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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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Many Member States had called [during MFF negotiations] for new own resources, including a Financial Transaction Tax [which proceeded by enhanced cooperation between a group of Member States].161 Chart 3.4: Development of EU Budget Revenue, 1958-2008 140,000

–  –  –

40,000 20,000 Source: European Commission, EU Budget, 2008 Financial Report, Annex 3 ‘Revenue 1970-2008’ (2009).

3.148 Several respondents questioned the impact that an FTT to fund the EU Budget could have on the UK. The Scottish Government in particular noted that ‘there are likely to be significant costs associated with moving to an alternative system, particularly one involving direct taxation of citizens’.162 Indeed, at the Brussels round-table event, this was considered by several attendees as likely to be firmly against the UK’s national interest by disproportionately affecting UK taxpayers.163 Brussels and Europe Liberal Democrats, submission of evidence.

George Lyon MEP, submission of evidence.

Alex Boyd, Note of Discussion on the EU Budget Call for Evidence, 17 January 2014, p 3.

Scottish Government, submission of evidence.

–  –  –

3.149 Several others also suggested that whatever the method of bringing in revenue to the budget, Member States would continue to see this as ‘their’ contribution, with the principle of juste retour, theoretically, distorting the impact of new own resources on Member

States’ positions:

One argument for this [introduction of new own resources] was that their introduction would help move the EU Budget debate beyond its current standing as a separate policy, with a focus on national budget balances, towards a new emphasis on what the EU should be doing. I think that this view is naïve: just as with traditional own resources currently, the money will still come ‘through’ Member States, even if it is not directly ‘from’ them.164 Although methods such as a Financial Transactions Tax or a change to the VAT levy have been proposed as a means to get away from the idea of net contributions, such alternatives would not solve the problem. Member States with a high number of financial transactions or VAT payments would still calculate that revenue as part of a net national contribution.165

3.150 Some respondents also criticised the proliferation of correction mechanisms on the revenue side of the budget, including, but not limited to, the UK abatement. Again, this was often seen, particularly by academics, as a representation of some Member States’ focus

on achieving a ‘fair’ net contribution:

The corrections on contributions are difficult to justify; ‘corrections’ should, arguably, be part of the expenditure side of the balance sheet, not an adjustment of contributions.166 This focus on budget balances and the juste retour has, as I have argued repeatedly, distorted all discussion over the EU Budget. This problem finds its ultimate expression in budgetary corrections, which are a political sop to Member States who are obsessed with budget balances, rather than what EU Budget is spent on. They have no economic rationale at all.167

3.151 However others noted that the need for corrections stemmed from the difficulties of


Corrections, on any reasonable view of multi-level governance, are a non-sense, but they reflect an inability to agree on what is a sensible package of expenditure. It should be seen as a political problem to be resolved by a fundamental rethinking of what the EU Budget is for, rather than increasing resort to a range of corrections.168

3.152 Others recognised that several Member States, including the UK, Germany and Sweden, also receive corrections on their contribution. Indeed, the size of the ‘other corrections’ for Member States other than the UK is now notably greater than the size of the UK abatement. Finally, the generalised correction was discussed by some respondents as a means to ensure fairness across all Member States’ contributions – with several suggested systems.169 Nicolaides argued that ‘an explicit system that is based on this kind of logic (ability to pay and receive) should be more transparent and fairer [than other Professor Robert Ackrill, submission of evidence.

Dr Giacomo Benedetto, submission of evidence.

Fiona Wishlade, submission of evidence.

Professor Robert Ackrill, submission of evidence.

Professor Iain Begg, submission of evidence.

On which Dr Benedetto, submission of evidence, p 13-14 and Nicolaides, submission of evidence, p 1 go into the greatest detail.

64 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget corrections, like the UK abatement]. Naturally, the threshold for a generalised rebate remains to be established’.170

3.153 The theory of a generalised correction has, however, been discussed for several decades.

In the absence of such a correction, Alex Boyd returned to defend the case for the UK abatement as being ‘entirely justified’, though ‘if one could be devised to provide fairness and equality in contributions, a generalised correction could be a way forward, possibly in the form of a % cap [in] GNI for net contributors’.171

3.154 Broadly, therefore, evidence from respondents argued that corrections across all Member States were a symptom of fundamental issues in the budget system – including difficulty in agreeing on the expenditure side of the budget and a focus among some Member States on achieving a ‘fair’ net contribution. Some respondents suggested the need for a generalised correction, with no consensus on what a generalised correction should look like – though several options were proposed.


3.155 In this section, respondents considered:

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

Respondents also supported the ECA, noting the importance of close cooperation between Member States 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 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 would disproportionately impact on the UK. The correction mechanisms on the revenue side of the budget (which are applicable to several countries, 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.

Professor Phedon Nicolaides, submission of evidence.

