A National Audit Office investigation into the Treasury’s £35-39bn Brexit cost estimate has described the calculation as “reasonable” but warned that “relatively small changes” to the assumptions that underpin the projection could result in a figure outside the range.
The figures were provided to MPs on the Treasury Select Committee by chancellor Philip Hammond in January, and supported prime minister Theresa May’s repeated pledges that the UK would honour its financial commitments to the EU through the Brexit process. They were designed to illustrate the monetary impact of the details in December’s first-phase Brexit agreement – the so-called Joint Report – between the UK and the European Commission.
However, the NAO’s analysis, which looks at the assumptions underpinning what Hammond described as a “central estimate” of the financial impact of the draft deal, highlights exclusions from the assessment and the potential for the Treasury’s projections to be undermined.
Despite the targeted Brexit date of 29 March next year, the UK will contribute towards the European Union’s annual budgets in 2019 and 2020 as if it were still a member state. However, the amount of those contributions will be based on the UK’s future economic performance.
The NAO said that the Treasury had worked on the assumption that the UK would contribute 12.7% of the EU’s annual budget as that was the EU’s own projection. But it said that if the actual figure decreased to 11.9% or rose to 13.7% it would push the cost of Brexit outside of the estimated range. The watchdog said that in the decade from 2007-16 the UK’s share of of the EU's running costs was below 11.9% for four years and above 13.7% once.
Another variable for the £35-39bn estimate is the rate of exchange. The Treasury used a rate of €1.13 to the pound for its calculations. The NAO said that exchange-rate fluctuations before 2020 would be partly be offset by changes to the financing share, but noted that using Bloomberg forward exchange rates would add £1.1bn to the bill. The exchange rate chosen by the Treasury was the one on the day the Joint Report was published.
Other near-term variables include income that UK businesses receive from the EU, which is included in the calculation but not distributed by the Treasury. The NAO gave a value of £7.2bn for the funding but noted that while the Treasury had assumed that receipts will continue at the same rate as in recent years, the flow may change – possibly because fewer UK businesses may apply for funding.
Elsewhere, the NAO noted exclusions from the Treasury’s figures – such as £2.9bn in commitments to the European Development Fund and the UK’s share of the EU’s forecast contingent liabilities exposure, calculated at €14bn.
The watchdog also cautioned that the government would be dependent on information it received from the EU to calculate the final settlement, but could appoint auditors to review that information.
NAO head Sir Amyas Morse said the Treasury could have chosen to give a cost estimate that was “wider than £35-39bn” because of the “number of moving parts” in the calculations, but he said that the figure was considered to be a “reasonable estimate”.
“As the vote on the draft withdrawal agreement approaches we expect that government will provide a substantial amount of material for parliament to consider,” he said. “We will support parliament in this scrutiny by providing independent assurance.”
Public Accounts Committee chair Meg Hillier said the government had a duty to be clear over what the true costs of Brexit would be, and predicted the estimate would rise.
“The government’s divorce bill estimate of between £35-39bn is exactly that, an estimate,” she said. “Whereas the promises made by some Brexiteers of the bounty that our public services would receive post-Brexit are likely to be downgraded, I fear the cost of the UK leaving the EU could increase further.
“Our children and grandchildren risk being saddled with paying off this bill for decades to come.”
Treasury Select Committee chair Nicky Morgan said that despite describing the Treasury’s figures as “reasonable”, the NAO’s report emphasised that the final cost appeared to be “shrouded in uncertainty”. Her committee is due to take evidence from Morse and Hammond next week.
A Treasury spokesman said the department had been entirely open in describing its Brexit figures as an estimate that was dependent on future events and the relative size of the UK economy.
“We have always been clear that we will honour commitments made while being part of the EU, and we have negotiated a settlement that is fair to UK taxpayers and means we will not pay for any additional EU spending beyond what we signed up to as a member,” he said.
The NAO added that the Treasury was in possession of legal advice about the UK’s rights and obligations on leaving the EU, but said it had been forthright about the damage that would be done to the national interest if that advice were published.
The watchdog said the advice was “primarily concerned” with the legal implications of a no-deal Brexit rather than an EU exit via a long-term withdrawal agreement.