Explanatory Memorandum from Miss Melanie
Johnson, Economic Secretary, HM Treasury
Preliminary draft budget of the European Communities
for the financial year 2001
SUBJECT MATTER
Introduction
1. The Preliminary Draft Budget
(PDB) for 2001 sets out the Commission's proposals for expenditure
in 2001. It provides the basis for the negotiation by the Council
and the European Parliament (the "Budgetary Authority")
of the Community's 2001 budget.
2. Explanations of the budget figures are given in the Commission's
volume 0 of the PDB, which provides a fuller summary. All figures
are in current prices.
Status of the PDB
3. The PDB is the first stage in the budget procedure[16]
which will result in the adoption of the
2001 EC Budget.
4. The context for each year's PDB is set by the financial
perspective, which forms part of the Inter-Institutional
Agreement (IIA). In the light of the conclusions of the Berlin
European Council in March 1999, a new IIA was signed on 6 May
1999 between the European Parliament, the Commission and the Council.
This purpose of the new IIA is to implement budgetary discipline
and to improve the functioning of the annual budgetary procedure
and cooperation between the institutions on budgetary matters.
5. The Commission this year has proposed a revision to the
Berlin financial perspective expenditure limits, on which a separate
EM has been submitted on 14 June. The Commission's PDB for 2001
is set in the context of its revised financial perspective.
Documents
6. To date, the Commission has published only a draft
of Volume 0 of the PDB, which is a summary of the key budget figures
on the expenditure side. The main PDB documents are expected in
early July, and will be deposited as soon as they are received.
7. This Memorandum is being submitted before receipt of those
detailed documents to allow more time for scrutiny before the
Council's first reading, which will be on 20 July. This is in
line with the European Scrutiny Committee's report on the EC Budget
(20th report of the 1997-98 Session).
8. The PDB has in the past consisted of 7 volumes. Volume
0 gives a summary of the whole budget by chapter (group of individual
budget lines) as well as a more detailed justification of the
overall budget figures than can be found in the overview.
9. Volume 1 gives details of the implications of the budget
for member states' gross contributions to the EC, calculated under
the Own Resources Decision. Volume 1 does not, however, include
estimates for net contributions to or receipts from the EC Budget.
A Government estimate for the UK's Net Payments to EC Institutions,
which takes account of the balance of UK expenditure and receipts
and also the abatement received in respect of the previous
year, was published in the "Financial Statement and Budget
Report" (HC 298).
10. Volumes 2, 4, 5, 6 and 7 set out the institutions' respective
budgets. Of these volumes, Volume 4 (the Commission's budget)
is the most important in terms of overall expenditure since it
covers almost all of the budget: section A of Volume 4 covers
the Commission's administrative budget, and section B the Community's
programme spending.
11. The remaining volumes cover the administrative budgets
of the other institutions: the Parliament (Volume 2); the European
Court of Justice (Volume 5); the Court of Auditors (Volume 6);
and the Economic and Social Committee and Committee of the Regions
(Volume 7). The Council's budget (which forms volume 3 of later
rounds of budget documentation) does not have a separate volume
in the PDB.
Summary of figures
12. The table at Annex A sets out the main figures for
commitments in the PDB, including sterling equivalents
(converted at the rate of £1 = _1.6064, the rate notified
in the Official Journal as prevailing on the last working day
of May 2000). Elsewhere in this Memorandum figures are given only
in euros since this is the unit in which the Budget is denominated.
The table at Annex B sets out the main figures for commitments
and payments in the PDB for 2000 and 2001.
13. Commitment appropriations in the PDB total 96,924 million
euros, 3.9 per cent above the 2000 Budget. The total for payment
appropriations is 93,874 million euros, 5.0 per cent above
the 2000 Budget.
Detail
14. For category 1 (agriculture) the Commission propose
appropriations of 44,100 million euros. (Since all agricultural
commitments are met in year, commitments equal payments.) The
allocation for the "traditional" CAP (category 1a) is
up by 2,716 million euros, or 7.4 per cent compared to 2000.
15. Proposed spending on rural development and accompanying
measures (category 1b) increases by 411 million euros, or 10.1
per cent.
16. It should be noted that the Commission have chosen to
reduce the financial perspective ceiling for category 1 by 300
million euros in their proposed revision of the financial perspective.
