Cost of the EU – The Direct Fiscal Cost

Posted by Tim Congdon in News Archive | 0 comments

Its membership of the European Union requires the UK government to make certain payments to EU institutions, and entitles it to a number of receipts. How much are these direct fiscal costs and benefits, and what is the net position? That may seem like a simple question which can be answered with a single number or set of numbers. Surely, when the government spends £100 million, it spends £100 million, and it does so without fuss or ambiguity. In fact, a range of complexities mean that no one  figure  for  many  EU  financial  concepts  is  exactly  ‘right’.  Like  love,  the  UK’s  financial contribution to the EU is a ‘many-splendored thing’. Again like love, it causes many squabbles.

The cost of the EU summarized: no single number is right

The first difficulty is that definite figures relate only to the past, after accounts have been prepared and finalized. If the object is to find out how much the UK is paying at present or will be paying in the next few years, estimates are needed. But these may prove unreliable in the end, because of – for example – the vagaries of the weather, which affect Common Agricultural Policy spending.1 Another problem is that statistics can refer to different notions of ‘the UK’. This may seem strange, but the UK could sensibly in this context be viewed as ‘the UK government’ or ‘the UK as a whole’. If ‘the UK as a whole’ is taken to be the more relevant, allowance has to be made for private sector receipts and outgoings that arise from the EU treaties and the resulting interactions between the UK private sector and EU institutions. Further, even when the time period has been decided, and the meaning of ‘the UK’ pinned down, interpretation can be confused by the existence of several alternative sources of information. All the sources may appear to be authoritative, but experience shows that they also conflict for no apparent reason. Bizarre though it may sound, the analyst has to make a lucky dip.

130801 Table1

But we have to start somewhere. The chart above shows the UK’s net contribution to the EU, according to balance-of-payment data prepared by the Office of National Statistics, and published in the 2012 Pink Book and updated for the latest quarterly balance-of-payments press release. The data remain subject to revision since new details may still be found, but they give the best available official view from the information now at hand. The numbers include transactions between the UK private sector and EU institutions, although they are dominated by government payments in and out.

The exercise generates a nice and easy round number. In 2011 the UK paid a net figure of £9.3 billion to the EU and in 2012 £10.5 billion. If someone wants a single number for the direct cost to the UK of its EU membership, ‘£10 billion’ is a good and perfectly reasonable one to choose. £10 billion is slightly under 0.7% of gross domestic product. To put it another way, for every £140 of output produced in our country, a net £1 is sent to the EU for its purposes and is lost to us. That is a neat and straightforward measure of the UK’s direct ‘membership fee’.

But at the time of writing (August 2013) the 2012 figure is to a degree history. To have a more up-to- date view it is necessary to check the latest official forecasts. Every year since 1980 the Treasury has published a Statement on the Budget of the EU, for submission to Parliament and a subsequent document on European Union Finances. The latest such document (Cm. 8405) was published in July 2012 and gave certain numbers for the UK’s net and gross contributions to the EU budget.

130801 Table2

A comparison of the numbers in this table with the chart on the previous  page may be a little unsettling. The table’s number for 2012 of a net contribution of £6.9 billion is much less than the chart’s figure of almost £10.5 billion. However, the two answers are consistent. The concepts at work are different, while the table relates to government expenditure and receipts as such, unlike the chart which is about the UK as a nation. (Note that in the first quarter of 2013 – the latest for which official data are now [August 2013] available – net transfers to the EU on a balance-of-payments basis were £3.4 billion. This was the highest figure ever and annualizes at almost £14 billion, but it may have been erratically high.)

