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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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Traditional Own Resources (TOR) consists of customs duties and sugar levies. These dutis are excluded from public sector current receipts because they are collected on behalf of the EU. Customs duties include duties on agricultural products. Under the current EU financial framework, the UK, like all Member States, retains 25% of the amount of TOR it collects to cover the costs of collection and this reduces TME in the National Accounts. This will change to 20% in the next financial framework, then the new Own Resources Decision comes into force.

These figures relate to the cost of additional receipts for DECC and DEFRA (from the EERP, CAP health check, school fruit, food aid programmes) under the Department Pays Principle.

Contributions calculated by applying a call-up rate, currently 0.3%, to a notional 1% harmonised VAT base. Not included in public sector current receipts because treated as an EU tax in the National Accounts.

These receipts are not netted off public sector expenditure in the national accounts, because they are deemed to finance spending by the EU.

Calculated as the net contribution to the EU budget, excluding pubic sector receipts from the EU.

–  –  –

The Sectorial Regulations and Financial Management

2.32 Each area of spending has a regulation to provide the legal basis for their operation.

These are the legal documents which underpin all EU programmes under the MFF and set the levels for those programmes. The majority are co-decided with the European Parliament and agreed by QMV in Council.

2.33 Detail on this spending is explored in individual Balance of Competences reports on each area. Reports on the largest areas (Structural and Cohesion Funds and Agriculture) will be published concurrently with this report.

2.34 The European Commission is obliged to take appropriate measures to ensure that, when actions financed under these regulations are implemented, the financial interests of the EU are protected. This protection takes the form of the application of preventive measures against fraud, corruption and any other illegal activities, effective checks and, if irregularities are detected, the recovery of amounts wrongly paid and, where appropriate, effective, proportionate and dissuasive administrative and financial penalties.

2.35 Member States are under a legal obligation (Article 325 TFEU and the Convention on the Protection of Financial Interests) to counter illegal activities at the expense of the EU and make fraud against the EU Budget punishable criminal conduct.

2.36 Article 325 of the TFEU provides that Member States shall counter fraud and any other illegal activities affecting the financial interests of the EU, by taking measures that act as a deterrent and effectively protect the EU Budget. The European Commission proposed a new Directive to protect the financial interests of the EU, which is currently being negotiated.

2.37 The OLAF may carry out investigations, including on-the-spot checks and inspections, in accordance with the provisions and procedures laid down in Regulation 883/2013/ EC (which came into force on 1 October 2013, replacing Regulation 1073/1999/EC and Regulation (EURATOM) 1074/1999 of the European Parliament and of the Council concerning investigations conducted by the OLAF. This regulation permits on-the-spot checks and inspections to be carried out by the Commission / OLAF in order to protect the European Communities’ financial interests against fraud and other irregularities.

30 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget Financial Management, Budget Discharge and Fraud The European Commission implements the EU Budget in accordance with the principles of sound financial management. The European Court of Auditors (ECA), the independent external auditor of the EU, publishes an Annual Report on the implementation of the EU Budget, with one component being the Statement of Assurance (DAS) – an opinion on the Commission’s accounts (checking if the books were well kept) and EU expenditure (checking if transactions were made in accordance with the rules). The ECA audits the budget based on sample transactions throughout the year, at EU, national, regional and individual beneficiary level, and provides an estimate of the ‘error rate’ in the budget. This reflects the ECA’s estimation of the degree of non-compliance with the rules governing EU spending, such as breaches of public procurement rules, ineligible or incorrect calculation of costs claimed to the EU co-financed projects or over-declaration of land by farmers. In other words errors may or may not be suspected as fraudulent.

Error In its latest report concerning the 2012 accounts, the ECA concluded that some payments were affected by material error, with an estimated error rate of 4.8 per cent for the EU Budget as a whole. The ECA regards 2 per cent as an acceptable level of error, and may refuse to give an unqualified DAS unless error rates are below that level. On this basis, the ECA has signed-off the EU Budget accounts but has been unable to give an unqualified DAS for nineteen consecutive years.

Budget Discharge The budget ‘discharge’ is the final annual approval of the Commission’s implementation of the budget. It is the responsibility of the European Parliament to decide whether it will grant this, based in part on a recommendation from the Council and on the ECA’s report. The European Parliament can refuse to grant the Commission ‘discharge’ for its management of EU funds in a given year, with serious political consequences for the Commission’s future.





For example, the non-granting of the discharge for 1996 initiated the process which led to the fall of the Santer Commission. Several Member States, including the UK, have criticised the current state of financial management. The UK Government has not voted in favour of discharge of the EU Budget for the last three years.

Chapter 2: Current State of Competence 31

Financial Management, Budget Discharge and Fraud continued Fraud Any suspicion of fraudulent activity involving EU funds is reported to OLAF. OLAF is an administrative investigative service of the EU, with the mission of combating fraud, corruption and other illegal activities affecting the EU, including serious misconduct within the EU institutions. It aims to ensure that EU taxpayers money is spent appropriately, that the EU is not being deprived of due revenue and that EU staff behave according to rules and regulations. OLAF also assists the Commission and national authorities in combating fraud and contributes to strengthening of anti-fraud measures. It works closely with national authorities investigation services, police, legal and administrative authorities to counter fraud.

