Mathematics could help UK’s May break Brexit money deadlock

25 October 2017 10:52am
Calculator with UK Money

23 October 2017. By Simon Taylor.

UK Prime Minister Theresa May has around six weeks to improve her offer on the Brexit bill if she wants to get the green light from EU leaders in December to start talks about a future trade deal.

With a bit of finesse, she should be able to achieve this without drawing fire from the hardline Brexit faction of her own party.

The EU wants Britain to pay about 60 billion euros ($70.5 billion) to settle its financial obligations as it leaves the bloc. May indicated in a speech in Florence last month that the UK would pay its share of the EU budget until 2020, which observers estimate would be about 20 billion euros.

But to get trade talks underway, she will need to show willingness to pay much more.

May is very unlikely to give an exact figure of how much she would pay, which at any rate would be impossible to calculate at this stage and would present an easy target for her domestic opponents.

Yet, she could still identify which parts of the EU's bill she accepts, which ones she doesn’t, and how she thinks the UK’s liabilities should be calculated. That would allow EU officials to work out roughly how much they can expect Britain to pay, and decide whether they're satisfied with it.

French President Emmanuel Macron said at a meeting of EU leaders on Friday that "we are less than halfway there" in the money negotiations.

Apart from the budget commitment until 2020, the EU wants the UK to pay its share in other future pledges it made towards infrastructure projects for instance, known in EU parlance as "reste à liquider," or RAL. This comes to about 28.7 billion euros. The EU also wants the UK to pay its share of EU officials' pension pot, costing around 8.06 billion euros, and provide capital for loans by the European Investment Bank.

May doesn't need to offer the whole amount. All the 27 EU leaders want is some form of guarantee from the prime minister that the UK will pay a substantial part of the outstanding amount.

Adding up

May could spell out to the 27 states that the UK is prepared to pay its share of all the items that have been listed as part of the outstanding obligations. At the same time, she should clarify what the UK calculates its share of those items to be. In almost every case, the UK calculates the amount as less than the 27.

For example, the EU's RAL funding gap was 238.8 billion euros in 2016. Taking the UK's average share of the EU budget at 12 percent would put the UK on the hook for 28.7 billion euros. But the RAL is expected to fall by 2019 as some of the payments backlog is eliminated. It is not clear that the UK should be liable for commitments made after it leaves the bloc.

The size of the gap will only be known closer to the date when the UK ceases to be a full member.

The deficit for the staff pension fund stood at 67.2 billion in 2016, according to the latest figures by the bloc's accounting body, the European Court of Auditors. But that figure is based on conservative forecasts the EU uses for economic growth and inflation. Applying rates used by the pension industry would reduce the deficit.

At home, May could point to this lower amount as an early victory in the battle over the money while reserving the right to haggle over the final sum at the end of the negotiations. At the same time, the greater clarity would give the 27 the assurances they need.

She could still face the risk of a revolt by hardline lawmakers in her cabinet and party. But if the 27 quickly agreed to start trade talks, May would have chalked up her first major breakthrough in the talks.

The prospect of trade talks would make the stakes for mounting a leadership challenges against May that much higher. It may even allow her to silence her detractors — at least for now.

Brexit Special Report