Even if we agree on a Brexit divorce bill, what would we be getting in return?

Even if we agree on a Brexit divorce bill, what would we be getting in return?

The Government is said to be ready to make an ‘improved’ offer on the financial settlement with the EU. This is, needless to say, hugely controversial. At one extreme, some argue that the UK should simply pay whatever the lawyers and accountants agree. Others insist that the UK should pay nothing at all, or actually get a refund. But, in my view, it may well be worth offering something extra to secure a better deal – provided the right conditions are attached.

Going back to basics, the ‘divorce bill’ is the amount of money that the UK is expected to pay to settle its share of the financial obligations accumulated by the EU while the UK was a member. It should therefore be separate from any costs that might arise after Brexit as the result of new agreements, such as continued participation in EU research and education programmes or Norway-style payments in return for tariff-free access to the Single Market.

Because the ‘divorce bill’ only covers the past relationship, some have concluded that the UK should just pay up. On this view, it is simply a matter of honouring existing obligations and the question of getting something in return should not arise.

But this doesn’t actually get us very far. For a start, Article 50 can be interpreted to mean that all financial obligations end in March 2019, unless there is an agreement to the contrary. What’s more, even if the UK does owe something more, there is no legal certainty about what the sums should be.

Remember that some EU officials suggested a bill as high as €100bn (£89bn) earlier in the negotiations. That figure was always ridiculous, as it assumed that the UK would have to pay its full share of all the EU’s gross liabilities and a large chunk on top for the contingent liabilities of the European Investment Bank. It also assumed that the UK would be on the hook for monies spent well after the current EU budget period ends in 2020, let alone the date of Brexit itself.

Finally, even if we could easily agree on the size of the liabilities, there are still many things to debate. In particular, what share of the liabilities should the UK pay? And what, of course, about the assets? This means that the divorce bill is something that needs to be negotiated.

The Government’s latest offer is reportedly worth up to €45bn (£40bn). This would be a huge sum, but still less than 2% of UK GDP (a plausible estimate of the hit from a chaotic Brexit), or just three years of the UK’s annual contributions to the EU. It might therefore be a fair price to pay in return for a ‘good deal’ with economic benefits potentially lasting many decades. Looked at this way, £40bn could be thought of as a one-off payment equivalent to only a few billion each year (and much better value than HS2!).

But whatever the exact number, the more important question is what, if anything, the UK would be getting in return – especially if the default position is that the UK could walk away without paying a penny and ‘no deal’ would not be the disaster many fear? The money could be spent instead directly on cushioning the economy from any disruption; for example, £40bn would pay for an additional three percentage point cut in corporation tax for five years.

At the very least it seems reasonable to expect the EU to agree to fast-track talks on a comprehensive trade deal, including an explicit agreement on a time-limited transition period where trade remains as frictionless as possible.

The UK could guarantee to pay something now – perhaps €30bn (£27bn) to cover bills until the end of 2020 and a contribution for officials’ pensions. This may be ‘sufficient progress’ for the EU to allow the next stage of talks to begin. However, any further payments should then depend on the outcome of these negotiations. This might just about be acceptable to the British public too. But I still wouldn’t envy the job of those trying to sell it.