Select Committee on European Communities Sixth Report


FUTURE FINANCING OF THE EU: WHO PAYS AND HOW?

PART 3 BACKGROUND

How the european union is financed[11]

OWN RESOURCES

25.  The way in which the European Community is financed[12] is laid down in the Own Resources Decision (ORD), made by unanimous decision of the Council of Ministers. The current ORD[13] came into effect on 1 January 1995.

26.  The ORD allows for four sources of Community revenue ("own resources"). These are defined as follows; the figures in brackets show the proportion of total revenue in the 1998 budget derived from each resource[14]:

  • agricultural levies (now replaced by duties on agricultural products, charged on a range of commodities imported into the Community from non-member countries) and sugar levies (charged on the production of sugar to recover part of the cost of subsidising the export of surplus Community sugar on to the world market) (2 per cent);
  • customs duties on imports from non-member countries (13 per cent);
  • contributions based on VAT, calculated by applying a notional rate of VAT to an identical range of goods and services in each Member State, subject to a cap relating to the size of the Member State's GNP (41 per cent);[15]
  • GNP-based contributions, collected from Member States in proportion to their GNPs (43 per cent).

The first two resources are together known as the "traditional own resources". The VAT and GNP-based contributions are often referred to as the "third" and "fourth" resources: hence the discussion of whether there should be a new source of revenue is often couched in terms of a "fifth" resource.

THE OWN RESOURCES CEILING

27.  The ORD also places a ceiling on the amount which the Community can raise from Member States each year, which forms an upper limit on expenditure because the Community is not allowed to borrow. The ceiling is expressed as a percentage of overall Community Gross National Product (GNP). It was set by the current ORD to increase in steps to 1.27 per cent in 1999, and remain at that level subsequently.

THE FINANCIAL PERSPECTIVE

28.  Expenditure is further constrained by a multi-annual expenditure framework, known as the financial perspective, which forms part of an inter-institutional agreement[16] between the Commission, the Council and the European Parliament. The present financial perspective sets out in money terms annual ceilings[17] for six categories of expenditure (agriculture, structural operations, internal policies, external action, administrative expenditure, and reserves) which must be respected when the annual budget is set. The current financial perspective, which runs from 1993 until 1999, was agreed at the December 1992 Edinburgh European Council. The agreement allows for annual revisions to take account of movements in Community GNP and prices, and of "the conditions of implementation of the budget" (primarily to adjust for under-spending in previous years).

THE ANNUAL BUDGET

29.  The annual budget is established[18] by the "budgetary authority", which consists of the Council of Ministers (acting by qualified majority) and the European Parliament. On the basis of a Preliminary Draft Budget drawn up by the Commission, the Council establishes a Draft Budget, which is then passed to the European Parliament for a first reading. The Draft, with any amendments, returns in turn for a second reading first to the Council, and then to the European Parliament. The Council has the final say on "compulsory" expenditure, which in practice means agricultural expenditure; the European Parliament has the final say[19] on nearly all the rest (defined as "non-compulsory" expenditure).

THE UNITED KINGDOM ABATEMENT

30.  The June 1984 Fontainebleau European Council decided that any Member State which was bearing excessive budgetary costs in relation to its relative prosperity could benefit from a correction. On this basis, the United Kingdom's VAT contributions are abated according to a formula set out in the ORD. This abatement[20] is broadly equal to 66 per cent of the United Kingdom's unabated contribution to the Community budget less its receipts, subject to the following points:

  • expenditure outside the Community (such as the development aid programme) is excluded;
  • the United Kingdom's contribution is calculated as though the budget were entirely financed by VAT-based contributions;
  • the abatement is deducted from the United Kingdom's VAT contribution a year in arrears.

The Fontainebleau Council further agreed that the cost of the United Kingdom abatement should fall on the other Member States, with Germany's contribution to it reduced by a third.

The cost of agenda 2000

31.  In its proposals for Agenda 2000[21], the Commission took the view that it should be possible to cover the development of priority measures to be financed from the Community budget without raising the own resources ceiling from the level of 1.27 per cent[22].

32.  Within that ceiling, the Commission proposed a new financial framework for the Community for the years from 2000 to 2006. This was further clarified in two Commission Communications of March 1998[23], which together set out more details of the financial implications of the Commission's proposals, but did not suggest fundamental changes. Table 1 (below) reproduces the Commission's proposed financial perspective from the first of those Communications[24].

