Select Committee on European Union First Report


Scrutiny of EU Financial Affairs: Memorandum by Sub-Committee A


1. We are keen to improve our scrutiny of EU financial affairs. In particular, we hope to develop the way in which we scrutinise the annual Budget of the European Communities and the implementation of that Budget[45]. For a long time there has been dissatisfaction with the arrangements for parliamentary scrutiny of the annual EC Budget and, despite several reviews over the years[46] and various improvements in how scrutiny of the Budget is handled, frustration remains. The annual timetable for the Budget is complicated and involves many different stages (see below paragraphs 14-16). Yet, although the overall procedure is lengthy, the short amounts of time between the different stages means that the process does not lend itself to in-depth scrutiny work at all junctures.

2. We examine how we might best discharge our scrutiny responsibilities given the restrictions of the Budget timetable. We set out the background to the current scrutiny arrangements for EC Budget documents and propose a number of changes that would improve both our scrutiny of the Budget and the arrangements for reporting to the House. We suggest a structure that will ensure we systematically approach the Budget in a way which is well-timed and effective.

3. We conclude that short, focused scrutiny of the Budget should take place at the earliest possible opportunity in the annual cycle. Furthermore, our scrutiny of the Budget should not distract us from other important inquiries on topics and legislative decisions that have large budgetary implications.


4. The annual EC Budget is one element that determines European spending levels, but many important budgetary decisions are taken outside the annual budgetary process. Broadly speaking, decisions on European spending involve three forms of legislation. These are as follows.

The legal framework

5. Expenditure in the annual Budget is tightly constrained by certain key agreements and items of legislation. Foremost among these is a multi-annual financial programme, known as the Financial Perspective, which lays down revenue and expenditure parameters. The Financial Perspective forms part of an inter-institutional agreement between the Commission, the Council and the European Parliament, all of who are bound to respect its principles and ceilings when the annual Budget is set year by year. This financial framework contains the Communities' medium-term expenditure plans. The Financial Perspective sets out annual ceilings for the six major categories of EC expenditure (agriculture, structural operations, internal policies, external action, administrative expenditure, and reserves) and is thus decisive in shaping the annual Budgets.

6. Another key piece of legislation is the Own Resources Decision, which sets out the arrangements for financing the Community Budget. This document determines Member States' contributions to the Budget and limits the amount of money that the Community can raise from the Member States. It is fixed in terms of a percentage of overall Community Gross National Income (GNI) that the Budget may absorb in any one year. For 2002, this figure is equivalent to 1.24% of Community GNI. These two legislative instruments constitute the major financial decisions for the EC, as they set the boundaries within which the annual EC Budget is negotiated.

7. Changes to this overarching legal framework are very infrequent and are the focus of concentrated scrutiny by the Committee. The current Financial Perspective was set at the March 1999 Berlin Council and covers the period 2000-2006.[47] We examined the proposals for the current Financial Perspective and the operation of the Own Resources System in our Report Future Financing of the EU: Who pays and how? (Session 1998-99, 6th Report, HL 36), which was published at the beginning of March 1999 in the run up to the Berlin Council.

8. The negotiations on the next Financial Perspective are set to be very complex and difficult. They will cover an enlarged EU and will take place amid calls for reform of the CAP for and a review of the UK abatement.

9. The decisions on the total level of EC expenditure are of paramount importance and must remain the focus of concentrated scrutiny by this Committee. We will continue to consider in detail any changes to the overarching legal framework within which the annual EC Budget is set. We undertake to carry out a full inquiry on the subject of the next Financial Perspective soon after the Commission publishes its proposals in this area (which are expected in 2004). By connecting with this procedure at an early stage, we will be able to publish our report whilst negotiations are still ongoing, and thus we hope to have an influence on the process.

