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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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1.13 This new structure, with increased powers for the European Parliament, saw several challenging negotiations of annual budgets – with several budgets through the 1980s not agreed in time for the New Year and therefore falling into contingency procedures. The EU Budget’s natural evolution following progressive expansions has resulted in a gradual shift of focus. The budget began as a bargain between the founding Members and has developed into the current series of complex bargains based on the individual priorities of the growing number of Member States. This focus on Member States seeking to secure the best possible individual deal by getting at least as much from the EU Budget as they put in, rather than on the needs of the EU Budget as a whole, is known as juste retour and has contributed to the challenges faced in agreeing annual budgets.

1.14 In addition to this shift towards juste retour, the annual budget also took on an element of progressive redistribution with structural funds becoming emblematic of this evolution.

The existence of this challenging system was a major factor in the introduction of the first

Chapter 1: Development of EU Competence 17

financial perspective, which would later come to be known as the Multiannual Financial Framework (MFF).

Reform and Enlargement (1988-2013)

1.15 The crisis over annual budget agreements in the 1980s prompted a radical shift in the process and planning of the budget. European Councils in February 1988 and June 1988 adopted a series of new measures. Additional resources were required over 1988-92, more closely matched to Member States’ relative prosperity. Annual budgets also saw prioritisation of expenditure towards the new cohesion policies, aimed at developing the poorer enlargement Member States’ economies so that they converged toward the growth rates of the long standing Member States, and new efforts to slow the growth of agricultural expenditure.

1.16 The first Financial Perspective introduced multiannual planning to the budget, aiming to control growth year-by-year by setting ceilings on expenditure (total budget and category of spend) in advance by unanimity in Council, beneath which annual budgets needed to be set by Qualified Majority Voting (QMV).3 In practice, the first Financial Perspective was adjusted on several occasions to reflect changing expenditure priorities, but the system brought improved certainty and stability to the budget.

1.17 The reform of the Own Resources system in 1988 brought the system closer to that in place today.4 The VAT-based resource was changed to a capped system where a Member State’s VAT base could no longer exceed 55 per cent of its Gross National Product (GNP), reduced to 50 per cent over 1995-99. The traditional Own Resources were reformed to a system whereby Member States retained ten per cent of duties collected to cover the costs of collection and paid 90 per cent to the EU Budget (over 1970-87, Member States contributed 100 per cent of their TOR revenue to the Commission, of which ten per cent was returned through the budget as expenditure in EU accounts). From 2001, the retention rate was increased to 25 per cent over the 2000-06 financial framework, with 75 per cent paid to the EU Budget. 1988 also saw the introduction of a fourth category of revenue – a contribution based on Member State GNP, which would be used as the ‘balancing’ resource (that is, making up the remainder of revenue required, adjusting for the income seen from other resources). This GNP resource has, over time, become the largest element of revenue to the budget.

1.18 The Edinburgh European Council of December 1992 agreed the first elements of the second Financial Perspective, for 1993-99. This Financial Perspective introduced the new Headings of the budget, splitting expenditure by policy priority, rather than by the mode of expenditure. The accession of Austria, Sweden and Finland in 1995 saw further correction mechanisms applied to the budget, benefitting the new Member States.

A major adjustment of the 1993-99 Inter-institutional Agreement took account of the growth of the Community to 15 Member States, raising the level of expenditure across the budget and incorporating a new, temporary ‘Compensations’ heading for the new Member States which ensured that they would not receive less from the budget while they were phasing into the system than they did as pre-accession countries.5 Otherwise, the second Financial Perspective remained largely stable throughout the rest of the period.

Interinstitutional Agreement on Budgetary Discipline and Improvement of the Budgetary Procedure (1988).

Decision 88/376/EEC on the System of the Communities’ Own Resources, 1988.

Interinstitutional Agreement on Budgetary Discipline and Improvement of the Budgetary Procedure, 1993.

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

1.19 The third and fourth Financial Perspectives, covering 2000-06 and 2007-13 were marked by the rapid expansion of the European Union, with a total of 12 new Member States acceding to the Union in 2004 and 2007. This had several major impacts on the budget system, most notably a substantial increase in the size of the budget which by this time accounted for approximately €100bn a year in payment appropriations.

1.20 A greater focus towards the Structural and Cohesion Funds (SCFs), which particularly benefited the new Member States, saw increased expenditure in that area to target economic cohesion between the richer and poorer regions of the expanded EU, while expenditure on development, on climate action and on research and development also increased substantially. Enlargement from the 1980s onwards resulted in the inclusion of less affluent countries. This began with the Mediterranean expansion to Greece in 1981 followed by Spain and Portugal in 1986. Expansion to include Central Eastern European countries spanned the 1990s culminating in the 2004 enlargement to include the A8 countries. This increase in expenditure on SCFs, and in new Member States in particular which were eligible for pre-accession funding to assist with necessary political and economic reforms before joining the EU, saw the development of a large stock of commitments which have not yet been translated into payments, known as ‘RAL’, which put significant uncertainty on the payments side of the budget and therefore on contributions from Member States.

Chart 1.2: EU Budget Expenditure and UK Contributions (1973-2011).

18,000 140000

–  –  –

14,000 10,0000 12,000 80,000 10,000 8,000 60,000 6,000 40,000 4,000 20,000 2,000 15 )

–  –  –

Source: European Commission, Commission Financial Report for 1973-2008 Gross Contributions Data and 1973-2006 EU Expenditure Data (2008); European Commission, Commission Financial Report for 2009-11 Gross Contributions Data and 2007-2011 EU Expenditure (2011); European Commission, Commission Financial Report for 2012 Gross Contributions Data and 2012 EU Expenditure Data (2012).

