Select Committee on European Scrutiny Thirty-First Report


2 Preliminary Draft Budget 2007

(27511)

Preliminary Draft General Budget of the European Communities for the financial year 2007

Legal baseArticle 272 EC; QMV; the special role of the European Parliament in relation to the adoption of the Budget is set out in Article 272
DepartmentHM Treasury
Basis of considerationEM of 23 May 2006
Previous Committee ReportNone
To be discussed in Council14 July 2006
Committee's assessmentPolitically important
Committee's decisionFor debate in European Standing Committee

Background

2.1 The Commission's Preliminary Draft Budget (PDB) is the first stage in the Community's annual budgetary procedure. The 2007 PDB will form the basis of the 2007 Budget which is expected to be adopted towards the end of December 2006.

2.2 The PDB sets out the Commission's proposals for Community expenditure in 2007, 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 14 July 2006 to be forwarded to the European Parliament for its first reading some time in late October 2006. The Draft Budget is expected to have its Council second reading in November 2006 and, after conciliation if necessary, its European Parliament second reading in mid-December 2006, prior to final adoption.

2.3 Although the official texts are not yet available, the Economic Secretary to the Treasury (Ed Balls) has submitted a helpful Explanatory Memorandum on the PDB. In order to provide an opportunity for the House to consider the PDB as early as possible, we have relied heavily upon that Explanatory Memorandum. As in previous years, we are annexing to this Report tables derived from the Explanatory Memorandum.[5] We understand that the official texts of the PDB should be available in good time for a debate.

The document

2.4 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 Inter­Institutional Agreement (IIA) of 2006 between the European Parliament, the Commission and the Council. The Financial Perspective for the years 2007-13 sets out annual expenditure ceilings for five broad expenditure categories and a sixth temporary one related to the accession of Bulgaria and Romania.[6] This year's PDB is the first under the new Financial Perspective.

2.5 The PDB is presented in the Activity-Based Budgeting (ABB) format.[7] It is expected to be published in ten volumes, covering a General Introduction and a General Statement of Revenue, and expenditure proposals for 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 the volume covering 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.

2.6 It should be noted that much of the budget (including the structural funds, agriculture and multi-annual 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. It should also be noted that a very large part of the budget is non-compulsory expenditure on which the final decision is in the hands of the European Parliament.[8]

SUMMARY OF THE FIGURES

2.7 For commitment appropriations[9] the 2007 PDB proposes a total of €126.82 billion (£88.04 billion). This is an increase of 4.6% over 2006. This total gives a margin of €1.58 billion (£1.10 billion) below the Financial Perspective ceiling. For payment appropriations[10] the 2007 PDB proposes a total of €116.42 billion (£80.82 billion). This is an increase of 3.9% over 2006. The total is €7.45 billion (£5.17 billion) below the Financial Perspective ceiling. Payment appropriations proposed represent 0.99% of Community Gross National Income compared to 1% in 2006 and the 1.24% ceiling in the Own Resources Decision about the financing of Community expenditure.

2.8 Compulsory expenditure makes up €45.57 billion (£31.64 billion) of total commitment appropriations. Non-compulsory expenditure makes up €81.25 billion (£56.40 billion) of total commitment appropriations. The figures for compulsory expenditure payment appropriations are €45.56 billion (£31.56 billion). For non-compulsory expenditure payment appropriations the figures are €70.96 billion (£49.26 billion). There is overall decrease in compulsory expenditure of 1.0% for commitment appropriations and 0.8% for payment appropriations, and for non-compulsory expenditure an overall increase of 7.3% for commitment appropriations and 7.8% for payment appropriations.

THE INDIVIDUAL EXPENDITURE HEADINGS

Heading 1: Sustainable growth

2.9 Overall expenditure under this heading is €54.28 billion (£37.68 billion) for commitment and €44.73 billion (£31.05 billion) for payment appropriations, leaving a margin of €122.00 million (£84.69 million) under the Financial Perspective ceiling for commitment appropriations.[11]

Heading 1a: Competitiveness for growth and employment

2.10 Expenditure under this sub-heading is €8.80 billion (£6.11 billion) for commitment appropriations, an increase of 11.5% over 2006, and €6.94 billion (£4.82 billion) for payment appropriations, a decrease of 6.5% over 2006 levels.

2.11 The change in commitment appropriations is largely due to increases in programmes which the Commission considers crucial to the implementation of the Lisbon Strategy. These include:

  • the Seventh Research Framework Programme increased by 3.1%, against 2006 levels;
  • the Competitiveness and Innovation Programme increased by 52.5%;
  • Trans-European Networks increased by 17.7%;
  • lifelong learning increased by 29.6%;
  • nuclear decommissioning increased by 70.4%;
  • a new commitment of €100 million to the Galileo programme; and
  • the Marco Polo programme increased by 60.0%.

The change in payment appropriations is accounted for by setting levels which properly reflect likely implementation. The levels include decreases in:

  • the Seventh Research Framework Programme of 7.1%;
  • Trans-European Networks of 46.4%; and
  • Research programme of 46.5%.

