Brexit and the EU budget Contents

Chapter 2: Background

The Government’s aims

9.The Government’s stance on the upcoming negotiations has been laid out in the Prime Minister’s speech of 17 January 2017, and in the White Paper (The United Kingdom’s exit from and new partnership with the European Union), published on 2 February. These set out twelve principles5 that will “guide the Government in fulfilling the democratic will of the people of the UK”. They are set out in Box 1.

Box 1: The Government’s 12 guiding principles

1.Providing certainty and clarity—We will provide certainty wherever we can as we approach the negotiations.

2.Taking control of our own laws—We will take control of our own statute book and bring an end to the jurisdiction of the Court of Justice of the European Union in the UK.

3.Strengthening the Union—We will secure a deal that works for the entire UK—for Scotland, Wales, Northern Ireland and all parts of England. We remain fully committed to the Belfast Agreement and its successors.

4.Protecting our strong and historic ties with Ireland and maintaining the Common Travel Area—We will work to deliver a practical solution that allows for the maintenance of the Common Travel Area, whilst protecting the integrity of our immigration system and which protects our strong ties with Ireland.

5.Controlling immigration—We will have control over the number of EU nationals coming to the UK.

6.Securing rights for EU nationals in the UK, and UK nationals in the EU—We want to secure the status of EU citizens who are already living in the UK, and that of UK nationals in other Member States, as early as we can.

7.Protecting workers’ rights—We will protect and enhance existing workers’ rights.

8.Ensuring free trade with European markets—We will forge a new strategic partnership with the EU, including a wide reaching, bold and ambitious free trade agreement, and will seek a mutually beneficial new customs agreement with the EU.

9.Securing new trade agreements with other countries—We will forge ambitious free trade relationships across the world.

10.Ensuring the UK remains the best place for science and innovation—We will remain at the vanguard of science and innovation and will seek continued close collaboration with our European partners.

11.Cooperating in the fight against crime and terrorism—We will continue to work with the EU to preserve European security, to fight terrorism, and to uphold justice across Europe.

12.Delivering a smooth, orderly exit from the EU—We will seek a phased process of implementation, in which both the UK and the EU institutions and the remaining EU Member States prepare for the new arrangements that will exist between us.

Source: HM Government, The United Kingdom’s exit from and new partnership with the European Union (Cm 9417), pp 7 and 8.

10.These 12 guiding principles do not refer to the EU budget, but a brief statement elsewhere in the White Paper repeats the gist of the Prime Minister’s speech. It emphasises that “decisions on how taxpayers’ money will be spent will be made in the UK”, and that an “appropriate contribution” may be made into the EU budget for specific programmes.6

11.The White Paper also comments on a number of areas that have budgetary implications. In particular, it repeats guarantees made by the Chancellor of the Exchequer in late 2016, that the UK Government will cover the equivalent of all Common Agricultural Policy funding between the Brexit date and the end of the current Multiannual Financial Framework (MFF) in 2020, and that it will also finance any European Structural and Investment Fund (ESIF) contracts signed before autumn 2016.

12.The UK’s ongoing budgetary commitments are at, or near, the top of the EU’s list of priorities. Thus, during a recent visit by the Select Committee to the European Parliament, the budget was cited by the German MEP David McAllister as foremost among the five most important issues for the EU to resolve during the Article 50 negotiations.7 Sir Ivan Rogers, the former UK Permanent Representative to the EU, describing “where the other 27 are coming from”, also listed the budget first among the EU’s priorities.8

How the EU budget works

13.A crucial aspect of the EU budget is that spending and revenue are treated separately. In other words, the UK’s leaving will create two separate accounting problems: one on the revenue side, and one on the expenditure side. Although the prime economic concern in the UK may surround the extent of any net contribution, the issues for the EU are inextricably bound up with the political and administrative processes concerning each side of the budget equation.

Revenue— ‘own resources’

14.The key principle of the EU’s financing is that annual expenditure must be completely covered by annual revenue. This means that the EU must not accrue any external debt for this purpose; it also has the consequence that Member States must agree on how to finance the EU’s anticipated spending lines in advance.

