House of Commons - European Scrutiny

Select Committee on European Scrutiny Twenty-First Report

3 Preliminary Draft Budget 2005

(25654)

—

Preliminary Draft General Budget of the European Communities for the financial year 2005

Legal base Article 272 EC; QMV; the special role of the European Parliament in relation to the adoption of the Budget is set out in Article 272

Department HM Treasury

Basis of consideration EM of 11 May 2004

Previous Committee Report None; but see (25420) 6870/04: HC 42-xvii (2003-04), para 7 (21 April 2004)

To be discussed in Council 16 July 2004

Committee's assessment Politically important

Committee's decision For debate in European Standing Committee B

Background

3.1 The Commissions Preliminary Draft Budget (PDB) is the first stage in the Communitys annual budgetary procedure. The 2005 PDB will form the basis of the 2005 Adopted Budget which is expected to be agreed in mid-December 2004.

3.2 The 2005 PDB sets out the Commissions proposals for Community expenditure in 2005, 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 on 16 July 2004 to be forwarded to the European Parliament for its first reading some time in late October 2004. The Draft Budget usually has its Council second reading in mid-November and, after conciliation if necessary, the budget is usually finally adopted in mid-December when the European Parliament has had its second reading.

3.3 The Financial Secretary to the Treasury (Ruth Kelly) submitted a helpful Explanatory Memorandum on the PDB on 11 May 2004. The official texts of the PDB have not yet been made available, but in order to provide an opportunity for the House to consider the PDB prior to the 16 July Budget Council, we have relied heavily upon the Ministers Explanatory Memorandum. As in previous years, we are annexing to this Report tables derived from the Explanatory Memorandum.[12] We understand that the official texts of the PDB will be available in good time for a debate.

The document

3.4 Although the Budget Council and the European Parliament set the budget for the following year, each years PDB is constrained by the Financial Perspective, which — although amended to take account of enlargement — forms part of the Inter Institutional Agreement (IIA) of 1999 between the European Parliament, the Commission and the Council. The Financial Perspective (for the years 2000-2006) sets out annual expenditure ceilings for eight broad expenditure categories. The Financial Perspective was set in 1999 prices, and each year the Commission makes a technical adjustment (based on variations in Gross National Income and prices) to bring the Financial Perspective into line with current prices. For 2005 this adjustment has resulted in an unexpectedly large reduction in the ceilings for Heading 3 (Internal Policies), Heading 4 (External Actions) and Heading 5 (Administration). Consequently, the Commission has had to adapt its original expenditure plans, and there is limited scope for retaining a margin for flexibility in these headings in 2005.

3.5 Moreover, it should be noted much of the budget (including the structural funds, agriculture and programmes adopted by co-decision) is determined initially by policy decisions made outside the annual budget process. To that extent, the budget process merely provides the budgetary provision for policies previously agreed.

3.6 The 2005 PDB is the first full budget for a Union of 25 Member States. (The 2004 Budget was adopted on the basis of figures for 15 Member States and was later amended with figures for 25 Member States for the period May-December 2004.)

3.7 The 2005 PDB is also the first to be presented wholly in the Activity-Based Budgeting (ABB) format.[13] Budget negotiations for 2005 will be conducted on the basis of ABB documentation. The PDB will be published in ten volumes, covering a General Introduction and a General Statement of Revenue, and expenditure proposals for the nine separate EU institutions — the European Parliament, the Council, the Commission, the European Court of Justice, the European Court of Auditors, the Economic and Social Committee, the Committee of the Regions, the European Ombudsman and the European Data Protection Supervisor. Operational expenditure will be set out in Volume IV (the Commission). In addition, the Commission will publish two sets of Working Documents entitled Activity Statements and Financial Statements. These present specific objectives, planned outputs and performance measures both at the level of individual budget-lines and for higher-level activity areas, in line with ABB practice.

