Last weekend, in his 4,000 word essay on Brexit in the Daily Telegraph, Foreign Secretary Boris Johnson resurrected the claim, much touted during the Brexit referendum, that the UK pays Brussels £350 million every week. This prompted howls of protest from the mainstream media and even from the head of the Office of National Statistics. So I thought it was time to delve into the EU’s own figures and to find out who is telling the truth – and who isn’t.
The lady speaks
As this article goes live Mrs May is about to climb the steps of a podium in Europe’s most beautiful city – Florence: cradle of the renaissance and home of the Medici. So I find myself at a disadvantage vis-a-vis my readers: you may know what she said, and I don’t.
What I think she is going to say (I’m sticking my neck out here) is that there will be a transitional period after D-Day – 29 March 2019 – of at least two years, during which, to all intents and purposes, the UK will remain a full member of the EU until such time as a free trade agreement between the UK and the EU is finalised.
I have called this option TRremain (temporarily remain) and in a previous article in late June I explained why it is virtually inevitable. There are just 79 weeks between now and D-Day and, for procedural reasons, there will not be more than one “negotiating day” per week. To unravel 45 years of complex legislation and then to put together a Canada-style free trade agreement in less than 80 days is simply impossible.
The payments that the UK continues to make to the EU during the transitional period will be linked to the famous “exit bill” – the amount that the EU claims the UK must pay to settle its outstanding financial obligations. I suspect that the deal that Mrs May now wants will involve the UK continuing to pay the EU in accordance with the current dispensation until at least two years after D-Day. Those annual payments will then be netted off the notional €50 billion (or whatever it is) currently demanded by the EU.
That is why it is important that we understand exactly what we are paying now.
The current dispensation
All the figures quoted here are taken directly from the EU Budget at a glance website – so they are European figures. All EU member states are obliged to pay the EU a portion of the total VAT that they collect plus a proportion of their total GDP – so that as GDP grows, so does the bill to the EU. In 2015 the UK government paid over to Brussels a total of €3.74 billion in VAT payments and €20.6 billion in GDP payments. The UK government then received a rebate (based on a formula hammered out by Mrs Thatcher in the 1980s) of €6.01 billion. So the total paid was €18.29 billion.
Divide that figure by figure by 52 weeks and you get €350 million – note the currency – NOT £350 as has been widely reported. Or, if you prefer, €50 million per day. Thus Boris’s figure – in Euros – is correct as the gross amount paid.
(I have checked on Google Images and Boris’s famous battle bus during the referendum campaign was daubed with “£350 million”. That was an incredibly sloppy mistake on the part of the entire Leave campaign (including Mr Gove) for which they should apologise. {I wonder why the mainstream media never picked up on that and instead you have to learn it here}. But, if they are careless, their opponents are usually innumerate).
There are reasons to argue that even the €350 million a week figure is an underestimate, as I shall explain.
Now, of course, we receive payments back from Brussels as do all the other member states. The largest payment we receive is in respect of agricultural subsidies under the Common Agricultural Policy (CAP). In 2015 we received a total of €3.79 billion in such payments which were doled out to farmers by DEFRA and the devolved administrations. Just for comparison, the French received over €9 billion in agricultural subsidies – but then the CAP was designed by the French for French farmers well before the UK joined the Common Market in 1973. Yes, the CAP has been substantially reformed over the years but it still favours countries with large numbers of relatively small-scale farmers.
Other receipts from Brussels included €1.59 billion for research and development. I note that €150 million was spent on “administration” and it is not clear whether those administrative costs were actually incurred in the UK or in Brussels. Anyway, the total of these receipts amounted to €7.46 billion. Again, one is tempted to compare this with total payments received by the French of €14.5 billion – but of course comparisons are odious.
Subtracting the amount received from the EU from the total paid we get a net figure of €10.84 billion. Dividing this by 52 we derive a figure of just under €209 million a week or – again, if you prefer – €30 million per day.