The table is also more complete than the chart, in that it presents data on gross payments to the EU as well as the net contribution. The difference between the two reflects the EU’s various payments to the UK. These are mostly Common Agricultural Policy money for farmers and development money for the regions, which are discussed in more detail in the next section. At present gross payments by the government to the EU run at about £16 billion to £17 billion a year. (They are due to rise to £18.7 billion in 2014/15 and then to fall back.) On top of that the private sector also makes payments in its own name to the EU, bringing the gross figure for the nation as a whole towards £20 billion year, which is over £50 million a day.2 While it is true that about 40% of that £50 million comes back to the UK, we do not in fact have much discretion about how the returned 40% is spent. The explanation is that the UK government’s freedom is constrained by EU treaty commitments. Even with the money that is sent back from Brussels, the British government is not able to take decisions according to perceived local conditions for the benefit of the people most immediately affected. So a legitimate statement is that, ‘we in Britain pay £50 million a day to European institutions, to be spent by the EU for its purposes’. That is about 1% of our national output. For every £100 of output produced in our country, £1 is sent to the EU for its purposes and is not under our control. (Strictly, £20 billion is 1¼% of national output, but let us stick to 1% to avoid the charge of exaggeration.)

Another clear message is that the UK’s direct fiscal cost of membership has been rising in the last few years. Broadly speaking, the cost from now on will be about ¼% of GDP higher than it was before the end of the Blair premiership in 2007. Unfortunately, the future prospect is quite murky, quite a lot murkier in fact than the apparently neat-and-tidy numbers in Table 1.1. The government has not so far (August 2013) published the 2013 edition of European Union Finances, perhaps because of uncertainties about the future direction of the EU’s finances. An intergovernmental agreement on the EU Budget appeared to have reached in February 2013, with ‘cuts’ (i.e., cuts relative to previously agreed increases) in expenditure. But in the middle of May the UK was outvoted at a meeting of the Council of Ministers, with an implied extra annual cost of £770 million.3

Despite the complexities, a fair summary of the facts is that the UK is a net contributor as a nation to EU institutions of about £10 billion a year and a gross contributor of about £16 billion to £17 billion. These figures are respectively 0.7% and 1% of our national output. (The UK government pays less, but – to repeat – it is the nation that matters.) The next section will consider whether the gross or the net concept is the more indicative of the burden falling on the UK, and hence the more valid and useful in debates on this subject.4

Which cost of the EU figure is right? Gross or net?

Many people are confused by the wide range of different possible estimates. It would be nice if it were at least possible to say whether the UK’s gross or net contribution to EU institutions was the more meaningful. The answer depends on assessing the benefit that the UK receives from the money that is sent, to both our government and private sector, by the EU. That, of course, depends in turn on whether the money is spent well or not. It must be reiterated and underlined that the expenditure is controlled by the EU bureaucracy, not the British government. According to the European Union Finances 2012 report, the UK public sector receipts are mainly from the FEAGA (‘Fonds europeen agricole de garantie’), the EAFRD (‘European Agricultural Fund for Rural Development’) and the Social and Regional Development Funds. Together these amounted to £5 billion. In 2012 another £890 million was paid directly to the UK’s private sector by the EU.5  In other words, the sums of money that the EU spends ‘for the UK’s benefit in the UK itself’ are concentrated in two areas, regional aid and farming. How worthwhile are the EU expenditures in these two areas?

The great bulk of the EU’s regional development spend takes place in the poorer member states, such as Poland and other East European countries. Only a small part of it is allocated to the relatively rich member states, of which the UK is one. The UK is generally regarded as having a competent and honest  government  machine,  with  its  ministries  answerable  to  parliament  for  tight  expenditure control. By contrast, the European Commission does not have a strong reputation for administrative efficiency. Perhaps not surprisingly, concern has been expressed at the highest level in the UK that the EU’s regional development expenditure in the UK is ineffective and wasteful, and that a better outcome could be achieved if responsibility for the expenditure were returned to the British government. In England the only part of the country to receive significant amounts of EU regional money is Cornwall. A parliamentary enquiry into the European Regional Development Fund last year judged that so far the ERDF expenditure in the 2007 – 13 period could not be said to have had ‘a significant impact’ in Cornwall or the Scilly Isles. In fact, ‘It is not even possible to conclude that the 2000 -06 ERDF round has done so, because of the lack of robust evidence.’6

More crudely, the EU’s regional development spend had done little obvious good. The consensus on this subject in UK parliamentary circles has been strong and well-defined for many years, and both Conservative and Labour governments have tried to repatriate regional expenditure. As long ago as 2003 the then Chancellor of the Exchequer, Gordon Brown, said that the time was ripe ‘to bring regional policy back to Britain’. Even the Commission has conceded that the whole process of structural aid for Europe’s poorer regions creates ‘considerable administrative and opportunity costs’.7

A reasonable conclusion is that – because the EU is bad at spending regional aid money in the UK – the benefits are less than implied by the many billions that over the years have appeared under this category of EU expenditure. By extension, the true cost to the UK of its EU membership is closer to the gross cost than the net cost.

