4Government spending on preparation for Brexit, and the financial settlement with the European Union
Preparation for Brexit
63.In his Autumn Budget speech, the Chancellor addressed how much spending would be necessary to prepare for leaving the European Union saying:
While we work to achieve this deep and special partnership [with the EU] we are determined to ensure that the country is prepared for every possible outcome. We have already invested almost £700 million in Brexit preparations. And today I am setting aside over the next two years another £3 billion. And I stand ready to allocate further sums if and when needed.61
64.The Chancellor previously told the Committee in October that:
the money that is required to be expended against the contingency of a no-deal scenario will come from the reserve, so we will not reopen departmental spending settlements.62
65.The Committee asked Robert Chote whether the £3 billion of spending announced would require the reopening of departmental spending plans. Mr Chote said:
The overall RDEL limits have been increased. You can think of this like a reserve on the grounds that, as far as I am aware, this has not been allocated to departments. You can think of this as having created a £3 billion Brexit reserve that you are then going to spend in the departments that you think need it, for the purposes for which they need it.63
Paul Johnson told the Committee that over the two years “it is clearly in the Budget measures here as an additional £1.5 billion per year on top of what was previously planned […] it makes the borrowing £1.5 billion more than it otherwise would have been”.64
66.The Committee asked the Chancellor whether the £3 billion would be financed from the reserves or whether it was new money, the Chancellor stated that:
I allocated an additional £3 billion to provide for additional expenses that departments will or may incur over the next two years65 […] It is an allocation that we have made in the Budget. It is fully scored in the Budget arithmetic.66
67.HM Treasury has not yet identified what this additional money will be spent on. When asked how the figure of £3 billion had been chosen, the Chancellor said it was an estimate:
It is based on a preliminary assessment of departmental estimated expenditure required during the process, but, as I made clear at the dispatch box during the Budget speech, if it is not enough, if we find that we need more funding, we will make it available as a priority.67
68.The Chancellor announced an additional £3 billion of spending on preparing for Brexit in the Government’s policy scorecard. This additional spending will be funded from increased Government borrowing rather than being allocated from existing resources.
69.The Chancellor has acknowledged that additional spending—and borrowing—on top of this £3 billion may be needed as the country prepares for all possible Brexit eventualities.
European Union withdrawal settlement
70.As part of its Economic and Fiscal Outlook the OBR has assumed that the UK leaves the EU in March 2019, at which point any reductions in the UK’s net expenditure transfers to the EU would be fully recycled into extra domestic spending. The OBR state this recycled spending could be spent in the following ways:68
- any additional spending to meet other domestic spending priorities,
- any payments made to private or public sector recipients to compensate them for the loss of EU funding, and
- any payments made to the EU after the UK exits, if the Government agreed to make such payments. For instance, the Government’s February white paper stated that “There may be European programmes in which we might want to participate. If so, it is reasonable that we should make an appropriate contribution”.69
71.The OBR’s November 2017 Economic and Fiscal Outlook also states that “No allowance for any one-off or ongoing EU Exit-related payments—the ‘divorce settlement’—can be made until more information becomes available.”70
72.When asked by the Liaison Committee about whether the OBR had taken the correct approach in forecasting payments relating to Brexit considering the Withdrawal Agreement reached with the EU, the Prime Minister said that:
It is not the case that these sums of money are additional to that budget forecast because they are baked in. The OBR has already baked in payments.71
73.The Chief Secretary to the Treasury was also asked about the OBR’s treatment of the withdrawal settlement in its forecast and said “the OBR has made predictions on EU payments and those are included in the Budget”.72
74.The OBR has highlighted the uncertainty around the size and timing of the “divorce bill” in its Fiscal Risks Report:
there is huge uncertainty over the size and timing of any payment that the UK might agree to make as part of the Brexit negotiations. The Government’s manifesto stated that it would “determine a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of the UK’s continuing partnership with the EU.” The European Commission’s ‘Essential principles on financial settlement’ working paper argues for a single financial settlement related to the EU budget, termination of membership of all EU bodies and institutions and the UK’s participation in specific funds and facilities related to EU policies. Commentators have cited figures for the possible divorce bill that vary widely, with some estimates as high as €60 billion73 or even €75 billion74 (both on a net basis). Any amount that was agreed could be paid upfront or spread over a number of years.75
75.Members of the Government have repeatedly stated that the OBR has included the UK’s financial settlement with the EU within its November 2017 forecast. This is not supported by the OBR’s Outlook. The OBR has assumed that the UK’s contributions to the EU budget are ‘recycled’ into domestic spending after March 2019, but it makes no judgement about the purpose to which these funds are deployed. The impact of the financial settlement on the public finances will depend on its size and the schedule of payments, neither of which are known at this point. It will also depend on the purposes to which the settlement is deployed. Until the final payments and scheduling are agreed, the Government cannot assume there will be additional money available for domestic spending.
76.While the size of the exit payment is likely to be significant, the Committee notes Robert Chote’s evidence that the impact of any one-off divorce bill on the public finances is likely to be dwarfed by the consequences of Brexit, positive or negative, for the long-term outlook for economic growth.
62 Oral evidence taken 11 October 2017, HC424 (2017–19), Q4
63 Q173
64 Q95
65 Q311
66 Q312
67 Q313
68 Office for Budget Responsibility, Economic and Fiscal Outlook, Cm9530, November 2017, Paragraph 4.6
69 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm9417, February 2017, para 8.51
70 Office for Budget Responsibility, Economic and Fiscal Outlook, Cm9530, November 2017, Paragraph 4.6
71 Oral evidence taken before the Liaison Committee on 20 December 2017, HC (2017–19) 637, Q10
73 Centre for European Reform, The €60 billion Brexit bill: How to disentangle Britain from the EU budget, February 2017
74 Financial Times, ‘Brussels hoists gross Brexit ‘bill’ to €100bn’ (3 May 2017), accessed 17 January 2018
19 January 2018