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58 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget budget’.136 To achieve this, Boyd suggests one solution could be an inter-institutional agreement on transparency of budget information.

3.132 In the discussion held in Sofia, attendees argued that ‘comparatively only very small levels of fraud were uncovered in EU programmes’ and this was therefore not a significant issue.137 George Lyon referenced Commission estimates that only 0.2% of the budget is subject to fraud – noting as the Call for Evidence did for this report (and as set out in the text box on Financial Management in Chapter Two of this report) that fraud and error are substantially different concepts in the EU Budget.138

3.133 In any event, there remains a view, seen widely in submitted evidence and noted by Dermot Hodson that the consistent negative assessments by the ECA have ‘undermined trust in how the EU manages public money’ noting a 2012 Euro-barometer poll which showed that ‘almost three quarters of EU citizens consider there to be corruption within the EU institutions’.139 Certainly, there is more that can be done in this area, to improve the oversight of budget money, the rate of error in the budget and the public perception of the EU Budget.

3.134 On the error rate and the recent findings of the ECA, the UK Government has expressed extreme disappointment that the ECA has been unable to give an unqualified Statement of Assurance to the EU Budget for 19 consecutive years. The ECA’s findings undermine the credibility of the EU Budget and clearly show that the UK’s strong stance on financial management is justified.  When countries across Europe are taking difficult decisions to tackle their deficits, the UK Government believes that taxpayers need to have confidence that every effort is being made to improve the management of EU funds, by the Commission and all Member States.  The Commitments and Payments System

3.135 Evidence also discussed the commitments and payments system in the EU Budget, and its part in management of the budget. This system, unlike many national budgets, sees a mismatch between the budget ‘promised’ and the budget available to spend, which raised questions around transparency and planning in several submissions of evidence, particularly from the research sector, where delays in adoption of the additional budget in 2012 was seen to have risked the future of some projects.

3.136 Some respondents saw advantages in the existing system:

• Increases control over the budget: ‘Paradoxically, it delivers greater control over the budget by the governments than if spending were released straight away [...] Commitments [...] are only fully delivered in ‘payments’ if the recipient complies with all the conditions, attracts the right amount of co-financing and spends any advance correctly’;140

• Opportunity for long-term planning: Respondents at the Brussels event suggested that the commitments and payments system allowed for long-term planning, with the ability to plan a project in the knowledge that a flexible system of ‘payments’ flowing from promised funding would be available when needed. The ‘snowball of liabilities’ as a result – the growing stock of RAL (see box below) was seen as a natural consequence of a system of this type.141 Alex Boyd, Note of Discussion on the EU Budget Call for Evidence, 17 January 2014, p 2.

Note of EU Budget Seminar, Sofia, Bulgaria, 19 December 2013.

George Lyon MEP, submission of evidence.

Referenced by Dr Dermot Hodson, submission of evidence.

Dr Giacomo Benedetto, submission of evidence.

–  –  –

Commitments, Payments and ‘RAL’ The EU Budget is different to the budgeting system the UK has in place. The EU system operates with commitments (which are planned or budgeted spend) and payments (which are actual realised spend, determining Member States’ contributions). The UK system operates on accruals, or payments only.

In some spending areas, this differentiation is of little consequence. With direct CAP payments, a commitment turns in to a payment in the same year with no time lag. In other areas the differentiation is important. With Structural Funds (which might include large infrastructure projects) there is a lag between commitments being realised into payments and some commitments are never spent. This could be because projects take time to implement or because matched funding from a Member State is not available. This creates unspent commitments, known as “RAL” – from the French ‘Reste à liquider’.

There are some rules to try to limit the build-up of unspent commitments, including rules on the expiration of unused commitments. Nevertheless, the stock of RAL has been growing, particularly over 2007-13, and now stands at over €200bn. This creates uncertainty in planning. In the negotiation for 2014-20 the UK put primacy on payments rather than commitments, given the uncertainty of commitments.

3.137 Several respondents also raised concerns with this system, noting the impact that it could have on planning, the disconnect between what was promised and what was actually

available and concern with the growing liability of unspent commitments:

• No improvement on national systems – Several respondents noted that most Member States funded long-term projects, including infrastructure and research projects, without needing a system of commitments and payments. However, the accrualsbased systems of some Member States, notably the UK, did not build up the same liabilities of unspent commitments as seen in the EU Budget.142

• Gap between commitments and payments – ‘The organisation of the EU Budget into commitments and payments can be problematic if the gap between the two different appropriations is too large, which can create a payment credit shortfall’.143 This can have a significant impact on planning of spend – and potentially on contributions (see inset box, above). It can also have an impact on the public perception of the budget, leading to confusion about which figure (commitments or payments) represents the ‘real’ budget.

• Build up of ‘RAL’ – The growth of the RAL (unspent commitments) was seen by some respondents as an issue linked to the gap between commitments and payments, but also to ‘the need for a medium-term in which juste retour is a key factor’.144 In this case, the disconnect could be seen as a product of some sides of the negotiation seeking increasing receipts (or an ability to claim increased receipts through increasing commitments), while others sought to reduce the size of contributions through Alex Boyd, Note of Discussion on the EU Budget Call for Evidence, 17 January 2014, p 2.

Russell Group, submission of evidence.

Professor Iain Begg, submission of evidence. Also Russell Group, submission of evidence.