10. The Financial Regulation applicable to the general Budget of the European Communities lays down the basic rules that govern all aspects of the EC Budget matters that are referred to in the Treaties. The 1977 Financial Regulation has this year been revised in an attempt to clarify and simplify the budgetary rules. The new Financial Regulation introduced Activity-Based Budgeting to the EC Budget, in an attempt to link proposed expenditure to clear objectives and results. It also redefined the financial actors, clearly separating the roles of authorising and accounting officer. The Financial Regulation thus lays down the general guidelines for the budget and the proposals for its revision were the subject of scrutiny by Sub-Committee A. We will in the future look at the ways in which the move to activity-based reporting is improving budgetary effectiveness across the Community, and how objectives and performance points are having an impact on the budgetary process.

Individual spending programmes

11. Spending in the annual Budget is divided amongst six major categories: agriculture, cohesion policy and the Structural funds, internal policies, external action, preparations for enlargement, and administration. Whilst the ceilings for spending in each category are set in the Financial Perspective, the driver for how and where money is spent within each category in the annual Budget comes from the decisions to adopt particular spending programmes. For example, a decision to enter billions into the Budget on a multi-annual research programme automatically follows from the decision to approve the research programme. The initial policy decision approving the spending programme therefore sets the dynamics for the annual Budget. In this sense, the annual Budget process simply records budgetary provisions for previously considered and scrutinised spending and revenue decisions. This is the case for the two areas that together take up nearly 80% of the total EC Budget: CAP spending and the Structural Funds. Scrutiny of such decisions is certainly as important as scrutiny of the annual Budget.

12. The Common Agricultural Policy (CAP) is historically the most resource-consuming of the Community policies. The EC provides a large proportion of the funding for European agriculture: this year, agriculture is set to consume almost 46% of EC expenditure. The Structural Funds aim to reduce inequalities in wealth distribution across the regions so that all European citizens can benefit from EMU and the large Community market. The Framework 6 programme for Structural Funds made far-reaching policy decisions with large budgetary implications. These funds are the second largest element of EC expenditure, accounting for 34% of the 2002 Budget.

13. A number of new multi-annual programmes, including indicative multi-annual spending volumes, have recently come into effect. These include the Sixth Research and Development Framework Programme (which will cost ?17.5 billion between 2002 and 2006) the Public Health Programme (?312 million over the period 2002-06) and the Employment Incentive Measures (?55 million, 2002-06). These spending decisions themselves underwent United Kingdom parliamentary scrutiny in the usual process, outside scrutiny of the annual Budget cycle.

14. Our Sub-Committees take an active role in scrutinising and reporting on these major spending decisions. In the build up to the current Financial Perspective, we reported on the financing of enlargement,[48] CAP reform[49] and reform of the Structural funds.[50] Since then, we have reported on EU Aid to the Balkans,[51] which is a large element of the spending on external relations. Furthermore, Sub-Committee D is currently conducting an inquiry into the mid-term review of the CAP.

15. By prioritising these long-term policy decisions, we act upon the strengths of the Sub-Committee structure and working methods. In such considered inquiries we have time to stand back and take a long-term perspective. In so doing, we hope to influence policy makers and those who take decisions in a way which is extremely difficult in the fast-moving process of the annual Budget cycle. Such inquiries, if well timed, can add much value to our scrutiny of the annual EC Budget. The major spending decisions will remain a focus of concentrated and rigorous scrutiny for us and will continue to form the basis of our inquiries. We will continue to scrutinise in detail proposals for legislation that have budgetary implications and will follow closely negotiations on such proposals at Council meetings. For instance, with the prospect of enlargement, we will scrutinise the proposals on Structural Funds before they are settled in preparation for the next IGC.

