Chagos Treaty Cost Calculations: Three Different Government Estimates Explained
The UK government has presented three distinct methods for calculating the financial implications of the Chagos Islands treaty with Mauritius, revealing a significant range from £3.4 billion to £35 billion in estimated costs over the 99-year agreement period.
Political Context and Controversy
During Prime Minister's Questions on January 21, Opposition leader Kemi Badenoch accused the government of "giving away" the Chagos Islands while "paying £35 billion" to maintain administration of Diego Garcia, which hosts a crucial UK-US military base. This figure has sparked considerable political debate about the true cost of the agreement.
The Chagos Agreement Explained
The treaty transfers sovereignty over the Chagos Archipelago to Mauritius while allowing the United Kingdom to maintain authority over Diego Garcia for an initial 99-year period. This arrangement follows decades of negotiations and a 2019 International Court of Justice advisory opinion recommending the UK cede control of the territory.
The islands were originally part of British Mauritius before being separated in 1965 to form the British Indian Ocean Territory. Mauritius gained independence in 1968 and has claimed sovereignty over the archipelago since the 1980s.
Payment Structure of the Deal
The treaty's explanatory memorandum outlines a detailed payment structure across 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 in the second year will establish a trust fund for Chagossians
- From the fourth year, an annual £45 million grant will support economic development projects in Mauritius for 25 years, remaining fixed without inflation adjustments
Three Different Cost Measurements
Government documents obtained through freedom of information requests reveal three distinct approaches to calculating the treaty's total cost:
The £34.7 Billion Nominal Total
This straightforward calculation simply adds up all payments across the 99-year period without adjusting for inflation or time value. The £120 million annual payment, when linked to inflation from year 14, could potentially increase to approximately £800 million annually in the final years of the agreement.
However, this approach has significant limitations as it fails to account for the changing value of money over time. £800 million nearly a century from now will not possess the same purchasing power as £800 million today, and inflation rates over such an extended period remain impossible to predict accurately.
The £10 Billion Present Value Estimate
This calculation converts all future payments into 2025-26 monetary values, providing a more realistic assessment of the treaty's actual cost in today's terms. Under this method, the £120 million annual payment reduces to the equivalent of £89.2 million by year 14 when inflation linking begins.
The separate £45 million annual development grant, which never receives inflation adjustments, diminishes to just £24.2 million in today's money by year 28 of the agreement.
The £3.4 Billion Net Present Value
The government's preferred estimate follows Treasury Green Book guidance using net present value methodology. This sophisticated approach not only removes inflation effects but also applies a discount rate reflecting social time preference.
Social time preference considers two key factors: expected growth in per-person consumption, and the general human preference for value now rather than later. This methodology significantly reduces the apparent cost of distant future payments, bringing the £120 million annual payment down to just £4.6 million in present value terms by year 98 of the treaty.
Former UK Statistics Authority chairman Sir Robert Chote has confirmed that the Office for Budget Responsibility considers this approach "reasonable" for evaluating long-term lease agreements.
Analysis and Implications
The substantial variation between these three estimates – from £3.4 billion to £34.7 billion – highlights the complexity of evaluating long-term financial commitments. Each method serves different analytical purposes, from simple nominal accounting to sophisticated economic valuation.
The political debate surrounding these figures reflects both genuine methodological differences and strategic framing of the agreement's costs. As the treaty progresses through its 99-year duration, the actual financial impact will depend on numerous economic variables that remain impossible to predict with certainty.
