3. EU budget and UK contribution

• UK net contribution was about 0.4% of GDP and less than 1.2% of public expenditure in 2019
• For 2019, UK contribution was:
  • £14.4 billion gross after rebate;
  • £7.9 billion after public and private sector receipts
  • £152 million a week (or 32p per person per day)
• Economic benefits of EU membership add an estimated 4% to GDP (IFS)
  • About ten times UK’s net contribution to the EU
• In 2019, GDP was £2.3 trillion and EU membership was worth:
  • ~£90 billion
  • ~£1,700 million a week
  • ~£450 per person for the year
• UK financial settlement was about £34 billion at 31 December 2020
  • Includes £10.1 billion contributions for 2020
• From 2021 onwards, UK pays EU for participation in EU programmes (e.g. Horizon)

Click here for summary of Brexit FactBase.

EU plan and budget

Multi-annual financial plan

The EU plans its spending in seven-year financial plans in a Multi-annual Financial Framework. The relevant Multi-annual Financial Plan (MFP) ran from 2014 to 2020. Annually, the European Parliament and the Council approve each year’s budget, within the MFP, separately in advance.

The 2014-20 MFP had 11 principal goals:

1. Strengthening research, technological development and innovation
2. Enhancing access to, and use and quality of, information and communication technologies
3. Enhancing the competitiveness of Small and Medium-sized Enterprises (SMEs)
4. Supporting the shift towards a low-carbon economy
5. Promoting climate change adaptation, risk prevention and management
6. Promoting sustainable transport and improving network infrastructures
7. Preserving and protecting the environment and promoting resource efficiency
8. Promoting sustainable and quality employment and supporting labour mobility
9. Promoting social inclusion, combating poverty and any discrimination
10. Investing in education, training and lifelong learning
11. Improving the efficiency of public administration

Sources: European Commission, Priorities for 2014-20 

EU budget

The EU annual budget is always balanced, so there is no deficit or debt. It consists mostly (>90%) of payments for the current year plus commitments in future years (<10%).

Country contributions to the budget vary principally according to country Gross Domestic Product. They average about 1% of GDP (the EU uses a similar measure, called Gross National Income – GNI). The GNI contribution is the major item but country contributions also include a VAT contribution, tariffs and levies. (See NAO diagram below for more details).

The 2018 budget was €160bn, consisting of:

• €132bn (83%) spent in EU countries, benefitting citizens directly, on the EU’s main objectives of sustainable growth and smart and inclusive growth:
  • €59bn (37%) on sustainable growth;
  • €56bn (35%) on economic, social and territorial cohesion
  • €22bn (14%) on competitiveness for growth and jobs
• €10bn (6.3%) on Global Europe;
• €10bn (6.3%) on administration; and
• €3bn (1.9%) on security and citizenship.

The EU budget for 2018 of €160bn averaged 85 cents a day per citizen (EU population 513 million) or €312 a year per citizen.
(The 2017 budget was €158bn and spent in similar proportions to 2018).

Source: European Commission, EU annual budget lifecycle – figures 

EU28 contributions compared

Figure 3.2 shows member state shares of the contributions to the EU budget. Of these, the top four contributors are Germany (19%), France (16.6%), UK (13.5%) and Italy (12.5%) who account for over 61% of gross contributions.

The chart shows that the UK contributed 13.45% of the EU budget in 2016. However, when pubic sector receipts from the EU are deducted, the UK’s net contribution was about 10% in round figures.

On a gross and net basis, the UK was the third largest contributor.

Source: Statista and House of Commons Library, A Guide to the EU Budget, January 2018

Budget accountability and control

This diagram from the excellent NAO briefing on the EU-UK finances shows the steps in granting funds, spending, reporting and auditing.

There is more detail on the role of the European Court of Auditors and its regular sign-off of the EU’s accounts in the section on ‘What is the EU?’.

Source: National Audit Office, Briefing on EU-UK finances, December 2016

UK contribution and benefits

Contribution for 2019

HM Treasury recorded the UK gross contribution to the EU budget in 2019 as £18.9 billion. After rebate, this reduces to £14.4 billion (£277 million/week), which is the amount sent to the EU (including duties UK collects on behalf of EU). Against this, the UK benefited from receipts from the EU of £5.0 billion (Table 3.1.).

From 2021, the UK will make contributions to the EU for its ongoing participation in EU programmes such as Horizon, where these are agreed. The EU-UK Trade and Cooperation Agreement makes provision for participation.

The UK net contribution in 2019 was £9.4 billion, taking account of £5.0 billion in EU payments to the UK public sector (the majority represents receipts under the Common Agricultural Policy).

In addition, UK organisations received funds secured through competitions (for example, for research in UK universities). The House of Commons Library estimates that between 2014 and 2018 these additional receipts were between £1.0 billion and £2.0 billion each year.

Assuming estimated receipts of £1.5 billion for 2019, resulted in a UK net contribution of £7.9 billion or £152 million per week or 33p per day per person (UK population of 66.9 million in 2019 – estimated by ONS – and 66.4 million in 2018).

Leaving the EU theoretically improves the UK’s public finances by saving the UK contribution, but this is just part of the story. All reputable economists agree that Brexit reduces UK national income by much more than the contribution. Scroll down for the economic benefits of EU membership. Also, see section on impact assessment.