The Commission have done this firstly to increase the financial
perspective ceiling for category 4 (external relations) by 280
million euros to give room to meet their proposed increase in
aid for the Western Balkans; and secondly to increase the ceiling
for pre-accession aid (category 7) by 20 million euros to accommodate
aid to pre-accession states in the Mediterranean.
17. In order to enter the most realistic figures into the
budget, the Commission have in recent years undertaken to submit
a rectifying letter in October setting out more up to date
forecasts of expenditure in the agriculture category.
18. Proposed commitment appropriations for structural operations
(excluding structural pre-accession aid) total 32,720 million
euros, equal to the ceiling in the financial perspective. The
total represents an increase of some 42 million on 2000.
19. The main component of structural operations are the structural
funds. These account for 28,184 million euros of the total
proposed commitments for structural operations in 2001.
20. Payment appropriations for structural operations are set
at 31,914 million euros, an increase of 0.4 per cent on 2000.
21. Commitments for internal policies (category 3)
total 6,135.7 million euros, an 86 million euro increase, or 1.4
per cent, on 2000.
22. Appropriations in category 3 respond directly to two Commission
objectives:
23. Commitments for external actions (category
4) come to 4,933 million euros, an increase of 143 million euros,
or 3 per cent on 2000. This reflects the Commission's proposal
to increase the financial perspective ceiling for category 4 by
280 million euros to 5,015 million euros for 2001, compared with
the Berlin ceiling of 4,735 million euros for category 4 in 2001.
24. The 2001 PDB includes a significant increase in funding
for the Balkans region, with the chapter covering co-operation
with the Balkan countries (B7-54) increasing by 343 milion euros
on 2000, or by 72.6 per cent.
25. Category 5: Administration. Proposed commitments
for 2001 are 4,861 million, a 3.4 per cent increase over 2000,
with a margin of 79 million euros below the financial perspective
ceiling. Total administrative expenditure breaks down into 2,564
million euros for Commission administration excluding pensions,
a 2.4 per cent increase compared to 2000, and 1,675 million euros
for the other institutions, an increase of 2.5% on 2000. Provision
of 621.5 million euros for pensions represents an increase of
around 57 million euros compared to 2000.
26. Category 6: Reserves. There are three reserves:
- the monetary reserve, with proposed commitments
of 500 million euros. This may be drawn upon in limited circumstances
to offset agricultural expenditure arising from changes in the
dollar-euro parity. Past expenditure on this reserve has been
very low, and it was agreed as part of Agenda 2000 that it should
be phased out by 2003;
- the emergency aid reserve. The proposed
commitment for this in 2001 is 208 million euros, a 2.5 per cent
increase on 2000;
- a guarantee reserve, covering payments made
into the Loan Guarantee Fund. The Fund's value is maintained at
a fixed proportion of the value of outstanding debt to the Community.
The proposed commitment for this in 2001 is 208 million euro,
a 2.5 per cent increase on 2000.
27. Pre-accession aid Category 7 incorporates
aid to the candidates for EU membership under PHARE and two new
programmes agreed in Agenda 2000: ISPA (structural aid) and SAPARD
(agricultural aid). The substantial level of pre-accession assistance
in this category is in line with the conclusions of the Cardiff
European Council. Pre-accession aid commitments for 2001 are 3,259
million euro. This is split in the 2001 PDB into 540 million euro
for agriculture, 1,080 million euro for structural instrument,
1,620 million euro for PHARE and 19 million euro for Mediterranean
countries which are also pre-accession states. The Commission
have moved this last item out of category 4 (external aid) into
category 7, and have increased the financial perspective ceiling
for category 7 by 20 million euro to reflect this.
Financing
28. The own resources required to finance payment
appropriations comprise:
- 1 968 million euro in agricultural and sugar
levies;
- 12 292 million euro in customs duties;
- 33 467 million euro in VAT resource, at
the uniform rate;
- 45 452 million euro in GNP-based fourth
resource; and
- 695 million euro anticipated in the form
of "other revenue".
MINISTERIAL RESPONSIBILITY
29. Treasury Ministers are responsible
for the Community budget. Other Ministers are concerned with those
parts of the budget which relate to their own Departmental interests.