15.The EU budget is funded by revenue drawn from a variety of sources governed by the EU’s Own Resources Decision (ORD) (the most recent iteration of which was adopted on 26 May 2014, entering into force October 2016). The ORD applies retroactively with effect from 1 January 2014. It is agreed by unanimity and must be ratified by each of the Member States: in the UK, this was achieved through the European Union (Finance) Act 2015. The overall amount of own resources needed to finance the budget is calculated from the total expenditure, less ‘sundry revenue’ (for example, fines for breaches of competition rules). Sundry revenue generally accounts for less than 10% of the total.9

16.The ORD limits the maximum annual amounts of own resources that the EU may raise during a year to 1.23% of the EU gross national income (GNI).10 In practice, the EU spends less than the ceiling of the ORD. The intended expenditure is expressed in terms of commitment appropriations (agreements by the Council and to an extent the European Parliament to provide finance within broad policy objectives, up to a defined limit) and payment appropriations (the actual amounts due to be paid over the term). The current spending agreement (the Multiannual Financial Framework for 2014–20) proposes total commitment appropriations of 1.04% of GNI and total payment appropriations of 0.98% of GNI, leaving a ‘margin’ under the 1.23% maximum. Commitment and payment appropriations often differ, because multiannual programmes and projects are committed in the year they are decided, but are paid out over the term of the project.

Customs duties and levies

17.‘Traditional own resources’ (TOR) consist mainly of customs duties on imports from outside the EU and of sugar levies. These are levied by Member States at the external border, and the Member States keep 20% as ‘collection costs’ (25% prior to the 2014 ORD). For the UK, such collection costs amounted to £772 million in 2015, with £3.1 billion returned to the EU.11 TOR are sometimes not regarded as originating in any particular Member State, as they derive from tariffs on goods entering the EU as a whole. Inevitably, countries on the EU’s external borders or with major international ports (such as the UK or the Netherlands) process a greater proportion of the goods entering the Union, and levy the bulk of customs duties, but it is moot whether the tariffs actually emanate from the countries in which goods enter the EU.

VAT-based contributions

18.The EU has had a common system of VAT since 1967. Contributions are levied on a notional VAT base for each country. This is calculated by dividing the total net VAT revenue collected by the Member State by the weighted average VAT rate for that country to obtain an intermediate VAT base. This is then adjusted to obtain a harmonised VAT base, which is capped at 50% of GNI. Each Member State must then provide a small percentage of its harmonised VAT base (the ‘call rate’) to the EU budget. The standard call rate is 0.3% of the notional harmonised VAT base, although for Germany, the Netherlands and Sweden (all net contributors) this was halved for the 2014–20 period. In 2015 approximately £2.7 billion was provided by the UK to the EU in VAT-based contributions.12

GNI-based contributions

19.The GNI resource has grown to become the largest of the EU’s resources and today accounts for about three-quarters of revenue.13 The GNI resource was designed as a top-up for the expenditure not covered by the other established own resources, but has grown substantially in importance over time. The calculations on which the GNI resource is based are derived from estimates provided by the relevant national statistical authority—in the UK, the Office for National Statistics (ONS). The figure is subsequently revised up or down as further data emerge. This can result in refunds to Member States, or calls for extra money, as happened to the UK in 2014.14 The amount members contribute varies from year to year according to the appropriations agreed in annual budgets, the relative GNIs of the Member States, receipts from traditional own resources and other revenue, and the effects of the various rebates. In 2015 the UK’s GNI-based contribution amounted to £13.8 billion.15