The same sort of conclusion is probably justified by the second head of expenditure here, namely agriculture and farm support, although less emphatically. At the start of European integration in the 1960s,  farm expenditure dominated  expenditure  by the  European  Economic Community.  It  was intended to encourage production, not least because of painful memories of food shortages following the  Second  World  War.  The  prices  received  by  European  farmers  were  well  above  the  prices prevailing in world markets. By the late 1980s the resulting increases in output were impressive in absolute terms. But they were also out of line with market forces, and huge stockpiles of grain, butter, wine  and  so  on  had  emerged.  It  was  widely  accepted  that  the  over-production  was  a  poor advertisement for the wider cause of European integration. So in 1988 the EEC introduced set-aside payments, in which farmers were paid for not producing grain on a certain proportion of their land. (In other words, they were being incentivised to do nothing!) From the McSharry reforms of 1992 onwards EU policy towards farming changed direction, with the new aim being to protect rural communities and the environment. Today the Common Agricultural Policy has two so-called ‘pillars’, direct farm payments which continue to be related to production and rural development.

What, exactly, is ‘rural development’? No doubt the phrase has many potential meanings. ‘A cleaner and safer countryside’, ‘a sustainable environment’, ‘the preservation of traditional ways of life in the rural context’, ‘respect for the vernacular in local culture’, and so on, are good things in their way. No doubt. However, the truth is that money is being paid to tens of thousands of people for no clear benefit economically to the 63 million people who constitute the nation as a whole. So here is another example of EU spending that has a definite cost to the taxpayers of the UK, but a benefit which is limited to only a handful of people and is in fact associated with the conscious restriction of output. Again, this must mean that the true cost to the UK of its EU membership is closer to the gross figure (i.e., 1% of national output) than the net one.

The Polish foreign minister’s missing nought, etc.

The discussion so far has acknowledged numerous complications and difficulties in calculating the direct fiscal cost of EU membership. Nevertheless, it has identified two straightforward and easy-to- remember conclusions. First, the net fiscal cost is currently running at about £10 billion a year. Second, the gross cost of 1% of GDP (which is more like £16 billion – £17 billion) is probably a better measure  of  the  burden  to  the  British  people  than  the  net  cost.  The  gross  cost  deserves  to  be highlighted because ample evidence is available that much of the money that ‘comes back to the UK from the EU’ is badly spent.

The 2012 edition of this publication translated numbers like this into a ‘per household cost’. It took the then estimate of the gross UK government payments to the EU in 2013/14, which was expected to be £17.6 billion, and added in some private sector costs to arrive at a total gross cost of £20 billion. This £20 billion was divided by the number of households in the UK, thought to be 26.7 million. The result was that the cost per UK household of EU membership was, more or less, £750 a year. It was also surmised that further eastward expansion of the EU, by for example allowing Turkey to join, could push that number up towards £1,000 a year. This would be equivalent to the cost of an annual holiday for a small family, something for which many less well-off households have to make a conscious decision to save during the rest of the year. In other words, the cost to the British people of EU membership – in terms of the direct fiscal cost – is not crushing, but neither is it trivial.

130801 Table3

Alarmingly, a few weeks after the publication of the 2012 edition of How much does the European Union cost Britain? a series of erroneous stories circulated in the press about the size of the direct fiscal cost. The first by Radek Sikorski, Poland’s foreign minister, appeared in The Times on 25th September under the title ‘Seven EU myths you should never believe’. According to Sikorski, ‘Your [i.e., the UK’s] annual net contribution of £8 billion – £9 billion…is less than £15 per UK citizen.’