The annual budgetary process

16. The budgetary procedure is set out in Article 272 of the EC Treaty, which stipulates the sequence of stages and the time-limits which must be respected by the two arms of the 'budgetary authority': the Council of Ministers (acting by qualified majority) and the European Parliament, who together establish the annual Budget. The Council has the final say on "compulsory" expenditure, that is, spending that is a direct result of treaty application or acts adopted on the basis of the treaties, which in practice means spending on agriculture; the European Parliament has the final say on all other categories (defined as "non-compulsory" expenditure, which includes spending on regional policy, research policy and energy policy).

17. The annual budgetary procedure, as defined in the Treaty, extends from 1 September to 31 December of the year preceding the Budget year in question. In practice, however, a 'pragmatic' timetable has been applied by the three institutions since 1977. The different stages of the Budget procedure are as follows:

—The Commission draws up a Preliminary Draft Budget (PDB) in May.

—The Council conducts its first reading in July and establishes a Draft Budget (DB), which is then passed to the European Parliament for a first reading.

—The European Parliament conducts its first reading in October on the basis of the Council's Draft Budget.

18. The Draft Budget, with any amendments, then returns for a second reading first to the Council and then to the European Parliament.

Second reading by the Council  

The Council conducts this second reading during the third week of November, after a conciliation meeting with a delegation from the European Parliament. The Draft Budget is amended in the light of the European Parliament's amendments (non-compulsory expenditure) or proposed modifications (compulsory expenditure). As a general rule, the Council's decisions on second reading relating to compulsory expenditure determine the final amount: unless the entire Budget is subsequently rejected by the European Parliament, the Council has the 'last word' on this category of expenditure. The Draft Budget as amended is then returned to the European Parliament.

Second reading by Parliament and adoption of the Budget.  

In December, the European Parliament reviews non-compulsory expenditure, for which it can accept or refuse the Council's proposals. The President of the European Parliament then declares the Budget adopted and it can be implemented.

19. The 2002 general Budget, which was formally adopted after its second reading in the European Parliament on 13 December 2001, amounted to ?98,635 million for commitment appropriations and ?95,655 million for payment appropriations. The UK's gross contribution, after abatement, to the 2002 adopted Budget was about ?13.4. billion (14.3% of the total). In 2001, this figure was ?12.6 billion (13.9%).


20. There are a number of complexities in the structure of the annual Budget cycle that make effective national parliamentary scrutiny of it difficult. The Budget generates a very large amount of paperwork that is often delayed in reaching Member States as a result of translation. This means that documentation is often dealt with at a national level at the same time as it is already being negotiated at European Council fora. It is then too late for national parliamentary scrutiny to be effective.

21. A number of years ago, the Chairman of the Select Committee recommended radical reform of the timetable as the only means to allow effective national parliamentary scrutiny of the Budget.[52] However, the prospect of any significant change to the annual Budget timetable is remote.[53]

22. The European Parliament Committee on Budgets is responsible for matters relating to the definition and exercise of the European Parliament's budgetary powers (Articles 268 to 273 of the EC Treaty) and the rules thereof dealing with the establishment of the Budget. Acting in this capacity, the European Parliament Committee on Budgets follows closely each stage of the annual budgetary procedure. In contrast, it is difficult for a scrutiny committee of a national parliament to keep pace with the fast-moving annual budgetary process. It is our opinion that the scrutiny system of a national Parliament should seek primarily to influence its Government Ministers in the Budget Council and to hold them to account for their decisions. The Committee does not have the time or resources to undertake detailed scrutiny of every single stage of the annual budgetary process without compromising its other scrutiny work, including our inquiries into the budgetary decisions that are taken outside the annual Budget cycle.

23. In deciding which stages of the annual budgetary process to scrutinise, we must ensure that the Committee's handling of budgetary matters does not simply duplicate the work we already do when Sub-Committees consider the legislative proposals authorising spending programmes or revenue raising powers. Given the 80% of the annual Budget that is spent on the CAP and the Structural Funds, and excluding a further 10% of the annual Budget that is taken up by spending on multi-annual programmes, only a small percentage of the total EC Budget is decided on an annual basis and is relevant for detailed annual scrutiny. This low percentage of EC spending does not merit the complicated procedure concentrated scrutiny of every stage of the annual Budget process would entail. The last point is borne out by the fact that the difference between the Preliminary Draft Budget and the final adopted Budget is often very small.

