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Domestic equivalents of the direct and indirect costs

It is easy to lose all sense of the scale and real value of the large amounts of UK taxpayers’ money sent to the EU every year, and of the many more billions of indirect costs incurred as a result of EU membership, especially as the costs are expressed in such a variety of ways as millions or billions of euros or of pounds, and as percentages of GDP or per capita or per household.

This is an attempt to express these expenditures and costs a little more intelligibly by comparing them with other more familiar national spending, including expenditures such as as the Premier League, the Olympics and various items of government spending, including health care, hospitals, housing, the police and the courts, aircraft, submarines and aircraft carriers, universities and R&D. The expenditures are all made in a single year, 2013, which is still the most recent year for which many figures are available, and are given alongside its equivalent as a percent of GDP.

The direct UK cash contribution of £11.5b to the EU in 2013 is shaded in dark blue on the chart. All the items listed above that row were smaller expenditures and hence allow one to say that the direct costs of the EU membership in that year were:

  • More than the total costs of 100,000 hospital nurses plus 20,000 GPs.
  • Considerably more than double the annual cost of six university teaching hospital trusts.
  • About the same as all central and local government expenditure on housing in that year.
  • More than the total construction costs of 6 Astute class nuclear submarines and 2 QE class aircraft carriers.
  • Substantially more than the cost of the 2012 Olympic every year.
  • Six times the total wages bill of all 20 Premier League clubs in 2013.

The indirect costs of EU membership can only be estimated. These estimates are given in the lightly shaded rows. They vary depending, among other things, on the costs that the analyst cares to include in the estimate. They are all discussed further in the notes below. In these cases, the validity of the cost comparison depends of course on the credibility of the estimate.

Chapter 16 - table

If Open Europe’s estimate of the costs incurred by 100 top EU regulations is roughly correct, then they equal the entire R&D expenditure conducted in the UK in that year, by universities, businesses, foundations and defence establishments.

If the European Commission estimates of ‘red tape’ or ‘administrative costs’ are anywhere near the correct, they far exceed the annual UK defence spending, which includes funding the UK’s three armed forces.

And if Tim Congdon’s estimate is correct, EU membership costs far more than total NHS expenditure.

These figures might well inform the choice to remain in or leave the EU, though it is worth remembering that only the direct costs are recoverable by the UK government in the event of a Brexit. Savings from the indirect costs are only recoverable by those affected and may help to make a more efficient economy and in that sense we all might benefit everyone. However, the UK would no doubt choose to retain some of them.

The chart enables one to see what alternative expenditures options might be possible, on housing, on education, on R&D, on healthcare and on defence, if the UK decides to leave the EU.

Notes on four estimates of indirect costs

The direct cost of membership, shown in the dark blue shaded row, is rather small by comparison with the indirect costs that result from EU policies such as the CAP and CFP, its environmental and renewable agenda, and from its employment health and safety policies such as the Working time or Temporary Agency Workers Directives.

The ultimate costs of these and other measures are often difficult to measure and estimates are subject to large margins of error, and therefore the subject of debate. This is not the place to try to settle those debates. The four estimates of the indirect costs of membership are entered in the lighter shaded rows. These notes simply explain how each of the estimates came to be in the public domain and leave the reader to decide which they find to be more credible.

  1. Open Europe’s estimate of the costs of the ‘Top 100’ EU regulations

This estimate starts from Open Europe’s analysis of the impact assessments (IAs) conducted by the UK government on regulations and directives proposed by the European Commission. However, apart from the costs, these IAs also attempt to assess the benefits of the proposed regulation. Unfortunately, Open Europe’s analysis indicates that the latter are ‘almost certainly vastly over-stated’. They give the EU’s climate targets as one example of several. Their estimated benefit was £20.4 billion, but this was dependent on a global deal to reduce carbon emissions that never materialized. In fact, Open Europe estimates that ‘up to 95% of the benefits envisaged in the UK Government’s IAs have failed to materialise.’

Even the most mildly sceptical person would have to acknowledge that the UK government’s determination to sell the benefits of EU membership to the British people gives it a strong incentive to provide flattering data about EU activities, or when that becomes difficult, no data at all. This is not, I might add, Open Europe’s view. The £27.7billion figure is their final assessment of the costs net of plausible benefits. [1]

  1. European Commission’s estimate of red tape in 2004

In 2004, speaking to the Confederation of British Industry as EU trade commissioner-designate, Lord Mandelson according to the report in the Financial Times:

…said the cost of EU red tape is roughly double the economic benefits generated by the Single Market. Regulation amounted to about four per cent of the EU’s gross domestic product.[2]

Lord Mandelson has never repeated this surprising admission. However, in a review of the literature of the costs of the EU, Jonathan Lindsell noted that in the same year the Dutch finance minister gave exactly the same 4 per cent figure for the burden to the Netherlands, which suggests that the figure came from official sources within the EU. [3]

This is therefore included as one estimate of the costs of the EU to the UK, even though it obliges us to assume that what was then true of the EU as a whole, and for the Netherlands, was also true of the UK, that there have been no significant increases or decreases between 2004 and 2013 and we have no idea how it was arrived at.

