Rising interest rates in Europe could push up the UK’s divorce bill by £5billion, the government’s Treasury office has said.
The new estimate comes as the European Central Bank raised interest rates for the first time in 11 years by 0.5 percentage points, ahead of the 0.25 percentage points expected by economists.
Simon Clarke, the Chief Secretary to the Treasury, made it clear in a written statement that rising interest rates affecting EU pension bonds were driving the new Divorce Bill estimates.
The Brexit Divorce Bill includes drawing up long-term guarantees on certain loans and spending by EU institutions while the UK was still a member of the bloc.
The government had originally estimated the bill covering the spending commitments to be between £35bn and £39bn. This included loans guaranteed by the European Investment Bank for infrastructure and other projects signed during the UK’s accession.
No finished settlement has been agreed as the bill takes into account the performance of the loans. The latest Treasury estimate puts the figure at £42.5bn, up from £37.3bn a year ago.
In a written ministerial statement, Clarke said the rise was mainly due to UK bonds for EU pensions.
“The main drivers are the latest discount rates and inflation assumptions, which are centrally set by the government to value long-term liabilities,” he added. “However, since this is a multi-decade liability, the variables used in this forecast will continue to fluctuate up and down.”
Until the end of last year, the UK said it had paid £5.8 billion to the EU under the deal.
A Treasury spokesman added: ‘The recent unprecedented rise in inflation and changes in discount rates have increased our pension liability, which is the main reason for the increase in the estimate. .
“The true cost of settlement is confirmed when payments are made, based on value at that time. The Treasury continues to monitor and verify these payments in accordance with the negotiated agreement.
The European Commission had calculated the divorce bill to be higher than the UK’s at £41billion, at the time of the Tripartite Withdrawal Agreement which also included pacts on Northern Ireland and the rights of citizens of the EU.
The Treasury said net payments to the EU so far amounted to £11billion and estimates of the total bill “will fluctuate up and down over time”, but the “underlying terms of payment remain unchanged”.
He said rising inflation and changes in discount rates have increased UK pension liabilities, the main driver behind the rise in estimates.
The shadow of the Withdrawal Agreement continues to hang over EU-UK relations, with hopeful Prime Minister Liz Truss threatening to tear up Brexit trade deals for Northern Ireland.
In turn, the EU has delayed ratification of the UK’s membership of the flagship £80 billion Horizon Europe scientific research programme, leading to the loss of funding for some university projects already approved by the European Council of the research.
On Thursday, 24 groups, including the Royal Society, the Russell Group of Universities and Cancer Research UK, called on the two candidates battling to become UK Prime Minister, Truss and Rishi Sunak, to pledge to keep the place the UK’s leader in research, development and innovation. (RDI).
In a letter to the candidates, they urged them to make membership of Horizon Europe a priority and to commit to devoting 3% of GDP to RDI.