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5. Covers administrative expenditure of all the European institutions, pensions and EUrun schools for staff members’ children (‘European schools’).
6. Temporary heading which includes compensatory payments relating to the latest expansion of the EU.
The Current Treaty Framework of the European Union
2.9 There are now two main Treaties which together set out the competences of the European Union: TEU and TFEU.
2.10 Article 5(2) of the TEU specifies that the Union has the competence to act ‘only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein’, known as the principle of conferral. The two main Treaties, the TEU and the TFEU, set out the legal basis for Union action in relation to various policy areas such as the Single Market, economic and monetary policy and energy policy.
2.11 In some policy areas, such as the customs union, the EU has exclusive competence to act, which means that only the EU may legislate and adopt legally binding acts in those areas unless the Member States are expressly empowered by the EU to act (Article 24 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget 2(1) TFEU).3 In other areas, such as the Single Market and consumer protection, the EU and the Member States share competence in which case the Member States may exercise their competence to the extent that the EU has not exercised, or has decided to cease to exercise, its competence (Article 2(2) TFEU).4 The EU also has coordinating and supporting competence in certain areas, such as the protection and improvement of human health, to carry out actions to support, coordinate or supplement the actions of the Member States without superseding their competence in those areas (Articles 2(5), 5 and 6 TFEU).
EU Legislative Process
2.12 EU legal acts such as regulations and directives are generally adopted by what, after the Lisbon Treaty, is known as the ‘ordinary legislative procedure’ (formerly known as the ‘co-decision procedure’). In most cases, only the European Commission can propose a new legal act. But it cannot become law unless it is jointly adopted by the Council, which is composed of ministers from each Member State, and the European Parliament. Under this procedure, the Council acts on the basis of QMV, where only a specified majority of votes is required and the share of votes of each Member State reflects its population size.
2.13 The Treaties also set out a small number of cases where EU legal acts are adopted under different procedures, referred to as ‘special legislative procedures’. For example, acts in some areas, such as foreign and defence policy, can only be adopted if the Council acts unanimously, so the act will not be adopted if a Minister from any one Member State vetoes it.
2.14 Articles 310 to 325 of the TFEU set out the legal basis for the EU Budget, covering the funding of the budget, the MFF and the annual budget.
2.15 The funding of the EU Budget, the Own Resources system, is covered in Article 311 TFEU. This states that the Council shall unanimously, after consulting the European Parliament, adopt a decision laying down provisions relating to the system of own resources. This must then be approved by all Member States in accordance with their respective constitutional requirements. In the UK’s case, approval requires an Act of Parliament.
2.16 Long-term EU Budget ceilings are established in the MFF which is covered in Article 312 TFEU. This provides that the Council, acting unanimously after obtaining the consent of the European Parliament, shall adopt a regulation laying down the MFF. The documents that comprise the MFF are scrutinised by the UK Parliament but do not need to be approved through an Act of Parliament.
2.17 The EU annual budget is covered in Articles 313 to 319 TFEU. These articles set out the broad process for each year’s annual budgetary procedure, including the role of the European Commission, the Council, the European Parliament and the ECA.
See article 3 TFEU for the list of areas in which the Union has exclusive competence to act.
2.18 Each annual budget is agreed by a qualified majority of the members of the Council and by a majority of the members of the European Parliament. The documents that comprise each annual budget are scrutinised by the UK Parliament but do not need to be approved through an Act of Parliament.
2.19 The TFEU sets out rules relating to the MFF and annual budget. Article 312 states that each MFF should last at least five years and should set ceilings in commitment appropriations (planned spend each year) and payment appropriations (actual spend each year). Article 312 and Article 315 set out what happens in the case where no MFF or annual budget is agreed. There is little detail in the TFEU on what the EU Budget should be spent on: Article 312 states only that categories of expenditure shall correspond to the EU’s major sectors of activity which are then set out in other documents.
2.20 Further procedures on the budget are set out in a series of legal instruments, described in greater detail below.
The Multiannual Financial Framework (MFF) Regulation
2.21 The MFF Regulation sets out the annual ceilings on commitments and payments (i.e, the maximum amounts that can be spent).5 It also sets out the high level rules of the operation of the budget for that period.
2.22 Agreement by Council to the MFF Regulation signals the codification of the MFF in EU law, thereby allowing spending under the MFF subject to agreement to the various sectorial regulations (see below). The MFF Regulation also sets out the budget for, and limits of, ‘off-budget’ items described in the text box below.6 The Council agrees the MFF Regulation unanimously after obtaining the consent of the European Parliament.
The adoption of the 2014-20 MFF by the European Parliament is the first time a free standing MFF Regulation has been adopted. Prior to the Lisbon Treaty, the MFF was provided for in an Inter Institutional Agreement (IIA). For instance, the 2007-13 IIA, setting out multiannual ceilings was adopted under a pre-Lisbon procedure by consensus in Council and with the agreement of the European Parliament. See Chapter One for more information on the system prior to the Treaty of Lisbon.7 OBR, Economic and Fiscal Outlook.
OBR, Economic and Fiscal Outlook, citing MFF Regulation; Regulation 1927/2006 establishing the European Globalisation Adjustment Fund, 2006.
Interinstitutional Agreement 2007-2013 between the European Parliament, the Council and the Commission on Budgetary Discipline and Sound Financial Management, 1996.
