House of Commons - European Scrutiny

Select Committee on European Scrutiny First Report

8 Preliminary Draft Budget 2006

(26588)

—

Preliminary Draft General Budget of the European Communities for the financial year 2006

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 1 June 2005

Previous Committee Report None

To be discussed in Council 15 July 2005

Committee's assessment Politically important

Committee's decision For debate in European Standing Committee B

Background

Section 1.23 8.1 The Commission's Preliminary Draft Budget (PDB) is the first stage in the Communitys annual budgetary procedure. The 2006 PDB will form the basis of the 2006 Adopted Budget, which is expected to be agreed in mid-December 2005.

Section 1.24 8.2 The 2006 PDB sets out the Commissions proposals for Community expenditure in 2006, 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 15 July 2005, to be forwarded to the European Parliament for its first reading some time in late October 2005. The Draft Budget usually has its Council second reading in November and, after conciliation if necessary, the Budget is usually finally adopted in mid-December when the European Parliament has had its second reading.

Section 1.25 8.3 The Economic Secretary to the Treasury (Mr Ivan Lewis) submitted a helpful Explanatory Memorandum on the PDB on 1 June 2005. 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 as early as possible 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.[24] We understand that the official texts of the PDB will be available in good time for a debate.

The document

Section 1.26 8.4 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 as amended to take account of enlargement, forms part of the InterInstitutional 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.

Section 1.27 8.5 The PDB is presented wholly in the Activity-Based Budgeting (ABB) format.[25] It 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.

Section 1.28 8.6 It should be noted that 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.

SUMMARY OF THE FIGURES

Section 1.29 8.7 For commitment appropriations,[26] the 2006 PDB proposes a total of €121.27 billion (£79.36 billion). This is an increase of 4% over 2005. This total gives a margin of €2.42 billion (£1.71 billion) below the Financial Perspective ceiling. For payment appropriations,[27] the 2006 PDB proposes a total of €112.55 billion (£79.38 billion). This is an increase of 5.9% over 2005. The total is €6.74 billion (£4.75 billion) below the Financial Perspective ceiling. Payment appropriations proposed represent 1.02% of Community Gross National Income compared to 1% in 2005. But they are below the 1.24% ceiling in the Own Resources Decision of 2000 about the financing of Community expenditure.

Section 1.30 8.8 Compulsory expenditure[28] makes up €46.38 billion (£32.7 billion) of total commitment appropriations. Non-compulsory expenditure[29] makes up €74.9 billion (£52.81 billion) of total commitment appropriations. The figures for compulsory expenditure payment appropriations are €46.39 billion (£32.71 billion). For non-compulsory expenditure payment appropriations the figures are €66.17 billion (£46.65 billion). The overall rise in compulsory expenditure is 1.4% for commitment appropriations and 1.3% for payment appropriations, and for non-compulsory expenditure 5.8% for commitment appropriations and 9.3% for payment appropriations.

THE INDIVIDUAL EXPENDITURE HEADINGS

Heading 1: Agriculture

Section 1.31 8.9 Overall expenditure under this heading is €51.41 billion (£36.25 billion) for commitment appropriations and €51.35 billion (£36.21 billion) for payment appropriations, leaving a margin of €1.21 billion (£0.85 billion) under the Financial Perspective ceiling for commitment appropriations.[30]

Heading 1a: Common Agricultural Policy (CAP)

Section 1.32 8.10 Total commitment and payment appropriations are €43.64 billion (£30.77 billion), an increase of 1.9% over 2005. The main element is an increase in direct aids of €1.6 billion — largely because of reform of the dairy sector and further phasing in of direct aids in the new Member States — offset by a reduction for interventions on the agricultural markets of €0.8 billion.

Heading 1b: Rural development

Section 1.33 8.11 Commitment appropriations are €7.77 billion (£5.48 billion) — an increase over 2005 of 13.6%. Payment appropriations are €7.71 billion (£5.44 billion) — an increase over 2005 of 22.8%. Increases result largely from modulation (that is, a partial transfer of direct aids from Heading 1a to rural development) but also from increased provision to new Member States.

