Brexit: the financial settlement – in detail

A shorter briefing Brexit: the financial settlement  – a summary covers what the settlement is and how much it might cost.

In the financial settlement (the settlement), the UK and EU have set out how they will settle their outstanding financial obligations to each other. The obligations arise out of the UK’s participation in the EU budget and broader aspects of its EU membership.

The settlement says which financial commitments will be covered, the methodology for calculating the UK’s share and the payment schedule. The settlement is part of the Withdrawal Agreement, which is the legally binding treaty setting out the negotiated terms of the UK’s departure from the EU.

There is no definitive cost to the settlement. The final cost to the UK will depend on future events such as future exchange rates and EU budgets. The Office for Budget Responsibility estimate that the net cost to the UK may be £33 billion.

Underlying principles

The UK and EU agreed some principles for the settlement:

• no EU Member State should pay more or receive less because of the UK’s withdrawal from the EU;
• the UK should pay its share of the commitments taken during its membership; and
• the UK should neither pay more nor earlier than if it had remained a Member State. This means that the UK will make payments based on the outturns of EU budget.

What is included in the settlement?

Broadly speaking, the settlement can be split into three components:

• During the transition period, until the end of 2020, the UK will pay into the EU budget almost as if it were a Member State. The UK will also receive funding from EU programmes– such as structural funding – as if it were a Member State.
• EU annual budgets commit to some future spending without making payments to recipients at the time. The commitments will become payments in the future. The UK will contribute towards the EU’s outstanding commitmentsas at 31 December 2020. Recipients in the UK will also receive funding for outstanding commitments made to them.
• The UK will share the financing of some EU liabilities as at the end of 2020, and any materialising contingent liabilities, and will receive back a share of some assets. The pensions of EU staff are likely to be the most significant liabilities for the UK, while the most significant item being returned to the UK is the capital it paid into the European Investment Bank (EIB).

Not everything in the settlement fits neatly into these three components. For instance, the UK has agreed to continue to contribute to the EU’s main overseas aid programme – the European Development Fund – until the current programme ends. This programme is funded directly by Member States, rather than through the EU budget. The UK’s contribution counts towards its commitment to spend 0.7% of national income on overseas aid.

Negotiations and ratification: the timeline

• June 2017. The European Commission set out what it expects from the settlement in a position paper.
• June – November 2017. The settlement is negotiated in the first phase of Brexit negotiations, along with other separation issues such as citizen’s rights and the Ireland/Northern Ireland border. Broadly speaking financial settlement negotiations focus on the Commission’s position paper.
• December 2017. A political agreement is reached on the financial settlement. It is published in a joint report along with the agreement reached on other separation issues.
• November 2018. A Withdrawal Agreement is agreed between Theresa May’s Government and the EU. The Withdrawal Agreement (WA) sets out, in legal terms, how the financial settlement will be calculated and administered. It also sets out the practicalities for payments between the UK and EU after 2020.
• October 2019. Boris Johnson’s Government negotiates and publishes a revised Withdrawal Agreement. There are no changes to the financial settlement.
• January 2020. The European Union (Withdrawal Agreement) Act 2020 becomes UK law. The European Parliament gives its consent to the Withdrawal Agreement. This means that the financial settlement becomes legally binding. The UK leaves the EU.