Such vague and dated estimates have to be included only because we lack anything better, as a result of the reluctance of either the EU or the UK government to undertake regular reliable surveys of the costs of regulation, despite both being committed to reducing them.

  1. The European Commission’s estimate of administrative costs of 6% GDP in 2012

The Commission figures about the costs of regulation tend to arrive out of the blue. In 2006 Günther Verheugen, Commissioner for Industry & Enterprise, stated that the average cost of regulation for member states was 5.5 per cent of GDP, though in the following year, he revised the figure down to 3.5 per cent, without giving any explanation of where either figure came from.[4]

Another out-of-the-blue estimate came on the Commission’s Better Regulation website in 2012. It reported that ‘According to estimates it would be feasible to reduce administrative costs by as much as 25 per cent by 2012. This would have a significant economic impact on EU economy – an increase in the level of GDP of about 1.5 per cent or around €150 billion.’[5] If 25 per cent of the administrative costs amount to €150bn and about 1.5 per cent of GDP, then it seems reasonable to infer that the EU’s total administrative costs were €600bn per annum and about six per cent of the EU’s GDP. Obviously, it would be preferable to have a direct statement of the total administrative costs, along with an explanation of how they were collected, but in their absence, we have taken this as a second very rough estimate, and again have to assume that what was true of the EU as a whole might also be true of the UK.

  1. Tim Congdon’s estimate in 2014

This estimate explains its methodology in detail, identifies and explains line by line the costs included, focuses specifically on the UK, and endeavours to measure all the costs of membership, not just those of regulation.[6] His work is based on earlier work by Gerard Batten and has been revised annually some six times, and draws on all the available published research over these years. Congdon concluded that, in 2013, EU membership cost the UK about £185bn or 11.5 per cent of its GDP. Until the UK government, the EU or some other agency sets about the task with as much care and documented detail as Congdon it must be considered the best estimate we have to date.

As he has been an active member of UKIP, it may be as well to add that he is also a distinguished professional economist, and that his method during this research was, as he put it, ‘to avoid giving my own opinion, but to use other people’s expertise and to cite other sources. With some exceptions (which I made clear in the text), every number was not mine, but that of another authority or individual.’[7]

His estimate of the costs of regulation turns out to be the same as that of the Commission given above, but his total estimate is considerably higher because he includes items which other estimates omit: the higher prices paid by consumers as a result of the Common Agricultural Policy, lost jobs owing to free movement, losses from fraud, waste and corruption and the potential costs for contingent liabilities. Any attempt to provide a comprehensive estimate would, one imagines, address these possible costs.

In my view it ought also to include the potentially enormous losses caused by many lost years of freer trade.

Notes

[1] http://openeurope.org.uk/intelligence/britain-and-the-eu/100-most-expensive-eu-regulations/

[2] Jean Eaglesham and Frederick Studemann, ‘Mandelson calls for Brussels to pick fights’, Financial Times, 8 November 2004: http://www.ft.com/cms/s/0/bf97ad9a-31c2-11d9-97c0-00000e2511c8.html#axzz3cT0ItOZK. The quotations refer to the FT report, and not to the words of Lord Mandelson.

[3] Jonathan Lindsell, ‘Does the EU impede the UK’s economic growth?’ Civitas, Europe Debate series, No.2, 2014.

[4] Ibid.

[5] Commission of the European Communities, ‘Reducing Administrative Burdens in the EU’, Brussels 28 January 2009: http://ec.europa.eu/governance/betterregulation.The EC did not date its estimates, but given that it is referring, in 2012, to a target ‘by 2012’, one guesses that it is referring to the study which it had conducted in 2009.

[6] Tim Congdon, ‘How much does the European Union cost Britain?’ UK Independence Party, Seventh Edition, 2014, p.7: http://www.timcongdon4ukip.com/docs/EU2014.pdf.

[7] Tim Congdon, ‘How much does the European Union cost Britain?’ UK Independence Party, Seventh Edition, 2014, p.11: http://www.timcongdon4ukip.com/docs/EU2014.pdf.


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