Heading 2: Structural Operations

Section 1.34 8.12 Commitment appropriations rise by 5% to €44.56 billion (£31.41 billion). This leaves a small margin of €62 million (£43.71 million). Payment appropriations are €35.64 billion (£25.13 billion), a 10 % increase over 2005. This increase is due to a 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.

Heading 3: Internal Policies

Section 1.35 8.13 Total commitment appropriations rise to €9.22 billion (£6.50 billion), a 1.8% increase over 2005, leaving a margin in the Financial Perspective of €167 million (£117.75 million). In line with the strategic priorities outlined in the Annual Policy Strategy for 2006,[31] significant increases are proposed for a number of individual programmes, including the 6^th Framework Programme for Research; transport and energy; and health and consumer protection. The increases are partially offset by savings elsewhere. Payment appropriations are €8.84 billion (£6.23 billion), an increase of 11.5% over 2005.

Heading 4: External Policies

Section 1.36 8.14 Commitment appropriations total €5.39 billion (£3.80 billion), an increase of 3.3% over 2005. This total exceeds the Financial Perspective ceiling for this heading by €124 million (£87.43 million). The Commission says funding for reconstruction in areas affected by the Asian tsunami of €180 million (£126.91 million) cannot be met from within the ceiling and proposes to cover the shortfall by using the Flexibility Instrument.[32]

Section 1.37 8.15 Commitment appropriations under this heading also include:

· €84 million (£59.23 million) for the European initiative for democracy and human rights programme;

· €505 million (£356.06 million) for relations with eastern Europe, the Caucasus and central Asian republics;

· €1.09 billion (£0.77 billion) for relations with the Middle East and the southern Mediterranean;

· €794 million (£559.83 million) for relations with Asia;

· €200 million (£141.01 million) for stabilisation and reconstruction in Iraq; and

· €62 million (£43.71 million) for the Common Foreign and Security Policy.

Section 1.38 8.16 The total payment appropriations for this heading are €5.36 billion (£3.78 billion), an increase of 2.2% over 2005.

Heading 5: Administration

Section 1.39 8.17 Commitment and payment appropriations are budgeted at €6.68 billion (£4.71 billion), leaving a commitments margin of €25 million (£17.33 million). The overall increase under this heading is a 5.2% rise over 2005. This increase is intended to provide for:

· 700 additional posts in 2006 to accommodate the impact of enlargement — staff to be assigned to internal policies and language services each account for around 40% of the increase;

· 100 new staff to prepare for accession of Romania and Bulgaria;

· 300 staff for institutions other than the Commission.

Heading 6: Reserves

Section 1.40 8.18 The commitment and payment appropriations budgeted for reserves total €458 million (£323 million), a 2.7% increase over 2005. The funds cover the loan guarantee reserve and the emergency aid reserve — €229 million (£161 million) each. The commitments are, as is usual for this heading, up to the Financial Perspective ceilings.

Heading 7: Pre-Accession Aid

Section 1.41 8.19 The total commitment appropriations proposed are €2.48 billion (£1.75 billion), an increase of 19.2% in comparison with 2005. As no further commitments can be made to the new Member States from this heading, a large margin of €1.09 billion (£0.77 billion) is left under the Financial Perspective ceiling for commitment appropriations. Commitment appropriations cover increases of 10% for Romania and Bulgaria, 40% for Turkey and 25% for Croatia. Payment appropriations for this heading amount to €3.15 billion (£2.22 billion), a 4.1% decrease over 2005. The decrease is accounted for by completion of the PHARE programme in the new Member States.

Heading 8: Compensations

Section 1.42 8.20 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 in regular programmes, such as the CAP, is gradually introduced. The commitment and payment appropriations budgeted for this category are €1.07 billion (£0.76 billion). This is a decrease of 17.7% over 2005, which is consistent with the financial settlement agreed at Copenhagen.

