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Brexit Briefing: This week in Parliament and an update on the £39 billion financial settlement

30 Apr 2019

Another quiet week for Brexit business in Parliament – most important are two key Committee meetings:

  • the ‘Brexit’ Committee will hear from four experts on the issue of customs unions, trade and Brexit; and
  • on Wednesday afternoon, the Prime Minister will be questioned by the ‘Liaison’ Committee. These meetings happen only a few times a year - and enable the Chairs of all Commons Select Committees to scrutinise the work of the Prime Minister.

Behind the scenes, talks between the Government and the Official Opposition to find a single unified approach on Brexit continue this week. If these talks are unsuccessful, the Prime Minister has committed to put a small number of options for the future relationship to the House of Commons in a series of votes.

Meanwhile, there has never been any dispute that there are mutual financial commitments between the UK and EU to be settled following Brexit. If the UK leaves the EU with a Withdrawal Agreement, outstanding financial commitments will be settled using the ‘financial settlement’ formula that was negotiated and agreed in November 2018.

Brexit in Parliament this week

Monday 29 April: the Commons will debate four Brexit-related statutory instruments which seek to make sure the UK can operate effective sanctions regimes for Zimbabwe; Belarus; and Syria - and the use of chemical weapons after Brexit. The regulations replace a pre-existing EU sanctions regime with substantially the same effect.

Tuesday 30 April: the Commons will question the Business, Energy and Industrial Strategy Department - including Brexit questions.

Wednesday 1 May: the Brexit Committee continues its long-running inquiry into ‘The progress of the UK’s negotiations on EU withdrawal’ with a session examining customs unions and future trade arrangements with the EU;

The Liaison Committee takes evidence from the Prime Minister;

A Westminster Hall debate on ‘Future international trade opportunities for the UK’.

Update on UK ‘Brexit financial settlement’

The Withdrawal Agreement sets out: the commitments to be settled; how payments will be calculated; and when payments will be made. It did not set an exact amount – and as events have proven, the final payments will need re-calibration in the light of changes to Brexit timings and UK-EU institutions working together.

The UK Treasury and Government’s ‘Office for Budget Responsibility’ agreed on an estimate of UK net settlement costs around £39 billion. With elements such as pensions liabilities, the final payment runs potentially to mid-2060s.

The estimate was based on the UK leaving the EU on 29 March 2019 under the terms of the Prime Minister’s Withdrawal Agreement…the ‘deal’. Brexit delays - now under the terms of a second Article 50 extension – will affect the calculation of financial settlement.

As the UK continues as a full and active ‘Member State’ during the Brexit delay, it is obliged to contribute monthly to the EU Budget – just as it has for the last 40 years. This continues up to the moment of leaving the EU – legally defined as ‘exit day’.

Payments made by the UK as a Member State will decrease its liability to the EU financial settlement. The EU will receive broadly the same total amount from the UK if the UK leaves under the Withdrawal Agreement – offset by payments made during the Brexit extension.

The ‘Transition Period’ is the key to this. The Withdrawal Agreement specifies a transition end date of 31 December 2020. The terms of the Brexit delay - as offered by the EU – keeps this end date.

The financial settlement calculation included full payments in lieu of membership through to December 2020 - the end of the present EU ‘budget period’. Contributions as a Member State reduce the liabilities under the financial settlement.

The ‘deal’ allows the transition to be extended beyond December 2020, for a period of up to two years. An extension will mean the UK makes further payments to the EU, but these are outside the financial settlement – which only addresses the UK’s commitments made under the EU’s 2014-2020 budget plan.

An extension of the transition period beyond December 2020 means the UK would make an – as yet unspecified – ‘ad-hoc’ financial contribution to the EU budget - determined by a Joint Committee of UK and EU representatives. The size of payment will be based on the UK’s ‘status’ during the extended transition period and will sit outside of the financial settlement. The potential cost is unquantifiable - but is likely to be substantial.

