Government’s estimate of withdrawal payment is “shrouded in uncertainty”, warns Nicky Morgan

In response to a request from the Treasury Committee, the National Audit Office (NAO) has today published a report which examines the reasonableness of the Government’s estimate that the UK’s withdrawal payment to the EU will be between £35 billion and £39 billion. 

The NAO ‘found the estimate to be reasonable’, but ‘relatively small changes to some of [the] assumptions would cause HM Treasury’s central estimate to be outside its £35 billion to £39 billion range.’

Commenting on the publication, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said:

“In December, the Treasury Committee asked the NAO to examine the reasonableness of the Brexit withdrawal payment. The NAO has today published this assessment.

“It has judged that the Government’s estimate of the UK’s withdrawal payment to the EU is ‘reasonable’, but it appears to be shrouded in uncertainty.

“As the report states, the Treasury didn’t incorporate some of the main uncertainties – of which it was aware – in its figure. For example, the settlement estimate doesn’t include the UK’s commitments to the European Development Fund, which the Treasury expects will cost £2.9 billion after the UK leaves the EU.”

“We will examine these issues further when we take evidence from Sir Amyas Morse on Tuesday 24 April, and from the Chancellor the following day.”

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Notes to Editors

• On 1 November 2017, Sir Amyas Morse, Comptroller and Auditor General of the NAO, appeared before the Treasury Committee as part of its inquiry into the UK’s economic relationship with the EU (the full transcript is here). During the evidence session, the NAO’s role in scrutinising any withdrawal payment that the UK Government commits to pay to the EU was discussed:

Stephen Hammond: That is a very clear answer in terms of expenditure necessary for preparations.  Can we look into the future and when there is a settlement delivered?  How do you intend, in the case of settlement, to try to scrutinise that settlement to ensure that there is value for money and good use of the public money?

Sir Amyas Morse: I have given that some thought already and it depends very much on what the shape of the settlement is.  If there is what is described as a divorce bill, how is that arrived at?  If it is arrived at under a series of specific heads, each one of which supposedly has some value associated with it, then we would be in a position to do something in examining them.  I would assume that the Treasury or the negotiating team would have their own advisers on all of this, but we would be examining from the point of view of reporting to Parliament whether these sums all appear to be within a reasonable range, looking at the circumstances and the legal position under each of these heads. 

At present my thinking is that we would approach it quite like a normal large transactional deal, where you examine all the elements in it and then look at how they combine for reasonableness and range of value.  It is quite familiar to people in the financial sector.

[..]

Chair: Can I just ask one further question, just going back to the questions earlier about the eventual financial settlement with the EU?  Obviously we do not know if there will be one but let us say that there is.  I wondered, in assessing the reasonableness of that settlement, whether you would be looking at what the Government might get back from the payment, i.e. market access, transition arrangements or something else, or will you just be looking at whether it can be objectively justified?

Sir Amyas Morse: It is really interesting.  Before coming along here, I was exactly thinking about that.  It may be that we get to something where it is an almost impossible task to evaluate it.  I will make up an answer, which is that we might find that we could look at each of the specific elements and work out whether the amount paid in aggregate reflected just those elements or whether there was a bit on top for whatever other consideration; but then, having been told what they were, we might look at them and think, “We really cannot evaluate this”.  How do you go about valuing access to the EU or the marketplace?  If there is a way we can evaluate, we will try to do so.  However, it would not surprise me if our approach only took us so far up the structure, with a bit at the top that we felt was too nugatory to associate a value with, where any value might be a bit arbitrary.  If we can find a way, and it is a supportable good-practice way of doing it, we will do the whole thing.

Chair: Presumably, in terms of the general NAO work in looking at value for money, there is always an element of some kind of judgment when you are reaching that value-for-money judgment.

Sir Amyas Morse: That is absolutely right; there is.  Just drifting into my mind is a business case for HS2 where you have quite remote economic benefits being cited as part of the justification for the project, and you try to arrive at some means of assessing what value should be associated with them.

• On 11 December 2017, the Prime Minister told the House of Commons (full transcript here):

We have agreed the scope of commitments, and methods for valuations and adjustments to those values. The calculations currently say that the valuation would be £35 billion to £39 billion[.]

• Mrs Morgan wrote to Sir Amyas on 20 December 2017 to request that the NAO examines the reasonableness of this payment, including the assumptions and methodologies used, to provide assurance to Parliament. The letter is here. Commenting at the time, Mrs Morgan said:

“Various wide-ranging sums for the UK’s withdrawal payment to the EU have been bandied about. Last month, the Prime Minister told Parliament that the so-called Brexit divorce bill will be £35-39 billion.

“Parliament must be able to scrutinise the reasonableness of this bill. Accordingly, I have written to Sir Amyas to request that the NAO examines the withdrawal payment, including the assumptions and methodologies used.”

• Shortly after Mrs Morgan’s letter was published on 20 December 2017, it was reported that Sir Amyas said:

“I can confirm that we intend to report on the main elements of the financial settlement with the EU. We are already in discussions with HM Treasury aimed at planning our work. I expect our report to be published in late March.”

• In response, Mrs Morgan said:

“I welcome the NAO’s commitment to examine the UK’s withdrawal payment to the EU. This will provide assurance to Parliament over whether or not the so-called divorce bill is reasonable”