BRITAIN'S MISSING SOVEREIGN WEALTH FUNDS
SUMMARY
Politicians, think-tanks and media commentators have had endless arguments about the economic costs and benefits of Britain’s EU membership since the early 1960s.
However, there has been virtually no discussion of the fiscal effects of EU budget contributions on the health of the finances of the British government and thus on the government’s deficit and the national debt.
The calculations in this study are that Britain’s EU budget contributions between 1973 and 2010 totalled £379 billion in 2010 values, around 42% of the national debt at March 2010. By 2014/15, they will total in the region of £550 billion in projected 2014/15 values.
INTRODUCTION
Politicians have assumed that the economic debate over EU membership was a self-contained policy area with little relevance to the fiscal health of the British government. In this, the assumption mirrored the often-repeated political claims that the EU was a subject that ranked low on voters’ concerns, and therefore by implication, was something with which policy makers need not concern themselves.
In reality, the true costs of EU budget contributions have had a major impact on the poor fiscal health of the British government.
As with all government expenditure, EU budget contributions have both economic effects and also fiscal effects.
The financial crisis has brought neglected accounting matters, such as fiscal burdens, deficits and the debt total, that is to say the fiscal condition of the British government, to the centre of politics. Indeed, the Coalition specifically stated in its Agreement, “The deficit reduction programme takes precedence over any of the other measures in this agreement”. The current government’s position on the costs of EU membership was put forward on 19th January 2011 by Lord Howell, who used to be a Thatcherite minister, when he replied to Lord Stoddart in the House of Lords, and refused to undertake a cost-benefit analysis of EU membership, “The government believes that membership of the European Union is in the national interest, bringing with it significant economic benefits to the UK”.
However, he said nothing about the fiscal impact on the deficit. The Coalition, quite correctly, has identified the deficit as its chief immediate problem.
Despite the Coalition’s main policy being proclaimed to be the reduction of the fiscal deficit, there still remains a serious unwillingness to acknowledge the fiscal costs of EU membership or to subject these costs to any reduction or, indeed, any analysis.
THE MAJOR CONCLUSIONS
There are three principal conclusions of this study.
First, it is necessary to be clear about the correct fiscal accounting for EU budget contributions. Gross EU budget contributions less abatements are an increase in government spending and, ultimately, contribute to the deficit and the national debt. In political statements, reference is frequently made to the incorrectly labelled ‘net budget contributions’ where the money spent by the EU on Britain is netted off the gross contributions. However, this EU spending in Britain does not reduce British government expenditure. It is simply extra spending which is recycled through Brussels and does not reduce the British government’s outlays. This is, of course, of interest when considering the economy as a whole but is irrelevant when considering the fiscal condition of the British government.
Second, when assessing the total cost of Britain’s EU budget contributions over the 38 years of membership (to 2010), it is necessary to calculate these figures on a ‘real-terms’ basis, that is to say, that every year’s budget contribution should be recomputed so as to be restated in 2010 ‘real-terms’ figures. It is the conclusion of this study that the total of Britain’s EU budget contributions between 1973 – 2010 amount to at least £379 billion, in 2010 values, which is around 42 per cent of the national debt in 2010.
Third, the clearest way to illuminate the true costs of the EU budget contributions is to consider what would have happened if Britain’s EU budget contributions had still been levied on the British taxpayer but, instead of being handed over to the EU, had instead been put into a sovereign wealth fund.
SOVEREIGN WEALTH FUNDS
Many of the new creditor countries have created sovereign wealth funds.
It should be noted that the idea of a sovereign wealth fund is not in itself a recommended course of action because taxpayers make better use of their own money than a government quango would do. It is, however, a concept which is easy to understand. Moreover, when a quango-controlled fund is shifting resources to long-term capital investment, this is at least directing funds to the only means of future economic growth.
There are at least 50 sovereign wealth funds in existence today, some having been created in the 1950’s. These include those created by many Middle Eastern countries and Asian countries but there are also huge funds in such diverse places as Quebec, Alaska, Alberta, New Zealand, Ireland, Chile and Norway. Their assets exceed US$4 trillion.
A sovereign wealth fund is a state-owned investment fund, invested globally and interested in maximising long term returns.
For example, the Government Pension fund of Norway is aimed at building up savings for future generations and is the second largest in the world.
In all cases, investing in a sovereign wealth fund is the creation of long-term assets and the assets of these funds remain the property of the investing state. The contrast between this hard-headed financial realism and the throwaway approach of British governments to their massive EU budget contributions is striking.