Heading 1b: Cohesion for growth and employment

2.12 Expenditure under this sub-heading is €45.49 billion (£31.58 billion) for commitment appropriations, an increase of 14.8% over 2006, and €37.79 billion (£26.23 billion) for payment appropriations, an increase of 19.1% over 2006 levels. These increases result from the new generation of structural and cohesion programmes agreed in the new Financial Perspective negotiations with higher payments to new Member States.

Heading 2: Preservation and management of natural resources

2.13 Overall expenditure under this heading is €57.22 billion (£39.72 billion) for commitment appropriations, an increase of 1.2% over 2006, and €55.68 billion (£38.66 billion) for payment appropriations, an increase of 0.4% over 2006. This leaves a margin of €1.13 billion (£0.78 billion) under the Financial Perspective ceiling for commitment appropriations.

2.14 The change in commitment appropriations results mainly from full implementation of the 2003 Common Agricultural Policy reform, as well as the continued phasing in of new Member States, increasing planned expenditure on market related aid and direct aids by 0.8%, against 2006 levels, and on rural development by 3.0%. The change in payment appropriations comes mainly from an increase in the European Fisheries' Fund of 40.4%, as against 2006 levels, due to continuing implementation of reform of the Common Fisheries Policy.

Heading 3: Citizenship, freedom, security and justice

2.15 Overall expenditure under this heading is €1.17 billion (£0.82 billion) for commitment appropriations, an increase of 1.2% over 2006, and €1.11 billion (£0.77 billion) for payment appropriations, a decrease of 4.4% over 2006. This leaves a margin of €99.00 million (£68.73 million) under the Financial Perspective ceiling for commitment appropriations.

Heading 3a: Freedom, security and justice

2.16 Expenditure under this sub-heading is €571.30 million (£396.00 million) for commitment appropriations, an increase of 4.0% over 2006, and €427.00 million (£296.00 million) for payment appropriations, a decrease of 19.9%, as against 2006.

2.17 The change in the commitment payments results from increases which include:

  • in accordance with strategic priorities of the Hague Action Programme, greater planned expenditure of €58.00 million for the Security and Safeguarding Liberties Programme and €72.00 million for the Fundamental Rights and Justice Programme; and
  • a 40.1% rise, against 2006 levels, in the cost of external agencies.

These increases are partially offset by a decrease in commitment to the Solidarity and Management of Migration Flows Programme, as funding for external border measures will be replaced by the External Borders Fund from January 2007. The decrease in payment appropriations is also due largely to a reduced funding for the Solidarity and Management of Migration Flows Programme of 47.5%, against 2006 levels.

Heading 3b: Citizenship

2.18 Expenditure under this sub-heading is €603.00 million (£419.00 million) for commitment appropriations, a decrease of 1.4% as against 2006 levels, and €680.00 million (£472.00 million) for payment appropriations, an increase of 8.9% over 2006.

2.19 The decrease in commitment appropriations comes largely from reduced funding for the Public Health and Consumer Protection Programme of 22.7%, against 2006 levels. The increase in payment appropriations is due largely to new programmes starting in 2007, which aim at fostering mutual understanding and a shared European identity. This includes €42.00 million for Culture 2007 and €16.00 million for Youth in Action. Additionally there is an increase of 32.7% for the Enlargement Programme.

Heading 4: The EU as a global partner

2.20 Overall expenditure under this heading is €6.70 billion (£4.65 billion) for commitment appropriations, a decrease of 20.2% as against 2006 levels and €7.45 billion for payment appropriations, a decrease of 13.8%, against 2006 levels. This leaves a margin of €110.00 million (£76.36 million) under the Financial Perspective ceiling for commitment appropriations.

2.21 The change in commitment appropriations includes:

  • the Instrument for Pre-Accession decreased by 57.2%, as against 2006 levels, (anticipating accession of Bulgaria and Romania);
  • the Development Cooperation and Economic Cooperation Instrument decreased by 12.2%; and
  • the Instrument for Stability (designed to deliver "an adequate response to instability and crises and to longer term challenges with a stability or security aspect") increased by 85.4%.

The change in payments appropriations includes:

  • the Instrument for Pre-Accession decreased by 18.9% (phasing out of payments to the Member States which acceded in 2004), as against 2006 levels;
  • the European Neighbourhood and Partnership Instrument decreased by 10.1%; and
  • the Development Cooperation and Economic Cooperation Instrument decreased by 8.2%.

Heading 5: Administration

2.22 Overall expenditure under this heading is €7.00 billion (£4.86 billion) for both commitment and payment appropriations, an increase of 6.0% against 2006 levels. This leaves a margin of €113.00 million (£78.44 million) under the Financial Perspective ceiling for commitment appropriations.

2.23 The increase in resources is to provide for an increase of 903 posts, including 13 new posts devoted to language services and 230 new posts to prepare for the accession of Bulgaria and Romania.

