Chagos Deal Cost Estimates: Government Calculations Reveal Three Different Figures
The UK government has presented three distinct methods for calculating the cost of the Chagos Islands treaty with Mauritius, revealing figures ranging from £3.4 billion to £34.7 billion over the 99-year agreement period. This follows claims made by Opposition leader Kemi Badenoch during Prime Minister's Questions on January 21, where she asserted the Prime Minister was "giving away" the Chagos Islands and "paying £35 billion" to continue administering Diego Garcia.
The Three Different Cost Measurements
The government's calculations offer three different ways to measure the financial impact of the Chagos deal. The most conservative estimate, cited by the government itself, uses the "net present value" method to arrive at a total cost of £3.4 billion. Conservative leader Mrs Badenoch referenced the nominal total of £34.7 billion, while a third measurement estimates the cost at £10 billion over the 99-year treaty period.
Understanding the Chagos Agreement
The treaty transfers sovereignty over the Chagos Archipelago to Mauritius while allowing the UK to maintain authority over Diego Garcia for an initial 99 years. Diego Garcia hosts a vital UK-US military base that has been operational for decades. The agreement follows long-running negotiations that began under the previous Conservative administration after a 2019 advisory opinion from the International Court of Justice recommended the UK cede control of the territory.
Payment Structure of the Deal
The explanatory memorandum outlines payments across the 99-year treaty period, divided into four distinct components:
- The UK will pay Mauritius £165 million annually for the first three years of the treaty
- From the fourth year, this reduces to £120 million annually until year 14, after which payments become linked to UK inflation rates
- A single payment of £40 million will be made in the second year toward a trust fund for Chagossians
- From the fourth year, an annual grant of £45 million will be paid for 25 years to support economic development projects in Mauritius
How the £35 Billion Figure is Calculated
The £35 billion figure referenced by Mrs Badenoch comes from a freedom of information release from the Government Actuary's Department. This represents the nominal total of all payments across the 99-year treaty, amounting to £34.7 billion. This calculation does not account for inflation or the changing value of money over time. Under this method, the annual £120 million payment - which becomes inflation-linked from year 14 - would increase to approximately £800 million annually in the final years of the agreement.
The £10 Billion Calculation Explained
The £10 billion total reflects all payments adjusted to 2025-26 values, accounting for inflation. According to the FOI release, when adjusted for inflation, the £120 million annual payment reduces to the equivalent of £89.2 million in today's money by the 14th year of the deal. The separate £45 million annual grant to promote Mauritius's development is never linked to inflation, so it falls to the equivalent of £24.2 million in today's money by year 28.
The Government's Preferred £3.4 Billion Estimate
The £3.4 billion estimate cited by the government uses the more complex "net present value" method, following Treasury Green Book guidance. This approach removes inflation effects and then applies a discount for social time preference (STP). The STP rate considers both expected growth in consumption per person and people's general preference for value now rather than later. Applying this method reduces the £120 million annual payment to a present value of £68.9 million in the 10th year and just £4.6 million in the 98th year.
In a letter last year, former chairman of the UK Statistics Authority Sir Robert Chote confirmed that the Office for Budget Responsibility considered the government's method "reasonable" for discounting the value of a lease agreement of this nature.