LEGAL AND PROCEDURAL ISSUES
30. Treaty basis: the PDB is presented under Article
272 of the Treaty of Amsterdam.
31. European Parliament Procedure: The European Parliament
participates fully in the budgetary process and formally adopts
the budget.
32. Voting procedure: The Council votes by Qualified
Majority and has the final say in setting the level of compulsory
expenditure in the budget (agriculture and some expenditure
in categories 4, 5 and 6 of the financial perspectives). The Parliament
votes by a majority of its members, or a three-fifths majority
of the votes cast depending on the exact circumstances, and has
the final say in setting the level of non-compulsory expenditure
(categories 2, 3 and 7 and parts of categories 4 and 5 of the
financial perspective, plus the emergency aid reserve). The classification
of expenditure will be clarified as part of the new Inter-Institutional
Agreement.
33. Impact on UK Law: none.
34. Subsidiarity: The Community budget is a matter
of exclusive Community competence and the Commission's presentation
of the PDB is required by the Treaty.
POLICY IMPLICATIONS
35. The Community budget has significant financial and
policy implications. Since the UK is a net contributor to the
EC budget it is in the UK's interests to restrict growth in the
budget as much as possible while working to achieve a more efficient
use of existing resources. The desire for rigour in the EC budget
is shared by a majority of member states.
36. Working with like-minded member states, the Government
will continue to apply this approach to its detailed examination
of the budget. However it must be borne in mind that some 90%
of the budget (including the structural funds, agriculture, and
programmes adopted by co-decision) is initially determined by
decisions made outside the annual budget process, and that the
final decision for almost all of the remainder is in the hands
of the European Parliament.
The Government cannot support the Commission's proposal to revise
the berlin financial perspective. The Government does not agree
with the proposals presented by the Commission. It believes it
is important that the Berlin Financial perspective expenditure
ceilings be respected, both overall and for each budget category.
The Government notes that the Commission has said elsewhere that
money in category 4 has been inefficiently spent in the past.
Financial assistance to the Balkans from the EC budget must be
funded through re-prioritisation of spending on EU aid programmes,
within the existing spending ceilings agreed at Berlin. The EU
spending plans for the Western Balkans must be set in the context
of all sources of finance — from budget, EIB lending, bilateral
commitments, commitments for IFIs, and must be properly assessed
for needs. It must also take account of the ability of recipients
to absorb spending.
37. The Government recognises the importance of EU cooperation
in providing assistance to the Balkans region, and will work closely
with other Member States in seeking now to set priorities for
EU aid that allow sufficient resources for the Balkans, whilst
respecting the agreed ceilings. As part of this process the Government
will also seek to increase the proportion of EU external aid directed
at the poorest regions.
FINANCIAL IMPLICATIONS
38. The Government expects that the UK's euro financing
share of the 2001 PDB will be around 19.6% before abatement and
13.98% after abatement. The UK gross contribution in 2001 will
be around 18.3 billion euro or 13 billion euro after abatement.
This compares with a share of some 17.65% before abatement and
13.54% after abatement in the 2000 Budget. The UK's actual contribution
in 2001 will therefore be significantly lower after the abatement,
which the Government successfully protected during the Agenda
2000 negotiations. The UK Government expects a significantly higher
abatement in 2001 than for previous years.
COMPLIANCE COSTS
39. The EC budget sets limits on Community expenditure.
It does not impose any compliance costs on business. A compliance
cost assessment has not, therefore, been carried out.
TIMETABLE
40. On 20 July the Budget Council will establish a Draft
Budget, which it will forward to the European Parliament. It is
expected that the Draft Budget will be considered by the European
Parliament at a plenary meeting in October. The European Parliament's
modifications and amendments to the Draft Budget will be considered
at the Second Budget Council in November. A revised draft will
then be submitted to the European Parliament, whose second reading
is set for mid December.
27 June 2000
GLOSSARY
The Budget procedure
The Community's financial year runs from 1 January
to 31 December.
The rules governing decisions on the Community Budget
are set out in Article 272 of the Amsterdam Treaty. These rules
have been built on by the Inter-Institutional Agreement. The timetable
is as follows:
- establishment of the preliminary draft budget
by the Commission, normally by end-April;
- establishment of the draft budget by the Council
in late-July
- first reading by the Parliament in late-October
- second reading by the Council in mid-November
- second reading by the Parliament and adoption
of the budget in mid-December.
