the nature of the UK’s existing financial obligations to the EU. If, however, the Government does not accept the proposal to make continued payments into the EU budget for 2019, it is unclear what contingency measures the Commission will take to ensure the EU’s expenditure is matched by its revenue for the rest of the year. It would still have the option of amending the EU budget, making politically painful cuts, or begin difficult negotiations with the remaining 27 Member States about increasing their national contributions.
6.30Given the obvious potential for this EU proposal to have significant financial implications for the UK, depending on the Government’s position on the Commission’s offer, we retain it under scrutiny pending the requested clarifications from the Chancellor and, where appropriate, further information from the Treasury about the legislative process leading up to the formal adoption of the Council Regulation.
6.31We also draw the proposal to the attention of the Committee on Exiting the EU, the Public Accounts Committee and the Treasury Committee.
Proposal for a Council Regulation on measures concerning the EU budget for 2019 in relation to the withdrawal of the UK: (40348), 5933/19, COM(19) 64.
33 HM Treasury, ‘European Union Finances 2017: statement on the 2017 EU Budget and measures to counter fraud and financial mismanagement’
34 The European Commission’s figures, which take into account all flows of EU funding to the UK—both to the public and private sector- give a net contribution for 2016 of £7.84 billion compared to the Treasury’s figure of £9.63 billion, indicating there was €1.79 billion of EU funding flowing directly to private sector UK entities that year.
35 At present, the Treasury makes the UK’s payments into the EU budget under section 2(4) of the European Communities Act 1972, which allows it to use the Consolidated Fund to “meet any EU obligation to make payments to the EU” as well as “any other expenses incurred under or by virtue of the [EU] Treaties”. However, some level of parliamentary oversight was retained as the EU’s long-term funding settlements—the Multiannual Financial Framework—and the legislation establishing how it is funded by the Member States—the Own Resources Decision—had to be approved by Act of Parliament before the Government could consent to their adoption at EU-level.
36 The UK’s EU membership could be extended under Article 50 TEU by common agreement between the UK and all 27 remaining Member States.
37 This was in fact the first Brexit position paper issued by the European Commission after the Government notified the EU of its withdrawal on 29 March 2017.
38 In her , the Prime Minister said: “I do not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave. The UK will honour commitments we have made during the period of our membership.”
39 The EU budget is often implemented by means of so-called ‘differentiated’ expenditure. This means that payments to which the EU legally commits itself, like research funding or investment in transport infrastructure, is agreed in one financial year but not actually disbursed—partially or wholly—until a later year. The difference between commitments made and actually paid out is known as the ‘Reste à liquider’ or RAL.
40 The final settlement is likely to cost more than this. See for more information: National Audit Office, ““ (20 April 2018).
41 An extension of the Article 50 negotiating period would also extend the UK’s full membership of the EU, meaning it would remain under a legal obligation to make payments into the EU budget for that period.
42 See the . It was by the European Statutory Instruments Committee on 12 February 2019.
43 See the if there’s no Brexit deal (accessed 7 March 2019).
44 Under Article 310 TFEU, “The revenue and expenditure shown in the [EU] budget shall be in balance.”
45 The European Commission published three policy papers covering the implications of a ‘no deal’ Brexit scenario In the second half of 2018, and how the EU intends to prepare for them. These papers, notably, did not cover the budgetary implications of a disorderly Brexit. See for more information our .
46 The proposed Regulation would take effect when the UK has ceased to be an EU Member State, and as such could obviously not be binding on the Government. Instead, the Treasury would voluntarily have to accept the proposal to make the payments. The proposal requires the Government to make a written commitment to that effect by 18 April 2019, although that deadline could be extended by the Commission.
47 The Commission has asked for the power to delay the deadline for the UK’s notification by Delegated Act.
48 As noted, if the proposal is adopted prior to the cessation of the UK’s EU membership, the Government would retain its veto right over the Regulation (although the proposal has no direct impact on the UK unless the Government subsequently voluntarily chooses to accept the budgetary offer in any event). Prior to the repeal of the European Union Act 2011 in July 2018, the Government would have been unable to let the proposal be adopted .
49 The withdrawal date is 29 March 2019, unless the Article 50 period is extended by common accord between the UK and the remaining Member States.
50 Under separate contingency proposals made by the Commission, there would be different treatment of UK participation the Erasmus+ student exchange programme and EU-funded cross-border cooperation programmes involving Ireland and Northern Ireland.
51 The contingency proposal relating to UK participation in Erasmus+ in a ‘no deal’ scenario is the subject of a separate chapter in this Report. The original Commission proposal is available .
52 For example, the continuing EU funding for cross-border cooperation programmes involving Northern Ireland contains a recital stating: “The United Kingdom remains liable for its financial obligations assumed as a Member State which relate to these legal commitments of the Union”.
53 require it to “grant finance […] for investments to be carried out in the territories of Member States”, except where—exceptionally—it decides to make an investment outside the EU. It is unclear under what terms the European Investment Bank would return the UK’s current paid-in capital, which amounts to €3.5 billion (£3 billion).
54 The UK’s share, post-abatement, is usually around 12 per cent of all contributions to the EU budget. The exact amount is contained in the column ‘Total own resources’ for the UK in Table 7 of setting out the EU budget for 2019.
55 Financial Times, “” (28 February 2019).
56 This is the amount the UK would have been expected to pay had it remained a Member State or if it ratifies the Withdrawal Agreement.
57 See for example Article 9 of the , the EU’s Framework Programme for Research from 2014 to 2020. Participants can also be drawn from non-EU countries formally ‘associated’ with the Programme, which the UK would not in a ‘no deal’ Brexit.
58 However, if the European Commission made a formal determination that the Treasury had not made payments or if audits and controls had revealed problems with the implementation of EU funding in the UK, the relevant accounting officer would have to take this into account when deciding whether the project as a whole was at risk of “possible serious deficiency” (which, under the , could lead to a suspension of payments).
59 For example, in to the House of Lords EU Committee on 29 August 2018, the then-Secretary of State for Exiting the EU (Rt Hon Dominic Raab MP) said there was still a “question around quite what the shape of [the UK’s] financial obligations were” if the Withdrawal Agreement was not ratified, adding that the UK “always pays its dues On 6 February 2019, the Government that “even if the UK leaves without a deal, the Government have always been clear that the UK has obligations to the EU […] that will survive its withdrawal, and that these obligations would need to be resolved”.
60 Daily Telegraph, ““ (25 February 2019).
61 Same as above.
62 However, this report noted as well that any agreement on post-Brexit “future market access on favourable terms […] is likely to prove impossible to do so without also reaching agreement on the issue of the budget”. See: House of Lords European Union Committee, , 15th Report of Session 2016–17 (4 March 2017).
63 That the EU would in any event return to the matter of what it sees as the UK’s outstanding financial commitments as part of any emergency discussions in the aftermath of a ‘no deal’ Brexit is clear from the text of the proposal itself, which states that it is predicated on the assumption that the ad hoc solution would be required only “until an agreement is eventually reached” on the overall financial settlement between the UK and the EU.
64 Financial Times, “” (28 February 2019).
65 See (Decision 2014/335), which sets out how the UK rebate is paid for by the other Member States. It reduces the contribution to the UK rebate for Germany, the Netherlands, Austria and Sweden.
66 If there is no extension of the Article 50 period and the Regulation is adopted on 8 April 2019, the UK will no longer be represented in the Council of Ministers when formal adoption takes place.
Published: 19 March 2019