Rebates and corrections

20.The UK receives a rebate (the ‘Fontainebleau abatement’) on its GNI-based contributions. It is not paid back to the UK in a separate transaction but rather deducted from the UK’s contributions, and paid a year in arrears (in other words, it is calculated on the basis of the previous year’s net contributions). The method of calculation is complex and has changed over time,16 but is based on the principle that the UK is awarded 66% of the difference between its contribution and its receipts from the budget, with the cost shared among the other Member States in proportion to their GNI. Some other countries have accordingly argued that they should receive a rebate on their payments towards the UK abatement—Austria, Germany, the Netherlands and Sweden have benefited from a reduction in their contribution to the rebate, paying 25% of their respective shares, with the difference covered by the other Member States. Since 2002 this has been a de facto permanent arrangement (as it is included in the ORD). Various other temporary lump-sum rebates have been agreed over individual MFF periods; current beneficiaries are the Netherlands, Sweden, Denmark and Austria.

Expenditure

21.The EU’s spending is approved by the Member States and the European Parliament at various stages: once every seven years through the Multiannual Financial Framework, once a year via the annual budget, and more regularly throughout the year via Draft Amending Budgets. The UK is in absolute terms one of the larger net contributors, along with Germany, France and Italy.17

The Multiannual Financial Framework (MFF)

22.The Multiannual Financial Framework (MFF), laid out in a Regulation,18 sets the parameters for the European budget process. It is drawn up for a period of seven years, with the current MFF running from 2014 to 2020; it was agreed in 2013 after negotiations lasting two and a half years. The MFF stipulates the maximum annual amounts (‘ceilings’) that the EU can spend, expressed in terms of commitment and payment appropriations, and broken down across different broad categories (‘headings’, of which there are currently six). The MFF is proposed by the European Commission, and then adopted via unanimity in the Council, after obtaining the consent of the European Parliament. Article 17 of the MFF Regulation states that it can be amended in response to “unforeseen circumstances” using the same procedure. Article 21 also provides for its revision if a country accedes to the EU, though the Regulation says nothing about a country withdrawing.

The annual budget

23.The annual budget sets the actual figures for expenditure for each EU project. It is proposed by the Commission, and then adopted by co-decision: both the Council and the European Parliament must agree it. The Council agrees the annual budget using the Qualified Majority Vote (QMV) procedure.19 The annual budget corresponds to the calendar year and must be agreed by the end of the preceding year. If no agreement is reached in time, the previous year’s budget is in effect rolled over, with the Commission authorised to continue equivalent spending on a monthly basis (the ‘system of provisional twelfths’). The amount agreed through the budget usually remains below the MFF’s expenditure ceilings, thereby retaining some flexibility to cope with unforeseen circumstances. Such events are dealt with throughout the year via ‘Draft Amending Budgets’ (DABs). These are subject to the same procedural rules as the general annual budget agreement.

The Common Provisions Regulation

24.The Common Provisions Regulation20 lays down common principles, rules and standards for the implementation of the five European Structural and Investment Funds (ESIFs). Article 76 empowers the Commission to commit resources directly to individual Member States in accordance with agreed national allocations (‘enveloping’) on the basis of which Member States determine their co-financing plans, resulting in budgetary provisions that are difficult to unpick. These funds form a large part of the budget (£371.4 billion over the term of the MFF, 34.2% of total commitment appropriations), and because they involve commitments made over the course of several years, associated payments tend to accrue during the latter part of the MFF period. The Commission anticipates that only 27% of the budget allocated to the three main ESIFs will have been transferred into payments by 2019.21

Reste à liquider

25.Reste à liquider (RAL, deriving from the French for ‘yet to be paid’) represents the difference between the amount of appropriations that have been committed and those that have been paid: that is, the accumulation of EU payment promises over the years that have not yet been disbursed to their intended recipients. The majority of commitments under the current MFF are due to be paid by 2023, under the ‘decommitment’ rule (Article 136 of the Common Provisions Regulation, also known as the ‘N+3’ rule). Under this rule, commitments under the ESIFs that have not been paid out by the end of the third year following the commitment under the operational programme, are cancelled.