The Commission's view

Section 1.43 8.21 It its press notice of 27 April 2005 on the PDB the Commission said:[33]

"The first EU budget proposal of the new Commission clearly reflects the new priorities of President Barroso and his team. The draft budget 2006 that was adopted today provides a record increase for European research and equally ensures increased investment in economic growth and more jobs, solidarity within the enlarged Union, improved security for its citizens, the future enlargement and a stronger role for the Union on the global scene….More than one third of the budget will be devoted to stimulating economic growth and creating more and better jobs."

In the press notice Dr Dalia Grybauskaité, the Commissioner for Financial Programming and Budget, is quoted as saying:

"Europe is at a crossroads. Either we invest in a knowledge-based economy that puts the European economy back on track, or we take a step back and let our competitors take the lead."

and

"The European Union must opt for leadership, and the 2006 budget proposal is a step in that direction. Otherwise, we risk falling behind in the world-wide race for knowledge, for growth and for jobs, and we cannot fight for our vital interests."

The Government's view

Section 1.44 8.22 On the policy implications of the Commission's proposals the Minister notes the significance of the Budget to the UK as a net contributor and says:

"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."

But he cautions that most expenditure is largely pre-determined by decisions made outside the annual budget process and that the European Parliament has the final say on much of the remainder.

Section 1.45 8.23 The Minister draws our attention to the fact that this year the Government will be chairing the Council's budgetary process and that, in pursuing its primary aim of ensuring agreement between the European Parliament and the Council to a Budget for 2006, it

"must be careful to respect the requirement that the Presidency is even handed, both in seeking agreement to a Council package and in its negotiations with Parliament. In addition it must take care to avoid being seen to attempt to unduly advance its own policy agenda."

Section 1.46 8.24 The Minister says that in its Presidency role:

"the Government will emphasise the need to respect agreed and established budgetary principles. In particular, these include the need to ensure that: spending delivers genuine value for money; global appropriations for payments are based on realistic implementation forecasts, to prevent the emergence of a budget surplus; Financial Ceilings are respected, with full accordance being given to the rules governing use of the Flexibility Instrument, and; Activity Based Budgeting is fully factored into the budgeting process."

Section 1.47 8.25 The Minister adds that other priorities for the Government include:

· achieving in Heading 4 (External Actions) an appropriate balance, within the Financial Perspective ceiling, between long-term assistance and emerging priorities (such as Iraq, reconstruction in tsunami-affected countries, CFSP and transitional assistance for countries affected by sugar reform); and

· in Heading 5 (Administration) ensuring that staff proposals are based on genuine need and can be accommodated under the Financial Perspective ceiling.

Section 1.48 8.26 As for the financial implications of the PDB the Minister says:

"The UK financing share of the 2006 PDB is shown as 17.52% before the abatement, or 12.41% after abatement. The actual net financial cost to the UK of the 2006 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 the following year.

"The continuing inefficiencies and inequities on the expenditure side of the budget, and the resulting unfairness of the UK position, mean that the abatement remains fully justified and is not up for negotiation."

Conclusion

Section 1.49 8.27 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. The debate should take place before the Budget Council on 15 July 2005.

Section 1.50 8.28 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 understand the main official texts will be available in time for a debate.

Section 1.51 8.29 The debate will allow Members to examine in greater detail the Government's approach to the forthcoming budget negotiations, particularly on such issues as the Commission's proposed staff increases. The UK has a substantial interest and role in scrutinising the PDB, not least because of the large sums involved and the UKs position as a large net contributor, but also this year because of its Presidency role and the parallel debate, in the context of the Community's finances for the period 2007-2013, on the UK's rebate.

Section 1.52 8.30 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.

Section 1.53 8.31 Members might also wish to examine with the Minister both the proposed use of the Flexibility Instrument in the External Actions heading, and the Commission's experience of the new Activity-Based Budgets.

Section 1.54 8.32 Members may also wish to examine to what extent there is a clear relationship between the Annual Policy Strategy (APS) 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 2006.

