1Brexit: UK contributions to the EU budget in 2019 in a ‘no deal’ scenario
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Committee’s assessment |
Politically important |
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Not cleared from scrutiny; recommended for debate on the floor of the House; drawn to the attention of the Committee on Exiting the EU, the Public Accounts Committee and the Treasury Committee |
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Document details |
Proposal for a Council Regulation on measures concerning the EU budget for 2019 in relation to the withdrawal of the UK |
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Legal base |
Article 352 TFEU and Article 203 EURATOM; special legislative procedure; unanimity |
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Department |
Treasury |
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Document Number |
(40348), 5933/19, COM(19) 64 |
Summary and Committee’s conclusions
1.1The UK is legally required1 to contribute to the EU budget while it remains a Member State of the European Union, because of the requirements of membership set out in the EU Treaties. The Treasury is at present a substantial net contributor to the Union’s budget, having made a gross contribution of £18.6 billion in 2016.2 The UK’s withdrawal from the European Union would by default remove the obligation to make payments into the EU budget unless some other bilateral arrangement is in place.
1.2Since shortly after the UK notified the European Council of its intention to withdraw in March 2017 under Article 50 TEU, it has been clear that the EU wanted the UK to pay for a share of existing financial commitments undertaken or incurred by the Union with Britain as a Member State.3 The Government accepted the existence of such commitments,4 and the draft Withdrawal Agreement on the UK’s exit from the EU, published in November 2018, contains an elaborate financial settlement which sets out in some detail what payments the UK would have to make in the years following its withdrawal.5 The total cost to the UK taxpayer of the financial settlement in the Withdrawal Agreement has been provisionally estimated by the Treasury at £39 billion.6
1.3This financial settlement, however, depends on the ratification of the Withdrawal Agreement by both sides. The House of Commons has rejected the Agreement three times, most recently on 29 March 2019. Subsequently, the EU and the Government agreed to delay the UK’s withdrawal from the European Union under Article 50 until 12 April 2019 at the earliest.7 In 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.8 However, it remains the Government’s position that even in such an eventuality “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”.9
1.4The EU, mindful of the financial and political repercussions for its remaining Member States if the UK leaves without a financial settlement in place, has been making the legal preparations for continued British payments into its budget even in a ‘no deal’ scenario.10
1.5Under a draft version of an emergency Council Regulation tabled by the European Commission in January 2019, the UK would be invited to continue making payments into the budget for the remainder of 2019 even without a Withdrawal Agreement in place.11 Under the original Commission proposal, the requested payments would amount to a gross contribution of €17.4 billion (£14.9 billion) over the course of 2019, inclusive of the estimated €5 billion (£4.3 billion) UK rebate for the year had the Withdrawal Agreement been ratified. However, the deduction of the rebate from the amount the UK would be asked to contribute is the subject of discussions among the remaining Member States in the Council, and apparently not yet guaranteed.12 As the proposal would only take effect from the date the Treaties cease to apply to the UK without an exit treaty in place,13 the amount to be paid post-exit would take into account any regular EU budget contributions made by the Treasury in 2019 prior to formal withdrawal from the Union.14
1.6In return for UK payments into the EU budget for the remainder of 2019, UK recipients would remain eligible to receive most types of EU funding until 31 December 2019 for “legal commitments entered into before the withdrawal date”15 if they would otherwise have become ineligible for such funding when the UK ceases to be a Member State (i.e. when there is no provision in EU law for the funding in question to be provided to the UK as a ‘third country’). Similarly, British public and private entities would be able to bid for new funding from EU programmes where calls are put out before the end of 2019 as if the UK were still a Member State. However, this would not apply to bids that relate to security-sensitive EU programmes like the European Defence Fund or the Galileo satellite programme.16 A revised version of the Council Regulation dated 12 March also clarifies that the cost of agricultural subsidies to British farmers from the date of EU exit onwards would have to be borne by the UK Government itself.17
1.7The EU proposal makes no provision for honouring multi-annual EU funding commitments to UK-based recipients in 2020 or beyond (for example long-term research grants or regional development funding), since it only foresees UK payments in 2019 as a short-term solution to its potential budgetary shortfall.18 This would also limit the usefulness of UK recipients being able to bid for new EU funding in 2019 in a ‘no deal’ scenario, since much of the actual disbursement of such grants would not take place until 2020 or later. For the EU to honour those commitments, a further post-2019 bilateral financial settlement would be necessary. By extension, this might inflate the UK’s net contribution under the ‘no deal’ arrangement as proposed by the EU because there would be less money flowing back to British recipients.19 This issue would not arise under the Withdrawal Agreement, because it deals comprehensively with all EU commitments to the UK and vice versa until they are settled.
