House of Commons - European Scrutiny

Select Committee on European Scrutiny Twenty-Fifth Report

2 Preliminary Draft Budget 2008

(28681)

—

Preliminary Draft General Budget of the European Communities for the financial year 2008

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 6 June 2007

Previous Committee Report None

To be discussed in Council 13 July 2007

Committee's assessment Politically important

Committee's decision For 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 2008 PDB will form the basis of the 2008 Budget which is expected to be adopted towards the end of December 2007.

2.2 The PDB sets out the Commission's proposals for Community expenditure in 2008, 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 13 July 2007 to be forwarded to the European Parliament for its first reading some time in October 2007. The Draft Budget is expected to have its Council second reading in November 2007 and, after conciliation if necessary, its European Parliament second reading in mid-December 2007, 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.[4] We also annex a glossary of terms used in relation to the Community's budget provided to us by the Minister with his Explanatory Memorandum.

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. This year's PDB is the second under the current Financial Perspective.

2.5 The PDB is presented in the Activity-Based Budgeting (ABB) format. 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.

SUMMARY OF THE FIGURES

2.7 For commitment appropriations the 2008 PDB proposes a total of €129.17 billion (£87.85 billion). This is an increase of 2% over 2007. This total gives a margin of €3.14 billion (£2.13 billion) below the Financial Perspective ceiling. For payment appropriations the 2008 PDB proposes a total of €121.58 billion (£82.69 billion). This is an increase of 5.3% over 2007. The total is €8.22 billion (£5.59 billion) below the Financial Perspective ceiling. Payment appropriations proposed represent 0.97% of Community Gross National Income compared to 0.96% in 2007 and the 1.24% ceiling in the Own Resources Decision about the financing of Community expenditure.

2.8 Compulsory expenditure makes up €44.05 billion (£29.96 billion) of total commitment appropriations. Non-compulsory expenditure makes up €85.11 billion (£57.89 billion) of total commitment appropriations. The figures for compulsory expenditure payment appropriations are €44.06 billion (£29.96 billion). For non-compulsory expenditure payment appropriations the figures are €77.52 billion (£52.72 billion). There is an overall decrease in compulsory expenditure of 1.2% for commitment appropriations and 1% for payment appropriations, and for non-compulsory expenditure an overall increase of 3.8% for commitment appropriations and 9.2% for payment appropriations.

THE INDIVIDUAL EXPENDITURE HEADINGS

Heading 1: Sustainable growth

2.9 Overall expenditure under this heading is €57.15 billion (£38.87 billion) for commitment and €50.16 billion (£34.12 billion) for payment appropriations, leaving a margin of €87.60 million (£57.59 million) under the Financial Perspective ceiling for commitment appropriations.[5]

Heading 1a: Competitiveness for growth and employment

2.10 Expenditure under this sub-heading is €10.27 billion (£6.98 billion) for commitment appropriations, an increase of 9.6% over 2007, and €9.60 billion (£6.53 billion) for payment appropriations, an increase of 35.4% over 2007 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 11%, against 2007 levels;
Trans-European Networks increased by 14%;
lifelong learning increased by 9%; and
Galileo increased by 51%.

The change in payment appropriations is accounted for by increases for:

the Seventh Research Framework Programme of 54.5%;
Trans-European Networks of 88.8%; and
lifelong learning of 19.7%.
the Competitiveness and Innovation Programme of 25.7%; and
decentralised agencies of 24.9%.

Heading 1b: Cohesion for growth and employment

2.12 Expenditure under this sub-heading is €46.88 billion (£31.88 billion) for commitment appropriations, an increase of 3.1% over 2007, and €40.62 billion (£27.62 billion) for payment appropriations, an increase of 7.5% over 2007 levels. These increases result particularly from proposed expenditure devoted to the Cohesion Fund, which is set to rise by more than 14% in 2008.

Heading 2: Preservation and management of natural resources

2.13 Overall expenditure under this heading is €56.28 billion (£38.27 billion) for commitment appropriations, an increase of 0.05% over 2007, and €54.77 billion (£37.25 billion) for payment appropriations, an increase of 0.1% over 2007. This leaves a margin of €2.52 billion (£1.71 billion) under the Financial Perspective ceiling for commitment appropriations.

2.14 Although overall expenditure under Heading 2 is to remain relatively stable compared to 2007, there are gradual percentage shifts which amount to fairly large sums. Under commitment appropriations:

market- related expenditure and direct aids to farmers decrease as a whole by €212.6 million;
rural development programmes are to grow by 1.6%; and
LIFE +, the environmental protection programme, is to increase by 10.9%.

Under payment appropriations there is:

an effective shift within market-relate expenditure and direct aids from agricultural markets to proposed spending on animal and plant health (health and consumer protection) with an increase of 516.6% on 2007;
an increase for rural development programmes of 4.5% on 2007; and
a decrease for the European Fisheries Fund of 46.2% on 2007.

