Top officials have defended the Treasury’s estimate of the UK’s Brexit bill following a warning from the National Audit Office that the true figure could breach the £35-39bn range.
The NAO said in a report last week that the Treasury’s figure was based on several assumptions, including on the UK’s economic performance relative to EU member states, the amount of EU funding that British businesses will receive and the exchange rate.
The report said: “Relatively small changes to some of these assumptions would cause HM Treasury’s central estimate to be outside its £35bn to £39bn range.”
But Sir Tom Scholar, Treasury permanent secretary, told MPs yesterday that the Treasury stood by its central estimate of the financial settlement to be paid by the UK to the EU following Brexit.
Prime minister Theresa May said in September last year that the UK would honour commitments it made while it was a member of the EU, and an agreement on the financial settlement was reached in December.
The Treasury calculated its £35-39bn estimate to illustrate the fiscal impact of December’s first-phase Brexit agreement – the so-called Joint Report – between the UK and the European Commission, which itself did not contain specific figures. The estimate includes the UK’s contributions to the EU budget in 2019 and 2020, the UK’s share of the EU’s outstanding budgetary commitments at the end of 2020, and its share of assets and liabilities incurred before the end of 2020.
Speaking at a Public Accounts Committee hearing on 23 April, Scholar told MPs that the main uncertainty that could impact the Treasury’s estimate was the “financing share” – the UK’s contribution to the annual EU budget, which is based on comparative economic output and growth rates across the bloc. Using European Commission figures, it is currently estimated that the UK's contribution will be 12.7%.
The NAO’s report indicated that if the actual figure is less than 11.9% or more than 13.7%, the Brexit bill would fall outside the Treasury’s range.
But Scholar said the Treasury had done a sensitivity analysis and assessed that “it’s really quite unlikely that the financing share would go above that level”. Only once in the past 10 years – in 2015 – has the figure been above 13.7%, and the Treasury perm sec said that had happened under “unprecedented” circumstances and was very unlikely to reoccur.
He also said the Treasury had done sensitivity analyses of other factors that could push the Brexit bill outside the Treasury’s range. “We stand by the comment that this is a reasonable sensible estimate,” he added.
The MPs quizzed the Treasury officials on other costs associated with leaving the EU, such as membership of certain EU agencies, which the officials said were separate from the financial settlement and depended on ongoing negotiations.
Conservative MP Sir Geoffrey Clifton-Brown asked whether the public had been given a “misleading impression of what the costs of leaving the EU are going to be”. Mark Bowman, the Treasury’s director general of international finance, replied: “I don’t think I accept that description. We agreed very clearly the components of the settlement.
“Now it’s true that it’s not possible at this stage to put a specific figure on all of those components because this depends on future events.”
Bowman added that the Treasury had in fact made “conservative estimates” in places, such as using the European Commission estimate for UK contributions to the EU budget for 2019 and 2020 when an OBR estimate would have “reduced the figure”.
He added that the Treasury knew from experience that “a significant proportion of EU commitments never materialise” and that the joint report makes it clear the UK will be refunded in those cases. The Treasury had calculated this “decommitment ratio” at 7-8% but the figure over the period of the EU’s last multi-annual financial framework was 9%, he said.
Asked by Labour MP Caroline Flint why the Treasury had not been clearer about the limitations of its estimate, Scholar said: “I think we have been clear and in particular the chancellor in his letter of 24 January [sent to various select committees] … set out in full not just the reasonable central estimate but also some of the other issues that need to be considered too.
“So, for example, it does cover the European Investment Bank, it covers contingent liabilities, it covers the European Central Bank, it covers the European Development Fund. I think that’s a reasonable and full characterisation of the totality of settlement and all of the issues around it.”
Elsewhere in the hearing he pointed out that the costs associated with the European Development Fund were “not a cost of exit, that’s money we were going to allocate anyway”.
The officials stressed that the ongoing negotiations would not have an impact on the Brexit bill, unless no agreement was reached at all – in which case the financial settlement is not legally binding. Most of the factors still to be agreed between the UK and the EU have no or very little cost attached to them, Scholar said.