26 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget ‘Off-budget’ Items The EU Budget system includes a series of items ‘outside the MFF’. These ‘off-budget’ items are set out in the MFF Regulation and are financed through the EU Budget. They provide flexibility and additional funds if needed within a budget year.
Flexibility Instrument This allows the financing, for a given financial year, of clearly identified expenditure that could not be financed within the limits of the ceilings available for one or more other headings.
Emergency Aid Reserve Allows for a rapid response to specific aid requirements of third countries following events which could not be foreseen when the budget was established, first and foremost for humanitarian operations, but also for civil crisis management and protection.
European Solidarity Fund Allows financial assistance in the event of major disasters occurring on the territory of a Member State or of a candidate country European Globalisation Adjustment Fund Provides specific, one-off support to facilitate the re-integration into employment of workers in areas, sectors, territories or labour market regions suffering the shock of serious economic disruption.
The European Development Fund (EDF) is sometimes considered to be an offbudget item, but is not financed through the EU Budget system. It is instead funded by Member States through a separate contribution. More detail on the EDF is provided in the Development Cooperation and Humanitarian Aid report, in the first semester of the Balance of Competences Review.
2.23 Annual budget Regulations are adopted in each year of the MFF period, with the budget size agreed in each year set at a level within the ceilings of the MFF as outlined in the MFF Regulation. Like the MFF Regulation, Annual budget negotiations begin with a proposal from the European Commission followed by agreement of the Council and European Parliament. The Council, as set out above, agrees the annual budget by QMV.
2.24 Within annual budget years (i.e. when spending is taking place), however, the European Commission will in most years present a ‘draft amending budget’ (DAB). DABs seek to adjust the annual budget agreement to take into account changing needs, or requirements for additional expenditure or use of ‘off-budget’ flexibilities. Many of these DABs therefore include a request for (sometimes substantial) additional budget expenditure within the MFF ceilings. As amending budgets represent an amendment to the original annual budget, they are agreed in the same way – by QMV in Council and requiring the agreement of the European Parliament. The UK has been heavily critical of the number and scale of DABs proposed by the European Commission in recent years.
Chapter 2: Current State of Competence 27The MFF Inter-Institutional Agreement (IIA)
2.25 The MFF IIA sits underneath the MFF Regulation, in effect providing more detail on the procedures of the budget, for example on how the ‘off-budget’ mechanisms will work and on how annual budgets will work.8 The IIA cannot set the levels of spending within the MFF as this can only be done through the MFF Regulation.
2.26 The Council agrees this instrument by QMV and through the ordinary legislative procedure with the European Parliament. The most recent version was agreed concurrently with the 2014-20 MFF Regulation.
The Own Resources Decision (ORD)
2.27 The ORD sets out how the budget will be financed by Member States. This instrument sets out the rules by which contributions to the EU Budget are made. The current system means Member States broadly make contributions according to their relative economic size.
2.28 The ORD also contains correction mechanisms, including the UK abatement and those for several other Member States, as described in the text box below. These are aimed at adjusting for the relative low receipts of some countries and compensating for ‘excessive’ budgetary burdens in relation to their relative prosperity, drawing on the Fontainebleau Principle, set out in Chapter One.
Correction Mechanisms for Other Member States In addition to the UK, several other Member States who are net contributors have made the case that their contributions represent an ‘excessive’ budgetary burden in relation to their wealth. For the 2014-20 period it has been agreed, subject to the approval of the ORD by all Member States, that five other Member States will have correction mechanisms of their own.
These are split into three types:
Correction on the contribution to the UK abatement The UK abatement is financed by the other 27 Member States, but Austria, Germany, the Netherlands and Sweden pay only 25% of their normal share. As this is an inherent part of the UK abatement mechanism, it is a non-time limited agreement and therefore continues to apply through the current ORD.
Reduced VAT contribution The rate of call of the VAT-based own resources for Germany, the Netherlands and Sweden will be fixed at 0.15% for 2014-20; all other Member States have a rate of call of 0.3%.
‘Lump sum’ correction For 2014-2020, Denmark, the Netherlands and Sweden will benefit from gross reductions in their annual GNI contribution of €130 m, €695 m and €185 m respectively. Austria will benefit from gross reductions in its annual GNI contribution of €30 m in 2014, €20 m in 2015 and €10 m in 2016 (all figures in 2011 prices).
Interinstitutional Agreement 2014-2020 between the European Parliament, the Council and the Commission on budgetary discipline and sound financial management, 2013.
28 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget
2.29 The ORD fleshes out the Treaty obligation to finance the EU Budget and the form of its adoption following national approval requirements and procedures meaning that its status is very close to that of the Treaties themselves. The successive ORDs have been designated as Union Treaties under the European Communities Act 1972.
2.30 The Council agrees the ORD by unanimous voting. The European Parliament is consulted following which the ORD must then be approved by Member States in accordance with their respective constitutional requirements. In the UK’s case, approval requires an Act of Parliament.
The Own Resources Regulations 2.31 At present, the implementing measures for the EU’s own resources are provided for by a single Regulation adopted by the Council after consulting the European Parliament. This Regulation is adopted by QMV. This is in the process of being split into two Regulations, the ‘Implementing Regulation’ and the ‘Making Available Regulation’ which are estimated to come into effect in January 2016 and apply retroactively.
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2012-13 Expenditure transfers to EU institutions
These contributions are included in current AME – see table 4.17 in the March 2014 Economic and fiscal outlook.