SUMMARY OF THE FIGURES

3.8 For commitment appropriations,[14] the 2005 PDB proposes a total of €117.21 billion (£82.60 billion). This is an increase of 5.2% over 2004. It largely reflects the impact of enlargement-related increases in agriculture and structural funds. The total is €2.38 billion (£1.68 billion) below the Financial Perspective ceiling. For payment appropriations,[15] the 2005 PDB proposes a total of €109.54 billion (£77.20 billion). This is an increase of 9.8% over 2004. The total is €4.70 billion (£3.31 billion) below the Financial Perspective ceiling. Payment appropriations represent 1.03% of Community Gross National Income compared to 0.99% in 2004.

3.9 Compulsory expenditure[16] makes up €46.75 billion (£32.95 billion) of total commitment appropriations. Non-compulsory expenditure[17] makes up €70.46 billion (£49.65 billion) of total commitment appropriations. The figures for compulsory expenditure payment appropriations are €46.78 billion. For non-compulsory expenditure payment appropriations the figures are €62.76 billion (£44.23 billion).

THE INDIVIDUAL EXPENDITURE HEADINGS

Heading 1: Agriculture

3.10 Overall expenditure under this heading is €50.68 billion (£35.71 billion) for commitment and €50.11 billion (£35.32 billion) for payment appropriations, leaving a margin of €764 million (£538 million) under the Financial Perspective ceiling for commitments.

Heading 1a: Common Agricultural Policy (CAP)

3.11 Total commitment and payment appropriations are €43.83 billion (£30.89 billion), an increase of 8.9% over 2004. The main reasons for the increase are, first, enlargement — 2005 is the first year in which direct payments will be made to farmers from the new Member States; and secondly CAP reform — new and additional payments in the dairy, rice, cereal and nut sectors form part of the reform package adopted in September 2003. The remainder of the increase is caused by movements in the €/US$ exchange rate, the return to normal levels of expenditure following front-loading in 2003 to compensate regions affected by drought, and a range of smaller measures.

Heading 1b: Rural development

3.12 Commitment appropriations are €6.84 billion (£4.82 billion) — an increase over 2004 of 4.7% and up to the level of the Financial Perspective ceiling. Payment appropriations are €6.28 billion (£4.43 billion) — an increase over 2004 of 15.3%. These increases also reflect the impact of enlargement.

Heading 2: Structural Operations

3.13 Commitment appropriations rise by 3.3% to €42.38 billion (£29.87 billion). Commitment appropriations for this heading are usually budgeted up to the level of the Financial Perspective ceiling. However, there will be a small margin of €62.5 million (£44.05 million) as Ireland became ineligible for assistance from the Cohesion Fund in 2004. Payment appropriations are €35.40 billion (£24.94 billion), a 14.8 % increase over 2004. This sharp increase is due to a significant rise in payments to the new Member States, in line with the agreement on financing for enlargement reached at Copenhagen, and to an improved rate of implementation expected for outstanding Structural Funds commitments.

Heading 3: Internal Policies

3.14 Total commitment appropriations rise to €8.96 billion (£6.31 billion), a 2.9% increase over 2004, leaving a margin in the Financial Perspective of €53.42 million (£37.65 million). In line with the strategic priorities outlined in the Annual Policy Strategy for 2005 ("Competitiveness and Cohesion" and "Security and European Citizenship"),[18] the Commission proposes significant increases for a number of individual programmes:

€232 million (£163 million) for the 6^th Framework Programme for Research;
€51 million (£35.94 million) for nuclear decommissioning and waste management;
€44 million (£31 million) for justice and home affairs (in particular for the Visa Information System II and Schengen Information System programmes, the creation of a European Police College, and extension of the European Refugee Fund);
€37 million (£26.07 million) for education and culture (in particular for the Socrates and Erasmus Mundus student exchange programmes);
€35 million (£24.67 million) for transport and energy (in particular for the transport Trans-European Network and transport safety);
€13 million (£9.16 million) for health and consumer protection;
€9 million (£6.34 million) for the Information Society programme; and
€8 million (£5.64 million) for taxation and customs.

