May's Brexit Budget Offer Is Said to Be Conditional on Trade

(Bloomberg) -- The U.K. will leave a 20 billion euro ($23 billion) hole in the European Union's budget unless the bloc agrees to give Theresa May the sweeping Brexit trade deal she wants, according to senior British officials.

Britain won't fulfill May's offer to cover the U.K.'s share of the EU budget through 2020 without a broader Brexit deal, said the officials, speaking on condition of anonymity. The U.K. also hasn't accepted that it's liable for a share of the pensions of EU staff, they said.

The comments from officials in May's administration help clarify the premier's intentions, which she laid out last month in a speech in Florence. In an attempt to unblock stalled talks, May said the U.K. would honor its financial obligations and keep paying into the EU budget. “I do not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave,” she said.

A spokesperson for the Brexit Department said the financial settlement should be “in accordance with law and in the spirit of the U.K.'s continuing partnership with the EU.”

Talks Unlocked

May is negotiating with Brussels while struggling to keep a united front within her Cabinet, whose members have differing ambitions for what Brexit should look like.

May got some relief from the infighting late Monday, when Foreign Secretary Boris Johnson said he was behind “every syllable” of his boss's Brexit plan, falling into line after weeks of insubordination. Johnson, a leading Brexit campaigner and long-time leadership candidate, speaks to the party's conference in Manchester, England, on Tuesday.

While May's speech in Florence divided Conservatives at home, it did help unblock negotiations in Brussels, the thorniest element of which is the financial settlement, or how much money the U.K. will pay towards the EU's ongoing liabilities when it leaves in 2019.

Talks ended acrimoniously over the issue in August, but May seemed to have spurred progress with her offer. She proposed a transition phase lasting around two years after Brexit day in 2019, and said that during that period Britain would continue to pay its full share of the EU's budget.

On Monday, Chancellor of the Exchequer Philip Hammond also qualified May's offer on the transition. He said at the conference that transition was a “wasting asset,” suggesting that the longer it takes to secure, the less it's worth to the U.K. “Our European interlocutors know that,” he said, amid calls from business to lock down the deal by year-end.

Read more: May's Florence Speech: the Key Changes in Her Brexit Stance

The prime minister's Florence speech -- and in particular the offer to pay up -- were welcomed in EU capitals. The bloc's chief negotiator, Michel Barnier, hailed the speech last week for creating the “new dynamic'' that he saw in the latest round of talks.

However, Barnier said that it was still not clear where the U.K. saw its liabilities beyond the two-year transition period, and warned that talks on the future trade relationship could still be “months” away. The EU says negotiations can't move on to future ties until there's an outline agreement on the bill.

Speaking anonymously, the two British officials said the U.K. recognized that pensions of EU staff are an issue but primarily because they are a liability for the EU. The question is still open whether the U.K. will have any responsibility for covering the cost of pensions for EU staff after it leaves the bloc, they said.

Both sides know they will not reach quick agreement on a figure for the Brexit bill, but the British officials insisted there would be no agreement on the money at all without the trade accord that May wants.

Last week, documents showed the EU's liabilities grew by almost 4 percent in 2016, with the cost of pensions for EU officials and lawmakers rising more than 5 percent.

To contact the reporter on this story: Tim Ross in London at tross54@bloomberg.net.

To contact the editors responsible for this story: Emma Ross-Thomas at erossthomas@bloomberg.net, Thomas Penny