Member states are ranked by GNI per capita with the poorest on the bottom and the richest on the top.

Source: Contributions, receipts and GNI from http://ec.europa.eu/budget/library/biblio/documents/2014/Internet%20tables%202000-2014.xls, population from Eurostat table demo_pjan.

The UK’s rebate and other ‘corrections’

We have just seen that the UK benefits less than other EU member states from the main areas of EU spending, namely the CAP (direct payments to farmers and rural development) and structural and cohesion funds. This has been the case ever since the UK joined the EU in 1973. As a result of this perceived unfairness, since 1984 the UK has secured a ‘correction’ or rebate to limit the size of its net contribution to the EU Budget. The rebate reduced the UK’s contribution to the EU budget by about 0.2% of GDP in 2014, or €6 billion (£4.4 billion). In per person terms, this reduced the UK’s contribution to the EU budget by around €94, meaning a post-rebate gross contribution of €219 per person.

The UK’s rebate was originally set at 66% of the difference between the UK’s share of the harmonised VAT base (which at that time was the main basis for contributions to the EU Budget) and the UK’s share of receipts from the EU Budget. The precise design of the UK rebate has changed more recently, with the most important change being that the UK does not receive a rebate on non-CAP spending in the member states that have joined the EU since 2004. The effect of this has been to limit the size of the rebate and increase the UK’s net contribution to the EU Budget, though it is important to note that without this change, the UK would have borne only a small share of expanding the EU to poorer countries.

This reduction in the UK’s contribution of course has to be made up by additional contributions for other member states. These are allocated on top of other revenue contributions, according to the GNI shares of the other member states, though Germany, The Netherlands, Austria and Sweden only pay a quarter of their GNI-share contribution to the rebate, with the remaining three quarters reallocated to the other member states, again based on their shares of total GNI. These countries have negotiated reduced contributions to the UK’s rebate because they are also significant net contributors to the EU Budget. The result is that France is the largest contributor to the UK rebate in aggregate terms (€1.5 billion in 2014), although Luxembourg (€40) and Denmark (€35) are the largest contributors per person.

Other significant net contributors to the budget (Germany, the Netherlands, Sweden, Austria and Demark) also receive ‘corrections’, though these take the form of lower contribution rates for their VAT-based and GNI-based contributions rather than a refund of some of their net contribution.

The UK government is able to veto any effort to try to abolish the rebate. In the absence of an agreement on future funding rules, the UK would continue to receive the rebate on the current basis. The same does not apply to the reductions in contributions obtained by other member states, which will all expire at the end of the current MFF period in 2020 unless similar arrangements are agreed for the next MFF period.

Net contributions to the EU

There are several different ways of calculating how much the UK contributes to the EU Budget.

The first main difference in the figures that are frequently quoted is whether the figure for the contribution is gross or net of the funds the UK receives from the EU budget, in other words whether the amounts received by the UK from the EU budget are deducted. HM Treasury says that the gross amount paid by the UK into the EU budget was £12.9 billion in 2015, £14.4 billion in 2014 (the year we focus on in much of this report) or £14.5 billion in 2013. This is a potentially meaningful figure, as this is the additional amount the UK government might have available to spend if the UK left the EU if two conditions were to hold. First, if the UK did not then have to continue making budget contributions as part of any future relationship with the other EU countries, as for example Norway does as part of the European Economic Area (EEA). And second if leaving the EU were not to reduce UK growth and hence tax revenues. In practice it is unlikely that either of these conditions would be satisfied. Nevertheless it is useful to know what this gross contribution is.

Larger figures for the gross contribution which do not take account of the UK’s rebate are not sensible. As already discussed, the UK is able to veto any attempts to abolish the rebate. And if we were to vote to leave the EU we would, at best, save only our actual contribution (accounting for the rebate): the EU would presumably not continue to pay the rebate to the UK!

One can also examine the net contribution after receipts from the EU budget are taken into account. The HM Treasury figures for this measure only capture those receipts that are received by the UK government, which includes structural and rural development funds and direct payments to farmers that are administered by government departments, but ignores items such as EU funding of research carried out at UK universities. Netting off these receipts by the UK government reduces the overall contribution to £8.5 billion in 2015, £9.8 billion in 2014 and £10.5 billion in 2013. If we further net off receipts by other organisations or businesses in the UK, the net contribution falls to around £5.7 billion in 2014 or £9.1 billion in 2013 (figures for 2015 for this measure have not yet been published by the European Commission).

Figure 5 shows the UK’s net contribution to the EU budget on this basis back to the 1970s. It shows that the UK’s net contribution in 2014 was rather lower than in the preceding few years. Over the next few years, OBR forecasts and historic receipts by the non-governmental sector suggest the UK’s net contribution on this basis seems likely to average around £8 – 8.5 billion per year.