FISCAL AND ECONOMIC ACCOUNTING
Despite their name, the National Accounts are not true accounts. They are a statistical artefact which purport to represent the sum of economic activity in the country. The government’s accounts form part of these. National accounts are also not computed according to Generally Accepted Accounting Principles (GAAP) and, in particular, do not have proper balance sheets and do not incorporate enormous pension liabilities. They are not based on real world individual entities’ cash flow, assets and liabilities. As stated by H.M. Treasury (Delivering the Benefits of Accruals Accounting for the whole Public Sector, 2005),
“National accounts are designed primarily for economic analysis, showing economic activity by sector of the economy. The main focus of National Accounts is therefore the income and consumption of the various sectors (and sub-sectors) of the economy rather than on individual entities’s financial performance. GAAP, on the other hand, has been developed to reflect the financial performance and position of individual organizations.”
While useful for economic purposes, the national accounts are based on economic aggregation, when, in fact, the income and expenditure and the assets and liabilities are particular, especially in legal terms, to each economic actor. They are not, therefore, true accounting.
In the case of EU budget contributions, aggregating the expenditure by the British government and the receipts of EU spending by other economic actors such as farmers and landholders and netting them off is misleading since those receipts do not return to the credit side of the British government’s budget.
So, EU budget contributions have to be considered in economic terms as part of the aggregate economic activity in the country and this shows up in the national accounts. They also have to be considered quite separately in considering the financial condition of the British government as a standalone entity.
This latter consideration is the purpose of this study.
OTHER BURDENS OF EU MEMBERSHIP
There are, of course, many financial and economic burdens arising from EU membership which are not relevant to the EU budget. These include, among other matters, the effect of the CAP [Common Agricultural Policy] on higher food prices, the cost of regulation, and the burden of paying for a customs union and euro bailout contributions. There have been a number of studies of these burdens.
One was made in 2004 by Ian Milne (A Cost Too Far?, Civitas, 2004). This latter study concluded that the economic costs amounted to between four per cent and 26 per cent of GDP p.a. Ian Milne’s study also referenced in turn other studies, including one by the Swiss government which all pointed to considerable net economic and fiscal costs of EU membership.
Beyond these financial matters is the most important negative of all, the destruction of independence and democratic sovereignty.
OBFUSCATION
There is a great deal of obfuscation in all matters to do with British and EU accounting for Britain’s EU budget contributions. There are different accounting year-ends, and also items by-passing the official Treasury figures, which make it difficult to compile correct figures within the British government’s published accounting mechanisms relating to the EU budget contributions.
There are also considerable differences between the yearly commitments and the yearly cash outflow.
THE EU BUDGET
However, this present study simply concentrates on the published contributions to the EU budget.
The total British National Debt at the end of March 2011 was estimated at 58.9 per cent of the then GDP, the debt then totalling £903 billion. One of the purposes of this study is to estimate what the value of all the aggregated payments to the EU over a period of 38 years was in 2010 values. In short, if there had been no payments to the EU over the 38 years (1973-2010) and the payments had been instead, for example, placed in a sovereign wealth fund, how much would that fund be worth at the end of 2010?
THE CALCULATIONS
What is the correct accounting figure for EU budget contributions?
Does proper accounting regard the gross contribution, the gross contribution less abatement, or the net contribution, as the true contribution to the EU budget and, therefore, the true entry in Britain’s government spending totals, with its effect on the deficit and the debt?
In 2008 the gross contribution by Britain to the EU budget was 12.6 billion and the abatement was £4.8 billion – a total of 7.8 billion. Additionally, some £4.5 billion was spent by the EU in Britain on EU mandated activities while the remaining funds were spent elsewhere in the EU. Some of the £4.5 billion, such as EU promotion, was plainly wasteful but much goes on agriculture subsidies and various social programmes. That some activities may be considered wasteful and others useful is irrelevant. The calculations should proceed in the same way as the calculation of the burden of domestic spending to the taxpayer and its effect on the deficit, whether useful or not. The question from an accounting view is whether the gross (less abatement) or net contribution is the correct figure when assessing the impact on government spending and, therefore, the deficit and the debt.
Plainly the gross contribution (less abatement) is the figure added to government spending and, therefore, the deficit and debt by EU budget contributions, while EU spending in Britain does not reduce debt; it is simply additional spending in the economy, recycled via the EU. This was confirmed recently by the Office of Budget Responsibility in its March 2011 Economic and Fiscal Outlook. In Table 2.16 Transactions with the European Union Note 7, it refers to “Public sector receipts from the EU” as follows, “These receipts are not netted off public sector current expenditure in the national accounts, because they are deemed to finance spending by the EU”. Whatever its other alleged economic benefits, spending on EU promotion programmes, agricultural subsidies and social programmes does not return to the credit side of the British government’s budget. What pushes up the deficit and the debt is the gross figure of EU contributions, less abatement.
FISCAL COSTS OF THE EU BUDGET
What are the real fiscal costs of Britain’s EU contributions 1973-2010?
Many people have for a long time been aware that the tables of historic contributions over 38 years by the British taxpayer to the EU budget have severely underestimated the costs these payments have inflicted on the British taxpayer. To calculate these enormous opportunity costs, it is illuminating to estimate how much those contributions would have been worth in today’s values if they had been invested in a sovereign wealth fund. With a huge and rising national debt, how far would such a sovereign wealth fund offset the national debt?
