Blog Post

The UK’s Brexit bill: what are the possible liabilities?

The EU-UK financial settlement will be a complex part of the Brexit negotiations. Here the authors estimate that at end-2018 the EU will have outstanding commitments and liabilities totalling €724bn. Most of these relate to spending after the UK’s likely departure date, but are tied to commitments made during the UK’s EU membership.

By: , and Date: March 30, 2017 European Macroeconomics & Governance Tags & Topics

The discussion about the “Brexit bill”, the expected payment by the United Kingdom to settle its financial commitments from its time as an EU member, is heating up. No official report is available from the European Commission about the details of this settlement, nor from the UK government. But politicians and journalists have already begun to discuss the issue.

In a new paper, we make a comprehensive attempt to summarise all the various assets and liabilities that might factor in the financial settlement. We also suggest questions that may arise in the political negotiations about what to include in the settlement, and how to assign the UK’s a share of the assets a liabilities. Since the paper is rather long, in this blogpost we briefly summarise the liabilities and commitments that might be relevant. An earlier post already summarised the assets. Another post covers the asset and liability sides together, along with the various open questions that negotiators might need to discuss.

EU financial commitments and liabilities: four main categories

The EU’s liabilities and commitments can be broadly classified in four main categories:

  1. Spending commitments related to the European Union’s 2014-20 Multiannual Financial Framework (MFF – the EU’s medium-term budget), and some other similar items, such as the EU budget’s contribution to the ‘Juncker investment plan’. Here there are three main kinds of commitment to calculate, which we explain in more detail later:
    1.1. Reste à liquider (RAL)
    1.2. Significant legal commitments (SLC)
    1.3. Other planned commitments (OPC) to be made in 2019-2020
  2. EU borrowing to finance financial assistance programmes
  3. Pension/sickness insurance liabilities related to EU employees
  4. Contingent liabilities

Projections to end-2018

The important question is not what the level of these liabilities and commitments is today, but what will be their value on the date when the UK leaves the EU. That date is not known. Since we are using annual data, we make our calculations up to the end of 2020 and consider end-2018 as the Brexit financial settlement date. This is the closest end-year date to March 2019, when the two-year period stipulated in Article 50 of the EU Treaty will expire after Article 50 was triggered yesterday. If for any reason the Brexit date is postponed, one can readily consider our end-2019 or end-2020 projections. Or if Brexit is postponed even beyond 2020, our methodology can be used to make calculations for post-2020 dates, once the next 2021-27 MFF is adopted.

EU budget basics: commitments and payments

EU budgeting operates through a combination of a seven-year budget plan (the MFF) and annual budgets. These budgets list the EU’s various planned expenditures. However, both the seven-year and the annual budgets include two indicators for each expenditure: a commitment, or confirmation that the budget allocation is approved, and a payment, or disbursement of money. The two do not need to fall in the same year. Indeed, only a part of the commitments made in a particular year is actually paid in that year. The payment of the rest is deferred for payment from subsequent annual budgets.

Table 1 shows the planned maximum for commitments and payments across the 2014-2020 MFF. The table highlights that a greater value of commitments than payments is planned.

From the perspective of the Brexit bill, more important is the extent to which payments are deferred. As Figure 1 shows, in any given year less than half of the payments made in that year’s EU budget is actually related to commitments listed in the EU budget for that year. That is to say, more than half the payments in any given year are for commitments from earlier years. To look at it the other way round, more than half of the commitments made in any given year are deferred for payment from budgets in later years – typically, it takes five years to pay down the commitments made in a year. This is what creates the reste à liquider liabilities (see below).

The value of EU commitments and liabilities

1.1 Reste à liquider (RAL): For the reasons we just discussed, at the end of each year there is a stock of commitments which have been made in annual EU budgets, but which are deferred for payment in later budgets. These commitments are called outstanding budgetary commitments, but are most commonly referred to with their French name, reste à liquider (RAL). At the end of 2015, RAL was at €217.7 billion. We project the RAL to increase to €248.8 billion by end-2018. Budget commitments made in a year are typically paid within the next five years, so the end-2018 RAL can be expected to be paid in 2019-23.

