Thursday, June 16, 2016

Redistribution of UK Contribution to EU Budget Post-Brexit

By Kent Matthews, Economists for Brexit

Professor Stephen Hawking, the UK’s most distinguished scientist, along with many other science worthies, have argued in that increased funding from Europe has greatly benefited science in the UK and that leaving the EU would be a “disaster” for UK science. Similar letters of support for remaining in the EU have been written by various lobby groups quoting the funds they receive from the EU.

It is critical for all recipients of ‘EU funds’ to understand that the UK pays for all of this, not the EU!

  • In 2014, the gross contribution by the UK to the EU budget was £18.8 billion. HM Treasury estimates the net contribution in 2015 will have been £8.5 billion (more than twice the number in 2009) and forecasts this will rise to £11.1 billion in 2016.

  • The net contribution by the UK to the EU has been rising systematically in real terms (adjusted for inflation) since 1973. Of course the fiscal costs represent only a fraction of the true cost of membership.

A well-established principle in welfare economics is that if the gainers can compensate the losers in any cost-benefit calculation, there is a net welfare improvement. What it is important to realise is that, as a net payer to the EU budget, the UK is well able to compensate the losers in a post Brexit world.

What are we paying for?

The two main beneficiaries of the disbursement of EU monies are regional development (30% in 2013) and farming and fisheries (CAP and CFP 60% in 2013). The latter receives funds in the form of agricultural development subsidies, block grants and price support.

Other recipients of funds via the EU number over 4,000 institutions - from Rolls Royce for research in energy saving aero-engines to individual academics at universities. While these recipients may perceive they are receiving EU funding, it is money that we, the UK taxpayer, have given the EU in the first place.

It is not clear that funds are being spent in an efficient or economically productive way

  • Research using the European Commission’s QUEST model has shown the effectiveness of structural and regional funds on GDP is negative in eight EU countries, and the UK is one of them.

  • Open Europe has pointed out, if one looks at EU cohesion funds, "Most of the money the UK received went back to the same region from which it came".

  • As the UK Government's competency report on cohesion and region funding stated, "The House of Commons Communities and Local Government Select Committee was concerned that it had been so difficult to assess the value for money of European Development Regional Funds (EDRF)."

The UK options for funding

  • The least distortionary method of compensation is to provide a lump-sum subsidy that will leave production decisions unaffected by interventions.

  • This would simply be a means of cushioning the financial impact on those recipients who have grown dependent on funds disbursed by the EU.

Can the UK government credibly commit to compensate the "losers"?

  • It is difficult for a future UK government to pre-commit to spend the Brexit-dividend in the way the EU currently does but it can broadly highlight the areas it intends to cover, though total funding levels are not necessarily the same.

  • This is particularly so as much of the EU spending may be inefficient and not allocated in the right areas or for the right reasons. We may be able to fund more with less.

  • It may be politically defensible to promise those that lose out in the short term that they will be protected but in the longer term this will have to be balanced against how the resources may be better used.

  • A logical proposal would be that each group would make their case to government during the Article 50 transitional arrangements.

Professor Kent Matthews – Professor of banking and finance at Cardiff University. He has held teaching positions at many of the leading universities across the world and is the author of six books and 75 published papers on areas including macro-economic modelling and forecasting.


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