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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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3.109 Open Europe, during the MFF negotiations, noted the direct link often made between the UK abatement and reform of expenditure, particularly of the CAP. Some respondents noted that the abatement could in effect ‘buy’ reform of the budget and become a

negotiating tool in itself. In this case, Open Europe argued:

In order to even consider giving up the rebate, the UK would need to be given firm guarantees that reforms would indeed happen. What happened in 2005 when Tony Blair gave up part of the rebate, in return for promises of CAP reform that never really materialised, cannot happen again. In other words, reform first, then rebate later.119

3.110 The link between reform and rebate is, arguably, already closer than some respondents suggested, with views from others heard in round table events recognising one indirect impact of the 2005 disapplication of some areas of spend from the abatement.

With substantial reform of the CAP, or focus of Structural Funds towards poorer regions in poorer Member States, the UK’s abatement already reduces without need for negotiation. It is also worth noting that this disapplication has come at a cost to the UK – of €2.9bn in 2012.120 Chart 3.2: EU receipts, 2012, Euros per Capita LU EE PT BE LT

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Source: 2012 Financial Report (receipts) and AMECO (population). Note: figure for Luxembourg (€2,879 per capita) is an outlier in the series, since Luxembourg has a small population and houses several EU institutions, including the European Court of Justice and the European Court of Auditors. In order to allow easy comparison between other Member States, the left hand axis is limited to €800.

Dr Phedon Nicolaides, submission of evidence.

Centre for European Reform, submission of evidence. See also Running the Budget section on revenue system.

Business for New Europe, submission of evidence.

Open Europe, Seizing the Moment, p 34.

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3.111 That the abatement remains as substantial as it is in part a result of continuing distortions in the direction of spend. CAP still accounted for 43% of EU expenditure in 2012, of which France received €5bn more than the UK did in 2011 (around 2.5 times the size of the UK abatement in that year). Professor Cillian Ryan noted this continued focus on agricultural

spend in his evidence:

The original case for the UK rebate was largely driven by the imbalance between the UK contribution to the EU Budget and its low share of CAP receipts by comparison with other high-income EU countries. Given that arguably the EU no longer has a competency function in supporting redistributions to the agricultural sector, if there was significant reform of this spending, it would largely obviate the need for the UK rebate.121

3.112 The UK Government position on this issue remains clear – recognising the impact that the abatement has on the UK’s contribution to the EU. Expenditure distortions mean that the UK continues to have the lowest per capita receipts from the EU Budget. In 2012 the UK was the second largest net contributor despite being among the poorest net contributors.

The abatement is not, therefore, a matter of juste retour (which concerns the amount returning to Member States), but instead of ensuring the UK pays a fair share towards the EU Budget.

Chart 3.3a: Member States’ Net Contributions to the EU Budget with the UK Abatement Applied 0.

06 0.05

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Source: HM Treasury calculations based on European Commission, Commission Financial Report for 2012. ‘Net balance’ is defined as ‘total receipts less total own resource contributions’.

Professor Cillian Ryan, submission of evidence, p 1.

54 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget Chart 3.3b: Member States’ Net Contributions to the EU Budget Without the UK Abatement 0.06 0.05

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3.113 Ultimately, on the UK abatement in particular, there was no consensus of views across respondents. Some respondents argued that ‘corrections, on any reasonable view of multi-level governance, are a nonsense’.122 However, there were significant views to the contrary, with others arguing that ‘the UK’s abatement was entirely justified – no convincing case had been made for its removal or reform’.123

3.114 Certainly, considering the fact that without the UK abatement, the UK would have a net contribution twice that of France and one and a half times that of Germany, it has been the strongly-held view of successive UK Governments that a budgetary distortion remains and the continued defence of the UK abatement remains firmly in the UK national interest.

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Running the Budget To what extent does the EU Budget protect UK taxpayers’ money through effective financial management and organisation of the budget system?

3.116 In this section, we consider the processes by which the EU institutions manage expenditure through the EU Budget, including: the financial management process itself and the discharge process; the system for planning spend through the budget (the commitments and payments system); and the revenue system, by which Member States contribute to the budget.

Financial Management, Error and Fraud

3.117 The role of institutions in managing EU Budget money and in agreeing budget contributions was a touchstone for many respondents. On financial management, there were views both critical and supportive of EU and national institutions, with a broad view that the overall system could always be improved. Several respondents considered the role of the ECA and their refusal to give the budget an unqualified statement of assurance for a number of years, though equally, others were supportive of both budget and ECA.

3.118 The commitments and payments system was another area of discussion, with some evidence noting its importance in delivering long-term plans, and others noting the risks and lack of transparency it can bring. Finally, the revenue side of the budget considered proposals for new taxes to fund the EU Budget and the future of correction mechanisms for Member State contributions, with several respondents referencing the possibility of a generalised correction.

3.119 On financial management, views split clearly between those who saw the budget as a well spent and well managed system and those who saw the inability to receive an unqualified statement of assurance from the ECA as a symptom of mismanagement.

3.120 In particular, respondents noted the ‘error rate’ in the EU Budget – a measurement of the implementation of the budget in accordance with the relevant legislation (and, to be clear, not the level of fraud in the budget, as the Call for Evidence for this report sets out).124 UK

Members of Parliament and delegates to the Council of Europe argued:

Management of this huge sum by the EU has been notoriously bad. For approaching two decades the EU’s own Court of Auditors has consistently refused to sign off the vast majority of the accounts [...] A key problem is one of propriety and property. To those dealing with “EU money” it has not come from any taxpayer, but been magicked [sic] out of thin air. There is no sense of ownership, nor guilt at any waste or loss.125 As does Hodson, submission of evidence.