Inter-Institutional Agreement and Financial Perspective
The Inter-Institutional Agreement (IIA) is a political,
but not legally binding, agreement, which clarifies the Community's
budgetary procedure. Under the Treaty, the Council and the European
Parliament have joint responsibility for deciding the Community
Budget on the basis of proposals from the Commission. The 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 — the financial perspective.
Agenda 2000
The Agenda 2000 package included the new Inter-Institutional
Agreement and financial perspective together with reforms to the
CAP and structural and cohesion funds, and new pre-accession aid
programmes. The main lines of the package were agreed at the Berlin
European Council in March 1999. Agreement on the implementing
legislation was reached between Council and Parliament in May
1999.
Commitment and payment appropriations
The Budget distinguishes between appropriations for
commitments and appropriations for payments. Commitment appropriations
are the total cost of legal obligations which can be entered into
during the current financial year for activities which will lead
to payments in the current and future financial years. Payment
appropriations are the amount of money which is available to be
spent during the year arising from commitments in the Budgets
for the current or preceding years. Unused payment appropriations
may, in exceptional circumstances, be carried forward into the
following year.
Compulsory and non-compulsory expenditure
Community expenditure is regarded as either "compulsory"
or "non-compulsory". Compulsory expenditure is expenditure
necessarily resulting from the Treaty or from acts adopted in
accordance with the Treaty. It mainly includes agricultural guarantee
expenditure including stock depreciation and the monetary reserve.
The Council has the last say in fixing its total.
The Parliament has the last say in determining the
amount and pattern of non-compulsory expenditure. The growth of
this expenditure is governed by the "maximum rate".
Article 272(9) of the Amsterdam Treaty provides a formula for
determining this rate unless an alternative figure is agreed by
the budgetary authority. Under the Inter-Institutional Agreement
the Council and Parliament agree to accept the maximum rates implied
by the financial perspective ceilings.
Agricultural Guideline
The agricultural guideline is a legally binding ceiling
on agricultural spending. In broad terms it grows each year by
74 per cent of Community GNP.
Structural Funds
The Structural Funds include the European Regional
Development Fund and the European Social Fund. The Cohesion Fund
supports projects and infrastructure networks in those Member
States with a per capita gross national product which is less
than 90 per cent of the Community average. The Berlin European
Council set out proposed commitment appropriations for these funds
between 2000 and 2006.
Own Resources
The Own Resources Decision lays down four sources
of Community revenue, or "own resources":
— agricultural
and sugar levies — The former have been replaced by
duties on agricultural products and are charged on a range of
commodities imported from third countries. Following the agreement
on agriculture during the GATT Uruguay Round, most agriculture
levies are now fixed. However, for some key commodities, they
continue to vary in line with changes in world prices. Sugar levies
are charged on the production of sugar to recover part of the
cost of subsidising the export of surplus Community sugar onto
the world market;
— customs duties on trade with nonmember
countries;
— contributions based on VAT — essentially,
this is the amount yielded by applying a notional rate of VAT
to an identical range of goods and services in each Member State
(Member States' contributions are, however, subject to a cap relating
to the size of their Gross National Products); and
— GNPbased contributions.
This resource is calculated by taking the same proportion of each
Member State's Gross National Product (GNP). It is a budgetbalancing
resource and covers the difference between total expenditure in
the budget and the revenue from the other three resources.
The Berlin European Council agreed that member states
should aim to agree and ratify a new Own Resources Decision by
1 January 2002. That agreement will have no effect on contributions
for 2000.
Fontainebleau abatement system
The UK's VAT contributions are abated according to
a formula set out in the Own Resources Decision. Broadly this
is equal to 66 per cent of the difference between what the UK
contributes to the Community budget and the UK's receipts, subject
to the following points:
— the abatement
applies only in respect of spending within the Community. Expenditure
outside the Community (mainly aid), amounting to 57 per
cent of the total, is excluded;
— the UK's contribution is calculated
as if the budget were entirely financed by VAT;
— the abatement is deducted from the UK's
VAT contribution a year in arrears.
16 The meaning of terms in italics is explained in
the glossary. Back
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