1.8The 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. While it reiterated the Government’s view there UK would have financial commitments to the EU even in a ‘no deal’ scenario, the Memorandum made no further assessment of the size of those commitments, or how the Government proposes to resolve them with the EU in the absence of a Withdrawal Agreement. With respect to the specific request made by the EU in relation to the 2019 budget, the Minister only noted that that the Treasury was “analysing the Commission proposal”,20 adding that any arrangements with the EU for the 2019 budget would be “without prejudice to negotiating an agreement with the UK on a [comprehensive] financial settlement”.21
1.9Given the potential cost to the UK taxpayer if the Government accepted the EU’s request for payments in the absence of a legally-binding overarching financial settlement, we wrote to the Chancellor of the Exchequer on 7 March 2019 to request urgent clarification of the Government’s intentions and how parliamentary approval would be sought for any payments to the EU in a ‘no deal’ eventuality.22 We reported the EU’s proposals to the House more comprehensively in our Report of 13 March 2019, noting that political considerations to smooth negotiations with the EU on a new trade agreement would be a major consideration as to whether the Government accepted further contributions to the EU budget beyond withdrawal.23 We also concluded that acceptance of the EU’s offer for the 2019 budget was likely to lead to a similar request for 2020, given that the financial settlement in the exit treaty would have required full UK budget contributions for both years.
1.10On 27 March, the Chancellor responded to our letter.24 He notes that “aspects of the [EU] proposal remain subject to change”, presumably a reference to the question of whether the estimated £4.3 billion rebate would be deducted from the gross contribution demanded of the UK for 2019 in a ‘no deal’ scenario, and how the remaining Member States would pay for it. The Chancellor’s reply did not to indicate whether the request for further contributions in the absence of a Withdrawal Agreement as framed in the Council Regulation would, in principle, be acceptable to the Government. Instead, the letter states that “the Government is continuing to analyse the Commission’s proposal” and would “make a final decision” only when the remaining Member States finalise the legal text of the offer. He added that the Government was mindful of the “need to secure appropriate parliamentary authority for public expenditure”, should the need arise. The Chancellor did not, however, provide the explicit assurance, sought by the Committee, that any Statutory Instrument authorising the Treasury to make payments to the EU in a ‘no deal’ scenario would be laid under the affirmative procedure (and therefore requiring the active approval of the House of Commons).
1.11The Chancellor also indicated that the Council Regulation creating the legal framework on the EU side for continued UK contributions in a ‘no deal’ scenario is likely to be adopted by the remaining Member States after 12 April 2019, when the UK’s membership of the EU is now due to cease if the Withdrawal Agreement is not ratified.25 That means the Government would not have a presence or vote on the proposal in the Council of Ministers when the Regulation is formally approved.26 The original Commission proposal required the Government to signal its acceptance to continue making payments into the EU budget by 18 April and ensure the first such payment by the end of that month, when ‘exit day’ was still scheduled for 29 March; it seems likely those legal deadlines will be pushed back now that the Article 50 extension has delayed the UK’s withdrawal, meaning the first payment would be due by the end of May 2019.27
Our conclusions
1.12While it is clear the Government believes some form of financial settlement would need to be reached with the EU in a ‘no deal’ Brexit scenario on 12 April 2019, it has refused to indicate what form this might take and how much it could cost the British taxpayer. If the Withdrawal Agreement is definitively rejected by the House of Commons, but the Government nevertheless accepts the EU’s offer, a full gross contribution of nearly £15 billion would be due in 2019. We regret that, in the absence of proper and proactive consultation by the Government of Parliament with respect to any ‘surviving’ UK financial obligations to the EU even in a ‘no deal’ scenario, the EU has effectively set the terms of the resolution of those commitments in the short term on a “take it or leave it” basis.
1.13Given the EU’s ‘no deal’ proposal entails a high cost to the UK Exchequer in return for uncertain benefits in terms of new EU funding in 2019, the Government’s position on this issue remains of paramount political importance. The question of the UK’s contributions to the EU budget played a major role in the referendum campaign, and both Parliament and the public deserve clarity about what payments the Treasury might still make even if the UK leaves the European Union without a Withdrawal Agreement in place. Instead, as things stand, we have no formal confirmation if the Government would accept the request for further contributions to the EU budget.