These increases are offset by total savings of €177 million (£124.74 million). Payment appropriations are €7.73 billion (£5.45 billion), an increase of 2.9% over 2004.

Heading 4: External Policies

3.15 Commitment appropriations total €5.23 billion (£3.69 billion), an increase of 1.1% over 2004. This total exceeds the Financial Perspective ceiling for this heading by €115 million (£81.04 million). The Commission says the original financial programming for 2005 did not foresee any assistance to Iraq, and proposes to cover the shortfall by using the Flexibility Instrument.[19]

3.16 The total allocation suggested for Iraq for 2005 is €200 million (£140.94 million) — a €40 million (£28.19 million) rise compared to 2004. Other significant increases compared to 2004 include the Mediterranean/Middle East (an extra €38 million; £26.78 million), Asia (an extra €30 million; £21.14) and Food Aid (an extra €17 million; £11.98 million). But compared to the original multi-annual programming for these budget lines, these appropriations represent reductions of €10 million (£7.05 million), €2 million (£1.41 million) and €8 million (£5.64 million) respectively. In line with the programming, aid to the Western Balkans is cut by €61 million (£42.99 million) and appropriations for Human Rights and Democratisation are cut by €20 million (£14.09 million) compared to 2004. Funding for the Common Foreign and Security Policy is reduced to €55 million (£38.76 million) — €8 million (£5.64 million) less than in 2004.

3.17 The total payment appropriations for this heading are €5.01 billion (£3.53 billion), an increase of 1.2% over 2004.

Heading 5: Administration

3.18 Commitment and payment appropriations are budgeted up to the Financial Perspective ceiling of €6.36 billion (£4.48 million), leaving no margin. This is to cover the Commission's request for 700 additional posts needed to cope with enlargement, part of a wider initiative to recruit 3,900 extra staff by 2008. Nearly half — 296 — of the proposed new posts would be allocated to translation and interpretation services, with the remainder allocated to operational services (in particular under the Internal Policies heading, which accounts for 243 posts). The overall increase under this heading is a 3.9% rise over 2004.

Heading 6: Reserves

3.19 The commitment and payment appropriations budgeted for reserves total €446 million (£314 million), a 0.9% increase over 2003. The funds cover the loan guarantee reserve and the emergency aid reserve — €223 million (£157 million) each. The commitments are, as is usual for this heading, up to the Financial Perspective ceilings.

Heading 7: Pre-Accession Aid

3.20 The total commitment appropriations proposed are €1.86 billion (£1.31 billion), a decrease of 7.1% in comparison with 2004. This covers an allocation of €1.5 billion (£1.06 billion) for Romania and Bulgaria and €300 million (£211.42 million) for Turkey (10 % and 20% rises respectively over 2004, in accordance with existing programming). In addition, €50 million (£35.24 million) is budgeted for decommissioning the Kozloduy (Bulgaria) nuclear plant and €4 million (£2.82 million) for administrative expenditure relating to the phasing-out of pre-Accession assistance in the new Member States. As no further commitments can be made to the new Member States from this heading, a large margin of €1.62 billion (£1.14 billion) is left under the Financial Perspective ceiling for commitment appropriations. Payment appropriations for this heading amount to €3.18 billion (£2.24 billion), an 11.3% increase over 2004. This comparatively high level is explained by the ongoing implementation of outstanding commitments to former accession countries from the ISPA, SAPARD and PHARE programmes.

Heading 8: Compensations

3.21 This is a heading agreed as a temporary measure at the Copenhagen European Council. It is intended to ensure that the new Member States remain net recipients from the budget, covering a shortfall of funding as pre-accession programmes are phased out and full participation from regular programmes, such as the CAP, is gradually introduced. The commitment and payment appropriations budgeted for this category are €1.31 billion (£0.92 billion). This is a decrease of 7.4% over 2004, which is consistent with the financial settlement agreed at Copenhagen.