In the annual Fight against Fraud report for 2012, the Commission estimates that the financial impact of irregularities reported as fraudulent for 2012 was €399m.

The UK Government has expressed 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, taxpayers need to have confidence that every effort is being made to improve the management of EU funds.

Chapter 3: Impact on the National Interest Overview

3.1 This chapter considers the evidence received in the call for evidence period. It will first look at the national interest regarding the EU Budget, recognising the spectrum of views on the issue, including the UK Government’s view of what is in the national interest and views from stakeholders. Second, this chapter will analyse the evidence received in response to the call for evidence document published in October 2013. This will look at questions of whether the budget system, priorities, size and mechanisms operate counter to, or in support of, the UK’s national interest.

3.2 In the first section, the chapter will discuss views heard from stakeholders on the national interest in relation to the EU Budget. It is that understanding of the national interest, and the differing views on what the national interest means in the context of budget negotiations, which underpins the discussion of the application of competence on the EU Budget.

3.3 In the second section, the chapter splits into three sub-chapters, recognising the three thematic areas of the budget system. The focus in this chapter is on the application of competence on the EU Budget, rather than the balance of competence itself, which was not discussed substantially in the evidence received (although discussion of new own resources for the EU Budget does touch on an area of exclusive national competence).

• Agreeing the budget: covering views on the fundamental rationale for the EU Budget, the overall scale of the budget, the roles of institutions in budget negotiations (and how these roles can impact on the lack of reform in the budget) and the relationship between MFF and annual budgets.

• Spending the budget: considering the value for money of the budget, views on the comparative value of major areas of expenditure (and the correction mechanisms linked directly to expenditure areas) and the particular delivery methods of expenditure.

• Running the budget: which includes the financial management structures of the budget, the role of the ECA, the budget’s major structures (primarily the commitments and payments system) and the revenue system for the budget (Own Resources).

3.4 Each of these sections has been set out with a summarising question, which aims to provide a framework for consideration of the evidence submitted, alongside the UK Government’s views on the national interest in that area.

34 Review of the Balance of Competences between the United Kingdom and the European Union: EU Budget The National Interest

3.5 In assessing whether the application of competence in the EU Budget, as it currently stands, is aligned to the UK national interest, it should first be noted that a range of views exist on what the UK national interest is in relation to the budget. Evidence received considered a variety of interests as the primary UK national interest: from restraining the size of the budget and limiting the expense to taxpayers; to retaining the UK’s abatement;

and, in some cases, to targeting increased UK receipts from the budget. Some of these interests, naturally, present contradictions which make an assessment of whether the budget is in the UK’s national interest dependent on individual consideration of priorities.

Some of those views are presented in this section, along with the view of the UK Government.

3.6 The UK Government has taken a clear view on the need for restraint and reform in the EU Budget, through recent negotiations on the MFF, annual budgets and the Own Resources Decision. The UK’s overriding priority through these negotiations, particularly on the MFF, has been to seek restraint in the size of the budget, with the consequent moderation in the UK’s contribution to the EU Budget thereby contributing to deficit reduction in the UK.

3.7 The UK Government set out in June 2010 the view that ‘the most urgent task facing this country is to [...] reduce the deficit’.1 This was part of the Government’s plan to return the public finances to a sustainable path, which has restored fiscal credibility, allowing activist monetary policy and the automatic stabilisers to support the economy.

3.8 The relationship of the EU Budget to deficit reduction plans is clear and direct – the UK’s contribution to the EU is made through the UK national budget. Most changes to the overall size of the EU Budget, to the revenue system or even to the distribution of EU expenditure between headings of the budget or Member States, will have an impact on the UK’s contribution. As a result, the UK has consistently been guided by an overall priority to restrain the size of the budget, thereby restraining the UK’s contribution to the EU.

3.9 In the view of the UK Government, therefore, restraining the size of the EU Budget is seen as being firmly in the UK national interest. Protecting the UK’s abatement, with its own impact on the UK contribution to the EU, is also a clear priority, as the Prime Minister noted

following the European Council political agreement on the MFF in February 2013:

As a result [of the disapplication of sections of expenditure from the UK’s rebate calculation in 2005], almost whatever budget deal was done; our net contributions were always likely to go up As a result of this deal, however, they will be going up by less. The only two sensible things we could do to protect the British taxpayer in these negotiations were to get the overall budget down and to protect what is left of our rebate.2

3.10 The UK Government has also taken clear positions on the distribution of expenditure between headings and Member States. The UK has consistently argued for increased expenditure on research and innovation and international development – and a substantial reduction in the size of the budget allocated to the Common Agricultural Policy, focussed on direct payments, and administration. The UK has argued that Structural and Cohesion Funds should be directed primarily towards poorer regions in poorer Member States, rather than being redistributed around rich Member States. However, within the UK, the Devolved Administrations have differing views on the approach to structural funds. This domestic difference of opinion on the national interest is not unique to the UK and has also been seen in Germany, specifically with regard to structural funds. These priorities, in the HM Treasury, Budget 2010 (2010) p1.

–  –  –

view of the UK Government, recognise the positive impact that a well-targeted, restrained EU Budget can have on the UK national interest, through growth and stability across Europe.



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