What is the real cost of the EU?

Labour wants to cut the EU budget in real terms. But the cost of the EU to the UK isn’t just about the EU budget itself, says Merryn Somerset Webb - it’s about a great many other things as well.

Everyone's beginning to get cross about the cost of the EU. The Prime Minister is against any large increases in the budget (although he is apparently OK with it rising in line with inflation); a good number of his party think that the budget should be frozen; and yesterday, the Labour party stepped into the fray with an article in The Times by those well known enthusiasts for austerity Ed Balls and Douglas Alexander.

They want the EU budget to actually be cut in real terms. They want it (if not us) to try to "do better with less". But how much less exactly? The problem with mainstream politicians attempting to answer this (which Balls and Alexander don't actually do) is that the cost of the EU to the UK isn't just about the EU budget itself the direct fiscal cost to UK taxpayers (£15.8bn at the moment, rising to £19.2bn by 2014/5), it's about a great many other things as well.

And if you add them all in, the cost to the UK of being in the EU rather than being independent and having a free trade agreement with the EU, appears to be rather higher.

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Tim Congdon wrote up his research on this for the UK Independence Party a few months ago. His conclusion? The UK is around 10% of GDP worse off as a result of its membership of the EU. 1% of the forgone GDP comes in the direct fiscal cost. Another 5% comes, says Congdon, from the costs of regulation.

Then there is 3.25% that he calculates results from resource misallocation (think CAP and the various bits and bobs of EU protectionism) and another 0.25% in the rise in unemployment among UK-born people as a result of the opening of the UK labour market in 2004.

To that you can add 0.25% for "waste, fraud and corruption" and finally 0.25% for the contingent liabilities of benefit tourism and the like. 10% altogether.

All these things are clearly complicated to measure and endlessly arguable about. But as Congdon says, the fact that it isn't easy to figure out doesn't mean it can be ignored: "there is no single exact number for the cost of the wreckage inflicted by a large hurricane but a large hurricane undoubtedly does inflict massive harm."

The point? That cutting the EU budget by a couple of percent in real terms probably isn't going to make much difference. If Balls and Alexander want to cut the real cost of the EU to the UK, they will need to think a little harder. You can read the full report (and whether you instinctively feel 10% is a good ball park figure or an insane over estimate, you probably should) as well as the full rationale for all these numbers here.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.