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EU budget implications of a no-deal Brexit

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A no-deal Brexit would mean the UK’s contributions to the EU budget fall to zero as of March 30th 2019. The author here calculates an estimate of the budget shortfall that would have to be covered in this case, and how the burden would fall across different member states. By: Zsolt Darvas Date: January 14, 2019 Topic: European Macroeconomics & Governance The United Kingdom’s financial contribution to the liabilities of the European Union – the so-called ‘exit fee’ – is, in my view, a less important aspect of Brexit. The amounts at stake are small relative to GDP both for the EU and the UK, and there are many more important issues that could also have larger direct budgetary impacts than the exit fee. For example, I regard the

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A no-deal Brexit would mean the UK’s contributions to the EU budget fall to zero as of March 30th 2019. The author here calculates an estimate of the budget shortfall that would have to be covered in this case, and how the burden would fall across different member states.

By: Date: January 14, 2019 Topic: European Macroeconomics & Governance

The United Kingdom’s financial contribution to the liabilities of the European Union – the so-called ‘exit fee’ – is, in my view, a less important aspect of Brexit. The amounts at stake are small relative to GDP both for the EU and the UK, and there are many more important issues that could also have larger direct budgetary impacts than the exit fee.

For example, I regard the future trade, services and immigration partnerships – which will affect economic growth and thereby direct budget revenues – as more important matters than the exit fee. Similarly, non-economic issues like security and defence cooperation, visa-free travel, aviation cooperation, nuclear safety and food safety are also crucial aspects of Brexit.

Yet it can be useful to quantify the exit fee, because the likelihood of a no-deal Brexit has increased and in such a case the UK might not contribute to the EU budget at all starting from March 30th 2019. Thereby, EU member states should stand ready to fill the eventual gap rather soon.

In this post I focus on the current multi-annual financial framework (MFF) in order to assess the near-term (2019 and 2020) necessary extra contribution to the EU budget in case of zero UK contribution after Brexit. After making certain assumptions and simplifications (see the end of the post), I find that in an extreme scenario – in which the UK will not contribute at all after 29 March 2019, and EU spending in the UK fully stops that day – the total Brexit hole in the EU budget for March 30th 2019-December 31st 2020 could amount to about €16.5 billion, or 0.066% of EU27 gross national income (GNI).

This figure relates to the extra transfer needed by members states to the EU budget, yet an offsetting factor is the 20% of customs duties on imports from the UK retained by member states, which could amount to €0.8 billion in the same period (80% of customs duty revenues go to the EU budget and 20% is retained by the member states). Thereby, the extra direct financial burden on the public budgets of the 27 members states would be €15.7 billion, or 0.062% of GNI.

This estimation can be considered as an upper limit for the Brexit hole for the following main reasons:

  • Even in the absence of a comprehensive withdrawal treaty, the UK might contribute to the EU budget because, for example, the UK might recognise its financial liabilities towards the EU, or it might wish to show its goodwill in the hope of a better agreement later. If so, the financing gap in the EU budget could be smaller (even if EU spending in the UK would also not stop overnight).
  • I assume that 100% of the MFF payment ceiling will be spent in EU27, but actual spending is typically slightly lower than the ceiling (even though some carry-overs used to be spent in later years). If so, the needed national contribution will be smaller.
  • I consider a low estimate for the customs-duty revenues arising from EU27 imports from the UK, by assuming the same average tariff rate as the current average tariff rate on imports from non-EU countries. But non-EU countries include developing countries, which typically face preferential tariff rates. Imports from non-EU countries also include a large amount of raw materials, which have zero or very low tariff rates. Thereby, the average tariff rate on imports from the UK could be considerably higher than what I consider in the calculations. (Note that customs-duty revenues from imports from the UK is not a transfer from the UK, but a duty primarily paid by EU27 companies and households. Yet this will be a revenue in the EU budget.)
  • I do not wish to estimate the fall of EU imports from the UK as a result of the distraction caused by a no-deal Brexit, including the introduction of the customs duties. But for illustrative purposes the calculation assumes a 20% fall in the volume imports. If imports fell less, higher customs duties would be collected on imports from the UK.

Even considering my upper-limit estimate of €16.5 billion for the extra contribution to the EU budget in 2019-2020, no new legislation is needed to cover this financing gap. The overall own-resources ceiling of the current 2014-2020 MFF is 1.22% of GNI, which represents the maximum amount of its own resources that the EU may raise.

See a simplified table of the MFF here, which shows the three types of MFF ceilings: payments, commitments, own resources. Some explanations are available here. The payment ceiling is 0.96% of GNI. The difference between the overall own-resources ceiling and the payment ceiling “provide room for maneuver in case of unforeseen needs and emergencies”. This margin, 0.26% of GNI, is much larger than the financing gap, 0.066% of GNI, caused by a no-deal Brexit. This gap would therefore be filled by larger contributions from the 27 EU member states. Figure 1 shows the distribution of this amount across countries based on their GNI, along with the nationally-retained 20% of the extra customs duty revenue from imports from the UK.

