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«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union EU Budget © Crown copyright 2013 You may re-use ...»

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Review of the Balance of

Competences between the

United Kingdom and the

European Union

EU Budget

Summer 2014

Review of the Balance of

Competences between the

United Kingdom and the

European Union

EU Budget

© Crown copyright 2013

You may re-use this information

(excluding logos) free of charge in any

format or medium, under the terms of the

Open Government Licence. To view this

licence, visit www.nationalarchives.gov.uk/

doc/open-government-licence/ or

e-mail: psi@nationalarchives.gsi.gov.uk.

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. Any enquiries regarding this publication should be sent to us at BalanceofCompetences@cabinet-office.gsi.gov.uk.

This document is also available from our website https://gcn.civilservice.gov.uk/ Contents Executive Summary 5 Introduction 9 Chapter 1: Development of EU Competence 13 The Development of the Treaty Framework of the 13 European Union The Original EU Budget System Pre-UK Entry (1951-1973) 13 Budgets Before Financial Perspectives (1973-1988) 15 Reform and Enlargement (1988-2013) 17 Chapter 2: Current State of Competence 21 The Current EU Budget System 21 The Current Treaty Framework of the European Union 23 EU Legislative Process 24 The Treaty 24 The Multiannual Financial Framework (MFF) Regulation 25 The MFF Inter-Institutional Agreement (IIA) 27 The Own Resources Decision (ORD) 27 The Own Resources Regulations 28 The Sectoral Regulations and Financial Management 29 Chapter 3: Impact on the National Interest 31 Overview 33 The National Interest 34 Agreeing the Budget 36 Size of the Budget 36 Length of the MFF 38 Roles of Institutions in Agreeing the Budget 40 4 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget Spending the Budget 42 EU ‘Added Value’ 43 EU Budget Areas of Spend 45 Evidence Presented on Higher Added-Value Spend 46 Evidence Presented on Lower Added-Value Spend 47 Administrati

–  –  –

This report examines the balance of competences between the European Union and the United Kingdom in the area of the EU Budget, and is led by HM Treasury. It is a reflection and analysis of the evidence submitted by experts, non-governmental organisations, businesspeople, Members of Parliament and other interested parties, either in writing or orally, as well as a literature review of relevant material. Where appropriate, the report sets out the current position agreed within the Coalition Government for handling this policy area in the EU. It does not predetermine or prejudge proposals that either Coalition party may make in the future for changes to the EU or about the appropriate balance of competences.

The EU Budget report considers evidence received as part of the call for evidence period, which ran from 21 October 2013 to 17 January 2014. During this period, the Government sought views from a wide range of stakeholders, including other Member States, European Institutions, the Devolved Administrations, the academic community, think tanks and the general public. A list of evidence submitted can be found in Annex A.

Discussion in the evidence focussed less on the existing competence on the budget, that there is an EU Budget, funded by Member States and managed centrally through the European Commission. Instead, rather than challenging that legal structure, evidence focussed on the way that competence is implemented – how the budget system is set up, how budget money is spent and how it is managed.

This report considers, therefore, how the budget impacts upon the UK national interest, which also requires a consideration of evidence on what the UK’s national interest is in the EU Budget.

All of these issues are explored in greater detail in Chapter Three of this report.

Responses from stakeholders, across the academic community, think tanks, representative groups and Devolved Administrations, suggested that while the balance of competences in the area of the EU Budget is largely appropriate, the application of competences could be improved by reform of budget structures, through improving the financial management of the EU Budget in Member States and EU Institutions alike and particularly through reform of budget expenditure, focussing on areas of genuine added value.

Evidence gathered as part of this report focussed around three discussion areas: agreeing the budget, spending the budget and running the budget.

6 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget In summary of the evidence received, the Agreeing the Budget section of Chapter Three considered the process by which the EU Budget is organised by institutions; how institutions agree on the size of the budget, how institutions vote on the budget and how the long-term

budget is structured. Views were heard in this area on:

• The overall size of the EU Budget, which was seen by some to be small as a percentage of Gross National Income (GNI), when compared to federal budgets in, for example, the United States. However, the unique structure and focus of the EU Budget was recognised, with expenditure not directly comparable with that of Member States;

• The need for a long-term budget period, with respondents largely supporting the need for long-term planning to support recipients, though difficulties were seen in agreeing budget periods by unanimity;

• The length of the Multiannual Financial Framework (MFF) period, with discussion of the relationship between the MFF period and European Parliament electoral cycles and the need for flexibility as well as long-term certainty. Some respondents supported a longer MFF period, to provide greater long-term certainty for spending plans, while others supported a move to the Treaty minimum of five years, to align with the terms of Members of the European Parliament (MEPs). Some also noted the inflexibility of longterm periods, supporting mid-term reviews of spend to provide planning flexibility;

• The roles of institutions in agreeing the budgets, with discussion in particular of the role of the European Parliament on the revenue side of the EU Budget system. Some respondents felt that the European Parliament’s limited role in decision-making on revenue enabled the Parliament to, broadly, support increases in the overall size of the budget.