Extending Article 50 doesn’t necessarily extend the transition period – but not doing so limits the time available to negotiate a new UK-EU trade agreement. A UK Government request for an extension of the transition period will mean a new calculation basis to the previous estimate of £39 billion financial settlement.

The ‘Office of Budget Responsibility’ will update its estimate of the financial settlement in its next forecast - likely to be Autumn 2019. The Brexit delay is likely to lower the OBR estimate of the financial settlement whilst increasing the size of the UK’s Member State contributions to the EU.

Other factors affect the estimate of the financial settlement since the OBR estimate in March 2018:

  • changes to exchange rates,
  • the reality of EU budget implementation,
  • the UK’s relative contributions,
  • revisions to past economic data.

Should the transition period be extended, the total UK payments to the EU will increase – but these will be offset by payments coming to the UK as a Member State to citizens, businesses and institutions. The OBR will not estimate this hypothetical scenario unless it becomes a reality.

In a no-deal Brexit – or if the UK leaves without ratifying the Prime Minister’s ‘deal’ - the Government believes that some form of alternative financial settlement will still need to be negotiated. There is no clarity about what form any alternative settlement might take. An EU proposal for continued UK contributions in a ‘no-deal’ scenario was put ‘on hold’ following the UK’s second request for a further extension of the Article 50 period.

Brexit in context – heads up on economic activity in Europe

  • Europe’s economic powerhouse, Germany, has been hit hard by weakening Chinese demand, trade tariffs and disruption to car production caused by new emissions standards. This year Germany is forecast to grow by 0.8%, a slower pace than Brexit-embattled UK.
  • Italy is now in its third recession in ten years - and its economy is expected to stagnate this year - making it one of the weakest performers in the industrial world. It faces continued concern over the health of its banks which are heavily exposed to Italian government debt - and a housing market that is yet to recover from the financial crisis. High levels of unemployment, especially for young people, illustrate the profound structural problems facing Italy.
  • Among the larger euro area economies, Spain is doing relatively well. Structural reforms and declining labour costs have helped improve export performance which, in turn, has helped with job creation and raise incomes. Spain is forecast to grow at 2.2% this year, twice the euro area average.
  • Across the euro area as a whole, 2019 is set to be ‘mediocre’ for growth. According to the International Monetary Fund the euro area is likely to contribute less to global growth than in any year since the euro crisis in 2012.
  • Despite Brexit-related worries, the UK economy is expected to grow by 1.3% this year - a slight slowdown from last year’s 1.4%. Uncertainty over the nature and timing of the UK’s exit from the EU has hit corporate confidence and investment. This is reflected in downgrades to economists’ forecasts for investment and profit growth since last autumn. By contrast, low unemployment and accelerating real wages have bolstered consumer spirits and delivered good growth in retail sales so far this year.

And in case you missed it – last week’s Brexit news

  • Cross-party Brexit talks resumed this week in the hope of finding a way though the Brexit impasse
  • Prime Minister, Theresa May, avoided a challenge to her leadership of the Conservative party as a proposed change to rules to allow a second no-confidence vote was rejected
  • The influential Conservative ‘1922 Committee’ of backbench Tory MPs demanded Mrs May set out a “clear timetable” for her departure
  • Scottish First Minister, Nicola Sturgeon, indicated she would seek another independence referendum by 2021 if the UK leaves the EU
  • UK parties have announced and published their candidate lists for the European Parliament Elections on 23 May - and campaigning is now underway

Looking Ahead

  • UK voting for the European Parliament is scheduled to take place on Thursday 23 May. There are 751 Members of the European Parliament - MEPs. Of those, 73 represent the UK. If the UK exits the EU before 22 May, the UK elections will not take place.
  • The next European Council meeting will take place on 20-21 June - providing the next opportunity for the EU to formally review the progress of negotiations on the UK’s progress towards Brexit.

Reference

https://commonslibrary.parliament.uk/brexit/the-eu/how-does-extending-article-50-affect-the-uks-financial-settlement-with-the-eu/

This article first appeared on the website for Brexit Partners (www.brexit-partners.com). 

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