Britain’s net contribution to the EU budget next year is set to rise by hundreds of millions of pounds due to the drop in sterling, increasing tensions with European partners already having to make up a €1.7 billion gap from the UK this year alone.

But even though the British bill will rise in 2017, its contributions will decline in euro terms because a weaker pound means Britain’s economy appears smaller, further souring the atmosphere across the English Channel.

Britain's additional EU bills will complicate the arithmetic facing chancellor Philip Hammond as he puts the finishing touches to his first autumn statement. Public finances are already under pressure and could be stressed further by Brexiters demanding the earliest possible exit from the EU.

The result that both Britain and other large European countries are out of pocket from a drop in sterling stems from the complexities of the EU budgeting process. For most aspects of the budget, the exchange rate is set on the final day of each year in December and held steady for the following year.

This ensures that Britain’s contributions in 2016 have remained stable in pounds despite sterling’s 15 per cent fall from €1.37 a year ago to €1.16 on Friday. But when calculated in euro, the pound’s fall has reduced Britain’s net contributions, leaving a €1.7 billion hole in budget contributions in 2016.

Shortfall

The European Commission is seeking to fill the gap by dipping into a pot for accumulated competition fines, which the EU would usually redistribute to member states as a bonus at the end of the year. The shortfall has generated some anger, particularly among MEPs.

While Britain did not lose out in 2016, that luck does not last in future years because it will need to use more sterling to pay its remaining EU contributions, which are initially set in euro.

When the Office for Budget Responsibility estimated the effects of a 9 per cent reduction in sterling at the time of the March budget, it estimated Britain’s new EU contributions would rise £400 million a year after 2018. The larger fall since the referendum suggests the additional costs of a weaker pound would be up to £700 million, although a senior treasury official cautioned that these calculations were not directly proportionate.

Jean Arthius, the chair of the European Parliament budget committee, said: "The UK is not the only one bearing the brunt of Brexit. The outcome of the British referendum and its consequences make us poorer collectively. Brexit is a lose-lose situation."

Should sterling further depreciate through the year – after the payment conversion rate is set – further budget top-ups will be required from other EU states, much like in 2016.

The fluctuations in UK payments are a taster of the far bigger challenges facing the EU budget in a post-Brexit union.

The loss of Britain’s net contribution of about £8 billion a year confronts Germany, Italy, France and other net contributors with a political dilemma. The gap can either be filled through bigger contributions, or spending plans can be pared back by scrapping programmes, which eastern and central European countries have in particular relied on. Berlin is signalling that it will not be willing to dip into its pockets after Brexit to cover Britain’s lost contribution.

– Copyright The Financial Times Limited 2016