24. The House will, of course, always have the opportunity to scrutinise the various stages of the budgetary process, if it deems that this is essential. We consider, however, that the Committee's efforts are best spent by focusing on particular key stages and developments in the annual process. The crucial question here is how a national parliament can best feed its views into the European procedure of formulating the Budget. It is important to understand when the Committee's opinions can best contribute to the European discussion and affect the position of the Government. In this respect, we consider that the key event is the establishment of the Draft Budget by the Budget Council in July, as this meeting sets the main features of the Budget for the following year. It is at this early stage in the annual budgetary process that our views could best influence the Government and be of most use to them.

25. Between the Commission adopting its Preliminary Draft Budget in May and the Council establishing the Draft Budget before 31 July, there would be time for the Committee to take evidence from a Minister or HM Treasury officials and scrutinise how the Government are approaching the negotiations. In fact, from 1995 to 1997, Sub-Committee A used to take oral evidence from the Government on the Preliminary Draft Budget at the beginning of July, before the Budget Council. The Select Committee published short reports following each of these evidence sessions.[54] In two out of these three years, however, these reports were not published until after the summer recess. It is our intention to ensure a publication date before the Council conducts its first reading on the annual Budget.

26. The Committee has a responsibility both to hold the Government to account preceding the first reading at the Council of the Budget and to inform the House of issues pertaining to the EC Budget. We therefore propose to take oral evidence from the Government on an annual basis before the first reading of the Budget in the Budget Council in July and thereafter to publish a short report.[55] Publication of a report at this juncture in the Budget-making process, before the Draft Budget has been established, would also inform the House of negotiations at an early stage and would introduce an element of parliamentary scrutiny where little presently exists in this House. By adopting this focused approach at an appropriate time in the annual Budget process, we would ensure greater accountability, openness and transparency. We hope thereby to ensure that the scrutiny process is a constructive one for all concerned.


27. There is a huge amount of documentation on the annual Budget that has to be deposited in Parliament. The 2003 PDB alone contains over 2000 pages. Not only is the documentation lengthy, it is also of a complex, technical nature. The flow of a large number of documents relating to the annual Budget, together with the accompanying EMs and Ministerial letters, is inefficient and produces a confusing and bureaucratic picture of the Budget-making process and of scrutiny generally. Furthermore, duplication occurs when the Committee considers each separate stage of the Budgetary making process. This duplication is reflected in the repetitive nature of successive EMs and Ministerial letters. There is great scope for streamlining the flow of documents on the annual Budget to Parliament, in order to produce a more efficient procedure that is focused on the key stages where our scrutiny work can have an influence on the Government.

Information for the proposed annual evidence session with the Government

28. Our aim is to move a substantial part of the scrutiny process to an earlier point in the annual cycle. In order to ensure that the evidence session with the Government on the Preliminary Draft Budget, before the Budget Council, is purposeful, the Committee will need a certain amount of well-focused documentation from the Government. The Commission's Overview document (Volume 0 of the Preliminary Draft Budget) contains a detailed summary of the expenditure proposals that should be sufficient for the purposes of making an overall assessment of the following year's annual Budget. Discussion of the issues that will arise at the Budget Council could begin on the basis of this document. We call on the Government to summit an EM on the Commission's Overview document at the earliest possible opportunity, preferably by the middle of May. The Committee could then hold an evidence session with the Minister and complete its formal scrutiny function as required by the Scrutiny Reserve Resolution, before the Budget Council.

