Britain's £1.7bn EU bill

David Cameron is refusing to pay. The FT says he's overreacting.Simon Wilson on Britain's latest row with the EU.

Why are we being penalised?

The European Commission is insisting that the UK pays £1.7bn to the EU by 1 December as an extra budget contribution. According to the FT, the surcharge is "not large". That's because it's supposed to be an adjustment for years of contributions that due to new statistical rules have turned out to be too low.

Indeed, the EU's "reservations" on the UK national accounts date back to 2002. Looked at in that way, the UK's average underpayment is less than €200m a year a drop in the ocean at about a hundredth of 1%of the UK's economic output.

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For the FT, Cameron's anger at the charge was a "disproportionate over-reaction" to a "modest EU matter"; Britain's economy has done a bit better than the others, so under the rules it has to pay a bit more. But to argue that the surcharge is in fact pretty small beer rather overlooks the toxic politics of the thing.

Isn't the timing a bit tactless?

The EU has demanded £1.7bn of (in effect) back taxes just as the Tories are facing the imminent prospect of a second by-election victory for a Ukip defector and the UK is facing the growing likelihood of an in-out EU referendum by 2017.

As such, the EU is hardly winning friends by presenting Britain with what looks (to some) like a massive penalty for success. UK public opinion is intriguingly poised on how it feels about the EU. An Ipsos Mori poll last week appeared to show that the rise of Ukip has hardened pro-EU opinion: it put support for the EU at 56%, a 20-year high.

By contrast, a YouGov poll showed a knife-edge 41%/40% split. In any event, Cameron's red-faced outrage at the €2.1bn EU bill was echoed across the British political spectrum and, indeed, much of the press.

Should the government have known this was coming?

It certainly appears bizarre, not to say incompetent, that the prime minister wasn't aware that this demand was on the horizon.

The Commission says that the UK has been aware for years of the impact of the new accounting standards; and UK officials at the Office for National Statistics knew for certain back in May that the likely backdated payment would cover the years back to 2002.

As an unimpressed Ken Clarke put it to David Cameron in the Commons this week, "May I sympathise with you at being taken by surprise on a subject which everybody in the Foreign Office and the Treasury must have known was coming along for the last five months."

But it seems Britain is not alone in being upset: plenty of other countries (notably Italy and the Netherlands) are angry too, though the others' bills are much smaller and they're making less fuss about paying up.

Will Cameron pay it?

He made it sound as if he wouldn't, but has in fact left himself vast expanses of wriggle room. "Britain will not be paying €2bn to anyone on December 1st," he told the House of Commons. "We reject this scale of payment!" The government will "crawl through this in exhaustive detail", promised the reddening prime minister but whatever happens, "we are not paying a sum anything like that".

In other words, the UK is all but certain to end up paying some or all of the amount demanded at some point after 1 December. Cameron looks angry, but his words strongly suggest it's unlikely he's planning to take the route taken by Margaret Thatcher of simply refusing to pay.

It's more likely the EU and the affected countries will agree some kind of fudge. This will involve another re-tweaking of the figures for economic output, phased payments, or some combination of the two.

How much does the UK contribute each year?

Most reports this week put the UK's net contribution to the EU budget in 2013 at £8.6bn (a figure taken from the Treasury's November 2013 white paper on EU finances). However, as economist Tim Congdon pointed out this week, there are in fact two official UK sources of data on this subject.

Earlier this year, the Office for National Statistics stated that the UK's "net transfers to EU institutions" were £12.9bn (up sharply from £10bn in 2012). Revised data due to be published within the next few weeks should help create more clarity, but for now Congdon reckons that Britain contributed at least £10.5bn to the EU last year, and perhaps more than £11bn. Either way, we put in rather more than we get out (as one of the richer members) and our net contribution is far bigger than it was in 2009, when it was £4.3bn.

Just as well, then, that the Confederation of British Industry (CBI) puts the value to the UK of EU membership of the EU at between £62bn and £78bn in trade and intangible benefits. Does everyone agree with the CBI? Of course not a subject we'll hear more about between now and 2017.

Sex, drugs and intra-EU transfers

The EU has sent us a bigger bill, in part thanks to our appetite for sex and drugs, says Phillip Inman in The Guardian. That's because the EU bases its complex calculations on how much member states should pay into its coffers, based largely on GNI (a measure that is similar, but not identical, to GDP).

Earlier this year the UK's official estimate of its GNI got a boost when officials from the Office for National Statistics calculated that sex work generated £5.3bn for the economy in 2013, with another £4.4bn coming from the sale of cannabis, heroin, cocaine, ecstasy and amphetamines.

Rather more happily for the UK's reputation, the other major factor (other than a strong economic performance relative to the EU average) is a surge in the size and contribution of our charity sector.