The legal framework

26.All of the components of the EU’s financial system—own resources, customs duties and levies, VAT-based contributions, GNI-based contributions, rebates and corrections, expenditure under the MFF and annual budget, reste à liquider, and the Common Provisions Regulation—are established by EU legal frameworks, subject, ultimately, to the interpretation of the Court of Justice of the EU (CJEU). Our inquiry has obliged us to consider the UK’s legal obligations under those frameworks in the event that the UK exits the EU without a withdrawal agreement. We address the legal obligations in detail in Chapter 4. The advice of the Legal Adviser to the European Union Committee is included in Appendix 3.


5 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, pp 7–8: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf [accessed 21 February 2017]

6 HM Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, p 49: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_exit_from_and_partnership_with_the_EU_Web.pdf [accessed 21 February 2017]

7 Oral evidence taken before the EU Select Committee, 18 January 2017 (Session 2016–17), Q 9 (David McAllister MEP)

8 Oral evidence taken before the House of Commons European Scrutiny Committee, 1 February 2017 (session 2016–17), Q 8 (Sir Ivan Rogers)

9 European Commission, Consolidated annual accounts of the European Union, Financial Year 2014, (July 2015), p 10: http://ec.europa.eu/budget/library/biblio/documents/2014/2014%20EU%20Annual%20Accounts.pdf [accessed 27 February 2017]

10 Gross National Income. This is slightly different from the more familiar Gross Domestic Product (GDP), because it includes net income from overseas.

11 Office for National Statistics UK Balance of Payments, The Pink Book: 2016, (29 July 2016), Section 9.9: https://www.ons.gov.uk/releases/unitedkingdombalanceofpaymentsthepinkbook2016 [accessed 21 February 2017]

12 Office for National Statistics UK Balance of Payments, The Pink Book: 2016, (29 July 2016), Section 9.9: https://www.ons.gov.uk/releases/unitedkingdombalanceofpaymentsthepinkbook2016 [accessed 21 February 2017]

13 Eurostat, ‘Monitoring GNI for statistics purposes’, (20 September 2016): http://ec.europa.eu/eurostat/statistics-explained/index.php/Monitoring_GNI_for_own_resource_purposes [accessed 21 February 2017]

14 In October 2014 the European Commission informed the Government that it would have to make an extra €2.1 billion in contributions to the EU budget, owing to a revision of historic GNI figures. This amount was reduced by the application of the UK rebate. See ‘The mystery of Britain’s €2.1bn EU budget bill explained’, Financial Times, (12 November 2014): https://www.ft.com/content/d0b07747–234c-37f4-8211–292a6fb8d51b [accessed 21 February 2017]

15 Office for National Statistics UK Balance of Payments, The Pink Book: 2016, (29 July 2016), Section 9.9: https://www.ons.gov.uk/releases/unitedkingdombalanceofpaymentsthepinkbook2016 [accessed 21 February 2017]

16 European Parliamentary Research Service, The UK ‘rebate’ on the EU budget: an explanation of the abatement and other correction mechanisms, (February 2016): http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577973/EPRS_BRI(2016)577973_EN.pdf [accessed 21 February 2017]

17 Iain Begg, ‘Who pays for the EU and how much does it cost the UK? Disentangling fact from fiction in the EU Budget’, (27 January 2016), p.7: http://ukandeu.ac.uk/wp-content/uploads/2016/01/Who-pays-for-the-EU-and-how-much-does-it-cost-the-UK-Disentangling-fact-from-fiction-in-the-EU-Budget-Professor-Iain-Begg.pdf [accessed 21 February 2017]

18 Council Regulation (EU, Euratom) No 1311/2013 of 2 December 2013 laying down the multiannual financial framework for the years 2014–2020, OJ L 347/884 (2 December 2013)

19 The European Council, ‘Qualified majority’, (31 May 2016): http://www.consilium.europa.eu/en/council-eu/voting-system/qualified-majority/ [accessed 27 February 2017]

20 Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006, OJ L 347 (20 December 2013)

21 Commission staff working document accompanying Mid-term review/revision of the multiannual financial framework 2014–2020, An EU budget focused on results, COM (2016) 603 final




© Parliamentary copyright 2017