The UK’s Brexit bill: what are the possible liabilities?

The discussion about the “Brexit bill”, the expected payment by the United Kingdom to settle its financial commitments from its time as an EU member, is heating up. No official report is available from the European Commission about the details of this settlement, nor from the UK government. But politicians and journalists have already begun to discuss the issue.

In a new paper, we make a comprehensive attempt to summarise all the various assets and liabilities that might factor in the financial settlement. We also suggest questions that may arise in the political negotiations about what to include in the settlement, and how to assign the UK’s a share of the assets a liabilities. Since the paper is rather long, in this blogpost we briefly summarise the liabilities and commitments that might be relevant. An earlier post already summarised the assets. Another post covers the asset and liability sides together, along with the various open questions that negotiators might need to discuss.

EU financial commitments and liabilities: four main categories

The EU’s liabilities and commitments can be broadly classified in four main categories:

1. Spending commitments related to the European Union’s 2014-20 Multiannual Financial Framework (MFF – the EU’s medium-term budget), and some other similar items, such as the EU budget’s contribution to the ‘Juncker investment plan’. Here there are three main kinds of commitment to calculate, which we explain in more detail later:
   
   1.1. Reste à liquider (RAL)
   
   1.2. Significant legal commitments (SLC)
   
   1.3. Other planned commitments (OPC) to be made in 2019-2020
2. EU borrowing to finance financial assistance programmes
3. Pension/sickness insurance liabilities related to EU employees
4. Contingent liabilities
   
   

Projections to end-2018

The important question is not what the level of these liabilities and commitments is today, but what will be their value on the date when the UK leaves the EU. That date is not known. Since we are using annual data, we make our calculations up to the end of 2020 and consider end-2018 as the Brexit financial settlement date. This is the closest end-year date to March 2019, when the two-year period stipulated in Article 50 of the EU Treaty will expire after Article 50 was triggered yesterday. If for any reason the Brexit date is postponed, one can readily consider our end-2019 or end-2020 projections. Or if Brexit is postponed even beyond 2020, our methodology can be used to make calculations for post-2020 dates, once the next 2021-27 MFF is adopted.

EU budget basics: commitments and payments

EU budgeting operates through a combination of a seven-year budget plan (the MFF) and annual budgets. These budgets list the EU’s various planned expenditures. However, both the seven-year and the annual budgets include two indicators for each expenditure: a commitment, or confirmation that the budget allocation is approved, and a payment, or disbursement of money. The two do not need to fall in the same year. Indeed, only a part of the commitments made in a particular year is actually paid in that year. The payment of the rest is deferred for payment from subsequent annual budgets.

Table 1 shows the planned maximum for commitments and payments across the 2014-2020 MFF. The table highlights that a greater value of commitments than payments is planned.

From the perspective of the Brexit bill, more important is the extent to which payments are deferred. As Figure 1 shows, in any given year less than half of the payments made in that year’s EU budget is actually related to commitments listed in the EU budget for that year. That is to say, more than half the payments in any given year are for commitments from earlier years. To look at it the other way round, more than half of the commitments made in any given year are deferred for payment from budgets in later years – typically, it takes five years to pay down the commitments made in a year. This is what creates the reste à liquider liabilities (see below).

The value of EU commitments and liabilities

1.1 Reste à liquider (RAL): For the reasons we just discussed, at the end of each year there is a stock of commitments which have been made in annual EU budgets, but which are deferred for payment in later budgets. These commitments are called outstanding budgetary commitments, but are most commonly referred to with their French name, reste à liquider (RAL). At the end of 2015, RAL was at €217.7 billion. We project the RAL to increase to €248.8 billion by end-2018. Budget commitments made in a year are typically paid within the next five years, so the end-2018 RAL can be expected to be paid in 2019-23.

1.2 Significant legal commitments (SLC): The bulk of these commitments are amounts for specific actions (rather than general ceilings) that have been pledged in legal terms but have not yet been committed in an annual budget. These amounts are found in the MFF either as specific projects (such as building works), or as multi-annual shared actions with the member states (allocations to member states in relation to the European Structural and Investment Funds (ESIF), the Asylum, Migration and Integration Fund (AMIF), and the Internal Security Fund (ISF)).

There are also legal commitments in this category that derive from other legal bases, for instance administrative contracts for the provision of services. The EU’s guarantee for the so-called Juncker investment plan, the European Fund for Strategic Investments (EFSI), is another example of a significant legal commitment that the MFF does not contain a commitment for.

Nevertheless, 91 percent of significant legal commitments relate to multi-annual shared actions with member states (under ESIF, AMF, ISF). At the end of 2015, there were €376.3 billion of such legal commitments. We project the SLC to decline to €148.7 billion by end-2018. While the precise payment timeline of these commitments is not available, the actual payments may be made by as late as 2025.

Figure 2 shows the annual developments of the RAL and SLC up to 2015, and our projections for 2016-20.  The RAL has been gradually increasing (the fall in 2014 was temporary). SLC is large at the beginning of each MFF and declines to close to zero by the end of the MFF. Our projections (which are fully explained in our paper) are in line with these past developments.

1.3 Other planned commitments (OPC) to be made in 2019-2020: So far we have considered possible liabilities and commitments that will be accumulated by the end of 2018. However, the 2014-20 MFF also includes a ceiling for commitments to be made in the 2019 and 2020 annual budgets, which are not related to the SLC (and RAL up to 2018). These include, for example, Common Agricultural Policy (CAP) payments and administrative expenditure. Our calculations suggest that the total value of these other planned 2019-20 commitments is €182.5 billion.

2. EU borrowing to finance financial assistance programmes: The EU cannot borrow to fund current expenditures, but the EU borrows to fund financial assistance programmes: EU borrowing perfectly matches EU lending. At the end of 2015, EU borrowing (and also the corresponding EU loans on the assets side) amounted to €56.9 billion, which we expect to decline to €52.7 billion considering the loans that Hungary repaid in 2016 and Romania is expected to repay by the end of 2018.

3. Pension/sickness insurance liabilities related to EU staff: Employees of EU institutions and agencies participate in unique pension and sickness insurance schemes. Officials should contribute one-third to the financing of the pension scheme via a compulsory contribution from their salaries, while two-thirds comes from the member states, via the general EU budget. Member states jointly guarantee the payment of these benefits.

In contrast to other international organisations, there is no actual fund behind the pension and sickness schemes, but the pension scheme operates as a notional fund with defined benefits. Since there is no fund, active EU employees pay their annual pension contributions to the general EU budget, while actual pensions are paid from the general EU budget. Pension rights are gradually acquired by the active employees, so at each point it time, an estimate can be made on the total pension liability towards current and former EU staff. The sickness insurance system of EU staff operates under the same principles. At the end of 2015, the consolidated accounts of the EU estimated this liability at €63.8 billion. We do not project the pension/sickness insurance liability, since its estimation is inherently uncertain (see our post on this issue) and depends on many variables (for example, the interest rates in December 2018).

4. Contingent labilities: There were €27.6 billion contingent liabilities at the end of 2015, of which €21.4 billion relate to guarantees given, primarily to European Investment Bank lending outside the EU, while another sizeable part relates to issues pending at courts (for example, disputes about EU fines). We do not project contingent liabilities either.

Thus our calculations show that there would be €724 billion EU liability and commitments at end-2018 (Table 2), to which the UK might be asked to contribute.

How could these liabilities be included and divided in the Brexit bill? What are the key issues that negotiators might need to address? These questions are considered in full detail in our paper, while this blogpost summarises the key points.