29. For the proposed evidence session to be comprehensive, it should look back at how money has been spent as well as looking forward to spending in the next Budget. Each year, the Government produces a very useful White Paper, entitled European Community Finances.[56] This document not only presents that year's Budget (fixed in the negotiations the year before), it also covers the implementation of the previous Budget, as it includes details of EC financial management and the fight against fraud. If the Government were to bring forward production of this White Paper, our evidence session before the Budget Council would be more informed and could entail a retrospective element. Consequently, we could monitor the execution of the current year's Budget, as well as considering the Budget for the following current year. Our consequent report could therefore be more comprehensive and so hopefully be of more use to Members of the House.

Information following the other stages in the Budget cycle

30. One strength of the current scrutiny process of the annual Budget is that, by recording each of the separate stages for the annual Budget-making procedures, a complete record is provided for the House on each annual Budget. This must not be lost. However, the supplementary comments that the Government supply at each stage on every document are of marginal benefit to the Committee if we are to focus our scrutiny efforts on the Preliminary Draft Budget.

31. Once we have scrutinised the Preliminary Draft Budget, the important thing is then for us to be informed of the major developments in the annual Budget negotiations as soon as possible. In practice, this would mean the Government quickly updating the Committee by Ministerial letter after the various stages of the annual Budget cycle (i.e., after the first reading in Council, the first reading in the European Parliament and after the second readings in the Council and the European Parliament). This way we would not have to wait to receive the official translated texts. The documents themselves, of course, should still be deposited in Parliament, in order to maintain a complete record of each EC Budget, but we see little use in having an additional EM at each stage if the Minister has already written to the Committee to update us.

Transfers of appropriations

32. Transfers do not change the total financial implications of an annual Budget but are concerned only with the movement of funds between chapters or Articles of the Budget. There seems to be no requirement for scrutiny to be completed before the transfer is effected and very little time in which this would be possible. This means that the Committee is normally informed of the transfer after the approval for the transfer has been given. Consequently, the documents are usually cleared by the Chairman of the Committee on the sift. There are more than 50 Transfers a year, many involving very small sums of money.

33. Acknowledging this fact, it was agreed a few years ago that transfers would be consolidated into quarterly reports, which are clear, useful documents that are depositable along with an EM. However, transfers which involve significant sums still necessitate a separate EM (the threshold is currently deemed to be over ?25m). This means that the Committee is often merely informed of relatively minor decisions that have already taken place. We no longer see the need for the Sub-Committee to continue to be informed in this way of matters where it has no power to alter, or even influence, the Government's position. We recommend that all transfers should be recorded in a consolidated report rather than deposited separately.[57] This reform would streamline the present bureaucratic system of reporting transfers and would provide a more efficient procedure so that we can concentrate our scrutiny work on the major financial decisions.

Supplementary and Amending Budgets

34. Supplementary and Amending Budgets (SABs) relate to "unavoidable, exceptional or unforeseen circumstances" (as defined by the Financial Regulation). This means that SABs generally serve to alter the total level of payments, commitments or contributions to an annual Budget. Like transfers, however, there is normally no real scrutiny of SABs, as Parliament is often informed only after a decision has been reached in the Council. Consequently, the documents are usually cleared by the Chairman of the Committee on the sift.

35. SABs can come forward at short notice, in order to deal with some sort of funding emergency. This means that there is often a very short time lapse between the publication of the documents and the time when decisions are made in Council. Indeed, English versions for deposit in Parliament are not always available before Council decisions are taken. The normal timetable for parliamentary scrutiny as laid out in the Amsterdam Protocol is therefore not always met.

36. SABs are usually related to high profile and potentially contentious events. Recent events covered by SABs include the situation in Kosovo, funding the 'Solana building', financing the Convention on the Future of Europe and in reaction to the floods across Europe over the summer. The number of SABs produced each year is much smaller than the number of transfers. Often there are only one or two per year.