Annex 1

Table 1: Summary of 2006 PDB proposals (€ million)

Heading 2005 Budget[34] 2006 PDB Change 2005/2006 % Change 2005/2006

CA PA CA PA CA PA CA PA

1. AGRICULTURE 49,676 49,115 51,412 51,353 1,736 2,238 3.5 4.6

1a. CAP 42,835 42,835 43,641 43,641 806 806 1.9 1.9

1b. Rural development 6,841 6,279 7,771 7,711 930 1,432 13.6 22.8

2. STRUCTURAL OPERATIONS 42,423 32,396 44,555 35,640 2,132 3,244 5.0 10.0

- Structural Funds 37,292 29,391 38,523 32,134 1,231 2,744 3.3 9.3

- Cohesion Fund 5,132 3,006 6,032 3,506 900 500 17.5 16.6

3. INTERNAL POLICIES 9,052 7,924 9,218 8,836 166 912 1.8 11.5

4. EXTERNAL ACTIONS 5,219 5,476 5,393 5,357 174 -119 3.3 -2.2

5. ADMINISTRATION 6,351 6,351 6,683 6,683 332 332 5.2 5.2

6. RESERVES 446 446 458 458 12 12 2.7 2.7

- Emergency Aid Reserve 223 223 229 229 6 6 2.7 2.7

- Loan Guarantee Reserve 223 223 229 229 6 6 2.7 2.7

7. PRE-ACCESSION STRATEGY 2,081 3,287 2,481 3,152 400 -135 19.2 -4.1

- SAPARD 250 579 300 660 50 81 19.9 14.0

- ISPA 526 704 585 855 59 151 11.3 21.5

- PHARE 899 1,655 977 1,290 79 -364 8.7 -22.0

- Turkey 286 323 480 291 193 -32 67.5 -9.8

- Economic Development of Turkish Cypriot Community 120 27 139 56 19 29 15.7 106.8

8. COMPENSATIONS 1,305 1,305 1,074 1,074 -231 -231 -17.7 -17.7

TOTAL 116,554 106,300 121,273 112,552 4,719 6,252 4.0 5.9

Financial Perspective ceiling 119,419 114,060 123,515 119,112

Margin[35] 3,040 7,935 2,422 6,740

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

Table 2: Summary of 2006 PDB proposals (£ million)

Heading 2005 Budget[36] 2006 PDB Change 2005/2006 % Change 2005/2006

CA PA CA PA CA PA CA PA

1. AGRICULTURE 35,025 34,629 36,249 36,207 1,224 1,578 3.5 4.6

1a. CAP 30,202 30,202 30,770 30,770 568 568 1.9 1.9

1b. Rural development 4,823 4,427 5,479 5,437 656 1,010 13.6 22.8

2. STRUCTURAL OPERATIONS 29,912 22,841 31,414 25,128 1,503 2,287 5.0 10.0

- Structural Funds 26,293 20,722 27,161 22,657 868 1,934 3.3 9.3

- Cohesion Fund 3,618 2,119 4,253 2,472 635 353 17.5 16.6

3. INTERNAL POLICIES 6,382 5,587 6,500 6,230 117 643 1.8 11.5

4. EXTERNAL ACTIONS 3,680 3,861 3,802 3,777 122 -84 3.3 -2.2

5. ADMINISTRATION 4,478 4,478 4,712 4,712 234 234 5.2 5.2

6. RESERVES 314 314 323 323 8 8 2.7 2.7

- Emergency Aid Reserve 157 157 161 161 4 4 2.7 2.7

- Loan Guarantee Reserve 157 157 161 161 4 4 2.7 2.7

7. PRE-ACCESSION STRATEGY 1,467 2,318 1,749 2,222 282 -95 19.2 -4.1

- SAPARD 176 408 212 465 35 57 19.9 14.0

- ISPA 371 496 412 603 42 107 11.3 21.5

- PHARE 634 1,167 689 910 55 -257 8.7 -22.0

- Turkey 202 227 338 205 136 -22 67.5 -9.8

- Economic Development of Turkish Cypriot Community 85 19 98 39 13 20 15.7 106.8

8. COMPENSATIONS 920 920 757 757 -163 -163 -17.7 -17.7

TOTAL 82,179 74,949 85,506 79,357 3,327 4,408 4.0 5.9

Financial Perspective ceiling 84,199 80,420 87,087 83,982

Margin[37] 2,143 5,595 1,707 4,752