Clarity on costs crucial to meaningful vote on Brexit says PAC report

REPORT SUMMARY

Overseeing the UK’s withdrawal from the European Union is one of the biggest challenges that has faced any government.

The cost to the UK of leaving remains uncertain because it depends on future events, such as the UK’s economic growth. There is a risk that the amount the UK actually pays will fall outside the narrow range estimated by the Treasury of £35 billion to £39 billion. 

The Treasury’s estimate does not include at least £10 billion of costs to the government on leaving the European Union associated with the settlement deal, including nearly £3 billion of contributions towards the European Development Fund. It also does not include potentially significant costs associated with the UK’s future relationship with the EU. The taxpayer could continue to make payments for years to come.

As new information becomes available the estimated value of the settlement may change. To have a meaningful Parliamentary vote on a withdrawal agreement later in 2018, Parliament and the taxpayer require an up-to-date estimate of the settlement’s costs, as well as better information on the wider potential costs of withdrawal.

Without this, MPs and the taxpayer won’t have complete information about the potential costs of the government’s deal with the EU.

There is much talk of an EU dividend but our work has highlighted a number of as yet uncertain costs. Any dividend will be hard to calculate and, if it materialises, is some years away.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“The true cost of Brexit is a matter of outstanding public interest. Government must provide Parliament and the public with clear and unambiguous information.

“Government’s narrow estimate of the so-called divorce bill does not meet this description. It omits at least £10 billion of anticipated costs associated with EU withdrawal and remains subject to many uncertainties.

“The UK’s contribution to the EU’s outstanding commitments and liabilities after 2020 is unknown. The estimate also excludes costs that may arise from parts of the withdrawal agreement still to be negotiated.

“We know UK payments to cover pension and benefit costs could run for decades. But there are other potentially significant ongoing costs likely to arise from post-Brexit restructuring – for example, new trade and customs arrangements, replacement institutions and the costs of participating in EU programmes as a non-member state.

“Given these uncertainties, it is critical that Parliament and the taxpayer are kept informed as agreements are reached and new information becomes available.

“A Parliamentary vote on EU withdrawal will only be truly meaningful if this information is disclosed in a timely fashion.

“Government must explain how it will approach this task and waste no time in getting on with it.”

CONCLUSIONS AND RECOMMENDATIONS

The exact value of the financial settlement agreed between the UK and EU remains uncertain. The Treasury has reached agreement with the EU on how a settlement will be calculated that will see the UK honour commitments it has made while it was a member state. Based on published data, the Treasury estimates the settlement will cost the UK between £35 billion and £39 billion. However, there are a number of uncertainties in the estimate that will only become more certain as further information becomes available. The most significant uncertainty is the ‘financing share’, which will determine how much of the EU’s outstanding commitments and liabilities the UK will pay for after 2020. This will not be known until outturn Gross National Income figures for 2020 become available in 2022, when the final tally is made of the UK’s budget contributions to the EU over the period 2014 to 2020, compared with all member states’ contributions. 

Recommendation: The Treasury should write to the Committee providing an updated estimate of the settlement’s value before the Parliamentary summer 2018 recess, and then at least annually following any significant new data becoming available after the UK’s withdrawal from the EU.

The UK could be making settlement payments to the EU for many years.  The Treasury estimates that 60% of the settlement will be paid by the end of 2021, but some payments could go on for many decades. Payments by the UK to meet the estimated £8.6 billion liability for its share of EU staff pensions and post-employment sickness benefits could last until at least 2064. The UK can negotiate with the Commission to settle the UK’s share of its pension and sickness benefits liabilities early, but assessing whether this is good value for money will require extensive cost-benefit analysis. The actual value of any early pay-off will be sensitive to the assumptions in the calculation to arrive at the present value of future payments among other factors, which will be determined by the EU.

Recommendation: In response to this report, the Treasury should set out the factors it will take into account when deciding the value for money of settling the UK’s pension and post-employment sickness benefit liability early.