I compiled such a table of historic contributions some ten years ago and updated versions of this have been included in Gerard Batten’s [the MEP for London] splendid annual publication How Much Does The European Union Cost Britain
However, these tables of historic contributions have limited value.
The problem of simply adding together some 38 years of annual contributions to the EU budget is that this is, effectively, aggregating apples and pears as inflation and economic growth have made the contributions made in earlier years appear much smaller than they actually were. In order to aggregate the contributions which were paid in sterling pounds of quite different values, it is necessary to re-compute the figures on a sound accounting basis.
Once the figures of EU budget contributions are recomputed on a sound accounting basis, they can be seen to be enormous in relation to the national debt.
The findings of this current study are revealing. If the EU budget contributions had gone into a sovereign wealth fund and been reinvested, they would have grown into a sizeable national asset which would offset the bulk of the national debt. MEASURING WORTH
I have been able to use the excellent website (www.measuringworth.com), run by the University of Illinois at Chicago Economics Department, to calculate relative worth.
Which is the best indicator to measure relative worth – the value in 2010 of past budget contributions in different years? There is no one correct answer and the University of Illinois economists enumerate various indicators; these include the RPI, the GDP deflator, per capita GDP and share of GDP.
There are problems with using the RPI index. The RPI is oriented solely to households and ignores business investment or government expenditure. The Illinois economists say that RPI is best used “when the monetary amount is the cost or price of a simple product, such as a loaf of bread or a pair of shoes”. It is also an index only for calculating inflation.
The GDP deflator index is a wider inflation type index than the RPI index as it covers all goods and services in the economy. For a relatively short historic period, 1973-2010, the RPI index and the GDP deflator index give similar values so I have used the GDP deflator index as one example, as it is broader.
One should note that the GDP deflator index is exactly what it says when used to calculate previous years’ contributions to 2010 values; it is simply a way of stripping out inflation, a way of restating those contributions in 2010 money values.
This table shows each year’s contribution in 2010 values, one by using the GDP deflator index, and one by using the share of GDP index. These show clearly that the apparently small budget contributions of the 1970s and 1980s were much larger “in 2010 real terms” when using the GDP deflator index or the share of GDP index.
Re-computing historic figures involves stripping out inflation, which is largely done by using the GDP deflator index. This re-computes all the historic figures to real term 2010 figures.
However, the GDP deflator index does not capture the change in values due to economic growth or investment returns. This is best done by the share of GDP index.
As the Illinois University economists say “in the past there were less materials or labor available for all projects”. This measure indicates opportunity costs and “the measure is the most aggregate of all the measures”.
Very large amounts, for example, total government deficits, or debts, are often expressed in the form of a share of GDP.
For example, take the following statements from George Osborne’s Budget speech of 22nd June 2010: “Public sector net debt as a share of GDP will be 62 percent this year, before peaking at 70 percent in 2013/4.” [Here, Osborne is referring to GDP in 2010/1 figures and then in 2013/4 figures]
or
“In order to place our fiscal credibility beyond doubt, this mandate will be supplemented by a fixed target for debt which, in this Parliament, is to ensure that debt is falling as a share of GDP by 2015/6.” [Note that here Osborne is not saying debt is falling but is falling as a share of GDP]
Using the share of GDP as a reference, as Osborne does here, is common in government statements because it is the most aggregate of measures relating figures of different years.
The Illinois University economists concur and say “the best measure for large-scale projects or expenditures, such as the construction of a bridge or government expenditure on health care, is the share of GDP”.
Another way of looking at this is to consider that past contributions were a deduction from the wealth of Britain. These contributions, if kept in the hands of the UK taxpayer, would have enabled the economy to grow faster. Amounts given away in the 1970s and 1980s would have grown at compound interest or at the average investment rate of return. The share of GDP index approximately captures both the inflation adjustment as well as the return on investment.
THE FIGURES
For instance, if we take the year 1980, the amount of the then EU budget contribution was £1669 billion. This is £5230 billion in 2010 figures, according to the GDP deflator index. However, if we calculate by the share of GDP index, it is £10400 billion. This is because the economy of 2010 was almost double the size of the economy in 1980. Looked at another way, the £1669 billion transferred to the EU in 1980 could have stayed in the British economy and grown to £10400 billion by 2010 (partly by inflation, partly by economic growth). Alternatively, it could have grown in the same way in a sovereign wealth fund; a concept which is more easily quantifiable and more illuminating.
It is also a course of action taken by many of the world’s new creditors.
