EU Budget - British contributions

What is the EU Budget?

The UK has contributed to the budget of the EU ever since its accession to the union in 1973.

Unlike many supranational organisations, the EU has specific policy tasks assigned to it and therefore requires a working budget to deliver these objectives. However, the political and media attention paid to the EU budget belies its relatively small size: for 2011 it was set at 126.5 billion euros; just 1.01 per cent of the EU's gross national income (GNI).

This is because most of the biggest spending items - defence, education, health, social services - remain reserved to the member states, while many of the EU's responsibilities, such as market regulation, involve little cost.

Annual EU budgets are based on a multiannual financial framework agreed between the European Parliament, the European Council and the European Commission. This financial framework sets the maximum amount of commitment appropriations in the EU budget each year for broad policy areas (headings) and fixes an overall annual ceiling for payment and commitment appropriations.

The payment appropriations figure relates to the amount of money expected to be paid out in the current financial year. The higher commitment appropriations figure includes funding for multi-annual programmes to be spent over one or more years.

Background

The Treaty of Rome 1957 envisaged that after a transitional period of 'national contributions' funding the budget, the EEC would be funded under a system of 'own resources', which effectively fixed national contributions to the EU budget. However, disagreements over the nature of the agreement delayed its implementation until 1970.

At present 'own resources' revenue is derived from three main sources: Customs duties; a share of the harmonised value added tax (VAT) base of each member state; and a further contribution from member states based on the size of their gross national income(GNI).

Previously, 'own resources' had been divided into four categories: Own resources of agricultural origin, customs duties, VAT-based resource and GNI-based resource. However, there is now no material difference between import taxes on agricultural and non-agricultural products.

The EU was plagued by budgetary crises in the early 1980s, when the common agricultural policy (CAP) was absorbing as much as 70 per cent of the budget. At the time, the GNI factor was not included and the VAT proportion was capped at a maximum of one per cent.

Conservative Prime Minister Margaret Thatcher argued from 1979 that the UK contributed too much to the EU Budget, on account of the small size of the UK farming industry. At the Fontainebleau summit in 1984, she famously 'handbagged' EU leaders into agreeing a rebate arrangement.

One of the key commitments at the Berlin Council of 1999, which agreed a financial perspective for 2000 to 2006, was to stabilise overall expenditure and to only marginally increase CAP spending in the period, while Structural Fund spending was to be reduced.

In December 2005, member states agreed a budget for the 2007-2013 financial perspective worth 862bn euros over the seven years, or 1.045% of the EU's Gross National Income (GNI).

EU leaders also agreed that a fundamental reform of the budget was needed and the European Commission launched a public consultation in 2007, the 'Budget Review', to look at key challenges now facing the Union including the costs of enlargement, the global economy, security threats and the environment.

The UK has called for far-reaching reform of the CAP and also for Structural and Cohesion Funds (SCF) to be focused primarily on removing differences in levels of economic development between member states. The agreement reached on agricultural financing to 2013 already determines a large share of the EU Budget.

In December 2010, Prime Minister David Cameron, together with other European leaders from Germany, France, the Netherlands and Finland, called for a real-terms freeze in the EU budget for 2014-2020.

In a letter to the European Commission president, Jose Manuel Barroso, the five signatories warned that European public spending "cannot be exempt from the considerable efforts made by the Member States to bring their public spending under control" and argued that payment appropriations should increase, at most, by no more than inflation over the next financial perspectives and commitment appropriations should not exceed the 2013 level with a growth rate below the rate of inflation.

Controversies

Since the 1980s, the EU has experienced relative budgetary peace, with most member states satisfied with the prevailing arrangements.

A major point of contention when revising the detail of the 'own resources' agreement has traditionally been the issue of the CAP. The less agrarian economies of the EU are committed to reforming the CAP away from direct production subsidies towards the promotion of 'rural development', but those that benefit most from the unreformed CAP, principally France, have repeatedly slowed progress.

The European Commission initiated the CAP 'Health Check' in 2007 with the aim of building on previous reforms to make the CAP more suitable for an enlarged EU of 27 member states.
A major simplification of CAP is also underway which aims to reduce red tape for both farmers and administrations.

The British rebate negotiated by Margaret Thatcher has been another source of controversy. When it was agreed in 1984 the UK was one of the poorest member states. Since that time Britain has become wealthier, leading to calls from other EU members for the amount to be renegotiated or scrapped altogether. In December 2005, the then prime minister Tony Blair agreed to reduce the British rebate by £1bn a year between 2007 and 2013 - a move still strongly criticised by the Conservatives, the Liberal Democrats and UKIP.

Statistics

In the 2011 budget, the first EU budget under the Lisbon Treaty, 126.5 billion in payments was adopted - an increase of 2.91% on the 2010 budget.

The EU budget foresees a 14.5% increase in payment appropriations for measures aimed at boosting economic growth (?41.7 billion - Cohesion for growth and employment) as well as a 10.1% increase in the area of Freedom, security and justice (?813 million). The increase in the level of payments for Cohesion is mainly due to the fact that many projects in regions across Europe are reaching cruising speed and that the Commission will have more bills to pay since it co-finances these programmes.
On the other hand, other parts of the budget are reduced compared to 2010: agriculture and the environment (?56.4 billion - Preservation and management of natural resources) would decrease by 3%; citizenship (?646,0 million) would see a drop of 3.9% and EU as a global player (?7,2 billion) would be reduced by 7.1%.
Administration remains at less than 6% of the total budget.

Source: European Commission - December 2010

Quotes

"We will strongly defend the UK's national interests in the forthcoming EU budget negotiations and agree that the EU budget should only focus on those areas where the EU can add value."

The Coalition: Our programme for government - May 2010

"All around Europe, countries are tightening their belts to deal with their deficits. Europe cannot be immune from that. We want to see real budgetary restraint for 2014-20 - the time of the next financial perspective."

Prime Minister David Cameron - December 2010

"The governments of our 27 Member States and the European Parliament, by adopting the 2011 budget, have sent a strong signal to their citizens: Europe is far more about addressing concrete issues then inter-institutional wrangling!
"Similarly, they have sent an even stronger signal to the markets and to the world: despite the difficult financial and economic situation, despite our national disparities, when faced with crises Europe acts as one!"

Statement by Commissioner Lewandowski on the adoption of the budget for 2011.