The Commission's view

3.22 On 28 April 2004 Budget Commissioner Michaele Schreyer said:

"With the budget 2005 we have to fulfil the Union's commitments fixed in the agenda 2000 decision, the accession treaties and the reform of the agricultural sector. We will increase the support to the new Member States, enhance the Community policies for security and meet our responsibility in the external sector. Nevertheless, we have managed to propose a budget volume which stays again far below the ceilings of the Financial Perspectives and in line with the principle of budgetary discipline."[20]

The Government's view

3.23 On the policy implications of the Commission's proposals the Minister says, in words very similar to those we have heard in relation to previous budgets:

"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 control growth in the budget, while working to achieve a more efficient use of resources and ensuring that the Financial Perspective ceilings agreed in Berlin and Copenhagen are respected. The Government will work with like-minded Member States to maintain budget discipline and subject all areas of EC spending to rigorous scrutiny. However, it must be borne in mind that most EC spending (including agriculture, structural funds and multi-annual programmes) 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."

3.24 However the Minister adds:

"Key priorities for the Government in 2004 include Heading 4 (External Actions), where the focus will be on ensuring that spending is consistent with budget discipline and delivers genuine value for money, as well as achieving an appropriate balance between long-term assistance and emerging priorities (such as Iraq and CFSP). Heading 5 (Administration) will also be closely examined to ensure that the Commission's staff proposals are based on genuine need and can be accommodated under the FP ceiling for this Heading. The Government will also want to be satisfied that global appropriations for payments are based on a realistic implementation forecast, to prevent the emergence of a budget surplus. Finally, the Government will work to ensure the successful implementation of ABB in the annual budget process."

3.25 On the financial implications the Minister says:

"The UK financing share of the 2005 PDB has not yet been set — detailed calculations will follow once the relevant data is available. In the 2004 adopted budget, the UK's financing share was 17.7% excluding the abatement, or 13% after abatement.[21] The actual net financial cost to the UK of the 2005 Budget will depend not only on the size of the budget that is finally adopted, but also on the balance between different spending programmes within the budget. This determines the level of UK receipts and subsequently affects the size of the UK's abatement in the following year."

Conclusion

3.26 As the Minister says, the EU budget has significant financial and policy implications and it is in the UK's interest to restrict budget growth and ensure efficient use of resources and general budgetary discipline. As is customary, we recommend that the Preliminary Draft Budget (PDB) be debated in European Standing Committee B. As we have indicated previously, the Commission's Annual Policy Strategy (APS) for 2005 will be relevant to the debate.[22] The debate should take place before the Budget Council on 16 July 2004.

3.27 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. But we expect the official texts to be available in good time for a debate.

3.28 The debate will allow Members to examine in greater detail the Government's approach to the forthcoming budget negotiations, particularly as regards any bids for extra spending by the European Parliament. The UK has a substantial interest and role in scrutinising the PDB, not least because of the substantial sums involved and the UKs position as a large net contributor.

3.29 The debate will also provide an opportunity for Members to assess the various policies implicit in the PDB, including those relating to the Common Agricultural Policy, structural funds, internal policies, external actions, administration and pre-accession aid.

3.30 Members might also wish to examine with the Minister both the narrow margins below some of the Financial Perspective ceilings and, in the case of the External Actions heading, the proposed use of the Flexibility Instrument, and how well, or otherwise, Commission activity has benefited so far from the move to Activity-Based Budgets.

3.31 Members may also wish to examine to what extent there is a clear relationship between the Annual Policy Strategy and the PDB — that is, to what extent the Commission has been successful in forming the PDB, the means to carry out programmes and projects, on the basis of the APS, which establishes the objectives and priorities of the programmes and projects. Specifically, Members might examine how the PDB matches the policy priorities in the APS for 2005 of increased competitiveness and cohesion, improved security and European citizenship and external responsibility.