It seems that Sikorski’s procedure had been to divide £9 billion (which was the UK’s net contribution in 2010) by the UK population of 60 million people, to arrive at…well, to arrive at £15. Now one does not need to be Sherlock Holmes to work out that, if one divides 9,000 million by 60 million, the answer is not 15, but 150. The Polish foreign minister had missed off a nought! (Even more upsetting perhaps, the sub-editors of The Times – reputedly one of Britain’s greatest newspapers – had not spotted the mistake.)

Worse was to follow. On 28th  November The Daily Telegraph took a letter from Roland Rudd, in which he pushed Tony Blair’s credentials as a future President of the European Union, and said that the UK’s contribution to the EU budget amounted to 1% of GDP or ‘about £15 per person’. Let us get this straight. 1% of GDP in 2011 was £15.2 billion in 2011, using the concept of ‘GDP at market prices in nominal terms’ (or ‘money GDP’) which is standard in this sort of exercise. If one divides 15,200 million by 60 million, the answer is just over £253, not £150 and certainly not £15. Rudd, in a letter representing a former  British  prime  minister  in  a leading newspaper, hadn’t  been able to perform a simple division sum correctly.8

The blunders in elementary arithmetic made by Sikorski and Rudd were pointed out to them, and might in a rational world have led to a period of silence from the Europhiles about the per-capita cost of EU membership. But, no, on 26th  January 2013 David Miliband, a former Foreign Secretary and someone once seen as a possible leader of the Labour Party, offered his view on the matter in an article in The Daily Telegraph.9  According to Miliband, ‘the EU costs us each £1 per week…The world is getting smaller, and the EU makes us bigger.’ Miliband may have strong opinions on the smallness and bigness of Britain in the world, but sadly he does not have a strong grasp of the smallness and bigness of the cost to Britain of EU membership. Heaven knows where his £52-a-year number comes from. It may a translation of the Sikorski-Rudd £15-a-year-per-person notion into a per-household figure. (Who knows?) Anyhow it is baloney, and does not justify much confidence in Miliband’s geopolitical ramblings.

The UK’s contribution to the EU Budget set in context

The UK’s contribution to the EU Budget may seem small relative to our national production and wealth. At about 1% of GDP, the UK’s gross contributions are of course heavily outweighed by the 99% of our output which we can use for ourselves regardless of bureaucrats and politicians from other European nations. But so it should be. The world includes other free-trading arrangements between nations, often referred to as ‘customs unions’. Typically, the only supra-national administrative structure needed is a panel (of judges, usually) to settle disputes in the interpretation of the treaties establishing the customs union. The cost of such panels, and even of the supporting bureaucracy, is trivial, less than a thousandth of 1% of GDP.

When the UK first engaged in ‘the European construction’ (to use the phrase often favoured by EU bureaucrats), the British public’s understanding was that we were ‘joining the Common Market’. In other words, the objective was economic, to participate in a free trading area and to enjoy the higher rates of output growth that had been seen in the Common Market nations in the 1960s. The British people did not want to help the building of a European super-state in which their independence would be weakened and lost. Unfortunately, by the early 1970s many top British policy-makers were afraid that the UK would be ‘left behind’ its economically dynamic European neighbours. To them membership of the Common Market seemed absolutely essential and they were prepared to pay a price for joining it. They were prepared to pay a price, even though all that the UK wanted was European free trade and – as has explained – the cost of administering customs unions ought to be tiny. But the Heath government that negotiated Common Market accession in 1973 knew that the membership fee could not be too much, as that would alienate British public opinion.

The result was therefore a membership fee – in terms of the direct fiscal cost – which was neither enormous nor trivial relative to GDP, although for most of the last 40 years it has been higher than that of any other member state apart from Germany. Of course Germany’s motives for the large sums that it has committed to European integration have always been totally different from the UK’s. Germany not only lost the Second World War, but also did so after horrific breaches of civilised standards in its treatment of racial minorities and subjugated territories in the early 1940s. German public opinion has seen European integration as a means both of compensating its neighbours for past wrongs and of seeking wider geopolitical reinstatement.

