2000 PRELIMINARY DRAFT BUDGET
(20235)
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COM(99) 200
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Preliminary draft general budget of the European Commission for the financial year 2000.
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| Legal base:
| Article 272 EC; qualified majority voting; the special role of the European Parliament in relation to the adoption of the Budget is set out in the Article
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| Department: |
HM Treasury |
| Basis of consideration:
| Minister's letter of 3 October 2000
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| Previous Committee Report:
| HC 34-xxiv (1998-99), paragraph 3 (30 June 2000)
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| Discussed in Council:
| Already discussed |
| Committee's assessment:
| Politically important |
| Committee's decision:
| Cleared (by debate in European Standing Committee B on 7 July 2000)
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Background
26.1 In our Report of 30 June 1999 on the
2000 Preliminary Draft Budget (PDB), we noted that the Government
said that the sterling estimates for UK Gross National Product
(GNP) had risen by some 5% between 1999 and 2000, but that the
effect of this growth, which otherwise would have led to higher
contributions, was counterbalanced for euro comparisons by a depreciation
of sterling against the euro. We asked the Minister for a note
on how changes in the exchange rate affected the UK contributions
to the EC Budget.
The Minister's response
26.2 In her letter of 3 October, the Economic
Secretary to the Treasury (Miss Melanie Johnson) apologises for
the long delay in replying and encloses a Treasury Note addressing
the question. She explains that it requires a complex answer.
We provide a brief summary of the Note below.
26.3 The Note first looks at the effect
of the strengthening of sterling between 1995 and 1999. It concludes
that, in practice, exchange rate movements have very little
impact on the UK's gross contributions, before abatement,
because, in brief, the UK contribution is worked out in advance
in sterling terms and therefore if the pound strengthens against
the euro, although UK contributions in Europe will increase, its
sterling payments will remain the same. Because the GNP contributions
made by Member States are the balance between the amount required
to fund the budget and the amount obtained from the VAT and traditional
own resources contributions, the effect of the UK paying more,
in euro, in terms of VAT and traditional own resources, is to
reduce the GNP contribution required from all Member States, including
the UK. The Note includes a purely illustrative analysis, in which
other changes are not taken into account, which looks at the effect
on gross contributions in sterling of the change in exchange rates
between 1995 and 1999. In this example, the UK's gross sterling
contributions decrease by £12 million for every 1% increase
in the value of sterling against the euro.
26.4 As regards the UK abatement,
the Note says that, if the pound increases in value against the
euro, UK contributions, in euro, will increase. This in turn increases
the UK's share of contributions to the Community budget. As the
UK's abatement is broadly based on the difference between its
share of contributions and its share of receipts, if its share
of contributions increases in euro and its share of receipts remains
unchanged, the abatement in euro will increase. Whilst the higher
exchange rate reduces its sterling value, as the abatement is
denominated in euro, the overall effect of an increase in the
value of sterling against the euro is that the abatement is
still higher in sterling than had the exchange rate remained unchanged.
In the illustration given for the period 1995-1999, the abatement
rises in sterling by about £40 million for every one per
cent increase in the value of sterling against the euro. The Note
however points out a short-term effect which produces a different
result. Because the abatement is paid a year in arrears, an
increase in the sterling value will not affect the euro value
of the abatement paid that year, but it will reduce the sterling
value when paid to the UK. This situation is then reversed, should
sterling revert to its previous levels.
26.5 As regards the UK's net contribution,
the Note points out that if the pound increases in value against
the euro, the sterling value of its receipts goes down.
In the analysis comparing 1995 to 1999, the UK's receipts would
decrease by around £40 million for every 1% increase in
the value of sterling. The UK's net contribution in sterling
remains largely unchanged because the reduction in receipts would
be offset by an increase in the UK abatement (net contribution
is the gross contribution after abatement, less receipts).
26.6 The Note also looks at the effects
of exchange rate movements between the 1999 Budget and the 2000
PDB of the exchange rate movements. It provides a simulation
of what the UK euro contributions would have been using the 2000
PDB if the UK exchange rate remained at the level it was for setting
the estimates for the 1999 Budget. This meant comparing the
effect of an exchange rate at 1 April 1998 of £1 = 1.559372
euro with an exchange rate at 1 April 1999 of £1 = 1.494768
euro. The calculations show that if the exchange rate had stayed
at the 1998 level, the UK would have paid 561 million more
euro (3.57%), but in sterling terms the contribution would have
been £75 million less.
26.7 The Note also provides an annex setting
out the process by which the Commission determines Member States'
contributions to the Budget.
Conclusion
26.8 This is a helpful note on a very
complex area. We thank the Minister for it, although we note that
it has taken over a year to provide. It should help to inform
our consideration of future budget proposals as they come to us
and any subsequent debates we may recommend. We ask her to place
a copy in the Library.
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