The Spending the Budget section of Chapter Three considered the relative value for money of areas of the budget, looking at how the budget is organised by budget headings and how the budget is delivered to recipients. This section also considered the UK’s abatement, which is

directly linked to the distribution of expenditure in the budget. Views were heard in this area on:

• The value of expenditure in the budget, where in particular Heading 1A, covering expenditure on research and innovation, was seen as a priority for a greater share of the budget, although views were also heard in support of structural and cohesion funds, particularly in poorer Member States. The value for money of the Common Agricultural Policy (CAP) was questioned by a large proportion of respondents, with particular concerns about the value of Pillar One of the CAP;

• The most effective methods of spend in the budget, where respondents largely accepted that this question depended on the aims of particular programmes, for example, automated payments were most applicable for delivering direct payments to farmers through the CAP, while grants were more sensible for providing funding for academic research, though increased use of innovative financial instruments was suggested by some respondents;

• The link between the UK abatement and value for money, where respondents discussed the UK abatement, with some recognising the link formed by the 2005 ‘disapplication’ between reform of the expenditure side of the EU Budget and the size of the UK’s abatement.

Executive Summary 7 The Running the Budget section of Chapter Three considered the financial management structures which control budget expenditure, including the roles of the European Court of Auditors (ECA) and Member States in ensuring budget money is well spent. This section also considered the commitments and payments system, the ‘off-budget’ items of spend and the

Own Resources system. Views were heard in this area on:

• The financial management system for the EU Budget, where respondents broadly argued for a continued effort to improve financial management of the EU Budget.

Respondents also broadly supported the work of the ECA, recognising its difficult role and noting the importance of close cooperation between Member States, who manage the majority of expenditure through the budget, and the ECA;

• The commitments and payments system, with several respondents supporting the existing system and its perceived focus on long-term stability and ensuring good value in spend. Others, however, raised significant concerns about the increasing failure of the system, particularly focussing on the growing liability of ‘RAL’, or unspent commitments, in the EU Budget;

• Off-budget items, where several respondents raised concerns about the scale of instruments outside the MFF. Others, however, noted the importance of some of these instruments in providing emergency relief both inside and outside the EU;

• Own Resources and corrections, where respondents discussed the future of the revenue side of the budget, with broad support for the Gross National Income (GNI) resource as a primary source of revenue. Other revenue streams were discussed, though respondents largely noted that proposed resources like a Financial Transaction Tax (FTT) would disproportionately impact on the UK. The correction mechanisms on the revenue side of the budget, applicable to several Member States, including the UK and Germany, were also discussed in more general terms, with respondents largely critical of their continued existence, though recognising the negotiating realities which were at cause. Proposals for a generalised correction were discussed, though there was no consensus on how this would be formed.

This report finally considered, in Chapter Four, the future challenges for the EU Budget and the questions raised by evidence which will need further consideration as the budget continues to develop In particular, the report considered the implications of further development of the Euro Area and the potential impact on the EU Budget. The final chapter also looked at questions around further reform of the budget for the future – looking ahead to future discussions on the budget – and the future of the financial management system, where several respondents in Chapter Three of the report made proposals for moderate reform of the existing system.

Introduction This report is one of 32 reports being produced as part of the Balance of Competences Review.

The Foreign Secretary launched the Review in Parliament on 12 July 2012, taking forward the Coalition commitment to examine the balance of competences between the UK and the European Union. It will provide an analysis of what the UK’s membership of the EU means for the UK national interest. It aims to deepen public and parliamentary understanding of the nature of our EU membership and provide a constructive and serious contribution to the national and wider European debate about modernising, reforming and improving the EU in the face of collective challenges. It has not been tasked with producing specific recommendations or looking at alternative models for Britain’s overall relationship with the EU.

The review is broken down into a series of reports on specific areas of EU competence, spread over four semesters between 2012 and 2014. More information can be found on the review, including a timetable of reports to be published over the next two years, at www.gov.uk/review-of-the-balance-of-competences.

The EU Budget report comes at a significant moment in the history of the EU Budget, at the outset of the first long-term budget package, or Multiannual Financial Framework (MFF), to represent a reduction on the package before. After several years of discussion, it is therefore an appropriate moment to reflect on the development of the budget system and present the views on all sides of those discussions which will inform future negotiations.

As set out in the EU Budget Call for Evidence document published in October 2013, the EU Budget report is intended to cover the running, priorities and structure of the budget of the European Union, including the financial management system of the budget. This report does not consider evidence on detailed proposals for reform of sections of the budget, for example reform of CAP, or Structural and Cohesion Funds. Views on these areas are covered in other reports – in the Agriculture and Cohesion reports of this semester, respectively.1 The analysis in this report is based on evidence gathered during the call for evidence period, running from October 2013 to January 2014. During this period, the Government sought views from a wide range of stakeholders, including other Member States, European Institutions, the Devolved Administrations, the academic community, think tanks and the general public. A list of evidence submitted can be found in Annex A. A literature review of relevant material, as well as opinions received in the course of regular business from a range of organisations, people and countries, has also been drawn on.

HMG, The Balance of Competences Between the UK and the EU: Agriculture Report, published in parallel; HMG, The Balance of Competences Between the UK and the EU: Cohesion Policy Report, published in parallel.

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