Select Committee on European Scrutiny Thirty-Sixth Report




Preliminary Draft General Budget of the European Communities for the financial year 2003.

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



HM Treasury

Basis of consideration:

EM of 5 July 2002

Previous Committee Report:


To be discussed in Council:

19 July 2002

Committee's assessment:

Politically important

Committee's decision:

For debate in European Standing Committee B before 19 July



    1. The Commission's Preliminary Draft Budget (PDB) is the first stage in the EC's annual budgetary procedure. The 2003 PDB will form the basis of the 2003 Adopted Budget which is expected to be agreed in mid-December when the European Parliament has its second reading.
    2. The 2003 PDB sets out the Commission's proposals for Community expenditure in 2003, together with bids for the other Community institutions, such as the European Parliament. On the basis of the PDB, the Budget Council will establish a Draft Budget (DB) on 19 July 2002 to be forwarded to the European Parliament for its first reading some time in late October. The Draft Budget usually has its second reading in mid-November and the EC budget is usually finally adopted in mid-December. Although the Budget Council and the European Parliament set the budget for the following year, each year's PDB is constrained by the Financial Perspective, which forms part of the Inter-Institutional Agreement (IIA) signed on 6 May 1999 between the European Parliament, the Commission and the Council. The financial perspective sets out annual expenditure ceilings for seven broad expenditure categories, currently over a period of seven years (2000-2006).
    3. The Financial Secretary to the Treasury (Ruth Kelly) submitted a helpful Explanatory Memorandum on the PDB on 5 July 2002. The official texts have not yet been made available, but in order to provide an opportunity for the House to consider the PDB prior to the 19 July Budget Council, we have relied heavily upon the Minister's EM. As in previous years, we are annexing to this Report tables derived from the Explanatory Memorandum. We understand that the official texts will be available in good time for a debate.

      The document

    5. The PDB is presented in two formats, which follow the traditional and the Activity Based Budgeting (ABB) approaches.[4] The budget negotiations this year are being conducted largely on the basis of the traditional documentation, but the 2004 budget will be negotiated on the basis of the ABB documents.
    6. The PDB consists of nine volumes. Volume 0 provides a summary and analysis of spending by activity areas in ABB style. Volume 1 gives details of the implications of the budget for Member States' gross contributions to the EC, calculated under the Own Resources Decision. Volumes 2, 4, 5, 6, 7, 8 and 9 set out the European institutions' administrative budgets: the European Parliament (Volume 2); the European Court of Justice (Volume 5); the Court of Auditors (Volume 6); the Economic and Social Committee (Volume 7); the Committee of the Regions (Volume 8); and the European Ombudsman (Volume 9). The Council's budget (which forms Volume 3 of later rounds of budget documentation) does not have a separate volume in the PDB. Volume 4 (the Commission's budget) is the most important in terms of overall expenditure[5] and comprises three books: Book 1 covers administration and agriculture; Book 2 covers the rest of the operational expenditure and establishment plans; and Book 3 contains annexes on research and technological development, borrowing and lending operations guaranteed by the general budget, and other matters.
    7. In terms of commitments,[6] the PDB for 2003 totals _100,007 million, which is:
          1. _1,372 million (1.4%) above the 2002 Adopted Budget, comprising increases of 1.4% for both compulsory expenditures, (mainly agriculture) and non-compulsory expenditures; and
          2. _2,308 million under the ceiling set by the Financial Perspective;

    8. Payment appropriations (cash payments) for the PDB for 2003 are _98,218 million, which is:
          1. _2,563 million (2.7%) above the 2002 Adopted Budget; comprising increases of 1.4% for compulsory expenditures, and 3.7% for non-compulsory expenditures; and
          2. _4,720 million below the ceiling set by the Financial Perspective.

    9. The public expenditure forecasts in the Member States for 2003, which serves as a reference for the preparation of the PDB, show an average increase of 3.4%[7], which indicates that EC payments are forecast to rise at a slower rate than total government expenditure by Member States in 2003.
    10. In terms of own resources, including payments to reserves, the EC budget represents 1.02% of Community GNP, compared with 1.04% and 1.03% in 2001 and 2002 respectively and an own resources ceiling of 1.27%.[8]
    11. According to Budget Commissioner Schreyer,
    12. "The Commission has again proposed a budget which takes financial care of many new responsibilities, initiatives and programmes but leaves a sizeable precautionary margin so that it could tackle other possible financial risks. That's sound budgetary policy."