1.2 Significant legal commitments (SLC): The bulk of these commitments are amounts for specific actions (rather than general ceilings) that have been pledged in legal terms but have not yet been committed in an annual budget. These amounts are found in the MFF either as specific projects (such as building works), or as multi-annual shared actions with the member states (allocations to member states in relation to the European Structural and Investment Funds (ESIF), the Asylum, Migration and Integration Fund (AMIF), and the Internal Security Fund (ISF)).

There are also legal commitments in this category that derive from other legal bases, for instance administrative contracts for the provision of services. The EU’s guarantee for the so-called Juncker investment plan, the European Fund for Strategic Investments (EFSI), is another example of a significant legal commitment that the MFF does not contain a commitment for.

Nevertheless, 91 percent of significant legal commitments relate to multi-annual shared actions with member states (under ESIF, AMF, ISF). At the end of 2015, there were €376.3 billion of such legal commitments. We project the SLC to decline to €148.7 billion by end-2018. While the precise payment timeline of these commitments is not available, the actual payments may be made by as late as 2025.

Figure 2 shows the annual developments of the RAL and SLC up to 2015, and our projections for 2016-20.  The RAL has been gradually increasing (the fall in 2014 was temporary). SLC is large at the beginning of each MFF and declines to close to zero by the end of the MFF. Our projections (which are fully explained in our paper) are in line with these past developments.

1.3 Other planned commitments (OPC) to be made in 2019-2020: So far we have considered possible liabilities and commitments that will be accumulated by the end of 2018. However, the 2014-20 MFF also includes a ceiling for commitments to be made in the 2019 and 2020 annual budgets, which are not related to the SLC (and RAL up to 2018). These include, for example, Common Agricultural Policy (CAP) payments and administrative expenditure. Our calculations suggest that the total value of these other planned 2019-20 commitments is €182.5 billion.

2. EU borrowing to finance financial assistance programmes: The EU cannot borrow to fund current expenditures, but the EU borrows to fund financial assistance programmes: EU borrowing perfectly matches EU lending. At the end of 2015, EU borrowing (and also the corresponding EU loans on the assets side) amounted to €56.9 billion, which we expect to decline to €52.7 billion considering the loans that Hungary repaid in 2016 and Romania is expected to repay by the end of 2018.

3. Pension/sickness insurance liabilities related to EU staff: Employees of EU institutions and agencies participate in unique pension and sickness insurance schemes. Officials should contribute one-third to the financing of the pension scheme via a compulsory contribution from their salaries, while two-thirds comes from the member states, via the general EU budget. Member states jointly guarantee the payment of these benefits.

In contrast to other international organisations, there is no actual fund behind the pension and sickness schemes, but the pension scheme operates as a notional fund with defined benefits. Since there is no fund, active EU employees pay their annual pension contributions to the general EU budget, while actual pensions are paid from the general EU budget. Pension rights are gradually acquired by the active employees, so at each point it time, an estimate can be made on the total pension liability towards current and former EU staff. The sickness insurance system of EU staff operates under the same principles. At the end of 2015, the consolidated accounts of the EU estimated this liability at €63.8 billion. We do not project the pension/sickness insurance liability, since its estimation is inherently uncertain (see our post on this issue) and depends on many variables (for example, the interest rates in December 2018).

4. Contingent labilities: There were €27.6 billion contingent liabilities at the end of 2015, of which €21.4 billion relate to guarantees given, primarily to European Investment Bank lending outside the EU, while another sizeable part relates to issues pending at courts (for example, disputes about EU fines). We do not project contingent liabilities either.

Thus our calculations show that there would be €724 billion EU liability and commitments at end-2018 (Table 2), to which the UK might be asked to contribute.