So you can argue that Boris should have made it clearer that the gross figure is indeed the equivalent of €350 million or on a net basis €209 billion. Yet Boris-inclined Brexiteers would say that the gross figure is the most important since it quantifies resources made over by the British state to Brussels without knowing exactly how much it is going to get back. Agricultural subsidies in any given year will depend on a range of parameters and the ways in which they are calculated are subject to change. Moreover, even before the Brexit vote in June last year there were murmurs that the UK’s substantial rebate would be withdrawn.
But that is not the end of the story. There are reasons to argue that even the €350 million a week figure is an underestimate, as I shall explain.
The question of VAT
Everybody knows that VAT is the most complex and confusing part of our system of taxation. So many anomalies and intricacies have been allowed to develop in the VAT code both in the UK and elsewhere over the years. That is why the tax advisory services of the likes of EY and PwC have huge VAT departments. Trans-national VAT calculations can be nightmarishly complex. Not only do rates of VAT vary across EU states (and even within member states) but the goods and services which are subject to VAT also vary widely – and the rules governing how VAT is reclaimed are highly idiosyncratic. This often gives rise to businesses gaming the system, and to some states therefore losing out on tax receipts.
I’ll give you one simple example. A French tour operator organising a trip to London can reclaim the VAT incurred on hotel expenses. But a British tour operator organising a trip to Paris is not allowed to reclaim VAT on French hotel expenses under French tax law. Not many people know that. I do – because I owned a training company and we used to organise seminars in must-see places like Paris. The cost to UK business of differential VAT regimes is indeterminate; but if I am right that UK businesses are disadvantaged, then reduced profits will feed through in terms of lower corporation taxes received by the UK government.
No doubt all this is enough to quicken the pulse of a tax accountant; though for most people it is deadly boring. A more interesting point is that VAT and customs duties charged on goods imported from third party states must be paid over to the EU. A footnote on the EU website tells us that in 2015 the UK government collected €4.27 billion in such VAT and duties. The UK was allowed to keep 25 percent of this as an “administration charge” but was obliged to pay over the remainder – some €3.2 billion. Now this €3.2 billion is tax that would otherwise have accrued to the UK Treasury.
If we now add back the €3.2 billion of taxes forgone and paid over to Brussels to total payments to the EU less the receipts, then Boris’s figure increases to €413 million per week gross or €270 million net. So Boris is indeed guilty – of understating the cost of the EU.
What we get in return
Remainers will argue that, OK, we have to pay the EU €10.84 billion net per year (€14.04 billion if we include the VAT and customs duties foregone – as above) but, in return we get access to the single market and the customs union. Therefore, we are able to trade with the EU without “friction”.
So we paid the club net fees of about €11 billion in order to run up a gargantuan current account deficit.
I could understand this argument better if, like Germany, we were running a trade surplus with our European partners. But of course the opposite is the case. The UK imported around £60 billion more goods and services from the rest of the EU than it exported there in the 12 months to September 2016 (although we have a trade surplus in services alone).
So we paid the club net fees of about €11 billion in order to run up a gargantuan current account deficit. And some of that deficit arises because some European goods – especially agricultural ones, such as pork[i] – are more generously subsidised by the EU in some countries than in ours (and we are paying for that). You don’t have to be an economist to conclude that something very odd is going on here.
In contrast, the Germans paid the EU, on a net basis, €13.27 billion in 2015 – that was €2.43 billion more than the UK (net). But they managed to generate a trade surplus with the rest of the EU of €72.5 billion[ii]. You can see why the Germans might think that they are getting quite a good deal.
The Costa problem
There are also significant indirect costs associated with EU membership. I have been working on an economic idea which I call the Costa problem – though it might also be called the Starbucks problem or the Caffè Nero problem. In fact it applies to any corporation which overwhelmingly employs low-skilled, low-wage migrants from EU countries where the level of wages and welfare is lower than the country in which it operates.
Whenever I go to Costa (or Pret or whatever) in central London I am struck that the staff I meet are overwhelmingly Eastern European. (I often try out my pidgin Polish). And, by the way, most of them are delightful – courteous, efficient and good-looking. The problem is not the people. The problem is that they are all paid at the Living Wage, currently £8.45 per hour.
