ICAEW chart of the week: UK-EU financial settlement update

This week’s chart is on the UK-EU withdrawal agreement financial settlement. Perhaps surprisingly given recent press coverage, ICAEW’s analysis is that it remains roughly unchanged from the Treasury’s 2018 estimate.

Chart on UK-EU financial settlement.

HM Treasury estimate from 2018 of £39bn less £16bn transition = post-transition net payments of £23bn (£19bn approved expenditure not paid + £11bn pension obligations, less £7bn share of EU assets).

Changes since 2018: -£2bn approved expenditure not paid +£2bn pension obligations.

EU 2020 accounts £42bn less forecast UK receipts of £14bn less EIB and other of £bn = Post-transition net payments £23bn (£17bn approved expenditure not paid + £13bn pension obligations - £7bn share of EU assets).

The €47.5bn (£42bn) receivable from the UK included in the recently published EU 2020 accounts caused a kerfuffle last week, as excitement levels grew over what turns out to be a pretty much unchanged estimate for the post-transition element of the UK-EU financial settlement.

ICAEW’s chart of the week attempts to reconcile the £39bn estimate calculated by HM Treasury back in 2018 with the €47.5bn (£42bn) receivable recorded by the EU in its financial statements on 31 December 2020, the last day of the transition period. Perhaps surprisingly, given recent press coverage, ICAEW’s analysis is that the estimate for the post-transition element of the settlement of £23bn remains unchanged overall.

Much of the confusion arises because the £39bn estimate made by HM Treasury in 2018 was a net number, reflecting forecasts of gross payments to the EU by the UK government less anticipated payments by the EU and EU-related institutions back to the UK.

The chart starts by analysing the £39bn estimate into its four main component parts: Net transition payments of £16bn, the UK’s share of approved expenditure not yet paid of £19bn and pension contributions of £11bn less the UK’s share of EU assets of £7bn, with the last three elements amounting to a net £23bn amount to be settled in the post-transition period.

The transition element of £16bn is now in the past, reflecting membership dues for the then anticipated transition period of 1 April 2019 to 31 December 2020 less money coming back from the EU to the UK over the same period. In the end, this turned out to be a couple of extensions in the UK’s period of membership that resulted in a shorter transition period from 1 February to 31 December 2020 – a switch in classification for some of the £16bn from post-EU transition payments to pre-EU exit net membership cost.

The UK’s share of approved expenditure not yet paid of £19bn was also a net number, reflecting a gross amount payable to the EU for ongoing programmes at the end of 2020 less amounts coming back the other way. The OBR has been working to an estimate of €296bn for the balance of approved expenditure not paid (also known as reste á liquider or RAL), which compares with €294bn in the notes to the EU accounts once adjustments were applied to the overall total of €303bn that the EU was committed to spend as at 31 December 2020. 

The calculated receivable of €35bn or £31bn does not reflect an estimated £14bn of payments by the EU to UK participants in these programmes, for example to British universities and research institutions, giving rise to a net amount in the order of £17bn, a couple of billion below the original estimate.

This slightly smaller net outflow is offset by a larger pension liability in the EU accounts, driven by a lower discount rate than originally anticipated. The UK’s €14bn or £13bn share of the €116bn liability is therefore higher than the €12bn or £11bn share of a €96bn liability that was previously forecast. In practice, the value attributable to this balance will change over time given that payments are expected to continue to 2064 or later.

Another area where the EU accounts do not provide the complete story is in the UK’s share of assets it expects to receive back as part of the withdrawal agreement. The €2bn amount in the EU accounts primarily relates to the UK’s share of fines, but it excludes the return of UK shareholdings in EU-related institutions that are owned by member states outside of the scope of the EU consolidated financial statements. Of the £5bn in this category, €3.5bn or £3bn relates to the return of the UK’s share capital in the European Investment Bank.

Despite the numbers being pretty much as expected, there still remains some uncertainty concerning the £23bn post-transition estimate in relation to the calculation of the amounts coming back to the UK, and HM Treasury and the OBR will no doubt continue to refine these estimates over the next few months and years.

The financial settlement is not the end of the UK’s financial engagement with the EU as the government has agreed to participate in a number of EU programmes from 1 January 2021 onwards, for example in Horizon pan-European scientific research, as well as working with the EU on international development programmes funded from the aid budget.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK trade in goods

With less than a month to go before the UK leaves the EU Single Market and Customs Union, trade is high on the agenda as negotiations between the UK and the EU go down to the wire.

