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; 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.
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.
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.
On 1 December 2011 the European Parliament endorsed the final size and priority spending areas of the 2012 EU budget, following the agreements reached by its negotiating team and the EU Member States.
The increase in payment appropriations will be limited (1.86%) as requested by the Member States. The Commission, Council and Parliament agreed to take stock in the course of next year to see if the budget is realistic or if amendments are needed.
The overall budget for 2012 will amount to EUR 129.1 billion (1.86 % increase) in payments and EUR 147.2 billion (+3.8 %) in commitments.
Source: European Commission
"I am pleased that the Council and the European Parliament have reached an agreement on the 2012 EU budget….I also welcome the fact that, unlike last year, both arms of the budgetary authority have adopted the EU budget before the end of the conciliation procedure.
"However, I regret that they did not take into account the fact that, as we are reaching the end of the current financial period, EU funded projects across Europe gather speed, and that therefore the European Commission has to pay higher amounts to beneficiaries than at the beginning of the financial period.
"There is now a serious risk that the European Commission will run out of funds in the course of next year, and will therefore not be able to honour all its financial obligations towards beneficiaries of EU funds such as Europe's regions and towns, businesses and scientists.
"When this happens, I count on both the Council and the European Parliament to honour their joint statement to the full, providing us with additional means to honour our commitments."
Statement of Commissioner Lewandowski on the adoption of the 2012 EU budget.
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