The rest of this study will show that the direct fiscal cost is, in fact, only part of the cost of EU membership to the UK. Far more important nowadays are the costs of regulation and waste, which were not even considered in the original negotiations. It is important to remember that the UK’s status as a net contributor to EU funds goes back to the disappointments and resentments of the original applications back in the 1960s and early 1970s. From a wider historical perspective, the UK – unlike the other big consistent contributor, namely Germany – has no reason to be ashamed of its past or to offer ‘blood money’ to its neighbours. The British interest in Europe has always been commercial and economic, while a customs union or free trade area can operate successfully with a disputes panel with a cost that is negligible compared with the current direct fiscal cost of the UK’s EU membership.

Bluntly, we should not be paying a membership fee at all. Sure enough, many bigwigs in British public life – including such figures as Tony Blair and David Miliband, aided by the public relations guru, Roland Rudd – have deluded themselves that the pay-off (in terms of ‘influence at the top table’) is worth the membership fee. But their views on the subject would have more credibility if they had a correct understanding of the elementary arithmetic of EU membership. In late 2012 they made ludicrous blunders in their estimate of what that membership fee meant to the average British citizen and household.

Appendix 1: How much does the average British household pay each year to the EU?

We have seen that no single number measures the direct fiscal cost of the UK’s EU membership. Nevertheless, Table 1.1 shows that the gross government cost in 2014/15 is expected to be £18.7 billion. Further, various payments are made to and from EU institutions by the private sector. Let us take it that in the next fiscal year the gross cost to the UK is £20.5 billion. We have also argued that the gross cost is more valid as a guide to the UK’s burden than the net cost.

The UK had 26.4 million households on census day in 2011. The number of households is officially estimated to rise by about 200,000 households a year.   So in 2014 the UK will have 27.0 million households. What, then, is the direct fiscal cost per British household?

The answer is,

The cost to the average British household of belonging to the EU is £759 a year (£20.5 billion divided by 27 million) or, as near as makes no difference, £750 a year. Sure, we get some of this money back for some regional development spending, but that only benefits the regions that receive the money. Anyhow our government cannot control exactly how it is spent. In most of the UK the average household is £750 a year worse-off because of our membership of the EU.

But that is not all. The three ‘main’ political parties have said they want the EU to expand to take in much of the Balkans and Turkey. The Balkans and Turkey would be large recipients of regional aid and  agricultural  support.  If  they joined  the  EU,  the cost  of  membership  to  the  average  British household could well rise towards £1,000 a year.

1 The Common Agricultural Policy is discussed and explained in chapter 3 below.

2 The UK Independence Party has for some time made the statement ‘EU membership costs £53 million a day’.

That statement is correct, despite all the ambiguities discussed in the text. The author has a copy of a letter of

29th April, from Peter Wilding of the British Influence pressure group, to Nigel Farage which says, ‘we believe [the £53-million-a-day figure is] materially misleading to audiences and as such…liable to be in breach of the Broadcasting Code’.

3 Matt Chorley ‘Britain loses EU budget battle’, Daily Mail, 15th May 2013.

4 The 2012 edition of this publication had a long discussion of how events had determined the UK’s EU

membership fee. It has been deleted for space reasons, but is available….

5 Cmnd. 8405 European Union Finances 2012 (London: Stationery Office, 2012), p. 14.

6 Department for Communities and Local Government Government Response to the House of Commons Communities and Local Government Committee Second Report of Session 2012/13 (Cmnd. 8389 [London: Stationery Office, 2012), box to clause 4.

7 Off Target: the case for bringing regional policy back home (London: Open Europe, 2012), p. 3.

8 The Daily Mail of 15th December 2011 carried a story on Rudd. To quote, ‘this arch-fixer’ had recently held

his annual drinks party at Tate Britain which ‘was among the most glamorous and exclusive of City end-of-year bashes. Captains of industry mingled with the big beats of Westminster. Such leverage made him an obvious choice to mastermind the Europhile Lib Dems’ fightback after David Cameron’s veto of a new treaty left the party [the political party, that is] floundering.’ Incidentally, Nigel Farage and the author of this publication – the leader of the UK Independence Party and its economics spokesman – sent a letter to The Daily Telegraph correcting Rudd’s howler. It was not published.

9 David Miliband ‘Cameron leaves us with a “Tantric” time bomb’, Daily Telegraph, 26th January 2013.

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