There is no doubt at all that Britain's EU membership has a heavy net cost attached to it, although there are different ways of assessing just how big the financial burden is. Whichever ways of calculating it are used, however, it is very clear that the sums involved are large enough to be highly material to Britain's economic future. The costs come each year in three major ways- to the public sector which pays the direct costs, to the economy as a whole which has to suffer a drain on real resources to meet these charges and to the balance of payments which is significantly worsened by payments in foreign exchange to Brussels. There are also year on year costs. If the burden of membership slows down the growth in the British economy - and there is substantial evidence that this has happened -the result is a cumulative loss which grows larger as each year slips by. This Bulletin looks at all these issues to see what numbers it is reasonable to put on them.
There are two main but inter-related costs of Britain's membership about which there can be little argument. The first is our net budget contribution. The second is the cost of the Common Agricultural Policy. Our net budget contribution is the difference between what we pay into the budget and what we get back out again. Recently, we have been contributing about 10 billion pounds and getting 6 billion back, leaving a net cost of about 4 billion per annum. 4 billion is, however, a major underestimate of the full costs involved. This is partly because much of the 6 billion spent by the EU in Britain is not on projects which we would regard as top priority. It is also because the contributions which we make to the main EU budget do not include large sums paid to other parts of the EU organisation. Careful scrutiny of government figures suggests that in recent years these subventions have recently been running at close to 2 billion a year and that they are on a fairly steeply rising trend. An important current example of these sorts of costs is the UK contribution to Galileo, the EU inspired Global Positioning System, which duplicates the one supplied free to the world by the USA. Furthermore, the main net budget payment is set to rise very substantially over the next few years to 2013, as a result of the budget negotiations which came to a climax in Brussels in December 2005. These were expected to increase Britain's net payment to about 6 billion a year. With the pound now much weaker against the euro than was the case until recently, however, all these net burdens are set to increase still further - by an estimated additional average of about 1.2 billion per year over the next three years.
The CAP is expensive for the UK in a number of different ways. The CAP is financed largely out of VAT and import duties paid to the EU, which fall disproportionately heavily on the UK. At the same time, Britain's agricultural sector is smaller than that in other EU economies. The result is that there is a heavy net budget cost to the UK from the CAP. There is also a burdensome real resource cost because the CAP regime, which keeps food prices far above world prices, also involves the British public buying food from much more expensive sources than is really necessary. The real resource cost to UK consumers was recently calculated by the OECD at about 15 billion per annum in 2009 money. To the CAP costs, we might also add those of the Common Fisheries Policy (CFP), which have recently been calculated to be about another 3 billion. If these costs are added to the net budget costs, a rock bottom total figure for the cost to Britain of our EU membership is currently around 22 billion per annum rising to not far short of 30 billion by 2013.
While there is little scope for argument about our net budget contributions and the costs of the CAP and the CFP, there are many other costs which are more difficult to pin down but which are nevertheless very real. One is the balance of payments deficit which we have had with our trade with the EU almost every year since we joined the Common Market at the beginning of 1973. It is hard to believe that this poor trading result - which has not generally been mirrored in our trade with the rest of the world - has not held back the British economy from doing better than it has. Another is the tide of regulations which pour out of Brussels, increasing costs all the time without a proportional rise in the benefits secured. Although much higher figures have been produced, the most conservative estimates - based on government figures - are that the net costs of regulations is about 2% of our national income, currently running at about 1,400 billion per annum. This produces a figure for the net cost of regulations of about 28 billion. Not all these costs are attributable to the EU, but a very significant proportion undoubtedly are.
There are also costs of Britain's membership which fall outside the UK, but about which many people within the UK care a great deal. They are incurred because of the heavily protectionist stance of the EU, which is generally not reflected in British policy objectives. The most flagrant case of protectionism involves agriculture. The CAP is not only very expensive for the EU consumer, it also has had a devastating impact on the Third World, undermining and counteracting all the net benefits of EU aid to poor countries. CFP fishing policies, especially down the coast of West Africa, have had a similar effect, disrupting local economies and impoverishing the indigenous population. Intransigence over agriculture, especially by France, was one of the causes of the collapse of the recent Doha trade round. Although these negotiations were not without their faults, and although not all the blame for its failure could be put at the door of the EU, a good deal can and should be placed there, where it belongs.
Not only do the annual costs of EU membership payable each year reduce living standards in the UK as resources are transferred abroad or wasted, there has almost certainly been a cumulative negative effect on the British economy from all these burdens. It is much harder to put a firm figure on what this impact might be than it is to calculate the net costs of our budget contributions or the CAP, but this is not an argument for not taking into account a potentially very important factor. Various estimates have been made about how much faster the UK economy might have grown if the constraints imposed by our EU membership had not been in place. These cluster round about 0.5% per annum cumulatively in lost growth. This cost arises partly from the direct costs we pay each year and partly because our EU membership ties us more closely than would otherwise be the case to one of the slowest growing economic areas in the world. Whereas economic output in the world as a whole over the last ten years has increased cumulatively by 3.8% per annum, for the Eurozone, which is the bulk of the EU, it has been only 2.6%. Inappropriate economic policies have been largely to blame, driven particularly by the restrictive and deflationary stance taken by the European Central Bank, whose remit is to keep down inflation to 2% at almost any cost. If it is true that the British economy could have grown 0.5% faster than it did without our being EU members, the cost is huge. 0.5% of our current national income is about 7 billion. If we have foregone this amount of growth for each of the last 10 years, our national income is 70 billion per year smaller now than it needed to be.
It is highly questionable whether it ever made any sense for Britain to allow itself to get itself into a position where it was forced to bear such very high costs to be a member of an organisation which has brought us such few non-economic benefits in compensation. It surely makes much less sense now as the British economy is clearly descending into what may well be the worst depression since the beginning of the 1930s. At a time when the government's finances are under unprecedented strain, what are we doing paying huge net sums into the EU budget, which are urgently needed to support domestic public expenditure and to avoid government borrowing getting out of hand? What sense does it make to pay huge sums across the exchanges to Brussels when Britain is struggling to pay its way in the world, as can be seen from our trade deficit which has now widened to about £45bn per annum? Why, indeed, are we acting as the EU's paymaster when most experts think that the current credit crisis is likely to have a bigger impact on the UK than almost any other European economy? When the pound was worth 1.36 euros, as it was as recently as the beginning of 2008, we might have been able to delude ourselves that we were richer than most other countries in the EU and therefore under some sort of obligation to pay heavy net contributions to the EU budget. As the exchange rate unravels, exposing the weakness of Britain's trading position for all to see, it becomes apparent that much of our supposed wealth and high living standards, compared to other EU Member States, were in international currency terms an unsustainable illusion.
The major problem which Britain faces is that there is very little which can be done about the huge financial burdens which our EU membership has brought in train for us as long as there is no fundamental change made in our relationship with our European neighbours. Although none of our major political parties are willing to recognise this, the British public clearly does. This is why the opinion polls consistently show resistance to any further integrationist steps involving the EU, whether the questions relate, for example, to either the Lisbon Treaty or to the possibility of Britain joining the euro. The British people want good relations with our European neighbours, free trade and travel and co-operation wherever this makes sense. They do not want to be part of an undemocratic European super state and they certainly do not want to have to pay a lot more than their fair share for it. If this has been apparent from the polls for a long time now, how much more are these sentiments going to come to the fore as the UK economy becomes more and more mired in recession, unemployment rises, the government's finances become under increasing strain, our trading position worsens, very probably reflected in the pound continuing to fall against the euro, and living standards fall? We shall see.