Source: House of Commons Library, The UK’s contribution to the EU budget, 4 January 2021

Additional details

Table 3.2 shows the components of UK contributions and public sector receipts 2014 – 2019. In addition, the UK received funds through competitions for funds.

Note that the UK contribution included the UK’s share of the EU’s international aid budget for which the UK’s share was about £1 billion in 2015/16. This counted towards the UK’s overseas aid target of 0.7% of GDP. Assuming this target continues, after leaving the EU, the UK still needs to spend the £1 billion on aid to meet the target. Assuming an aid figure of £1 billion for 2019 meant that the UK could only have ‘saved’ £6.9 billion a year (£133 million/week), even less than the net figure of  £7.9 billion in Table 3.1.

Table 3.2: UK contributions and public sector receipts, 2014 to 2019 (£ million)

Source: House of Commons Library, The UK’s contribution to the EU budget, 4 January 2021

Contribution and public expenditure

The UK’s net public sector contribution to the EU of £9.4 billion in 2019 represented  less than 1.2% of UK public expenditure of £802 billion for 2018 -19 (Figure 3.3). This meant that nearly 99% of UK public expenditure was under direct UK government control.

Figure 3.3: UK public sector spending 2018 -19 (£bn)

Source: HMT, Public Spending Statistics, July 2019

Economic benefits of EU membership

In August 2016, the Institute for Fiscal Studies (IFS) reviewed several reputable economic studies about the costs and benefits of different options for UK’s relationship with the EU. The IFS concluded that membership of the Single Market was worth an additional 4% of UK GDP over the long run.

To give an idea of scale, 4% of GDP of £2,255 billion in 2019 (Figure 3.4), was worth about £87 billion (4/104 x 2,255).

This was a benefit to GDP of £1.7 billion a week, or over ten times the weekly net contribution of £152 million (Table 3.1).

The economic benefits of EU membership come mainly from:

• Near-frictionless trade within the EU;
• EU trade agreements with other countries;
• Freedom of movement, which benefits the UK workforce and UK citizens working, studying or retiring in the EU;
• Attractiveness of UK as a destination for FDI to access the EU market;
• Productivity gains from access to a huge market with common standards.

Benefits to public finances

Public finances are sensitive to changes in GDP and fiscal policy. In its projections, HM Treasury typically assumes that 35% – 37% of GDP flows through to public finances. Applying these percentages to an additional £87 billion of GDP in 2019 indicates that:

EU membership benefited UK public finances by around £30bn to £32bn in 2019, or:

• 3.2 to 3.4 times the UK’s net contribution of £9.4 billion
• £580 million – £620 million/week
• £1.24 – £1.32 per person per day (population of 66.9 million)
• £450 – £480 for the year for every man, woman and child

Sources:
Institute for Fiscal Studies, Brexit and the UK’s public finances, May 2016
Institute for Fiscal Studies, The EU Single Market: the value of membership versus access to the UK, August 2016
ONS, Quarterly National Accounts data, March 2022

Financial settlement

Principles

The UK committed to honouring its share of gross EU liabilities accrued while Britain was a member state until 31 January 2020. One important objective of the first phase of the Brexit negotiations was to determine how to calculate the financial settlement.

As the Attorney-General stated in Parliament on 15 January 2019, the UK had an international legal obligation to pay what it owed to the EU. Indeed, the Withdrawal Agreement (which covers the financial settlement) is legally binding.

The UK and the EU agreed to avoid a lump-sum settlement by developing a system to calculate payments in years to come when specific liabilities fall due. This means that the final figure for the so-called “Brexit bill” will not be known until the final liabilities fall due in 2064.

Calculation

Although, the UK’s exit payments will be spread over several years, about 75% is payable by end 2020 and the majority by 2024. Thereafter, small annual annual payments will continue until 2064 of about £50 million a year.

The main liability is the UK’s share of unpaid spending commitments in the 2014-20 financial plan at the end of the transition period (31 December 2020). To this will be added other obligations such as pensions and about contingent liabilities in relation to decisions taken while the UK was a member, such as guarantees in relation to outstanding loans from the European Investment Bank. HM Treasury, the OBR and the European Commission all believe that that these liabilities are likely to prove minimal.

Using the UK’s share of EU contributions of about 13%, this implied a gross liability of about €100bn. From this will be deducted:

• UK share of EU assets estimated at €17bn to €23bn
• EU spending commitments to the UK to 2020 estimated at €29bn

In March 2021, the OBR estimated that the net cost of the settlement was around £34 billion (see below). In 2018 the government had estimated that the net financial settlement would be £35 billion – £39 billion as at 29 March 2019.

As a result of the extensions of Article 50 to 31 January 2020, the UK has continued to pay monthly contributions to the EU. By 31 December 2020, following monthly payments during the transition period (including £8.4 billion for 2020), the outstanding financial settlement was ~£34 billion. 

The National Audit Office (NAO) has warned that the outcome is uncertain and the settlement could easily be higher.

Sources:
Financial Times, UK bows to EU demands with breakthrough offer on Brexit bill, 29 November 2017
House of Commons Library, Brexit: the financial settlement in detail, December 2020
National Audit Office, Exiting the EU: the Financial settlement, April 2018
Office of Budget Responsibility, Fiscal risks report, July 2019, p166
Office of Budget Reponsibility, Economic and Fiscal Outlook, March 2021

Last updated on 23rd January 2023 by Richard Barfield