PROPER ACCOUNTING – THE FIGURES
THE UK’s DIRECT CONTRIBUTIONS TO THE EU BUDGET 1973 TO 2010
This table shows gross contributions minus negotiated abatements (UK rebate)
YEAR A (£) B (£) C (£) D (£) E (£)
Gross contributions Abatements Gross contributions less abatements Gross Contributions less abatement Gross Contributions less abatements
in real terms (via GDP deflator index) in real terms (via share of GDP index)
1973 181 0 181 1,660 3,540
1974 179 0 179 1,430 3,090
1975 341 0 341 2,140 4,660
1976 463 0 463 2,520 5,350
1977 737 0 737 3,530 7,310
1978 1,348 0 1,348 5,780 11,600
1979 1,606 0 1,606 6,010 11,800
1980 1,767 98 1,669 5,230 10,400
1981 2,174 693 1,481 4,160 8,430
1982 2,862 1,019 1,843 4,820 9,560
1983 2,976 807 2,169 5,380 10,300
1984 3,201 528 2,673 6,340 11,800
1985 3,925 227 3,698 8,290 14,900
1986 4,493 1,701 2,792 6,050 10,500
1987 5,202 1,153 4,049 8,330 13,800
1988 5,120 1,595 3,525 6,820 10,700
1989 5,587 1,156 4,431 7,990 12,300
1990 6,355 1,697 4,658 7,800 11,900
1991 5,807 2,497 3,310 5,200 8,060
1992 6,738 1,881 4,857 7,360 11,400
1993 7,985 2,539 5,463 7,920 11,500
1995 8,889 1,207 7,682 10,800 15,300
1996 9,133 2,412 6,721 9,160 12,500
1997 7,991 1,733 6,258 8,310 11,000
1998 10,090 1,377 8,713 11,300 14,500
1999 10,287 3,171 7,116 9,090 11,200
2000 10,517 2,084 8,433 10,700 12,600
2001 9,379 4,560 4,819 6,030 6,800
2002 9,439 3,099 6,340 7,730 8,600
2003 10,966 3,560 7,406 8,830 9,480
2004 10,895 3,592 7,303 7,330 7,650
2005 12,567 3,655 8,912 10,100 10,400
2006 12,426 3,570 8,856 9,760 9,720
2007 12,456 3,523 8,933 9,636 9,270
2008 12,653 4,862 7,791 8,140 7,920
2009 14,106 6,336 7,770 7,990 8,130
2010 13,700 4,200 9,500 9,500 9,500
(estimated)
Totals 252,730 72,258 180,472 267,186 379,570
(in billions)
[Yearly figures shown in millions]
Source: ‘Gross Contributions and Abatements’ from HM Treasury, European Community Finances, July 2009, quoted in Library of House of Commons Briefing, SN EP/8614 (28th October 2010) – for all figures up to 2009. 2010 from OBR March 2011 Economic and Fiscal Outlook. Columns ‘D’ and ‘E’ based on website measuringworth.comNote: Small revisions continue to occur to previous years.
One interesting observation from these figures in that some of the most costly years in real terms’ contributions were some time ago, specifically in 1985, 1995 and 1998. So, the total contributions to the EU budget between 1973 and 2010, totalled in real terms according to the share of GDP index, are the sum of £379 billion. This is approximately the worth a sovereign wealth fund would have achieved if funded by those contributions.
This compares with the national debt at March 2011 of £903 billion.
OTHER SOVEREIGN WEALTH FUNDS
The size of some large sovereign wealth funds was calculated by the Sovereign Wealth Fund Institute [SWFI] in March 2011, as follows:
Country US$ Billion £ (at 1.57US$ to £)
Abu Dhabi 627 399
Norway 557 355
Saudi Arabia 439 280
China (Top two funds) 347 221
332 211
Singapore (largest fund) 248 158
The Office of Budget Responsibility calculated, in March 2012, that future contributions would be as follows (not including the costs of euro bailouts):
£ billion
2010-2011 13.0
2011-2012 12.6
2012-2013 12.0
2013-2014 13.5
2014-2015 14.7
65.8
Adding these £65.8 billion to the £379 billion already contributed between 1973 and 2010 – and allowing for investment returns including inflation of, say, five per cent p.a. over five years, a sovereign wealth fund would grow to the region of £550-600 billion by 2014-15. Of course, the national debt is growing enormously but such a fund would still be nearly 40 per cent of the projected national debt in 2014-15.
CONCLUSION
Politicians, and others who speak about ‘net’ budget contributions to the EU, are not stating the true fiscal costs, the true entry in the government’s expenditure accounts.
That true entry is the gross EU budget contributions less abatements.
To calculate the true cost of Britain’s EU budget contributions over 38 years, it is necessary to recalculate all the budget contributions in ‘real terms’. The ‘real terms’ value of all past EU budget contributions would have been in the region of £379 billion by the end of 2010. This could have been invested in a sovereign wealth fund which would have been the biggest in the world at that date and a huge asset to offset the national debt.
The government, as represented in Lord Howell’s parliamentary answer, seems to be unaware of the fiscal costs. Any purported economic benefits of EU spending in Britain are irrelevant to the financial health of the British government. In the current Parliament, a further £65 billion is to be handed over to the EU as budget contributions and added to the National Debt.