    13. The Commission says that the budget proposals allocate the financial means for the Commission's policy priorities for 2003, i.e. the preparation for enlargement, stability and security, and sustainable and inclusive economic development.[9]
    14. A substantial part of the Budget (including the structural funds, agriculture and programmes adopted by co-decision) is determined initially by decisions made outside the annual budget process. To that extent, the budget process merely provides the budgetary provision for decisions previously agreed.
    15. Expenditure proposals by category

    16. Agricultural spending (category one), is to rise to _45,117 million, or by 1.9% compared with the 2002 budget. Within this category, market-related agricultural expenditure (traditional CAP spending, or Category 1a) is to rise by 1.9% over the same period to _40,420 million, leaving a margin of _2,260 million under the ceiling. Appropriations for rural development and accompanying measures (Category 1b) are budgeted up to the financial perspective ceiling of _4,698 million, and represent an increase of 2.2% over 2002.[10]
    17. As regards agriculture, the Commission comments:
    18. "The situation on agricultural markets looks favourable for the PDB 2003. Internal consumption and export volumes are on the increase. Public storage needs are likely to fall substantially. A stable USD-EUR exchange rate also contributes to the stable trend.[11] The available margin in this heading allows for unforeseen events.

      "The Commission intends to use the facility offered by the Inter- institutional Agreement to reassess needs in a Letter of Amendment to be brought forward in October 2002. Changes arising from the mid-term review may also need to be incorporated at that time."[12]

    19. Proposed commitment appropriations for structural operations (category two), comprising the Structural Funds and the Cohesion Fund, are to rise (by 0.5% compared with 2002) to _33,995 million. This figure exceeds the ceiling in the Financial Perspective by _27 million, which is allocated to fishing fleet restructuring. The excess will be funded by using the flexibility instrument provided under the Inter-Institutional Agreement.[13] Last year, the commitment appropriations for structural operations exceeded the ceiling by _200 million and were also funded by recourse to the flexibility instrument. Payment appropriations for structural operations are budgeted at _33,538 million.
    20. Proposed commitments for Internal Policies (category three) are set to rise 2.4% compared with 2002 to _6,715 million. The margin below the ceiling is proposed to be _81 million, whereas the 2002 Adopted Budget had a margin of just _2 million. Payment appropriations are budgeted to fall to _6,132 million, a reduction of 0.4% on 2002. In her Explanatory Memorandum of 5 July 2002, the Minister says:
    21. "The largest single item in this Category is research and technological development which has been budgeted at the same amount as last year, _4,055 million, almost two thirds of Internal Actions spending. Significant changes in Category 3 over the 2002 budget include the following: 46% increase in energy programmes under a new framework programme 'Intelligent energy for Europe', 18% increase in measures to combat fraud and a _48 million, or 7%, increase in Trans-European networks."

    22. Proposed commitments for External Actions (category four) are up 2.3% compared with the 2002 budget to _4,912 million. Within this increased budget, funding for Asian developing countries and Mediterranean partner countries (including pre-accession aid to Turkey, Malta and Cyprus) is to rise by 12% and 5% respectively compared with 2002. On the other hand, appropriations for the Western Balkans and Latin America are to fall by 11% and 5% respectively over the same period. The largest increase within this budget category is spending on the Common Foreign and Security Policy, which is allocated _40 million, an increase of 33% from 2002. The Minister says:
    23. "Spending on aid for poverty-related diseases (HIV/AIDS, malaria and tuberculosis) in developing countries, including contributions to the Global Health Fund, is allocated _73 million, in line with a proposed multi-annual programme expected to be adopted later this year."

    24. Proposed payment appropriations for external actions total _4,692 million, a slight increase of 0.6% from the 2002 budget.
    25. Proposed spending on Administration (category five) totals _5,447 million, an increase of 5.2% on 2002, and _66 million over the Financial Perspective ceiling. To fund the excess, the Commission proposes to make further calls on the flexibility instrument. According to the Commission, the proposed increase arises from enlargement. The Commission's administrative expenditure (without pensions) increases by 4.8%, while the increase in the other institutions' administrative budgets is 5.2%.
    26. The Reserves (category six), which now comprise only two instruments (the emergency aid reserve and the loan guarantee reserve) is to total _434 million, which is consistent with the Financial Perspective ceiling. The monetary reserve will cease to exist on 31 December 2002.
    27. Pre-accession aid (category seven) comprises aid to the ten candidates for EU membership under PHARE and two additional programmes: ISPA (structural aid) and SAPARD (agricultural aid) Pre-accession aid has been budgeted up to the Financial Perspective ceiling of _3,386 million in commitment appropriations, an increase of 1.7% on 2002. Payment appropriations total _2,857 million, which is 10% higher than in the 2002 budget. The Commission proposes to increase the PHARE allocation by 1.7%. The payments for the SAPARD and ISPA instruments are to rise by 47% and 9% respectively compared with 2002. The Minister says that these increases partly reflect the fact that very few payments could be made in the first years of these instruments. There are no figures for Accession (category eight) in the PDB 2003 since no accession is foreseen for 2003.
    28. The Government's view

    29. The Minister says:
    30. "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 interest 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. 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 most EC spending (including the structural funds, agriculture and programmes adopted by co-decision) is largely pre-determined by decisions made outside the annual budget process, and that the final decision on much of the remainder is in the hands of the European Parliament.