That means that, assuming they work full-time with normal hours, they will earn £16,477 per annum – on which they will pay approximately £2,100 in income tax and NICs. Now, at that level of disposable income there is no way that they can afford accommodation in central London. Even assuming that each barista shares a flat with three other people they will be claiming Housing Benefit from the state of about £4,500 per year in addition to Working Tax Credit of about £3,500 per year. So even before they use the National Health Service (to which they are of course entitled, being taxpayers), each of those baristas is costing the British taxpayer almost £6,000 per year.
If Costa and others paid gigantic amounts of corporation tax you might think that was justified. But they do not. All the coffee chains have elaborate tax structures whereby they pay most of their operating profits in “royalties” to holding companies in offshore jurisdictions.
Thus, by adhering to freedom of movement combined with universal access to the welfare state (which no other EU country permits) the British state is effectively offering gargantuan subsidies to the likes of Costa. The next time you buy one of their coffees you can reflect on this. I calculate that every coffee you buy has cost the taxpayer about 22 pence in subsidy (which, by the way, is more than its cost of manufacture).
It would cost much less to raise the Living Wage to £13 per hour and to compel Costa et al to employ local labour (something we can’t do if we stay in the EU). In fact, if Costa and its ilk were closed down by decree and its courteous, good-looking workers were to return to their beautiful homelands, then GDP per capita would actually rise – and the UK budget deficit would shrink.
Many will object to this on the basis that young English, Scottish, Welsh and Irish people are afflicted by a bizarre genetic mutation which apparently renders them incapable of working in catering establishments. I’ve never been able to understand that one.
A capricious overlord
Even if you think that the huge net contributions that Britain has been obliged to pay (cumulatively about £70.6 billion net since 2010) are worth it for a quiet life; and that the indirect costs of EU membership by having to pay benefits to any one of its residents who turns up on our shores (likely to be exacerbated as Europe admits hundreds of thousands of so-called refugees) is a price worth paying… Even if you think that all must be sacrificed to the sacred icon of frictionless trade… consider that if the EU mandarinate mess up and overspend, we the UK, are duty bound to cough up any amount that they believe appropriate. Thus, in September 2015 the Cameron-Osborne pantomime horse was suddenly stung for an unbudgeted £1.7 billion bill which came out of the blue[iii]. The horse balked: and then paid up.
Whatever Britain pays up for an “exit bill” will be received by an unaccountable bureaucracy which has not signed off its accounts officially for years, and which will use those resources to further its now stated goal of total integration – including using coercive measures to force Sweden, Denmark and Czechia to join the Eurozone against their will.
Moreover, as I revealed before the referendum, there is an intricate spider’s web of bailout and stability funds to which the UK will remain contingently liable so long as we remain a member of the EU. They don’t publish accounts, and nobody knows who really controls them – but they can menacingly demand money at any moment.
A recent paper published by the Bruges Group argues that the “true” cost of EU membership is in fact £661 million per week due to an intricate payments system largely ignored by the mainstream media. That figure includes £80billion lost to the Treasury after the European Court of Justice forced tax rebates to multinationals. Thus far, I have been unable to authenticate those numbers, though I am on the case.
Boris’s figure of €350 million (NOT £350) gross and €209 million net – based on the EU’s own figures – is fact. That leaves the question which, out of charity (or cowardice), I did not answer: Who is lying?
[i] Danish and Dutch pork is cheaper than British because they have much weaker animal welfare standards. There will be a case for banning them altogether once we leave – an issue to which I shall return soon.
[ii] See: http://ec.europa.eu/eurostat/statistics-explained/index.php/Intra-EU_trade_in_goods_-_recent_trends
[iii] See: http://www.dailymail.co.uk/news/article-3237073/Cameron-Osborne-quietly-pay-1-7BILLION-bill-Brussels-dismisses-totally-unacceptable.html