Heading 6 Compensation

2.24 Overall expenditure under this heading is €445.00 million (£309.00 million) for both commitment and payment appropriations, a decrease of 58.6% against 2006 levels. This leaves a margin €0.35 million (£0.24 million) under the Financial Perspective ceiling for commitment appropriations. Expenditure is intended to help improve cash-flow in the national budgets of Bulgaria and Romania and to finance control actions at the new external borders of the EU.

The Commission's view

2.25 In a question and answer brief for the press of 3 May 2006 the Commission said:

    "This budget will continue to fulfil the strategic priorities of this Commission — prosperity, solidarity, security and external projection — within the limits set by the new financial framework.

    "There has been a clear focus on and increase of funding for sustainable development goals (heading 1), up 14.3% compared to 2006, with a total of €54,282.7 million in commitment appropriations. This is €6.8 billion more than in 2006. Rural development (heading 2) will increase by 3% to €12,371.4 million. There are significant increases in funding for actions under Fundamental Rights and Justice, Security and Safeguarding Liberties (heading 3a). For external projection, there are new generation programmes such as European neighbourhood and partnership, development and economic cooperation, and the Instrument for Stability."

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

    "The budget is more than just numbers: it is a precise translation of the EU's political goals, mainly stimulating growth and employment, into concrete financial terms. Once implemented, this budget can make a substantial contribution to enhancing European economic competitiveness".

The Government's view

2.27 The Minister, noting that as a net contributor to the Community budget it is in the UK's interest to control growth in the budget and achieve a more efficient use of resources, tells us that the Government will work with like-minded Member States to maintain budget discipline and subject all areas of spending to rigorous scrutiny. But he reminds us that much of the budget is predetermined by policy decisions made outside the annual budget process and that much of it is non-compulsory expenditure on which the final decision is in the hands of the European Parliament.

2.28 The Minister says the Government's first aim will be to respect agreed and established budgetary principles, particularly ensuring that:

  • spending delivers genuine value for money;
  • global appropriations for payments are based on realistic implementation forecasts, so preventing emergence of large surpluses;
  • Financial Perspective ceilings are respected, with proper regard being given to the rules governing use of the Flexibility Instrument; and
  • Activity Based Budgeting is fully factored into the budgeting process.

2.29 The Minister continues that the Government's key priorities this year include:

  • in regard to Heading 1b, Structural and Cohesion Funds, and a proposed increase in payment appropriations 19.1%, levels of expenditure that take into account the genuine implementation capacity of new Member States rather than Commission ambition;
  • reprioritisation and a front loading in Heading 4, the EU as global partner, to meet urgent needs for the Common Foreign and Security Policy and for transitional assistance to sugar protocol countries;
  • ensuring the Commission finds sufficient resource in Heading 4 to support urgent development needs in Afghanistan and Iraq; and
  • closely examining Heading 5, Administration, to ensure that the Commission's staff proposals are based on genuine need, reflect efficiency savings and economies of scale and can be accommodated under the Financial Perspective ceiling.

Conclusion

2.30 The Community budget has significant financial and policy implications and the UK has a substantial interest and role in scrutinising the Preliminary Draft Budget (PDB), not least because of the large sums involved and the UK's position as a large net contributor. As the Minister says, 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 PDB be debated in European Standing Committee. The debate should take place before the Budget Council on 14 July 2006.

2.31 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.

2.32 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 use of Activity Based Budgeting and the relationship of the PDB to the Commission's Annual Policy Strategy for 2007.[12]

2.33 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, the Lisbon strategy, external actions, and pre-accession aid.


5   In the annexes and in the following paragraphs € figures are converted at a May 2006 rate of £1 = €1.4405. Back

6   See (27269) 5973/06 (27302) 6426/06: HC 34-xxi (2005-06), para 2 (8 March 2006) and HC 34-xxvi (2005-06), para 4 (26 April 2006) and HC Deb, 8 May 2006, cols. 89-142. Back

7   Activity-Based Budgeting is defined by HM Treasury as a system involving reclassification of expenditure into 31 policy areas with associated activities, each having SMART (specific, measurable, achievable, relevant and timed) objectives, performance indicators and evaluation measures. The intention is to shift the focus from inputs (budgetary resources) to outputs (what is actually achieved by expenditure) and to make annual budget allocations more transparent and evidence-based. Back

8   Compulsory expenditure is expenditure necessarily resulting from the Treaty or from acts adopted in accordance with the Treaty. Its main components are agricultural guarantee expenditure. The Council has the final say in fixing its total. All other expenditure is classified as non-compulsory. Back

9   Commitment appropriations are the total cost of legal obligations which can be entered into during a financial year for activities which will lead to payments in that and future financial years. Back

10   Payment appropriations are the amount of money which is available to be spent during a financial year arising from commitments in the budgets for that or preceding financial years. Back

11   An equivalent breakdown of the total margin for payment appropriations is not available. Back

12   See (27371) 7571/06: HC 34-xxvii (2005-06), para 7 (3 May 2006). Back


 
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