37. There is an argument that the same scrutiny rules should apply to SABs as to Transfers. That is, if the total amount of money involved is significant, or if the issue involved is novel or contentious, then a signed EM from the Minister is necessary. If the total involved is less than this designated amount, then they can be dealt with together in a single quarterly report. The distinction between Transfers and SABs is a fine one and a transfer dealing with ?30m could be said to be more important than a SAB with limited financial impact. However, given the small number of SABs produced each year and their discrete nature (they deal with the Union's response to a distinct event which would often be of interest to the House), we suggest that the arrangement for the deposit of SABs remain unchanged. We recognise, however, that these are matters that must be agreed between the Government and both Houses of Parliament.


38. We will continue to examine EU finances rigorously. Our aim is to concentrate on our strength of conducting inquiries and producing timely, considered reports. In doing so, we will focus on the important, financial issues for the Union. We will produce more reports that deal with the budgetary issues that surround the annual EC Budget.

38. As regards our scrutiny we will reorganise our timetable of the annual Budget so as to ensure that our scrutiny is more focused and regularly takes place earlier in the annual cycle, at a time when it can influence the Government. In particular, we will call the Government to account each year in an evidence session before the first reading of the Budget in the Council and thereafter produce a short report for the House.

40. Taken together, these recommendations would result in a shift in focus from documents that merely inform the Committee of decisions previously taken to dealing directly with the Government before decisions are made and asking the Minister to account for decisions afterwards. In our opinion, this would be a sensible move towards greater scrutiny and could be of more interest to Members of the House.

45   The Budget is established and authorised under the Community pillar of the Union and its legal order; it is thus a Budget not of the Union but of the Communities. Back

46   Over the years there have been several internal reviews in Parliament and numerous meetings between the officials of the two Houses and HM Treasury. These have led to several sets of correspondence and two published reports: one by the House of Commons Select Committee on European Legislation entitled Scrutiny of the EC Budget (Session 1997-98, 20th Report, HC 155-xx) and one by the House of Commons European Scrutiny Committee European Scrutiny in the Commons (Session 2001-02, 30th Report, HC 152-xxx). Back

47   The first financial perspective ran from 1988 to 1992. The second one, which ran from 1993 until 1999, was agreed at the Edinburgh European Council in December 1992. Back

48   The Financial Consequences of Enlargement, 10th Report, HL 41, Session 1997-98. Back

49   CAP Reform in Agenda 2000: The Transition to competition: Measures for rural development and the rural environment, 18th Report, HL 84, Session 1997-98. Back

50   The Reform of the Structural Funds and the Cohesion Fund, 30th Report, HL 138, Session 1997-98. Back

51   Responding to the Balkan Challenge: The role of EU aid, 20th Report, HL 107, Session 2001-02. Back

52   Letter of 23 July 1997 from Lord Tordoff to Mrs Helen Liddell, Economic Secretary to the Treasury (Correspondence with Ministers Session 1997-98, 11th report, HL 60 pp 48-50). Back

53   Amendment of the budgetary procedure figured little in the Inter-Governmental Conference that led to the Amsterdam Treaty. Working Group IX (Simplification of legislative procedures and instruments) of the Convention on the Future of Europe is examining the budgetary procedures, but it seems unlikely that it will recommend significant amendment or simplification of the timetable. Back

54   Preliminary Draft General Budget for 1995, 18th Report, HL 94, Session 1993-94; Preliminary Draft General Budget for 1996, 20th Report, HL 100, Session 1994-95; Preliminary Draft Budget for 1997, 14th Report, HL 104, Session 1995-96. Back

55   This process would work in much the same way as how the Select Committee currently takes evidence every 6 months from the Minister for Europe and the incoming Presidency of the Council and is proposing to do every year on the Commission's Annual Work Programme. Back

56   The most recent White Paper, entitled European Community Finances: Statement on the 2002 EC Budget and Measure to Counter Fraud and Financial Mismanagement, Cm 5547, was published in July 2002. Back

57   The same could apply to Amending letters to the Budget.  Back

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