      "In line with this, the Government will — while welcoming the main thrust of the PDB — support reductions to the proposed levels of commitment appropriations in a number of spending categories, in order to establish larger margins where necessary to protect the Financial Perspective ceilings. The Government will also seek to reduce the payment appropriations in categories which have been over-budgeted in recent years, leading to significant surpluses. The Government will attempt to ensure that all possibilities for redeployment have been exhausted before any decision is made on the use of the flexibility instrument.

      "Key priorities for the Government will be to press for reductions in the PDB proposals for administrative spending while ensuring that necessary pre-enlargement costs are met; to work for an increase in the share of the external actions budget that is spent in low income countries and to ensure that margins are left to meet priority asylum-related measures which may be proposed by the Commission later in the year in response to the mandate given by the Seville European Council."

    31. As regards the UK's share of financing the 2002 PDB, the Minister says:
    32. "The 2003 PDB shows the UK financing share to be some 14.2% after abatement and indicates a UK gross contribution after abatement of some _13.8 billion (8.5 billion). This compares with a share, after abatement, of some 14.3% (_13.4 billion) in the 2002 adopted budget."


    33. We have reported on the PDB now because it allows for a debate to take place before 19 July, when the Budget Council will establish the Draft Budget for 2002. As in previous years, we have found it necessary to report to the House before the official texts are available. We have therefore relied heavily upon the Explanatory Memorandum from the Minister and the Commission's press releases, but we expect the official texts to be available shortly and in good time for a debate.
    34. We regard a debate on the PDB as necessary because the UK has a substantial interest in scrutinising the EC budget, not least because of the substantial sums involved and the UK's position as a large net contributor. It would also provide an opportunity for Members to assess the various policies implicit in the PDB, including those relating to the common agricultural policy, structural operations, internal policies, external actions, administration and pre-accession aid.
    35. Members may also wish to press the Government on the Commission's proposal to fund the spending on administration and restructuring fishing fleets which breaches the Financial Perspective ceilings by use of the flexibility instrument.
    36. As noted above, the Commission is proposing a budget that exceeds _100, 000 million. Although this represents only 1.02% of Community GNP, it is a substantial sum. As proposed, the PDB also allows for a margin below the ceilings set by the Financial Perspective of _2,308 million for commitments and _4,720 million for payments, which the European Parliament has a habit of wanting to allocate. Members may wish to question the Minister as to whether the Council will examine closely any bids for extra spending by the European Parliament.
    37. As noted above, the 2004 budget negotiations will be negotiated on the basis of Activity Based Budgeting, with the aim of ensuring that priority setting, planning, monitoring and evaluation is conducted more effectively. During the debate the Minister could be questioned about the usefulness of this new approach and whether the Government has any particular goals or concerns regarding the ABB approach.
    38. We recommend a debate on the document to be held in European Standing Committee B before the Budget Council on 19 July.


4  ABB is a system for making budget decisions which ensures allocations more closely reflect pre-defined political priorities and objectives. The system is designed to ensure that priority setting, planning, monitoring and evaluation better inform the EU's budget setting.  Back

5  Section A of Volume 4 covers the Commission's administrative budget, section B the Community's programme spending and a series of annexes provide further details. Back

6  The EC 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. These cash payments arise from commitments in the Budgets for the current or preceding years. Commitments appropriations are important, not least because the legal limits in the Financial Perspective are presented in this form. Payments appropriations are important because they determine the contributions made by Member States. Unused payment appropriations can, in exceptional circumstances, be carried forward into the following year. Back

7   The average figure for the EU15 according to economic forecasts of April 2002.  Back

8   The calculations use figures from the Adopted Budget for 2001 and 2002 and Gross National Product (GNP). Alternative measures are sometimes cited using Gross National Income (GNI).  Back

9   Commission press release, IP/02/639, Brussels, 30 April 2002, The Commission's proposals for the 2003 budget: sound balance between financing new tasks and budgetary disciplineBack

10   In the Autumn, the Commission usually submits a rectifying letter setting out more up-to-date forecasts of expenditure in the agriculture sector. Back

11  The PDB is calculated on an exchange rate of 1_=0.88US$. Back

12   Commission Press release, IP/02/639, 30 April 2002  Back

13  The flexibility instrument is a budgetary instrument established in the Inter-Institutional Agreement which provides for additional financing, for a given year and up to the amount of _ 200 million, of clearly identified expenditure which could not be financed within the limits of the ceilings available for one or more spending categories. The Commission presents a proposal for the use of the flexibility instrument during the budgetary procedure. The decision to deploy the flexibility instrument is taken jointly by the two arms of the budgetary authority, i.e. the Council and the European Parliament. Back

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