FUTURUS/31 October 2011
Politicians, think-tanks and media commentators have had endless arguments about the economic costs and benefits of Britain’s EU membership since the early 1960s.
However, there has been virtually no discussion of the fiscal effects of EU budget contributions on the health of the finances of the British government and thus on the government’s deficit and the national debt.
The calculations in this study are that Britain’s EU budget contributions between 1973 and 2010 totalled £379 billion in 2010 values, around 42% of the national debt at March 2010. By 2014/15, they will total in the region of £550 billion in projected 2014/15 values.
INTRODUCTION
Politicians have assumed that the economic debate over EU membership was a self-contained policy area with little relevance to the fiscal health of the British government. In this, the assumption mirrored the often-repeated political claims that the EU was a subject that ranked low on voters’ concerns, and therefore by implication, was something with which policy makers need not concern themselves.
In reality, the true costs of EU budget contributions have had a major impact on the poor fiscal health of the British government.
As with all government expenditure, EU budget contributions have both economic effects and also fiscal effects.
The financial crisis has brought neglected accounting matters, such as fiscal burdens, deficits and the debt total, that is to say the fiscal condition of the British government, to the centre of politics. Indeed, the Coalition specifically stated in its Agreement, “The deficit reduction programme takes precedence over any of the other measures in this agreement”. The current government’s position on the costs of EU membership was put forward on 19th January 2011 by Lord Howell, who used to be a Thatcherite minister, when he replied to Lord Stoddart in the House of Lords, and refused to undertake a cost-benefit analysis of EU membership, “The government believes that membership of the European Union is in the national interest, bringing with it significant economic benefits to the UK”.
However, he said nothing about the fiscal impact on the deficit. The Coalition, quite correctly, has identified the deficit as its chief immediate problem.
Despite the Coalition’s main policy being proclaimed to be the reduction of the fiscal deficit, there still remains a serious unwillingness to acknowledge the fiscal costs of EU membership or to subject these costs to any reduction or, indeed, any analysis.
THE MAJOR CONCLUSIONS
There are three principal conclusions of this study.
First, it is necessary to be clear about the correct fiscal accounting for EU budget contributions. Gross EU budget contributions less abatements are an increase in government spending and, ultimately, contribute to the deficit and the national debt. In political statements, reference is frequently made to the incorrectly labelled ‘net budget contributions’ where the money spent by the EU on Britain is netted off the gross contributions. However, this EU spending in Britain does not reduce British government expenditure. It is simply extra spending which is recycled through Brussels and does not reduce the British government’s outlays. This is, of course, of interest when considering the economy as a whole but is irrelevant when considering the fiscal condition of the British government.
Second, when assessing the total cost of Britain’s EU budget contributions over the 38 years of membership (to 2010), it is necessary to calculate these figures on a ‘real-terms’ basis, that is to say, that every year’s budget contribution should be recomputed so as to be restated in 2010 ‘real-terms’ figures. It is the conclusion of this study that the total of Britain’s EU budget contributions between 1973 – 2010 amount to at least £379 billion, in 2010 values, which is around 42 per cent of the national debt in 2010.
Third, the clearest way to illuminate the true costs of the EU budget contributions is to consider what would have happened if Britain’s EU budget contributions had still been levied on the British taxpayer but, instead of being handed over to the EU, had instead been put into a sovereign wealth fund.
SOVEREIGN WEALTH FUNDS
Many of the new creditor countries have created sovereign wealth funds.
It should be noted that the idea of a sovereign wealth fund is not in itself a recommended course of action because taxpayers make better use of their own money than a government quango would do. It is, however, a concept which is easy to understand. Moreover, when a quango-controlled fund is shifting resources to long-term capital investment, this is at least directing funds to the only means of future economic growth.
There are at least 50 sovereign wealth funds in existence today, some having been created in the 1950’s. These include those created by many Middle Eastern countries and Asian countries but there are also huge funds in such diverse places as Quebec, Alaska, Alberta, New Zealand, Ireland, Chile and Norway. Their assets exceed US$4 trillion.
A sovereign wealth fund is a state-owned investment fund, invested globally and interested in maximising long term returns.
For example, the Government Pension fund of Norway is aimed at building up savings for future generations and is the second largest in the world.
In all cases, investing in a sovereign wealth fund is the creation of long-term assets and the assets of these funds remain the property of the investing state. The contrast between this hard-headed financial realism and the throwaway approach of British governments to their massive EU budget contributions is striking.
FISCAL AND ECONOMIC ACCOUNTING
Despite their name, the National Accounts are not true accounts. They are a statistical artefact which purport to represent the sum of economic activity in the country. The government’s accounts form part of these. National accounts are also not computed according to Generally Accepted Accounting Principles (GAAP) and, in particular, do not have proper balance sheets and do not incorporate enormous pension liabilities. They are not based on real world individual entities’ cash flow, assets and liabilities. As stated by H.M. Treasury (Delivering the Benefits of Accruals Accounting for the whole Public Sector, 2005),
“National accounts are designed primarily for economic analysis, showing economic activity by sector of the economy. The main focus of National Accounts is therefore the income and consumption of the various sectors (and sub-sectors) of the economy rather than on individual entities’s financial performance. GAAP, on the other hand, has been developed to reflect the financial performance and position of individual organizations.”
