Brexit and the EU's budget funding gap

How will the EU deal with the budget funding gap when the UK leaves? Eoin O’Shea takes a look.

The EU budget for 2017 amounts €158 billion of committed spending. 70% of it is spent on payments to farmers under the common agricultural policy (CAP) and cohesion (e.g. infrastructure projects in less wealthy member states). While the EU budget is a small part of what is spent by EU member states annually (about 2% of member states’ combined national budgets), EU funds have significant effects in particular sectors. For example, in some countries, 70-80% of publicly-funded investments are financed by EU budget and investment funds. In Ireland, around 65% of farm incomes on average are represented by direct payments from the CAP and, in some countries, the numbers are higher. The EU is also the largest donor of humanitarian and development aid in the world. 

The UK is a substantial net contributor to the EU budget. The net budgetary effect of the UK leaving has been calculated by the European Commission at around €11 billion. If the EU budget remains the same size, and if it continues to be financed in the same way, and if the UK refuses to make contributions to the budget in return for having a post-Brexit trade deal, Ireland will need to contribute roughly €200 million extra to the EU budget per annum.

Every five years or so, there is a structured and forward-looking debate about the EU budget including what it is spent on and how it is financed. For the first time, Ireland will take part in the debate as a net contributor to the EU budget rather than as a net recipient. 

When dealing with the spending of the budget post-Brexit, the EU could decide to spend €11 billion per annum less. That won’t find favour among large net-recipient countries and, because agricultural spending would be almost certainly be affected, it wouldn’t be popular among the farming community in Ireland, either.

When dealing with the income of the budget post-Brexit, the EU could decide to introduce a new funding source rather than collect the additional €11 billion proportionally among the member states. Possibilities mentioned in a paper produced by the EU Commission last week included new EU taxes on fuel, electricity, corporate income, or financial transaction taxes. It is not the first time new potential revenue sources have been proposed by the EU authorities but consensus among member states (altering the funding method requires unanimity) for such change has never been achievable before. 

Because of the budgetary conundrum to be caused by the loss of €11 billion annually to the EU budget post-Brexit, and the difficult decisions the EU will be forced to make every year at budget time because of Brexit, it seems clear that, if the UK wants to retain a free trading relationship with the EU post-Brexit (the UK’s key goal from the negotiations), a key quid pro quo will be the continuance of a very deep and meaningful annual contribution to the EU by the UK. The EU negotiators will no doubt point out to the UK that there will be political difficulties in agreeing a trade deal in the absence of continued payments to the EU budget after Brexit.

In her speech on 17 January 2017, Theresa May said that, because the UK would not be staying in the EU single market after Brexit, they "will not be required to contribute huge sums to the EU budget”. The Conservative Party’s manifesto for the recent UK elections also stated that “the days of Britain making vast annual contributions to the European Union will end.” The key question to be asked and answered by all parties, it appears, is: how huge is huge? And how vast is vast? The EU negotiators would probably have no difficulty in considering that €11 billion per annum is neither huge nor vast compared to the benefits a UK/EU free trade and services deal would give to the UK when they leave. 

Eoin O’Shea FCA is a practising barrister, specialising in commercial and tax law. He is a former member of the European Court of Auditors.