How could these liabilities be included and divided in the Brexit bill? What are the key issues that negotiators might need to address? These questions are considered in full detail in our paper, while this blogpost summarises the key points.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

Brexit bill negotiators must answer these 12 questions

Is Brexit a divorce, or is the UK leaving a club? This is the first question to answer as negotatiors discuss the key aspects of the EU-UK financial settlement. The authors present various scenarios, and find that the UK could be expected to pay between €25.4 billion and €65.1 billion. But the final cost can only be calculated after extensive political negotiations.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article Download PDF More on this topic

Working Paper

WP_2017_03 cover

Divorce settlement or leaving the club? A breakdown of the Brexit bill

To bring transparency to the debate on the Brexit bill and to foster a quick agreement, the authors of this Working Paper make a comprehensive attempt to quantify the various assets and liabilities that might factor in the financial settlement.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 30, 2017
Read article More by this author

Blog Post

Giuseppe Porcaro

29 charts that explain Brexit

From financial services to the creative industry, from trade to migration, this selection of charts maps out the troubled waters of Brexit, and provides a compass through blogs and publications Bruegel scholars have written on the topic.

By: Giuseppe Porcaro Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: March 28, 2017
Read article More on this topic

Blog Post

Uuriintuya Batsaikhan
Zsolt Darvas

European spring - Trust in the EU and democracy is recovering

Trust in the EU and satisfaction with democracy are returning in southern European countries, where citizens’ confidence in European institutions was dented during the crisis years.

By: Uuriintuya Batsaikhan and Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 24, 2017
Read article More on this topic More by this author

Podcast

Podcast

Special edition - The Treaty of Rome at 60

The 60th anniversary of the Treaty of Rome presents an opportunity to reflect on the progress of European integration so far, and to discuss what the future will bring for Europe. We explore these topics in this special edition of The Sound of Economics.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 22, 2017
Read article More by this author

Parliamentary Testimony

House of Lords

Brexit: EU budget

On 25 January 2017 Zsolt Darvas appeared as a witness at the House of Lords Select Committee on the European Union, Financial Affairs Sub-Committee.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, House of Lords, Testimonies Date: March 7, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

European identity and the economic crisis

What’s at stake: the EU prepares to mark the 60th anniversary of the Treaty of Rome, and the European Commission has presented a white paper “on the future of Europe”. However, some have argued that Europe is going through a serious identity crisis, whose roots are to be found in the economic crisis and whose implications could challenge further steps towards integration. We review the recent contributions to this debate.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 6, 2017
Read article More on this topic

Blog Post

Schoenmaker pic
Nicolas Véron

Brexit should drive integration of EU capital markets

Brexit offers EU-27 countries a chance to take some of London’s financial services activity. But there is also a risk of market fragmentation, which could lead to less effective supervision and higher borrowing costs. To get the most out of Brexit, the EU financial sector needs a beefed up ESMA.

By: Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 24, 2017
Read article More on this topic

Blog Post

unnamed
Simone Tagliapietra

Brexit goes nuclear: The consequences of leaving Euratom

The UK Government has confirmed that it will withdraw from Euratom. But what does Euratom actually do? And what will happen when the UK leaves? The authors find major risks, potential costs and open questions.

By: Enrico Nano and Simone Tagliapietra Topic: Energy & Climate Date: February 21, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The Brexit bill: uncertainties in the estimate of EU pension and sickness insurance liabilities

Pension and sickness insurance liabilities for EU staff could be an especially contentious part of negotiations on an EU-UK financial settlement: the “Brexit bill”. This post looks behind the calculation of the alleged cost of pension benefits and concludes that it may be less than half of what it seems.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 17, 2017
Read article More on this topic

Blog Post

Zsolt Darvas
DSC_0798
dsc_1000

The UK’s Brexit bill: could EU assets partially offset liabilities?

The ‘Brexit bill’ is likely to be one of the most contentious aspects of the upcoming negotiations. But estimates so far focus largely on the EU costs and liabilities that the UK will have to buy its way out of. What about the EU’s assets? The UK will surely get a share of those, and they could total €153.7bn.

By: Zsolt Darvas, Konstantinos Efstathiou and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: February 14, 2017
Read article More on this topic

Blog Post

MariaDemertzis1 bw
unnamed

The impact of Brexit on UK tertiary education and R&D

In this blog post, we look at the impact of Brexit on UK’s education and research and development sectors in terms of students and staff, as well as funding.

By: Maria Demertzis and Enrico Nano Topic: European Macroeconomics & Governance Date: February 14, 2017
Load more posts