Alex Boyd, Note of Discussion on the EU Budget Call for Evidence, 17 January 2014, p 3.

Chapter 4: Future Options and Challenges

4.1 In this chapter, we consider the potential implications of the discussion of the national interest and the impact the EU Budget has on the national interest, set out in the previous chapters. We consider some of the challenges that the budget will face in the future – including evidence received from respondents on developments in the Euro Area – and some of the questions emerging from this report.

4.2 Evidence received on all areas of the report has provided an important commentary on the impact that the EU Budget has on the UK. Evidence has considered the need for long-term planning in the budget, the need for institutions to work closely to achieve agreements, the value of the expenditure that comes from the budget and the consequent need for the UK abatement. It has also considered some of the questions around the management of the budget – both in tackling error and fraud in budget spending and in controlling areas like the commitments and payments system and ensuring the budget is funded in a fair and transparent way.

4.3 It is important to remember in considering this chapter that, as this report has set out, many areas for major structural reform would require unanimity in Council – and the agreement of other institutions including the European Parliament – to deliver. While the UK therefore has a ‘veto’ in such cases, all other Member States have the same responsibilities and powers. Therefore, while this report may include evidence which suggests amendments to the budget system which might be in the UK’s national interest, others may consider that those reforms would not be in their national interest – or in the interest of the Union as a whole. Nevertheless, below we set out some of the challenges which will be faced by the Union in this area in the coming years. We then set out the further questions which emerge from this report, for consideration by those approaching the next reform of the EU Budget.

Future Challenges

4.4 Euro Area developments:

• Several respondents commented on the future of the EU Budget with respect to ongoing developments towards closer integration in the Euro Area.  The possibility of using the EU Budget as a facility as part of this development was raised by some – discussed below – although the development of an alternative budget, or substantial reform of the existing system, was not covered by the legal scope of this report.  The impact on the UK of further Euro Area integration and any related ‘solidarity’ mechanisms will be covered by the Semester Four ‘Economic and Monetary Policy’ report;

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

• In summary of the evidence received as part of the call for evidence on this report, some respondents suggested a need for a Euro Area budget as the Euro Area continues to develop. This was particularly seen in evidence from the Brussels and Europe Liberal Democrats, who suggested, simply, that the Euro Area ‘should in due course have its own budget’.1 This was seen by some as a possibility, separate to the EU Budget, as a ‘parallel budget for the Eurozone [...] made available by enhanced cooperation’.2 These views reflected recent informal proposals by European Union institutions for Euro Area solidarity mechanisms;

• Alternatively, several respondents, particularly from the academic community, questioned the necessity of a Euro Area budget.3 Fiona Wishlade linked the difficulty seen in finding agreement in other areas of EU Budget negotiations with this point, arguing that ‘it is difficult to envisage that the structure of the budget would change significantly in future given the drivers underpinning agreement on the budget – net balances and juste retour, coupled with national vetoes’.4 Indeed, this recognises some of the potential risks to the UK national interest, were non-Euro Area Member States to become implicated in Euro Area expenditure.

4.5 Return to growth – an opportunity to reform the budget?

• The MFF agreement for 2014-2020, with its delivery of increases in spending on research and innovation, was seen by some respondents as a step in the right direction towards growth spending;5

• However, a large proportion of respondents commenting on the added value of EU Budget expenditure argued that there was further to go in re-shaping the budget towards higher value, growth-focussed expenditure;

• ‘Added value’ relates to expenditure that provides a collective benefit which could not have been achieved as efficiently through Member States acting in isolation. Climate policy as well as research and development are often cited as examples of areas that add value at an EU level and are discussed in greater detail in the Research and Development report that forms part of the Balance of Competences Review;

• One future question might therefore be around the evolving shape of the budget beneath the now-agreed MFF ceilings and ensuring that, the budget agreed for 2014is delivered in the most effective ways possible, to the highest value areas of expenditure. The mid-term review of the budget, during the MFF period, may be a key moment for this discussion.

4.6 Financial management – opportunities to improve the delivery of the budget:

• As debate continues on the relationship between the UK and the EU, the budget (and the UK contribution in particular) is a clear touchstone for the UK public. Ensuring that the budget is well-spent and that the financial management processes which protect taxpayers’ money in the EU are robust and appropriate was a key point made by several respondents in this report;

Brussels and Europe Liberal Democrats, submission of evidence.

Dr Giacomo Benedetto, submission of evidence.

Professor Cillian Ryan, submission of evidence.

Fiona Wishlade, submission of evidence.

–  –  –

• Respondents focussed on two key challenges for the future; that a) all sides work towards a more transparent, well-spent budget system and b) institutions and Member States work to ensure that the discussion around financial management of the budget is truly transparent, aiming to clear some misconceptions about the level of fraud and error in the budget.

4.7 Agreeing budgets and expenditure priorities:

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