The OBR's new forecast and the EU budget: What's in there?

On the same day as George Osborne's Autumn Statement, the Office for Budget Responsibility (OBR) published its new Economic and Fiscal Outlook. As usual, the first section we looked at was the one about how much the UK pays into the EU budget. Here is a reader-friendly table we put together, comparing the UK's net contributions to the EU budget in the latest outlook published yesterday with those in the March 2012 outlook (click to enlarge).  

So, the numbers tell us that the UK's net contribution for 2011-12 turned out to be £1.3 billion lower than expected, but the net contribution for 2012-13 is going to be £2.1 billion higher than the previous forecasts indicated. Why?

The OBR is not exactly forthcoming with a clear explanation, but the report (on page 148) notes:  

The largest change [in expenditure transfers to the EU institutions] is in 2012-13, where we have increased our forecast by £1.5 billion [N.B.: Expenditure transfers to EU institutions are something slightly different from EU budget contributions as a whole]. This mainly reflects revised estimates of GNI and VAT bases for all EU countries in 2012 and 2013. Partly because of exchange rate changes these revisions increased the UK’s relative share in both the GNI and VAT bases, particularly for 2012, and thus increased our GNI contribution. 

This increases our expenditure contributions in all future years, but the effects are partially offset by increases in the abatement [the UK rebate] after 2012-13. The expenditure transfers [to the EU institutions] have also been increased in 2012-13 because of lower than expected surpluses carried forward in the EU budget from the outturn for 2011, and to reflect increases in amending budgets in 2012.

Therefore, essentially the OBR suggests that because the UK economy has done relatively well compared to other EU countries, its share of contributions in terms of Gross National Income (GNI) and VAT base have increased. This is natural given the way the budget is calculated, although it once again highlights the fallibility of economic forecasts at the national and international level - clearly the OBR's early forecast of how the UK economy would develop relative to the rest of the EU was some way off.

The OBR also notes the impact of exchange rate changes which have also increased the UK's contributions in sterling terms. Again this is hard to avoid, although the assumption that this will hold in the longer term is far from certain - and paves the way for future forecast revisions. All this is offset to some extent by the automatic adjustments in the UK rebate (designed to account for these sorts of changes), although as we have noted recently the UK rebate could decrease in the next budget period, hampering this offsetting process.

Finally, though, as the OBR warns, much of this is rather academic given the ongoing EU budget negotiations:

The forecast is subject to risks depending on the outcome of the negotiations for the EU budget for 2013, where we have assumed an increase of 2.8%, and for the new EU budget envelope for 2014 to 2020, where we have assumed a small real terms increase.

The first assumption sounds about right - given that MEPs now seem more willing to accept a 2.9% increase in payments in next year's EU budget, as opposed to the inflation-busting 6.8% increase proposed (twice!) by the European Commission. The second assumption is perhaps a bit pessimistic, given that David Cameron has said that he will veto anything different from, at worst, a 'real terms freeze' in the next seven-year EU budget - and Germany, Sweden and the Netherlands are also pushing for a similar freeze.

This is all clearly but another round in the series of forecasts of UK contributions to the EU budget, and far from the last since the negotiations on the next long term budget are under way. But if you are still confused by all these numbers and wondering how it could all end up, we would recommend reviewing our analysis of what could come out of the negotiations on the next long-term EU budget, and how much the UK would have to pay under each scenario.