The Treasury’s estimate does not provide Parliament and the taxpayer with a sufficient understanding of the uncertainty attached to the settlement’s value. The Treasury believes that its estimate of the settlement value is ‘conservative and reasonable’. However, in making this estimate, the Treasury has undertaken limited analysis of the impact of changes to the assumptions on which the settlement estimate is based, considering the inherent uncertainty involved in forecasting future events. In particular, the Treasury did not account for the uncertainty associated with the ‘UK’s financing share’ in its estimated range of the settlement. The Treasury told us that its primary concern was to publish an estimate that the Commission would agree to, meaning it could not deviate from published data. But this means that the estimated range of £35 billion to £39 billion is narrow given the degree of uncertainty about the settlement. While the Treasury told us that it has undertaken additional analysis beyond its published estimate, it did not tell us how likely it is that the settlement’s actual value will fall outside its estimated range.

Recommendation: In responding to this report, the Treasury should provide the Committee with details of the sensitivity analysis it has performed on the £35 billion to £39 billion settlement value. In subsequent updates to its settlement estimate, the Treasury should also set out details of the sensitivity analysis performed, including how likely it considers the actual settlement value will fall outside its estimated range.

The Treasury’s estimate of the cost of the financial settlement does not include at least £10 billion of costs to the government associated with the UK’s withdrawal from the EU. The Treasury has not included nearly £3 billion of payments the UK will make to the European Development Fund, the EU’s main way of providing overseas development aid, after withdrawal. It also excludes an estimated £7.2 billion of EU funding that will go directly to UK private sector bodies, which the Treasury has deducted from its estimate of the settlement. Its estimate also does not include parts of the withdrawal agreement that are still to be negotiated which could have associated costs, such as how to deal with the taxation of goods dispatched from the UK during the transition period but do not arrive in the EU until after 2020. The Treasury believe any such costs will be small. 

Recommendation: When providing its updated estimate of the settlement’s value to Parliament, the Treasury must be clear what the total potential cost of the settlement is to the government, including how much of EU receipts factored into the settlement will not come into the government’s accounts and setting out payments to the European Development Fund.

We are concerned that the Treasury has not set out how it will assure Parliament and the taxpayer that future settlement payments will be made accurately. Some financial settlement payments will be made outside of the usual assurance arrangements in place for the UK’s contributions to the EU, and the Treasury will need to verify settlement payments as a non-member state and ‘outside the EU’. The Treasury told us that it has limited the EU’s ability to make subjective decisions or judgements on what the UK should pay for, but the Treasury will nonetheless still be reliant on information from the EU when making payments. The European Court of Auditors will be responsible for auditing the EU accounts. The UK’s representation in that organisation will end when the UK leaves the EU. The Treasury expects to be able to scrutinise settlement bills from the EU, supported by appointed auditors, but it is yet to decide on the precise skills and capabilities that it will need to do so. 

Recommendation: The Treasury should, within four months of our report, set out the assurance arrangements that it has put in place to ensure that the UK does not pay more than it owes, including how and when it will appoint its auditors. The Treasury should ensure that the UK continues to have sufficient input into the key EU institutions responsible for ensuring the accuracy of the EU’s financial information, particularly the European Court of Auditors, until the transition period finishes.

The Treasury’s plans for reporting to Parliament on the wider potential costs and benefits of withdrawal are not sufficiently clear. The UK faces potentially significant costs from withdrawing from the EU depending on the nature of its future relationship with the EU. This includes needing to set up new institutions to replace services currently provided by EU bodies, establishing new trade and customs arrangements, and potentially paying to participate in some EU agencies and programmes. Government departments are developing proposals for this future relationship and these are still to be negotiated. The Treasury told us that the government plans to set out a framework for the UK’s future relationship with the EU in time for Parliament’s vote on the withdrawal agreement. The Treasury told us that the financial settlement will not become legally binding until the withdrawal agreement is agreed and ratified by the UK and EU. For Parliament to have a meaningful vote on the withdrawal agreement, in which it may commit to paying the financial settlement, there must be greater clarity on the full potential costs and benefits of withdrawal. While the Treasury recognises that Parliament and the public must have better information on these costs and benefits in the run up to the Parliamentary vote later in 2018, it has not set out any details of the nature, timing and subsequent frequency of reporting.

Recommendation: In responding to this report, the Treasury and the government should set out its arrangements for reporting to Parliament on the wider potential costs and benefits of withdrawal, such as the costs of setting up new institutions to replace services currently provided by EU bodies and participating in EU institutions, and when it will provide Parliament sight of the legal advice it received. These arrangements should seek to provide MPs with as much time as possible to review the information before Parliament’s vote on the withdrawal agreement.