1.14The Chancellor told us on 27 March that the Treasury is still analysing the Commission proposal, because it was at that stage still subject to further change before formal adoption by the Member States. Disappointingly, he refused to indicate whether the latest version of the Regulation—dated 12 March 201928—was in principle acceptable to the Government. This is a marked departure from the normal approach to the parliamentary scrutiny process of EU proposals, where the relevant Department provides regular updates on the Government’s position on the legal text as it evolves through discussions in the Council of Ministers, and whether the text as it stands at a given point in the legislative process is acceptable to the UK. We can only conclude that such information is not forthcoming in the present case because of the political implications of setting out the Government’s position on the financial consequences of a ‘no deal’ scenario.
1.15The Government’s refusal to provide clarity will, however, not make the question of the financial settlement with the EU in the absence of a Withdrawal Agreement go away. If the House of Commons does not approve the Agreement and the ‘no deal’ scenario is not otherwise averted, the matter will need to be put to the House in the very near future, and without any prior debate. This is disappointing: if the Government was minded to accept the EU’s offer for continued payments even in the absence of an Agreement, significant political and legal issues would arise that Parliament would need to consider. These include not only the matter of the size and timing of UK contributions in such an eventuality, but also how the Treasury would seek Parliament’s approval for them, and what powers EU institutions and bodies like the European Commission and the Court of Auditors would have in the UK to supervise how EU funding was managed.
1.16Any parliamentary agreement to such ‘no deal’ payments to the EU would also need to take into account the fact that British bids for competitive EU grants—for example under Horizon 2020, the Creative Europe Programme or the Euratom nuclear research programme—are could dry up after ‘exit day’ even if the Treasury is still paying into the EU budget. This is a likely side effect not only of the lack of clarity about the UK’s future partnership with the EU in areas like scientific research, nuclear cooperation and culture, but also the need for further, ad-hoc financial arrangements for 2020 and beyond to settle fully resolve commitments that pre-date the UK’s exit from the EU. In addition, the traditional method of calculating the UK rebate ex-post would not apply, so that any reduction in EU funding flowing to the UK would not reduce our eventual net contribution further following future readjustments, as is currently the case.29
1.17If acceptance by the Government of the EU offer for 2019 were indeed to lead to further ad hoc financial settlements for 2020 and beyond, in the long term effectively replicating the financial settlement in the Withdrawal Agreement, this would constitute a material disadvantage compared to the latter’s comprehensive approach. The Withdrawal Agreement would offer longer-term certainty for the public authorities of both sides, as well as for UK recipients of EU funding. It would also, unlike the contingency proposal, preserve the full application of the rebate (allowing for the downward adjustment of the British contribution in 2019 and 2020 if receipts from the EU budget in that period do indeed decrease substantially).
1.18Overall, given that the UK is a net contributor to the EU budget, whether or not to make payments to the EU in a ‘no deal’ scenario would be the result of a political, rather than a financial calculation. We emphasise that the Treasury should not take the approval by the House of Commons for any further contributions to the EU for granted, if the UK leaves the EU without a Withdrawal Agreement in place. We are disappointed, therefore, that despite the urgency of the matter the Treasury has not shed any further light on its position with respect to the UK’s financial obligations to the EU in a ‘no deal’ scenario.
1.19Given the Government’s inability, or unwillingness, to articulate its position, we now recommend the Council’s request for further UK payments into the 2019 EU budget in a ‘no deal’ scenario for debate on the floor of the House at the earliest opportunity. We also draw our conclusions and recommendation to the attention of the Committee on Exiting the EU, the Treasury Committee and the Public Accounts Committee.
Full details of the documents
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.
Previous Committee Reports
See (40348), 5933/19, COM(19) 64: Fifty-ninth Report HC 301–lvii (2017–19), chapter 6 (13 March 2019).
1 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 under the European Union Act 2011.
2 The gross contribution does not take into account EU funding that flows back into the UK, either via public authorities like agricultural subsidies via the Rural Payments Agency or directly to private-sector recipients, like EU research grants.
3 The European Commission issued a position paper to that effect in June 2017, and in her Florence speech 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.
4 For example, in evidence 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 again told Parliament 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”.
5 Principally, the financial settlement covers UK contributions in 2019 and 2020—the final years of the EU’s current Multiannual Financial Framework—as if it were still a Member State; a share of EU expenditure commitments outstanding as of 31 December 2020, which will decrease rapidly; and a share of the EU’s other liabilities, like pensions of European civil servants.