While useful for economic purposes, the national accounts are based on economic aggregation, when, in fact, the income and expenditure and the assets and liabilities are particular, especially in legal terms, to each economic actor. They are not, therefore, true accounting.
In the case of EU budget contributions, aggregating the expenditure by the British government and the receipts of EU spending by other economic actors such as farmers and landholders and netting them off is misleading since those receipts do not return to the credit side of the British government’s budget.
So, EU budget contributions have to be considered in economic terms as part of the aggregate economic activity in the country and this shows up in the national accounts. They also have to be considered quite separately in considering the financial condition of the British government as a standalone entity.
This latter consideration is the purpose of this study.
OTHER BURDENS OF EU MEMBERSHIP
There are, of course, many financial and economic burdens arising from EU membership which are not relevant to the EU budget. These include, among other matters, the effect of the CAP [Common Agricultural Policy] on higher food prices, the cost of regulation, and the burden of paying for a customs union and euro bailout contributions. There have been a number of studies of these burdens.
One was made in 2004 by Ian Milne (A Cost Too Far?, Civitas, 2004). This latter study concluded that the economic costs amounted to between four per cent and 26 per cent of GDP p.a. Ian Milne’s study also referenced in turn other studies, including one by the Swiss government which all pointed to considerable net economic and fiscal costs of EU membership.
Beyond these financial matters is the most important negative of all, the destruction of independence and democratic sovereignty.
OBFUSCATION
There is a great deal of obfuscation in all matters to do with British and EU accounting for Britain’s EU budget contributions. There are different accounting year-ends, and also items by-passing the official Treasury figures, which make it difficult to compile correct figures within the British government’s published accounting mechanisms relating to the EU budget contributions.
There are also considerable differences between the yearly commitments and the yearly cash outflow.
THE EU BUDGET
However, this present study simply concentrates on the published contributions to the EU budget.
The total British National Debt at the end of March 2011 was estimated at 58.9 per cent of the then GDP, the debt then totalling £903 billion. One of the purposes of this study is to estimate what the value of all the aggregated payments to the EU over a period of 38 years was in 2010 values. In short, if there had been no payments to the EU over the 38 years (1973-2010) and the payments had been instead, for example, placed in a sovereign wealth fund, how much would that fund be worth at the end of 2010?
THE CALCULATIONS
What is the correct accounting figure for EU budget contributions?
Does proper accounting regard the gross contribution, the gross contribution less abatement, or the net contribution, as the true contribution to the EU budget and, therefore, the true entry in Britain’s government spending totals, with its effect on the deficit and the debt?
In 2008 the gross contribution by Britain to the EU budget was 12.6 billion and the abatement was £4.8 billion – a total of 7.8 billion. Additionally, some £4.5 billion was spent by the EU in Britain on EU mandated activities while the remaining funds were spent elsewhere in the EU. Some of the £4.5 billion, such as EU promotion, was plainly wasteful but much goes on agriculture subsidies and various social programmes. That some activities may be considered wasteful and others useful is irrelevant. The calculations should proceed in the same way as the calculation of the burden of domestic spending to the taxpayer and its effect on the deficit, whether useful or not. The question from an accounting view is whether the gross (less abatement) or net contribution is the correct figure when assessing the impact on government spending and, therefore, the deficit and the debt.
Plainly the gross contribution (less abatement) is the figure added to government spending and, therefore, the deficit and debt by EU budget contributions, while EU spending in Britain does not reduce debt; it is simply additional spending in the economy, recycled via the EU. This was confirmed recently by the Office of Budget Responsibility in its March 2011 Economic and Fiscal Outlook. In Table 2.16 Transactions with the European Union Note 7, it refers to “Public sector receipts from the EU” as follows, “These receipts are not netted off public sector current expenditure in the national accounts, because they are deemed to finance spending by the EU”. Whatever its other alleged economic benefits, spending on EU promotion programmes, agricultural subsidies and social programmes does not return to the credit side of the British government’s budget. What pushes up the deficit and the debt is the gross figure of EU contributions, less abatement.
FISCAL COSTS OF THE EU BUDGET
What are the real fiscal costs of Britain’s EU contributions 1973-2010?
Many people have for a long time been aware that the tables of historic contributions over 38 years by the British taxpayer to the EU budget have severely underestimated the costs these payments have inflicted on the British taxpayer. To calculate these enormous opportunity costs, it is illuminating to estimate how much those contributions would have been worth in today’s values if they had been invested in a sovereign wealth fund. With a huge and rising national debt, how far would such a sovereign wealth fund offset the national debt?
