Friday, November 07, 2014

The £1.7bn question - who's right: Osborne, Farage or the European Commission?

Below we give a blow by blow breakdown of what George Osborne did or did not secure at today’s EU finance ministers meeting. This basically comes down to the UK’s rebate and how it’s applied - and whether it was always going to apply to the £1.7bn.  Osborne claimed that:

Whilst Ukip leader Nigel Farage has claimed that:

This is what EU Budget Commissioner Georgieva said at a press conference just now:
“As we all know the UK receives a rebate on their contribution, but in years when the UK has to pay additional because of GNI corrections, normally this payment would be on 31 December and it would be in the full amount. With the proposal [under discussion]…in exceptional years this period of time would be stretched into the next year, and when this happens, and it would be in these exceptional circumstances, then the payment and the rebate on the payment could converge. In a normal year, they would not. In a normal year, you have a payment on 31 December and then next year, in the spring, we have the calculation of the rebate on this payment.” 
So who’s right?

Well, Osborne is right that the UK will pay half of the initial £1.7bn demand, since the UK’s rebate will now knock off the difference. So in that sense, Farage is wrong. Britain “will not pay the full £1.7bn”. However, the Government’s position isn’t’ entirely what it seems either, since it’s possible (though still not clear) that the rebate was always going to apply to the £1.7bn.
Confused? Don’t worry. Few people know how the rebate actually works. Below is our attempt to clarify the issue.

What has actually been agreed?
  • The UK secured a delay on its payments and will now have until September 2015 to pay. It will probably pay in July and September 2015.
  • It was also agreed that the UK’s £1.7bn bill will have the UK’s rebate applied to it (in the same way all annual contributions do). The Government claims that it wasn’t ever clear whether the rebate would apply, however, Commissioner Georgieva’s suggest that it always would. Usually  the rebate operates on a one year time lag, but now it will be netted off at the same time when the payment is made. The UK government also claims that the rebate applied to the specific amount is above and beyond that which applies normally, due to the way different facets of the rebate are applied and the time period over which it was calculated (we're still looking into this one). 
  • This accounts for the reduced the bill from £1.7bn to £850m.
So, Osborne has effectively achieved an ‘interest free’ payment plan for the surcharge, which will see it coincide with the rebate on said surcharge.

Would this always have happened?
  • It has been unclear for some time how the rebate would factor in here. Either people were purposefully trying to obscure the question or it was genuinely unclear.
  • However, now that it has been settled that the rebate would be applied, it can be said that this reduction would always have happened. The main change is that the rebate has been moved forwarded allowing the initial payment to be reduced.
  • On net the UK will pay £850m, but this should always have been the case thanks to the rebate.
Does this impact other countries?
  • Since other countries essentially pay for the UK rebate, they will on net be hit.
  • Our understanding is that the countries will still get the full amount expected from the GNI calculations – i.e. France should still get €1bn.
  • That said, since the rebate is being paid and also a year early, it is likely that their annual EU budget contributions will increase in 2015. On net then, the gains for certain countries (such as France) could actually be less than expected.
So are we looking at a cash flow problem for the EU budget?
  • One outstanding question is how this will all work in practical terms. Judging from the European Council conclusions, countries who are getting a pay-out from the GNI calculations can still claim the money on 1 December.
  • However, countries who are paying in large amounts can delay their payments until September 2015. It is not clear whether there is enough spare cash in the budget to smooth over this gap.
  • Furthermore, the UK is using its rebate to offset its payment. This will not be covered until all countries have paid in their (higher) annual EU budget contributions next year. This further worsens the cash flow problem.
A political conspiracy or genuine uncertainty?
  • Questions will now swirl around when all this was known. Surely, if the rebate applies, that was always known to be the case? Logically, since all UK contributions are subject to the rebate, it always was going to be. The only thing that wasn’t entirely clear was when and how it would be factored in. While this is tricky to work out, it’s not clear why the HM Treasury and the European Commission let the dispute run for two weeks. If this was a “set up” by the UK government to claim success, then the Commission was in on it.
  • Maybe the handover in Commission has helped breed uncertainty.
So what’s the verdict? Who’s right, Farage, Osborne and Georgieva? Well, Farage is wrong, Osborne right on the amount but may be exaggerated the extent of the concession. The most right is probably Georgieva - though, we still don't have evidence that the rebate was always going to apply.

And of course, the UK will still pay an additional £850 million.

We will update this as events unfold, but what a mess.


  1. Denis Cooper7/11/14 4:22 pm

    I suppose that this new lie will now be added to the standard litany of lies routinely spouted by Cameron and his slavish Tory MPs.

    "We have already cut the EU budget"

    [but our contributions will go up]

    "got Britain out of the bail-out schemes"

    [which were illegal, and we got nothing in return for the EU treaty change Merkel wanted to make future bailouts legal, and we still contribute through the IMF]

    "vetoed a treaty that was not in our national interest"

    [but Merkel went ahead with it anyway outside the framework of the EU treaties, and we did not follow up on our threat to stop her using the EU institutions]

    And on October 27th:

    "we have already achieved the biggest transfer of power from Brussels back to Britain by opting out of 100 different pieces of legislation"

    [by exercising a right to opt out under the existing EU treaties, but when we opt back in to 35 of them including the EU Arrest Warrant apparently that will not be a transfer of power back to Brussels from Britain]

  2. Classic negotiation ploy from the EU and Cameron.

    Think of the sum you want, then double it.

    Create outrage; pretend shock and horror. Make loud and angry noises, thump the table.

    Go away for dinner and a chat.

    Revert to the original sum first though of and claim a huge victory.

    They must think we're idiots.

    £800million isn't a victory. It's an outrage. We shouldn't be paying a penny.

  3. They must think that the British
    are really badly educated to believe
    this latest con trick.
    I hope they get severely punished
    for it.

  4. William MacDougall8/11/14 9:53 am

    We're only saving on the interest, and interest rates on euros paid by the EU and the UK are close to zero so that ain't much of a saving is it?

  5. Sound like Tesco Car Insurance when they make an offer for your car. Give impression they've given you more than initial offer by reducing one figure and then adding a new figure. Thus bringing you back to the "offer" that was on the table all along. Some of us are not idiots.

  6. Funny. UK to pay £800 million and France receives a £790 million rebate.

    Merci beaucoup, Cameron.

  7. Unfortunately the situation in the EU is quite unstable. And this is not only concerning labor market and the level of prices. We have global problems with sources such as oil due to the difficulties in Ukraine. The other problem I think is in the people from different countries within EU. Some countries have the other laws and people tend to work less. In the UK people now take only short-term loans from vita loans in name, and this is a mark of economical instability.