60 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget reducing the payments side. This was seen by some respondents as an area where action was needed, with ‘currently around €230bn of these commitments [...] rolling forward into the new MFF from the previous one’.145

• Disconnect in planning within institutions- Linked to the above, the Russell Group also noted that ‘the Commission is able to enter into new commitments, such as signing new research grant agreements which require pre-financing, but they run out of payment appropriations to cover these commitments’.146 The impact of this commitments-side focus in the Commission can result in uncertainty for recipients.

Research Councils UK noted that ‘a lack of payment credit could for example result in late payment of pre-financing, for which the Commission would have to pay interest to beneficiaries’.147 A payments-led system would, in theory, provide greater certainty for contributors of the amount needed for the budget and therefore the impact on Member States’ fiscal positions and would ensure that institutions ‘commit’ only the amount which is actually likely to be available in any given year.

‘Off-Budget’ Items

3.138 In considering the transparency of the budget, some respondents also covered views on the system of ‘off-budget’ items – or items ‘outside the MFF’, with broad recognition from most that some flexibility is needed in the system, but recognising that this does not necessarily require off-budget instruments, which could be seen by some to lack transparency. Some referred to the European Development Fund, which was seen as an ‘off-budget item’, though its contribution does not come through the same system as the EU Budget.148

3.139 Some respondents put forward the case that off-budget items were necessary to ensure

the budget ran smoothly and was able to respond to unforeseen circumstances:

The held “off-budget” provides a safety valve for the budget and allows for the EU to respond to emergency situations. Given the length of the seven-year budgetary period, a potential corrective mechanism is useful in being able to provide emergency aid to stricken areas as has been the case during the last few years.149 Some expenditure in the EU Budget is occasional and very unpredictable. Catastrophes within the Union or outside need responses but one cannot foresee the extent of these beforehand. Instruments have been agreed that aim at providing rapid response to exceptional or unforeseen events, and provide some flexibility beyond the agreed expenditure ceilings within certain limits.150 George Lyon MEP, submission of evidence.

Russell Group, submission of evidence.

Research Councils UK, submission of evidence.

The European Development Fund was covered in greater detail in: HMG, The Balance of Competences Between the UK and the EU: Development Cooperation and Humanitarian Aid (2013).

Professor Robert Leonardi, submission of evidence.

–  –  –

3.140 Iain Begg noted that off-budget items could be seen by some as ‘occasionally necessary to break a logjam’ by finding additional expenditure outside the publicly agreed ceilings.151

3.141 Some respondents suggested drawing a line at the point where those instruments which provided emergency relief (the European Solidarity Fund and the European Aid Reserve) would be held off-budget, but that all other expenditure would be held on-budget ‘to ensure proper transparency’.152

3.142 Recognising the advantages and disadvantages above, the NFU suggested that maintaining flexibility in the budget was important, but that this might be achieved by ‘allowing flexibility between funding headings’, without off-budget items acting ‘as some type of savings account for the European funds’.153 This view was echoed by the Brussels and Europe Liberal Democrats, who argued that ‘if the MFF were already more flexible, these latter instruments [off-budget instruments] would not be so necessary’.154 Own Resources

3.143 Evidence also considered the Own Resources, or revenue, system of the budget. Views in this area were varied, with some respondents discussing options for alternative revenue streams for the EU Budget, such as a greater focus on the use of the GNI resource.

Others discussed the correction mechanisms which are a part of the current budget system (see Chapter One) and some considered alternatives, including a generalised correction mechanism.

3.144 This report has already discussed the roles of institutions in agreeing the revenue side of the budget in the Agreeing the Budget section of this chapter. The UK abatement has also already been considered as part of the ‘Spending the Budget’ section of this chapter.

3.145 There was less evidence provided on the need for reform of the Own Resources system.

Respondents provided, however, a critique of the existing system, considered some of the alternative mechanisms and noted the potential impact on the UK of some of those

alternatives. Some argued that the existing system was acceptable without reform:

It is adequate in its present form which expresses a good level of solidarity between rich and poor countries in the EU.155 The current system based on GNI is reasonable in terms of fairness and efficiency.156 This is a sensible system. No change is needed.157 GNI percentage transfers [which make up the bulk of the revenue into the EU Budget system] are the fairest and most accountable source of revenue based on ability to pay.158 Professor Iain Begg, submission of evidence, p 3. Also argued in Robert Ackrill, submission of evidence, p 7.

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

National Farmers’ Union, submission of evidence.

Brussels and Europe Liberal Democrats, submission of evidence.

Robert Leonardi, submission of evidence.

Professor Fiona Wishlade, submission of evidence.

Centre for European Reform, submission of evidence.

Dr Giacomo Benedetto, submission of evidence.

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

3.146 Others have suggested, however, that the contributions system is fundamentally flawed through lack of transparency and Member States’ interests in juste retour (that is, the focus on a Member State’s net contribution);

‘The current own resources system is complex, does not respect fully the precept of “own resources”, and is undermined by correction systems. It is too dependent on contributions of Member States according to their GNI. The link between the funded actions of the Union and its sources of revenue should be understandable for the general public. It is not. Ideally long-term corrections should not be needed and all major sources of revenue should be linked to the activities of the Union’.159

3.147 As George Lyon MEP noted, ‘a High Level Group on Own Resources is to be formed which will consider the most prudent approach to funding the European budget’.160 However, some respondents discussed alternative funding streams, including progress on a Financial Transaction Tax (FTT) to fund the EU Budget (greater detail on the general EU Financial Transaction Tax can be found in the Taxation Report of Semester One of this Review);

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