Rising interest rates in Europe could increase Britain’s Brexit divorce bill by £5 billion, the government’s Treasury office has said.
The new estimate comes as the European Central Bank raised its interest rates for the first time in 11 years by 0.5 percentage points, ahead of the 0.25 percentage points expected by economists.
Simon Clarke, the chief secretary to the Treasury, made it clear in a written statement that rising interest rates affecting EU pension liabilities were the driver of the new divorce bill estimates.
The Brexit divorce bill includes drawing up long-term guarantees on certain borrowing and spending by EU institutions while the UK was still a member of the bloc.
The government originally estimated that the bill covering the spending commitments would be between £35bn and £39bn.
This included loans guaranteed by the European Investment Bank for infrastructure and other projects signed during the UK’s membership.
No finite settlement was agreed as the bill takes into account the performance of the loans.
The latest Treasury estimate put the figure at £42.5bn, up from £37.3bn last year.
In a written ministerial statement, Clarke said the increase was mainly due to the UK’s obligations to EU pensions.
“The main drivers are the latest discount rates and inflation assumptions, which the government sets centrally to value long-term liabilities,” he added.
“However, given that this is a multi-decade liability, the variables used in this forecast will continue to fluctuate up and down.”
As of the end of last year, the UK says it has paid 5.8 billion to the EU as part of the deal.
A Treasury spokesman added: “The unprecedented recent rise in inflation and changes in discount rates have increased our pension liability, which is the main reason for the increase in estimate.
“The actual cost of settlement is confirmed when payments are made, based on the value at the time. The Treasury continues to monitor and verify these payments in accordance with the negotiated agreement”.
The European Commission had calculated the divorce bill to be higher than the UK’s at £41bn at the time of the three-party withdrawal agreement which also included deals on the rights of citizens of Northern Ireland and the EU
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