Brian Binley MP, Davit Harutyunyan MP, David TC Davies MP, The Other Strasbourg Britain’s Division of Competences Review: A View from the Council of Europe.

56 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget

3.121 Indeed, statistics from the latest ECA report show an increase in the rate of error in the EU Budget over recent years and particularly concerning figures in the major spending areas of agriculture and regional policy.

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2011 2010 3.7% 2011 2010 2.3%* 2011 2010 7.7% 2012 2011 6.0% 2012 2011 2.9% 2012 2011 6.0%

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Source: European Court of Auditors, Annual Audit Reports, 2011-13.

3.122 Several respondents argued, however, that:

The current discharge process is working perfectly well [...] [institutions including OLAF, ECA, European Parliament and Commission] have served to reduce the incidence of corruption and mismanagement to levels that are usually much lower than what is customary in individual Member States.126

3.123 Alex Boyd suggested that the ECA was ‘seen to be doing a good job and needed greater encouragement [...] the ECA set high standards and their reports should be acted upon’.127 This also recognised the reality that many of the issues underpinning the rate of error in the EU Budget originate in Member States.

3.124 Several respondents suggested that the majority of these errors were at a national level through ‘shared management’, with some noting that ‘80% of EU spending is enacted through the Member States’, including the UK.128 Indeed, some respondents noted that while the error rate is a factor in failing to receive an unqualified statement of assurance

from the ECA:

The majority of errors occur at a member state level and this may be because of confusion with reporting processes on the part of beneficiaries or an incorrect amount being used in error.129

3.125 Indeed, George Lyon MEP, Vice President of the European Parliament’s Budget Committee, further noted in his evidence that the UK Government, Northern Ireland Executive and Scottish Government had all been responsible for such errors in recent

years. A point also noted by the NFU:

There is something of a paradox that exists in the EU auditing process. Member States are left to develop, implement and deliver EU funded programmes. It is only when they are operational that the EU will determine whether or not rules have been broken and disallowances incurred. Indeed, Defra’s delivery of CAP incurred significant disallowance for the UK.130 Professor Robert Leonardi, submission of evidence.

Alex Boyd, Note of Discussion on the EU Budget Call for Evidence, 17 January 2014, p 2.

Professor Robert Ackrill, submission of evidence.

George Lyon MEP, submission of evidence.

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3.126 Equally, while the system in the UK may not be directly comparable with that of the EU Budget, George Lyon compared the 2012 error rate in the EU Budget (4.8%) with a rate of 4.4% in the 2012 US federal budget.131 The system in the UK does not allow for direct comparison of ‘error’ in the budget.

3.127 In the UK, the audit of central government departments’ financial statements is undertaken by the National Audit Office (NAO). When auditing the financial statements, the NAO provides an audit opinion as to whether the accounts provide a true and fair view. This effectively means whether, in the opinion of the auditors, the relevant accounting standards have been followed correctly. They also provide an opinion on regularity. When providing assurance over regularity, the NAO are examining whether voted Parliamentary control totals have been exceeded and whether the expenditure and income recorded in these financial statements have been applied to the purposes intended by Parliament and other authorities which govern them.

3.128 Where departments breach their budgets, or where there is evidence of material levels of fraud and error, the NAO will qualify departments’ accounts in the same manner as the ECA by refusing to give a clean audit opinion because of levels of errors in the use of the EU Budget.

3.129 The Scottish Government, in their submission of evidence, argued that while ‘it is critical that there is a robust, but proportionate, approach to the sound financial management of the budget’s resources when distributed through the various spending programmes’, there were several areas that needed further consideration, including comment on the challenging level of ‘materiality’ in the error rate, the relationship between auditors and differences in interpretation all posed particular challenges for budget recipients. One suggestion was to consider ‘the role of the EC’s auditors around providing advice [...] to examine the appropriateness of advice-giving in the context of independent audit, in order to deal with avoidable irregularities’.132 Similarly, the NFU suggested that ‘it would seem more appropriate that the EU and it institutions works with Member States as EU programmes are developed to ensure that disallowance is minimised and that schemes are effective and legally compliant from the outset’.133

3.130 Another suggestion for reform of the financial management system came from the Brussels and Europe Liberal Democrats, who proposed a greater role for ‘the budgetary control committees of national parliaments’, who could ‘receive and examine Member States own audit and control practices concerning the EU Budget managed by them’, working closely with the European Parliament and Council.134

3.131 The role of the European Parliament in financial management was also raised and discussed in depth at the Brussels event in December 2013. At that event, a greater role for the European Parliament Budget Committee was suggested, with the Committee taking on a role similar to that of the Public Accounts Committee of the UK Parliament – with the Commission, other institutions and Member States challenged on their part in EU Budget error.135 Alex Boyd, of the European Conservatives and Reform Group of the European Parliament, suggested that institutions including the European Parliament could do more in this area, though this would require ‘increased, better-targeted, information from the Commission [...] to ensure Member States and MEPs could fully scrutinise the system – in the way the Public Accounts Committee in the UK scrutinises the UK’s national George Lyon MEP, submission of evidence.

All from Scottish Government, submission of evidence.

National Farmers’ Union, submission of evidence.

Brussels and Europe Liberal Democrats, submission of evidence.

Note of EU Budget Seminar, Brussels 3 December 2013.

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