I compiled such a table of historic contributions some ten years ago and updated versions of this have been included in Gerard Batten’s [the MEP for London] splendid annual publication How Much Does The European Union Cost Britain
However, these tables of historic contributions have limited value.
The problem of simply adding together some 38 years of annual contributions to the EU budget is that this is, effectively, aggregating apples and pears as inflation and economic growth have made the contributions made in earlier years appear much smaller than they actually were. In order to aggregate the contributions which were paid in sterling pounds of quite different values, it is necessary to re-compute the figures on a sound accounting basis.
Once the figures of EU budget contributions are recomputed on a sound accounting basis, they can be seen to be enormous in relation to the national debt.
The findings of this current study are revealing. If the EU budget contributions had gone into a sovereign wealth fund and been reinvested, they would have grown into a sizeable national asset which would offset the bulk of the national debt. MEASURING WORTH
I have been able to use the excellent website (www.measuringworth.com), run by the University of Illinois at Chicago Economics Department, to calculate relative worth.
Which is the best indicator to measure relative worth – the value in 2010 of past budget contributions in different years? There is no one correct answer and the University of Illinois economists enumerate various indicators; these include the RPI, the GDP deflator, per capita GDP and share of GDP.
There are problems with using the RPI index. The RPI is oriented solely to households and ignores business investment or government expenditure. The Illinois economists say that RPI is best used “when the monetary amount is the cost or price of a simple product, such as a loaf of bread or a pair of shoes”. It is also an index only for calculating inflation.
The GDP deflator index is a wider inflation type index than the RPI index as it covers all goods and services in the economy. For a relatively short historic period, 1973-2010, the RPI index and the GDP deflator index give similar values so I have used the GDP deflator index as one example, as it is broader.
One should note that the GDP deflator index is exactly what it says when used to calculate previous years’ contributions to 2010 values; it is simply a way of stripping out inflation, a way of restating those contributions in 2010 money values.
This table shows each year’s contribution in 2010 values, one by using the GDP deflator index, and one by using the share of GDP index. These show clearly that the apparently small budget contributions of the 1970s and 1980s were much larger “in 2010 real terms” when using the GDP deflator index or the share of GDP index.
Re-computing historic figures involves stripping out inflation, which is largely done by using the GDP deflator index. This re-computes all the historic figures to real term 2010 figures.
However, the GDP deflator index does not capture the change in values due to economic growth or investment returns. This is best done by the share of GDP index.
As the Illinois University economists say “in the past there were less materials or labor available for all projects”. This measure indicates opportunity costs and “the measure is the most aggregate of all the measures”.
Very large amounts, for example, total government deficits, or debts, are often expressed in the form of a share of GDP.
For example, take the following statements from George Osborne’s Budget speech of 22nd June 2010: “Public sector net debt as a share of GDP will be 62 percent this year, before peaking at 70 percent in 2013/4.” [Here, Osborne is referring to GDP in 2010/1 figures and then in 2013/4 figures]
or
“In order to place our fiscal credibility beyond doubt, this mandate will be supplemented by a fixed target for debt which, in this Parliament, is to ensure that debt is falling as a share of GDP by 2015/6.” [Note that here Osborne is not saying debt is falling but is falling as a share of GDP]
Using the share of GDP as a reference, as Osborne does here, is common in government statements because it is the most aggregate of measures relating figures of different years.
The Illinois University economists concur and say “the best measure for large-scale projects or expenditures, such as the construction of a bridge or government expenditure on health care, is the share of GDP”.
Another way of looking at this is to consider that past contributions were a deduction from the wealth of Britain. These contributions, if kept in the hands of the UK taxpayer, would have enabled the economy to grow faster. Amounts given away in the 1970s and 1980s would have grown at compound interest or at the average investment rate of return. The share of GDP index approximately captures both the inflation adjustment as well as the return on investment.
THE FIGURES
For instance, if we take the year 1980, the amount of the then EU budget contribution was £1669 billion. This is £5230 billion in 2010 figures, according to the GDP deflator index. However, if we calculate by the share of GDP index, it is £10400 billion. This is because the economy of 2010 was almost double the size of the economy in 1980. Looked at another way, the £1669 billion transferred to the EU in 1980 could have stayed in the British economy and grown to £10400 billion by 2010 (partly by inflation, partly by economic growth). Alternatively, it could have grown in the same way in a sovereign wealth fund; a concept which is more easily quantifiable and more illuminating.
It is also a course of action taken by many of the world’s new creditors.