UK trade in goods in the year to September 2020: exports £338bn & imports £420bn

EU: £153bn & £230bn
Continuity deals: £49bn & £43bn
USA: £53bn & £38bn
China: £32bn & £54bn
Other: £51bn & £54bn

The #icaewchartoftheweek this week is on international trade, illustrating how exports and imports of goods amounted to £338bn and £420bn respectively in the year to 30 September 2020. This excludes £289bn and £181bn of services exports and imports over the same period that are also extremely important, but which are not the principal subjects of the free trade deal currently being negotiated.

The UK’s largest trading partnership for goods is with the members of the EU Customs Union (together with Turkey for non-agricultural products), with the UK exporting £153bn (45% of total goods exports) and importing £230bn (55% of total goods imports). 

This is followed by a further £49bn (15%) of exports to and £43bn (10%) of imports from 52 countries that have trade deals with the EU that the UK has been able to agree replacement trade arrangements with. These include Norway, Switzerland, Japan, South Korea, Canada and South Africa, with discussions underway to roll-over trade deals with a further 13 countries not included in these numbers, in particular with Singapore and Vietnam.

The UK’s two largest individual trading partners are the USA and China, where the UK will continue to trade on World Trade Organisation (WTO) terms. The UK exported £53bn (16%) of goods to the USA and imported £38bn (9%) in the year to September, while it exported £32bn (9%) to China and imported £54bn (13%).

The balance of goods trade, comprising exports of £51bn (15%) and imports of £54bn (13%), is with over 130 other countries and territories where the UK does not have a trade deal in place for after 1 January 2021, including India, Russia, Vietnam, Taiwan, the UAE, Saudi Arabia, Qatar, Thailand, Singapore, Australia, Malaysia and Nigeria.

Both exports and imports of goods have reduced in the year to September 2020 compared with a year previously, with exports down 7% and imports down 18%. The principal driver of the fall is the coronavirus pandemic, although reconfiguration of cross-border supply chains ahead of the end of the transition period may also be a factor.

Although global trade is expected to pick up in 2021 once covid-19 vaccines are widely available, there is significant uncertainty as to the effect on trade of the UK’s departure from the Single Market and Customs Union – with or without a deal. Either way, increased trade frictions are likely to have at least some impact, while the imposition of tariffs in the event of no deal could cause significant additional problems for key sectors such as car manufacturing and agriculture.

The size and closeness of the EU economy means that it will continue to be the most important trading partner for the UK whatever is agreed. If only we knew on what terms we are going to be trading in less than a month’s time and what the major changes that are coming in January will mean for the future!

This chart was originally published on the ICAEW website.

The £4.4bn cost of preparing for Brexit

17 March 2020: the NAO has provided an analysis of the spending by government departments on preparing for Brexit, highlighting just how significant an exercise leaving the EU is for the government machine.

A recent report by the National Audit Office (NAO) on the cost of EU Exit preparations analysed the £4.4bn spent by government departments in getting ready for Brexit between June 2016 and 31 January 2020.

The NAO is the independent audit body responsible for scrutinising public spending on behalf of Parliament. In its Brexit report, the NAO identified over 300 workstreams with £1.9bn spent on staff, £1.5bn on building new systems and procuring goods and services, £0.3bn on external advice, and £0.6bn in other costs.

Over half of the costs were incurred by three departments, with £871m, £803m, £748m spent respectively by DEFRA, the Home Office and HMRC. This included preparation for new international trade, immigration and customs processes, as well as implementing domestic regulation in areas currently regulated by the EU.

This spending is not the complete total. It does not include costs incurred, for example, of staff only partially working on Brexit or seconded for less than six months, nor local authority preparations not covered by central government funding. It also does not include the net contributions payable to the EU of £8bn during the transition period between 1 February 2020 and 31 December 2020 nor the net financial settlement payable to the EU after that of an estimated £23bn.

The NAO reported that some of the £1.8bn spent between 1 April and 31 October 2019 was spent on no-deal preparation, but that it is not possible to analyse how much of this was wasted (other than the £92m in losses incurred on terminating ferry and other contracts already identified by Whitehall as ‘fruitless payments’ or ‘constructive losses’). This is because many of the preparations will still be needed for when the UK leaves the Customs Union and Single Market at the end of the year.

Spending on advertising and communication amounted to £77m, including £49m spent on the Cabinet Office’s ‘Get ready for Brexit’ campaign, the subject of a critical NAO report in January 2020.

Alison Ring, Director, Public Sector for ICAEW commented: “The NAO has provided a very helpful analysis of the spending by government departments on preparing for Brexit. It highlights just how significant an exercise leaving the EU is for the government machine, with the need for more staff, new regulatory arrangements and new systems and processes across the public sector.

This effort is far from complete, with a huge amount of work still needed to prepare for leaving the EU Customs Union and Single Market in less than nine months’ time.”

The NAO report: ‘The cost of EU Exit preparations’ is publicly available.

This article was originally published by ICAEW.