Chapter 1: Development of EU Competence 19

1.21 The system of Own Resources remained largely unchanged from 2000 to 2013, with a greater proportion of contributions coming through the GNI-based resource, which effectively replaced the GNP-based resource with the introduction of the Own Resources

Decision (ORD) agreed on 29 September 2000. This stated:

It is appropriate to use the most recent statistical concepts for the purposes of own resources and accordingly to define gross national product (GNP) as being equal for these purposes to gross national income (GNI).6

1.22 This ORD came into force on 1 January 2002 and the formal change to the GNI-based resource happened as part of the current ORD, effective from 1 January 2007.

1.23 In 2005, as part of the negotiations for the 2007-13 Financial Framework, the then UK Government agreed to adjust the UK’s abatement, so that non-agricultural expenditure in the new Member States would not count towards the calculation of the UK abatement.

This ‘disapplication’ was seen to be part of the support for new Member States and was phased in gradually over 2009-11. It resulted in a substantial decrease in the size of the abatement and increased sensitivity of the value of the abatement to rebalancing of spending towards new Member States.7

1.24 The European Council agreements on the 2014-20 MFF in February 2013 set out a new phase in the history of the EU Budget.8 For the first time, Heads of Government agreed a real-terms reduction in multi-year expenditure ceilings. The UK’s abatement was also left unchanged. The new MFF Regulation, setting this historic agreement into EU law, was adopted in December 2013.

Council Decision 2000/597/EC on the system of the European Communities own resources, 2000.

In May 2013, the European Commission estimated the cost of the abatement ‘disapplication’ over the 2007-2012 at more than e9bn.

Regulation 11791/7/13 REV 7 laying down the Multiannual Financial Framework for the years 2014-2020, 2013.

Chapter 2: Current State of Competence

2.1 The EU Budget procedures, documented in the previous chapter, have evolved to form the system which we have in place today. This chapter sets out the latest developments in the EU Budget and how the current legal framework operates.

The Current EU Budget System

2.2 The structure and priorities of the EU which exists today are considerably different to those seen when the organisation was created by the Treaty of Paris (1951). The Member States of today’s EU, emerging from a global financial crisis, are greater in number and more economically diverse than at the organisation’s inception. There is also a broad spectrum of priorities across the Member States reflecting different economic, social and political circumstances. The EU’s policies, and how they are financed by the budget, have to be agreed between these diverse Member States.

2.3 Indeed, many areas of reform would require unanimity in Council, and with the agreement of other institutions including the European Parliament, to deliver. While unanimity has assisted the pursuit of UK national interests, such as blocking increases to the EU Budget, it has also served as a block to other important UK priorities as evidenced by France’s obstruction of the UK-driven reforms to CAP spending. Conversely, the use of QMV on less significant issues has allowed for some progress in other areas that is often in the UK’s interests.

2.4 This political reality means that the budget today is a product of compromise and cannot always reflect the UK’s preferences, or those of any other Member State, in every policy area. It also explains why the budget’s evolution over the years has been gradual rather than radical. The EU Budget is primarily agreed through action by three key institutions – the budgetary authorities of the Council and European Parliament and the European Commission, who are responsible for proposing new budgets and for implementing EU Budget expenditure.

2.5 The European Commission makes proposals for the regulations and decisions set out in this chapter, including the MFF which sits above the annual budgets that decide actual spend in each year. The Council and European Parliament then agree final budgets, initially the European Council in the case of the MFF, with MEPs and Ministers voting by the rules set out below.

2.6 The European Council agreed the 2014-2020 MFF in February 2013. This marked a new phase in the history of the EU Budget. For the first time, Heads of Government agreed a real-terms reduction in multi-year expenditure ceilings. The financing side of the budget, 22 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget the Own Resources system, was largely unchanged and the UK’s abatement was left unchanged by the agreement. The impact of the new ceilings was set out in the Office of Budgetary Responsibility’s (OBR) March 2013 ‘Economic and Fiscal Outlook’, which estimated that UK contributions to the EU were reduced by £3.5bn over the forecast period to 2017-18.1 A comparison of the UK’s gross contribution to the budget against the annual budgets for UK Government departments is set out in Chart 2.1 below.

Chart 2.1: Total Managed Expenditure by Departmental Group and Gross Contribution to the EU Budget 2012-13.

180,000 160,000 140,000 120,000 100,000 80,000 60,000

–  –  –

Source: PESA (March 2014). HM Treasury, Public Spending Statistics (April 2014).

Available at: www.gov.uk/government/publications/public-spending-statistics-release-april-2014, accessed on 10 May 2014.

–  –  –

Office of Budgetary Responsibility (OBR), Economic and Fiscal Outlook (2013).

Council of the European Union, Council Regulation 11791/7/13 REV 7 Laying Down the Multiannual Financial

–  –  –

2014-2020 Budget Headings For 2014-20, the budget framework is split into six broad areas of expenditure (the headings of the budget), as set out below.

1. Sustainable Growth 1a. Competitiveness for growth and employment (including Connecting Europe);

Research and innovation; education and training; trans-European networks; social policy; economic integration; and accompanying policies.

1b. Cohesion for growth and employment; including Structural and Cohesion Funds.

Convergence of the least developed EU countries and regions; EU strategy for development outside least prosperous regions; inter-regional cooperation.

2. Preservation and Management of Natural Resources

2. Includes CAP (encompassing market-related expenditure and direct payments to farmers); common fisheries policy; rural development; and environmental measures.

3. Citizenship, Freedom, Security and Justice 3a. Freedom, security and justice; justice and home affairs; border protection;

immigration; and asylum policy.

3b. Citizenship; public health; consumer protection; culture; youth; information; and dialogue with citizens.

4. EU as a Global Player

4. Covers all external action (‘foreign policy’) by the EU. It does not include the European Development Fund.

5. Administration

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