Fact check: Government calculations set out three cost estimates for Chagos deal

The measurements vary from simply totalling the agreed estimated payments to calculating the total cost of the 99-year treaty in today’s money.

At Prime Minister’s Questions on January 21, Opposition leader Kemi Badenoch claimed the Prime Minister is “giving away” the Chagos Islands and “paying £35 billion” to continue administering the island of Diego Garcia, which hosts a UK-US military base.

Evaluation

The Government’s calculations offer three different ways to measure the cost of the Chagos deal. The Government cites the “net present value” to estimate a total cost of £3.4 billion, while Conservative leader Mrs Badenoch references the nominal total of £34.7 billion. The third measurement estimates the cost at £10 billion over 99 years.

The facts

What is the Chagos deal?

The agreement gives sovereignty over the Chagos Archipelago to Mauritius. The islands were previously part of the British Mauritius colony, but were split from the colony in 1965 to form the British Indian Ocean Territory.

Mauritius gained its independence from the UK in 1968 and from the 1980s has claimed sovereignty over the archipelago.

The agreement followed long-running negotiations started under the previous Tory administration after a 2019 advisory opinion by the International Court of Justice said the UK should cede control.

The deal allows the UK to maintain authority over Diego Garcia – the archipelago’s largest island where the UK and US have a joint military base – for an initial 99 years.

What payments are set out in the deal?

The explanatory memorandum sets out payments (pages 9-10) across the 99-year treaty that allows the UK to maintain the military base. These are split into four distinct parts.

The UK has agreed to a £165 million annual payment to Mauritius for the first three years of the treaty.

From the fourth year, the UK will pay £120 million annually. This will be a fixed amount until the 14th year, when the payment becomes linked to the UK rate of inflation.

There will also be a single payment of £40 million made in the second year towards a trust fund “for the benefit of Chagossians”.

From the fourth year, an annual grant of £45 million will be paid for 25 years to “support projects that promote the ongoing economic development and welfare of Mauritius and its people”. This grant will not increase in line with inflation, remaining fixed at £45 million.

How is the £35 billion figure calculated?

The £35 billion figure is sourced from a freedom of information (FOI) release from the Government Actuary’s Department showing the calculations of the deal’s total price.

The document includes three different ways of measuring the cost, coming to £34.7 billion, £10 billion, or £3.4 billion over 99 years.

The nominal total of the various payments adds up to £34.7 billion across the 99-year treaty. This does not reflect the payments in today’s value.

With this calculation, the annual £120 million payment – which is linked to inflation from the 14th year – increases to around £800 million a year in the last few years of the deal. But £800 million 95 years from now will not be worth the same as £800 million today.

The figure is also an estimate because no one knows what the rate of inflation will be 99 years from today.

How is the £10 billion figure calculated?

The £10 billion total reflects all payments in 2025-26 terms.

As shown in the FOI release, the £120 million annual payment drops to the equivalent of £89.2 million in today’s money by the 14th year of the deal, when it starts to be linked to inflation.

The separate £45 million-a-year grant to promote Mauritius’s development is never linked to inflation, so falls to the equivalent of £24.2 million in today’s money by year 28, after which it is no longer paid.

How is the £3.4 billion figure calculated?

The £3.4 billion estimate cited by the Government is the more complicated “net present value“, which follows the Treasury’s Green Book guidance. This method aims to show the cost in today’s value by removing the effects of inflation – similar to the £10 billion estimate – and then discounting for so-called social time preference (STP).

The STP rate considers two components. The first is the expected growth in consumption per person, and the second is people’s preference for value now rather than later.

The first component is somewhat similar to a person leasing a car who may find the monthly payment significant at first. If they get above-inflation pay rises, that same payment takes up a smaller share of their monthly income and feels less significant relative to their other spending, even if the amount is linked to inflation.

The second component of STP reflects that people, as a general rule, prefer to have things now rather than tomorrow. Payments further in the future are therefore discounted so they can be compared with values today.

Applying this method to the Chagos deal reduces the £120 million annual payment to a “present value” of £68.9 million in the 10th year of the treaty, and to just £4.6 million in the 98th year.

In a letter last year, former chairman of the UK Statistics Authority Sir Robert Chote said the Office for Budget Responsibility confirmed the Government’s method is a “reasonable one” to use when discounting the value of a lease.