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Friday, September 05, 2008

Why the falling pound leaves the treasury with an £8bn black hole

This week saw the pound hit an all time low against the euro.

On wednesday the pound only got you €1.2282 - or to put it the other way round, a euro cost 81.4p

When the euro launched the pound bought €1.42, and it climbed to a peak of about €1.70.

Since the day that Gordon Brown arrived in number 10 (the guy is unlucky?) the value of Sterling has tanked. Observe:

The collapsing value of the pound will presumably increase the sterling cost of the UK's contribution to the EU.

The value of the UK's contributions and receipts both go up, and so does the net contribution.

In 2005 Tony Blair agreed that the UK would, over the 7 year financial perspective (2007-13), pay €103 billion into the EU, and receive back €46bn - a net contribution of €57bn.

At December 2005 exchange rates that would have meant paying in £70bn, getting back £31bn and making a net contribution of £39bn.

But at today's exchange rate, that it will mean paying in £84bn, getting back £37bn and making a net contribution of £47bn.

So the collapsing value of sterling could mean paying an extra £8 billion pounds into the EU.

Thats quite a lot of new hospitals, schools and roads.

In fairness, the first year of the programme shouldn't be affected as much. The pound only started to slide in spring 07, and as the Government recently pointed out in a letter to MPs:

"UK in-year contributions to the EC budget are not affected by exchange rate contributions. This is because VAT and GNI contributions , and any revisions to the VAT and GNI bases, are made on using a fixed exchange rate that is set on the last working day prior to the start of the EC budget year. However, the UK's net contribution over a given period will also depend on the level of UK receipts. Unlike UK VAT and GNI contributions, the exchange rate used for reciepts fluctuates in-year and is fixed two days before any payment is made to the UK. Exchange rate changes are one of the factors that affcect the forecast of future UK contributions, which are published twice a year in the budget and PBR.
(Htp: Graham Brady)

We'll start to see the full effects in the official figures from next year. Should be one to watch out for.

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