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It’s not a divorce payment
10 Jan, 2018

We harm our cause by misusing the settlement

London4Europe Committee member and former HM Treasury senior civil servant Michael Romberg reminds us of what the financial settlement figure is and is not. Mis-describing the payment as a divorce payment or a cost of Brexit plays into Leavers’ narrative that we should quit the EU.

We are settling our bills

We will be paying about £40bn to the EU as part of the Withdrawal Agreement. That is because we promised that we would pay that sum when we signed up to the EU budget. So we will be honouring our commitments. It is a little like paying our restaurant bill before resigning from the club.

It is not a divorce payment – we are not paying for the maintenance of the children in the future.

Nor is it a payment for a trade deal – though of course our chances of a decent trade deal would have been diminished if we had left without settling our debts. We would have to pay this sum even if we left without any sort of a deal.

Nor is it a payment for access to EU institutions or the single market – though if the transition period ends when the financial perspective ends it will have smoothed that process. Pay-to-play will require separate payments after the end of the current budget period if we leave.

Nor of course is it the EU’s punishment for us leaving – it is just what we have promised to pay.

We should not use it as a “cost of Brexit” because it is not: we would have paid this sum even if we had voted to Remain (with small exceptions, like the cost of relocating EU agencies from London). What we can say is that it will delay the realisation of any savings from not paying the contribution.

Why it matters how we describe the payment

At some point the reality of negotiating a future Framework with the EU will collide with the promises of have-our-cake-and-eat-it made by Leave campaigners.

The public will then have to decide how to interpret that crash: does it show that Brexit is a bad idea? or does it show just how important it is to leave the EU given that Brussels are a bunch of scoundrels?

If we have described the payment as a divorce settlement, as a cost of Brexit imposed by the EU, then we play into the narrative of the EU as a club we would not wish to be in.

The figures to use for the cost of Brexit

As a general point we should say that the savings from not paying the net contribution would be dwarfed by the overall economic costs of Brexit.

I suggest two figures to use:

First, for the cost of the decision to vote for Brexit. Be clear, Brexit has not happened, so this is the loss we have incurred in anticipation and because of uncertainty/ disruption caused by the referendum vote, not by Brexit.

The Financial Times of 18 December 2017 put the cost at – by a strange coincidence - £350m a week.

Leavers’ response varies between denial and acceptance of short-term costs for long term economic/ social benefit.

Second, for a forecast of the long term cost there is still no better analysis than HM Treasury’s pre-referendum report. After 15 years a Canada style deal would leave annual GDP per household about £4,000 lower than it would have been under continued EU membership (NB: not than now). While the difference would be too small to notice in any one year, the effects would cumulate up.

The figure – like all forecasts – needs to be seen as an approximation (the report publishes a range and the figure cited is the central estimate). But the underlying message is sound: leaving the EU would increase barriers to trade; less trade means less competition; so lower incentives to perform; so lower growth.

The Treasury’s forecast was within the consensus of most economic forecasters at the time. The criticisms of the report have not dented its central message. No major new work has been done since that calls into question the central forecast.