6 The final settlement is likely to cost more than this. See for more information: National Audit Office, “Exiting the EU: the financial settlement“ (20 April 2018).
7 The House of Commons instructed the Government to extend the Article 50 period—and therefore the UK’s membership of the EU—on 14 March 2019. The European Council and the Government subsequently agreed to extend the period until 12 April 2019, unless the House of Commons approves the Withdrawal Agreement by 29 March (in which case the extension would last until 22 May 2019). The UK’s EU membership could be extended further under Article 50 TEU by common agreement between the UK and all 27 remaining Member States.
8 The Treasury has already introduced legislation to remove EU budgetary law from the UK statute book in a ‘no deal’ scenario. The Government has also established an EU funding guarantee, 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.
9 As 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”. 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, Brexit and the EU budget, 15th Report of Session 2016–17 (4 March 2017).
10 Under Article 310 TFEU, 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).
11 Given the exceptional circumstances that have led the Commission to make this proposal, the legal basis for the draft Regulation is Article 352 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.
12 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. See for more information: Financial Times, “Germany and France battle over UK’s EU budget rebate” (28 February 2019).
13 The EU proposal would take effect on the date of EU exit, whether that is on 12 April 2019 as currently scheduled, or following any further extension of the Brexit negotiation period under Article 50. During any such additional extension, the UK would remain a full Member State including the obligation to make regular payments to the EU budget.
14 The exact amount the UK will already have paid towards the full amount by EU exit (and therefore how much it might pay from the date of exit until the end of 2019) is unclear. GNI-based contributions are paid monthly, but under EU law other types of budget contributions (the Traditional Own Resources, like the revenue from customs duties) accrue directly to the EU budget. It appears the UK will already have paid approximately €7 billion into the EU budget between January the end of April 2019, which—as things stand—would be the last full calendar month of EU membership. That would leave a further gross contribution post-exit totalling €10 billion. That translates into monthly payments of approximately €1.3 billion until the end of 2019.
15 Following the European Council of 21 March 2019, the default withdrawal date is now 12 April 2019 unless the House of Commons approves the Withdrawal Agreement.
16 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.
17 Continued flows of EU funding would also be conditional on 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).
18 The sole exception foreseen is for new public procurement contracts signed by an EU institution involving a UK contractor, which “shall be implemented in accordance with their terms and until their end date” (even if this falls beyond 31 December 2019).
19 According to a report in the Daily Telegraph on 25 February 2019, the estimated net UK contribution for 2019 under the proposal would amount to roughly €7 billion (£6 billion).
20 On 25 February 2019 the Daily Telegraph reported 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.
21 We understand this to refer to a settlement 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).
22 In particular, we requested assurance that—should authorisation for such payments be sought by means of a Statutory Instrument—the relevant regulations would be laid subject to the affirmative procedure, requiring active parliamentary consent.
23 It has also been suggested that an immediate cessation of payments to the EU in respect of financial commitments undertaken with the UK’s agreement when it was still a Member State could have wider implications for its perceived reliability as a negotiating partner, and have an impact on the country’s sovereign credit rating.
24 Letter from Philip Hammond to Sir William Cash (27 March 2019).
25 By Decision of the European Council of 22 March 2019, with which the Government and the House of Commons have agreed, the end of the UK’s EU membership was delayed from 29 March until 12 April if the Withdrawal Agreement is not ratified. If the Agreement is approved by the House of Commons, the UK would remain a full Member State until 22 May to provide time for passage of the Withdrawal Act Implementation Bill.
26 As noted elsewhere, the Council Regulation is based on Article 352 TFEU, meaning its adoption requires unanimous agreement of the Member States in the Council. As a consequence, if it were voted on while the UK was still a Member State, the Government would also need to vote in favour of—or abstain on—the Regulation for it to be adopted. 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 without parliamentary agreement under Section 8 of that Act. The European Parliament is due to vote on the Council Regulation at its Plenary Session on 4 April 2019.
27 Similarly, it is likely the first actual payment would be due on 31 May rather than 30 April as foreseen by the original proposal (since it was meant to be at the end of the first full calendar month following the UK’s withdrawal). The Council Regulation gives power to the European Commission to change the dates by which UK acceptance of the EU’s request must be notified, and of actual payments, by Delegated Act.
29 As explained by the Treasury, the European Commission is directly and solely responsible for calculating the UK’s rebate. It calculates the rebate on the basis of a forecast of contributions to the EU Budget and the UK’s receipts from it. This is subsequently corrected in the light of outturn figures.
Published: 9 April 2019