Cui bono? The budget impact of a British withdrawal from the EU

So David Cameron’s not-actually-a-veto at the European Council summit last week has reignited the eternal debate over what the United Kingdom actually wants to do with itself in the EU, or whether it would be better off leaving altogether. One of the points that seem to be brought up with some frequency in that debate is that since the UK is a net contributor to the EU budget, i.e. paying out more than they get back, it would be worse for the Union than for the UK if they were to actually leave (and this point is usually delivered with a generous helping of the “screw everyone else, we’re better off on our own” subtext). But is that actually true? Let’s take a closer look.

I regret that we will first of all have to look over the budget of the Union itself, just to get an idea of where all the money is coming from and where it is going. (Hang on.) The 2009 budget of the EU amounted to about €140 billion (£117/$183 billion). This money comes from three major sources of income, or so-called “own resources”:

  • Traditional own resources, which mostly consist of a part of the customs duties levied on goods entering or leaving the EU (13% of income);
  • Own resources from value added tax, which is a percentage of all VAT collected by the Member States (11%); and,
  • Own resources based on gross national income, which is a percentage levied on the GNI of each Member State (75%).

The expenses side of the budget is a little more complicated, since the EU does a lot of different things, but they can essentially be grouped under two major and a couple of minor headings:

  • Sustainable growth, which covers everything relating to competitiveness, infrastructure, research, regional development, etc. (45% of expenses);
  • Natural resources, which is predominantly the agricultural subsidies of the Common Agricultural Policy, but also fisheries policy and some environmental and rural development policies (42%);
  • The remainder is made up of administration and external action (both about 6%) and some other minor expenses.

So to summarise, the EU gets its annual income from various sources in its member states, then returns about 90% of that money to the states in the form of various subsidies and development projects to (hopefully) make life better for all of us.

Regions marked in red are the less developed ones, while blue regions are those that are higher developed. Lighter colours represent regions in transition.

It’s not quite that simple, however, because as we know, the quality of life is not exactly equal across the EU, so some regions (particularly, but not exclusively, in Central and Eastern Europe – see the map, right) reasonably enough need more development funds than those that enjoy a higher level of econonic development. About 75% of the ‘sustainable growth’ funds go to these ‘Convergence objective‘ regions. Likewise, some member states (such as France or Spain) have relatively much larger agricultural sectors than others (such as the UK or the Netherlands), so they benefit more from the Common Agricultural Policy. The bottom line is that some member states pay more money to the EU than they get back, while others (obviously) get more back than they pay in.

So with the basic context of the budget in place, let’s get back to the question of the British contributions. We will be using the numbers helpfully crunched by Deutsche Bank Research from the 2009 budget: Data tables and explanatory notes (both PDF). And I should mention there are some issues with how net contributions or benefits exactly are measured and compared between the member states. They do not make a comparison impossible, but one should keep them in mind to avoid comparing apples and oranges, as it were. So do take a look at the explanatory notes as well.

Margaret Thatcher, here pictured with secret handbag weapon

Staying for simplicity with the ‘standard calculation method’, we can see that the UK contributed a net amount of €3,865 million (£3,242/$5,041 million) in 2009. While that sounds like a lot of money, it actually makes the UK only the fourth largest net contributor in absolute figures, at less than half that of Germany and about 2/3 of both France and Italy. Ad if we look at the contributions in terms of percentage of GDP or per capita, the UK is even further down the list in seventh place by both measurements, just barely above Austria. This is mostly due to the so-called ‘British rebate‘, which was coerced negotiated by Margaret Thatcher back in 1984 (“I want my money back!“). Without the rebate, the British net contribution would be about €3 billion higher, putting it on roughly the same level as Italy or France.

Still, €3.8 billion is a fair sum, and if the UK were to withdraw from the Union, it would be missing in its budget, while David Cameron on the other hand would have that much more money to play around with. So on the balance of things, in terms of the budget, leaving would be good for the UK and bad for the EU, right?

Well, maybe not quite. Certainly, it would create a shortfall in the budget, and since the Union is not allowed to operate a deficit (or for that matter a surplus; this is often referred to as the ‘equilibrium principle’, Art. 310 TFEU), it will have to be covered from some other source. And granted, the other member states would probably not be too thrilled at having to pay more than they already do – but they might not actually have to.

As I mentioned in the beginning, some of the EU’s income is in the form of traditional own resources, which are a percentage of all customs duties levied on goods entering or leaving the Union’s territory. So in this scenario, it seems like a fairly natural conclusion to make up for at least part of the shortfall by introducing tariffs on the trade with a United Kingdom that would now be outside the free trade zone of the Single Market. And since trade with the rest of the EU makes up a significant part of the British foreign trade  (I won’t get into a discussion of how significant, because that’s really complicated), this is something that could potentially hurt the already somewhat fragile British economy a great deal.

Granted, since the traditional own resources account for only about 13% of the total EU budget, or about €18 billion, expecting tariffs to make up for the entire €3.8 billion shortfall from a British withdrawal is probably too optimistic. But it could realistically cover maybe up to half of that, leaving the budget short only a couple of billion € or less than 1.5% of the total. Bit of a problem, certainly, but not anything that would devastate the Union’s finances.

One anticipates the Euro-sceptic reply to this scenario: “Well, cor blimey, if those Continentals raise the tariffs, we’ll do the same to their goods! Won’t that show them what’s what?” And yes, the UK could of course do that. But that is the path to protectionism; and as we have recently seen elsewhere in the neighbourhood, protectionism may seen like a just splendid idea until it suddenly ruins your Christmas because your country has run out of butter. And I doubt even the staunchest Tory Euro-sceptic would want something like that to happen.

This entry was posted in Politics and tagged , , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s