Table 1

Financial Perspective for Agenda 2000

APPROPRIATIONS FOR COMMITMENTS
1999
2000
2001
2002
2003
2004
2005
2006
1.  Agriculture (Note 1)

Of which: Pre-accession aid

45,20546,050

520

46,920

520

47,820

520

48,730

520

49,670

520

50,630

520

51,610

520

2.  Structural operations

Structural Funds

Cohesion Fund

Pre-accession structural instrument

adjustments (Note 2)

39,025

32,731

3,000

3,294

36,640

32,600

3,000

1,040

37,470

33,430

3,000

1,040

36,640

32,600

3,000

1,040

35,600

31,560

3,000

1,040

34,450

30,410

3,000

1,040

33,410

29,370

3,000

1,040

32,470

28,430

3,000

1,040

3.  Internal policies 6,3866,390 6,7106,880 7,0507,230 7,4107,600
4.  External action

Of which: Pre-accession aid

6,8706,870

1,560

7,070

1,560

7,250

1,560

7,430

1,560

7,610

1,560

7,790

1,560

7,900

1,560

5.  Administration 4,7234,730 4,8204,910 5,0105,100 5,2005,300
6.  Reserves

Monetary reserve

Emergency aid reserve

Guarantee reserve

1,192

500

346

346

850

500

200

150

850

500

200

150

600

250

200

150

350

0

200

150

350

0

200

150

350

0

200

150

350

0

200

150

TOTAL APPROPRIATIONS FOR COMMITMENTS 103,401101,530 103,840104,100 104,170104,410 104,790105,230
TOTAL APPROPRIATIONS FOR PAYMENTS 96,38098,800 101,650102,930 103,520103,810 104,170104,560
Appropriations for payments as % of GNP Margin

Available for accession

Own resources ceiling
1.23%

0.04%



1.27%

1.24%

0.03%



1.27%

1.24%

0.03%



1.27%

1.22%

0.03%

0.02%

1.27%

1.20%

0.03%

0.04%

1.27%

1.18%

0.03%

0.06%

1.27%

1.15%

0.03%

0.09%

1.27%

1.13%

0.03%

0.11%

1.27%

Source:  7046/98 COM(98) 164: Commission Communication on the establishment of a new financial perspective for the period 2000-2006.

Notes:

Figures show appropriations in million euro at 1999 prices.

  1. The ceiling corresponds to the agricultural guideline.

2.  Including the amount in respect of the EEA financial mechanism and the adjustment proposed by the Commission to take account of the conditions of implementation of the 1997 budget.


11   This factual section is largely based on the helpful HM Treasury publication, European Community Finances, Cm 3937, April 1998. For a more detailed account of the development of the financing system, see Iain Begg and Nigel Grimwade, Paying for Europe, Sheffield Academic Press, 1998. Back

12   For the relationship between the funding of the EC and that of the EU, see paragraph 6 above. Back

13   94/728/EC. Back

14   In addition, there was a small amount (1 per cent of the total budget) of miscellaneous revenue available to the Community (deriving for example from pensions payments of staff, sale of goods and services, etc). Back

15   For more details, see pp 18-20. Back

16   "A political, but not legally binding, agreement which clarifies the Community's budgetary procedure. Under the [EC] Treaty, the Council and the European Parliament have joint responsibility for deciding the Community budget on the basis of proposals from the Commission. The inter-institutional agreement (IIA) sets out the way the three institutions will exercise their responsibilities in accordance with the Treaty, and respecting the revenue ceilings which are laid down in the own resources decision. In particular, it provides for the annual Community budget to be set in the context of a multi-annual financial framework" (European Community Finances, op cit, page 28). Back

17   Defined in terms of commitments, ie legal expenditure obligations which will lead to payments either in the current year or in future years. Back

18   According to the procedure laid down in Article 203 of the Treaty. Back

19   Subject to a cap on the rate of increase specified in Article 203(9) of the EC Treaty. Back

20   Which on average from 1995-1997 amounted to some 2.3 billion ecu per year: see 11666/98 COM(98) 560: Financing the European Union: Commission report on the operation of the own resources system, Annex 8, Table 7. Back

21   9984/97 COM(97)2000: Commission Communication: Agenda 2000: The EC Budget 2000-2006; and Reform of the Structural and Cohesion PolicyBack

22   We have addressed this point in the present enquiry: see paragraph 42 ff. Back

23   7046/98 COM(98)164: Commission Communication on the establishment of a new financial perspective for the period 2000-2006 and 7221/98 COM(98)165: Commission report on the implementation of the inter-institutional agreement of 29 October 1993 on budgetary discipline and improvement of the budgetary procedure together with proposals for renewalBack

24   7046/98, Table 1. Back


 
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