Assumptions for the 2014-17 calculations:

  • All 2014-17 data, except values in italics in Table 1, are calculated on the basis of actual data from DG Budget;
  • It is not possible to determine the share of the UK in ‘further’ expenditures (line 1.3 of Table 1). ‘Further’ expenditure is the sum of expenditures in non-EU countries (€8.6 billion in 2017), earmarked expenditure (€11.1 billion in 2017) and other (€6.1 billion in 2017). Other expenditure is expenditure allocated to beneficiaries whose countries cannot be determined (covering groups of countries or paid to international organisations). Earmarked expenditures relate to revenue earmarked for a specific purpose, such as income from foundations, subsidies, gifts and bequests, including the earmarked revenue specific to each institution. To guesstimate the UK’s share in these expenditures (line 1.3.1), I do not consider non-EU expenditure and the global and administration components of other and earmarked expenditures. For the rest I assume that the UK’s share is the same as the UK’s share in EU28 expenditures of the same expenditure heading.
  • It is not possible to determine the share of the UK in ‘other’ revenues (line 2.6 of the table). ‘Other revenues’ include income from third countries for participating in EU programmes, competition fines, taxes paid by EU staff, interest on late payments, and so on. Most likely, competition fines play a big role in the annual fluctuations of this revenue. For example, in 2017 there was an unusually large ‘other revenue’ amounting to €17.2 billion, which resulted in much lower VAT- and GNI-based revenue collection from member states in 2017 than in earlier years (lines 2.1 and 2.2). The estimated ‘other revenue’ from the UK simply assumes that the share of the UK in these revenues is the same as the UK’s share in EU28 GNI (line 2.6.1).

 

Assumptions for the 2018-2020 projections under the scenario of the UK’s continued EU membership or the transition period along the agreed deal (lines 1-5 of Table 1):

  • EU spending in the UK in 2018-2020 is assumed to be the same proportion of total EU spending as it was on average in 2014-2017;
  • Actual EU budget payments will be 100% of the payment ceilings in 2018-2020;
  • ‘Assigned revenues’ will not reduce the GNI-based contributions (“Assigned revenues” finance specific items of expenditure which are not subject to the MFF’s ceiling for payments);
  • ‘Other revenues’ will be €8.9 billion annually in 2018-2020 (average value for 2014-17);
  • ‘Other revenues’ from the UK relative to total ‘other revenues’ is proportional to the ratio of UK GNI to EU28 GNI;
  • Annual customs revenues from non-EU countries will grow in 2018-2020 as in 2017;
  • The EU budget will close with zero overall balance;
  • VAT- and GNI-based contributions result as residual;
  • For 2018-2020, I use the European Commission’s November 2018 forecast for GNI;
  • I assume that the UK’s share in the EU28 VAT- and GNI-based contribution will remain the same 11.1% in 2018-2020 as it was in 2017 (this share, which is lower than the UK’s share in GNI (14.9%), reflects the UK rebate, which itself varies across the years);

 

Assumptions for the 30 March 2019 – 31 December 2020 projections under the scenario of no-deal Brexit:

  • No UK contribution to the EU budget starting from March 30th 2019, while the January 1st-March 29th contribution is proportional to the number of days;
  • No EU spending in the UK starting from March 30th 2019, while the January 1st-March 29th EU spending in the UK is proportional to the number of days;
  • Starting from March 30th 2019, EU27 imports from the UK will be subject to customs duties. I assume that the average tariff rate will be the same as the current average tariff rate on imports from non-EU countries. Note that this assumption underestimates the customs duty revenues from imports form the UK, because of the preferential tariff rates applied to import from developing countries and the zero or very low tariff rates applied to raw materials;
  • Line 6 of the table shows the customs duty revenue estimate if import volumes do not change, while line 7 shows the estimate if EU27 imports from the UK declines by 20% –- in the overall calculation mentioned earlier I used values corresponding to the 20% reduction for illustrative purposes;
  • The total March 30th 2019-December 31st 2020 impact is calculated from the EU27 balance (line 5 of Table 1): 0.7589 times the 2019 values, plus the 2020 values.

 

Assumptions for the calculation about the cross-country distribution of the Brexit financing gap:

  • The €16.5 billion, March 30th 2019-December 31st 2020 gap is to be distributed among the member states according to their GNI;
  • The corrections mechanisms (“rebates on rebates”) are not considered in this calculation;
  • Member states retain 20% of customs-duty revenues: the orange bars show the estimates using the assumptions discussed above, considering the 2017 distribution of imports from the UK across the 27 member states.

See our tutorial for the main EU budget concepts and our detailed methodology to calculate the exit fee in our 2017 working paper.

I thank Konstantinos Efstathiou for helpful discussions on various issues related to the understating of EU budget numbers, and André Sapir on certain customs issues.

About Z. D.
Zsolt Darvas

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