PROPER ACCOUNTING – THE FIGURES
THE UK’s DIRECT CONTRIBUTIONS TO THE EU BUDGET 1973 TO 2010
This table shows gross contributions minus negotiated abatements (UK rebate)
YEAR A (£) B (£) C (£) D (£) E (£)
Gross contributions Abatements Gross contributions less abatements Gross Contributions less abatement Gross Contributions less abatements
in real terms (via GDP deflator index) in real terms (via share of GDP index)
1973 181 0 181 1,660 3,540
1974 179 0 179 1,430 3,090
1975 341 0 341 2,140 4,660
1976 463 0 463 2,520 5,350
1977 737 0 737 3,530 7,310
1978 1,348 0 1,348 5,780 11,600
1979 1,606 0 1,606 6,010 11,800
1980 1,767 98 1,669 5,230 10,400
1981 2,174 693 1,481 4,160 8,430
1982 2,862 1,019 1,843 4,820 9,560
1983 2,976 807 2,169 5,380 10,300
1984 3,201 528 2,673 6,340 11,800
1985 3,925 227 3,698 8,290 14,900
1986 4,493 1,701 2,792 6,050 10,500
1987 5,202 1,153 4,049 8,330 13,800
1988 5,120 1,595 3,525 6,820 10,700
1989 5,587 1,156 4,431 7,990 12,300
1990 6,355 1,697 4,658 7,800 11,900
1991 5,807 2,497 3,310 5,200 8,060
1992 6,738 1,881 4,857 7,360 11,400
1993 7,985 2,539 5,463 7,920 11,500
1995 8,889 1,207 7,682 10,800 15,300
1996 9,133 2,412 6,721 9,160 12,500
1997 7,991 1,733 6,258 8,310 11,000
1998 10,090 1,377 8,713 11,300 14,500
1999 10,287 3,171 7,116 9,090 11,200
2000 10,517 2,084 8,433 10,700 12,600
2001 9,379 4,560 4,819 6,030 6,800
2002 9,439 3,099 6,340 7,730 8,600
2003 10,966 3,560 7,406 8,830 9,480
2004 10,895 3,592 7,303 7,330 7,650
2005 12,567 3,655 8,912 10,100 10,400
2006 12,426 3,570 8,856 9,760 9,720
2007 12,456 3,523 8,933 9,636 9,270
2008 12,653 4,862 7,791 8,140 7,920
2009 14,106 6,336 7,770 7,990 8,130
2010 13,700 4,200 9,500 9,500 9,500
(estimated)
Totals 252,730 72,258 180,472 267,186 379,570
(in billions)
[Yearly figures shown in millions]
Source: ‘Gross Contributions and Abatements’ from HM Treasury, European Community Finances, July 2009, quoted in Library of House of Commons Briefing, SN EP/8614 (28th October 2010) – for all figures up to 2009. 2010 from OBR March 2011 Economic and Fiscal Outlook. Columns ‘D’ and ‘E’ based on website measuringworth.comNote: Small revisions continue to occur to previous years.
One interesting observation from these figures in that some of the most costly years in real terms’ contributions were some time ago, specifically in 1985, 1995 and 1998. So, the total contributions to the EU budget between 1973 and 2010, totalled in real terms according to the share of GDP index, are the sum of £379 billion. This is approximately the worth a sovereign wealth fund would have achieved if funded by those contributions.
This compares with the national debt at March 2011 of £903 billion.
OTHER SOVEREIGN WEALTH FUNDS
The size of some large sovereign wealth funds was calculated by the Sovereign Wealth Fund Institute [SWFI] in March 2011, as follows:
Country US$ Billion £ (at 1.57US$ to £)
Abu Dhabi 627 399
Norway 557 355
Saudi Arabia 439 280
China (Top two funds) 347 221
332 211
Singapore (largest fund) 248 158
The Office of Budget Responsibility calculated, in March 2012, that future contributions would be as follows (not including the costs of euro bailouts):
£ billion
2010-2011 13.0
2011-2012 12.6
2012-2013 12.0
2013-2014 13.5
2014-2015 14.7
65.8
Adding these £65.8 billion to the £379 billion already contributed between 1973 and 2010 – and allowing for investment returns including inflation of, say, five per cent p.a. over five years, a sovereign wealth fund would grow to the region of £550-600 billion by 2014-15. Of course, the national debt is growing enormously but such a fund would still be nearly 40 per cent of the projected national debt in 2014-15.
CONCLUSION
Politicians, and others who speak about ‘net’ budget contributions to the EU, are not stating the true fiscal costs, the true entry in the government’s expenditure accounts.
That true entry is the gross EU budget contributions less abatements.
To calculate the true cost of Britain’s EU budget contributions over 38 years, it is necessary to recalculate all the budget contributions in ‘real terms’. The ‘real terms’ value of all past EU budget contributions would have been in the region of £379 billion by the end of 2010. This could have been invested in a sovereign wealth fund which would have been the biggest in the world at that date and a huge asset to offset the national debt.
The government, as represented in Lord Howell’s parliamentary answer, seems to be unaware of the fiscal costs. Any purported economic benefits of EU spending in Britain are irrelevant to the financial health of the British government. In the current Parliament, a further £65 billion is to be handed over to the EU as budget contributions and added to the National Debt.
FUTURUS/31 October 2011