Annex 1

Table 1: Summary of 2005 PDB proposals (€ million)

Heading 2004 Budget[23] 2005 PDB Change 04/05

CA PA CA PA CA PA

1. AGRICULTURE 46,781 45,693 50,675 50,114 8.3% 9.7%

1a. CAP 40,245 40,245 43,834 43,834 8.9% 8.9%

1b. Rural development 6,536 5,448 6,841 6,279 4.7% 15.3%

2. STRUCTURAL OPERATIONS 41,035 30,822 42,378 35,396 3.3% 14.8%

- Structural Funds 35,353 28,022 37,247 32,391 5.4% 15.6%

- Cohesion Fund 5,682 2,800 5,132 3,006 -9.7% 7.3%

3. INTERNAL POLICIES 8,705 7,510 8,959 7,729 2.9% 2.9%

4. EXTERNAL ACTIONS 5,177 4,951 5,234 5,010 1.1% 1.2%

5. ADMINISTRATION 6,121 6,121 6,360 6,360 3.9% 3.9%

6. RESERVES 442 442 446 446 0.9% 0.9%

- Emergency Aid Reserve 221 221 223 223 0.9% 0.9%

- Loan Guarantee Reserve 221 221 223 223 0.9% 0.9%

7. PRE-ACCESSION STRATEGY 1,733 2,856 1,856 3,180 7.1% 11.3%

- SAPARD 227 402 250 542 10.4% 34.8%

- ISPA 453 658 501 703 10.5% 6.9%

- PHARE 810 1,604 819 1,634 1.1% 1.8%

- Turkey 243 192 286 302 18% 56.8%

8. COMPENSATIONS 1,410 1,410 1,305 1,305 -7.4% -7.4%

TOTAL 111,404 99,806 117,214 109,540 5.2% 9.8%

Financial Perspective ceiling[24] 115,609 111,555 119,594 114,235

Margin 4,204 11,748 2,380 4,695

(Note: CA = commitment appropriations, PA = payment appropriations. Figures in table may not add up exactly due to rounding)

Table 2: Summary of 2005 PDB proposals (£ million)

Heading 2004 Budget[25] 2005 PDB Change 04/05

CA PA CA PA CA PA

1. AGRICULTURE 32,968 32,201 35,712 35,316 8.3% 9.7%

1a. CAP 28,362 28,362 30,891 30,891 8.9% 8.9%

1b. Rural development 4,606 3,839 4,821 4,425 4.7% 15.3%

2. STRUCTURAL OPERATIONS 28,918 21,721 29,865 24,944 3.3% 14.8%

- Structural Funds 24,914 19,748 26,249 22,827 5.4% 15.6%

- Cohesion Fund 4,004 1,973 3,617 2,118 -9.7% 7.3%

3. INTERNAL POLICIES 6,135 5,292 6,314 5,447 2.9% 2.9%

4. EXTERNAL ACTIONS 3,648 3,489 3,689 3,531 1.1% 1.2%

5. ADMINISTRATION 4,314 4,314 4,482 4,482 3.9% 3.9%

6. RESERVES 311 311 314 314 0.9% 0.9%

- Emergency Aid Reserve 156 156 157 157 0.9% 0.9%

- Loan Guarantee Reserve 156 156 157 157 0.9% 0.9%

7. PRE-ACCESSION STRATEGY 1,221 2,013 1,308 2,241 7.1% 11.3%

- SAPARD 160 283 176 382 10.4% 34.8%

- ISPA 319 464 353 495 10.5% 6.9%

- PHARE 571 1,130 577 1,152 1.1% 1.8%

- Turkey 171 135 202 213 18% 56.8%

8. COMPENSATIONS 994 994 920 920 -7.4% -7.4%

TOTAL 78,510 70,335 82,603 77,195 5.2% 9.8%

Financial Perspective ceiling[26] 81,472 78,615 84,280 80,504

Margin 2,963 8,279 1,677 3,309