When newspaper headlines blared that Britain and the EU had agreed a Brexit divorce bill, the economist Andrew Lilico was incandescent with rage.
In a series of tweets, the executive director of Europe Economics, and one of the most prominent proponents of Brexit, called on Theresa May, the prime minister, to quit if she had failed to tie any pledge to hand over tens of billions of pounds to future trading arrangements.
Writing for the think tank-run website CapX, he later qualified his argument, claiming the UK could still walk away without making settlement payments in a no-deal Brexit.
“Whilst the UK was willing to pay perhaps €45 billion (Dh196.62bn) but only as part of an overall deal, the EU insisted the UK had to accept it owed €45bn or more and would pay it even if there were no deal with the EU at all,” he wrote. “If Theresa May had really agreed that, this article would be calling for her to resign. But Downing Street has denied that, stating that reports that a settlement has been agreed unconditionally and that it could be as much as €55bn are ‘completely wrong’.”
Confusion over how much Britain will pay out to Europe after it quits the bloc in March 2019 has dogged the exit negotiations. Economists are split over the merit of the payments and the impact on the British economy.
A report commissioned from Capital Economics by the high-profile investor Neil Woodford from Capital Economics set out a detailed breakdown of the likely divorce bill facing the British exchequer. It established three scenarios including handing over nothing following the breakdown of talks. Its high-end estimate was €56.7bn.
The best-guess in the Capital Economics report was €37.8bn, a figure that was based on payments across four broad areas.
The report assumes that British contributions to the annual budget would taper off to levels similar to non-member Switzerland by 2021.
It additionally accounts for particular liabilities to accumulated over 46 years of British EU membership. The principle that Britain would continue to pick up its share of the cost of multi-year projects, such as long-range infrastructure investments, is one of the biggest demands from Brussels.
Contingent liabilities for unpaid loans and other risky future projects make up another multibillion-euro tranche.
Finally the British share of the pensions of European employees – the outstanding overall pension liability is as high as €63bn – represents the longest-range liability facing London.
Against this Britain could attempt to net off the returns from its share of EU assets. It could also recover the €4.3bn annual revenues lost from handing over customs duties to the EU’s budget. Mr Lilico estimates that since the UK imports about €4 worth of products from the EU for every €3 it exports, a failure to secure a free trade agreement would lead to short-term gain of revenues, not a loss for the treasury.
The effect on the loss of trading access, financial passporting and the disruption of supply chains dominates the concerns of most economists. Robert Chote, the head of the office of budget responsibility warned last month that the financial settlement was outweighed by trade, productivity and investment concerns.
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“If it is an extra amount you are talking here about a one-off payment of some billions of pounds that would be dwarfed by the consequences of Brexit positive or negative, for the long-term outlook for economic growth,” he told policymakers in Parliament.
The pound has fallen as much as 14 per cent since the Brexit vote and, combined with a squeeze on real incomes, the result is a narrowing of Britain’s trade deficit. The monthly figure fell to £2.75bn (Dh13,6bn) in September from £3.45bn in August. But that was largely as a result of Britain’s continuing membership of the single market. Exports to the EU were up £900 million, while sales outside the block fell £1.7bn.
Overall growth has slowed dramatically. Benjamin Born and his colleagues at the Centre for Economic Policy Research (CEPR) believe the impact of the Brexit vote has already resulted in lost growth to the British economy and extrapolates that the gap in the economy’s economy potential will rise over time.
“We find that the economic costs of the Brexit vote are already visible," a recent CEPR report said. "By the third quarter of 2017, the economic costs of the Brexit vote are about 1.3 per cent of GDP. The cumulative output loss is £19.3bn. As 66 weeks have passed between the referendum and the end of the Q3 2017 (our last GDP data point), the average output cost is almost £300m on a per-week basis.
With rising prices after sterling’s slump, the squeeze on real wages has damaged the spending power of British consumers. Pantheon Macroeconomists estimates that consumer price inflation will rise to 3.3 per cent in the new year. Wages, meanwhile, are rising at just 2.3 per cent.
Yet with no clear picture of future trading arrangements, it is the Brexit bill that dominates the debate. Capital Economics economists describe the payments mooted as in line with their own estimates.
"Clearly the figure that has been reported is a lot higher than the Brexiteers had said. But this is more of a political decision as it is about negotiating a future trade deal. The UK cannot move on to the next stage of the negotiations on trade unless it has settled its accounts with the EU,” said Paul Hollingsworth, senior UK economist at the firm founded by Roger Bootle.
"When the payments are spread over time- macro economically - it won't make a huge impact. The figure is more politically significant and is not worth holding up a future trade deal."
The foreign exchange markets are divided over the impact of confirmation of a headline figure. Some strategists believe any form of progress is a signal of stability. Stephen Gallo, the European head of FX strategy at BMO Financial Group, thinks sterling could start to regain its post-Brexit losses as the negotiations make incremental progress over the next six to 12 months.
Others are more cautious but still welcomed an expected breakthrough. “All else equal, a formal confirmation of a payment agreement reduces some of sterling’s Brexit risk premium,” said James Rossiter, a strategist at TD Securities. “What the EU members and the UK have agreed to will give certainty to sterling and the market.
“It is a strategic decision to pay the money out over time, not as a one-off big number but as bills as they fall due. It moves the talks on from backward obligations to a UK transitional deal.”
There is even a perverse benefit to London agreeing a higher bill as that creates an incentive for the Europeans to lock in a deal with the departing member. Signs of a long-term arrangement would bolster investor confidence overall. “This deal would be crucial to a breakthrough in the first phase of the negotiations,” said Danielle Haralambous of the Economist Intelligence Unit. “It implies a continuation of payments to the EU but some of the payments will be contingent on a trade deal.”
The political implications remain troublesome. With the minority government limping from vote to vote in the House of Commons, Morgan Stanley analysts warn that Mrs May’s government may not be able to avoid a hard Brexit.
"Keeping EU access for an interim period may be the best outcome for now but will likely come with a high exit bill price tag which could exceed the tolerance levels of certain Conservative party members," it said in a research paper. "Political uncertainty potentially leading to early elections is not yet in the GBP price."
A survey on the influential Conservative Home website found that a majority of the 1,300 respondents could support to a £20bn payment to the EU. But only 14 per cent would back a £60bn or more payment. A hard core of 33 per cent believe that Britain should pay the EU “not a penny”.
Mr Rossiter rejects the suggestion an exit payment row could result in another general election.
“For us the odds of an election in the next 12 months are as high as one-third, so it is not an insignificant risk,” he said. “I’m not sure this is what triggers it.”