Heading 3: Citizenship, freedom, security and justice

2.15 Overall expenditure under this heading is €1.29 billion (£0.88 billion) for commitment appropriations, an increase of 1.3% over 2007, and €1.19 billion (£0.81 billion) for payment appropriations, a decrease of 1% as against 2007. This leaves a margin of €74.00 million (£50.32 million) under the Financial Perspective ceiling for commitment appropriations.

Heading 3a: Freedom, security and justice

2.16 Expenditure under this sub-heading is €691.00 million (£470.00 million) for commitment appropriations, an increase of 10.8% over 2007, and €496.00 million (£337.00 million) for payment appropriations, a decrease of 4.8%, as against 2007. This leaves a margin of €56.00 million (£38.08 million) under the Financial Perspective ceiling for commitment appropriations.

2.17 The largest change in commitment payments is an increase of 24% for Solidarity and Management of Migration Flows. As for payment appropriations questions will again remain on absorption capacity in this area and also for programmes under Fundamental Rights and Justice, with an increase of 28.3% foreseen and Decentralised Agencies, with an increase of 9.5%.

Heading 3b: Citizenship

2.18 Expenditure under this sub-heading is €597.00 million (£406.00 million) for commitment appropriations, a decrease of 7.8% as against 2007 levels, and €693.00 million (£471.00 million) for payment appropriations, a decrease of 4.8% as against 2007. This leaves a margin of €17.70 million (£12.04 million) under the Financial Perspective ceiling for commitment appropriations.

2.19 The decrease in commitment appropriations is largely due to 81.8% less funding for "Other actions" and programmes relating to enlargement (the transition facility for Romania and Bulgaria) — whilst public health and consumer protection and Media 2007 programmes receive increases of €9 million and €18 million respectively. For payment appropriations the large decrease for enlargement associated programmes of 24% is offset by increases for Culture 2007-2013 of 27.6% and for Decentralised Agencies of 22.9%.

Heading 4: The EU as a global partner

2.20 Overall expenditure under this heading is €6.91 billion (£4.70 billion) for commitment appropriations, an increase of 1.5% over 2007 levels and €7.92 billion (£5.38 billion) for payment appropriations, an increase of 7.7% over 2007 levels. This leaves a margin of €329.00 million (£223.73 million) under the Financial Perspective ceiling for commitment appropriations.

2.21 The change in commitment appropriations includes:

an Instrument for Pre--Accession increase of 9.4%, over 2007 levels, (anticipating accession of Bulgaria and Romania);
a Development Cooperation and Economic Cooperation Instrument increase of 1.9%;
an Instrument for Stability increase of 28.7%;
an increase of 58.1% for macroeconomic assistance; and
a Common Foreign and Security Policy increase of 25.8%.

Development Cooperation continues to be the largest item at €2.20 billion. The change in payments appropriations includes:

an Instrument for Pre--Accession increase of 14.3%, largely for regional policy and agriculture and rural development, over 2007 levels;
a European Neighbourhood and Partnership Instrument increase of 4%;
a Development Cooperation Instrument decrease of 1.5%;
an Instrument for Stability increase of 51.3%; and
a Common Foreign and Security Policy (CFSP) increase of 29.5%.

Heading 5: Administration

2.22 Overall expenditure under this heading is €7.34 billion (£4.99 billion) for both commitment and payment appropriations, an increase of 5.7% against 2007 levels. This leaves a margin of €121.00 million (£82.28 million) under the Financial Perspective ceiling for commitment appropriations.

2.23 The increase in resources is to provide for an extra 860 posts in the Community institutions and bodies, for which enlargement remains the main reason given, and for pensions provision for all institutions which is to increase by 10.2%.

Heading 6 Compensation

2.24 Overall expenditure under this heading is €206.00 million (£140.09 million) for both commitment and payment appropriations, a decrease of 53.5% against 2007 levels. This leaves a margin of €0.36 million (£0.22 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 press notice of 2 May 2007 announcing the PDB Dr Dalia Grybauskaité, the Commissioner for Financial Programming and Budget, is quoted as commenting:

"Today's budget proposal marks a historical shift for the EU: for the first time, spending directly related to growth and jobs take the biggest share of the EU budget. This proves that the Commission is steady in its ambition of refocusing the budget on the global challenges facing Europe as a whole. More funds are now available for policies geared towards economic progress, without sacrificing the efforts needed in other areas, notably the environment, energy, freedom and security, and Europe's common foreign and security policy".[6]

The Government's view

2.26 The Minister (Ed Balls) comments that the Community budget has significant financial and policy implications and says:

as the UK is a net contributor it is in its interest to control growth in the budget while working to achieve a more efficient use of resources;
the Government will work with like-minded Member States to maintain budget discipline and subject all areas of spending to rigorous scrutiny; but
it must be borne in mind that most spending (including agriculture, structural funds and multi-annual programmes) is largely pre-determined by previous decisions on the Financial Perspective and that in the budget process the final decision on much of the expenditure is taken by the European Parliament.

2.27 The Minister tells us that the Government's primary aim will be to respect agreed and established budgetary principles, particularly to ensure that:

spending delivers genuine value for money;
global appropriations for payments are based on realistic implementation forecasts — so as to prevent the emergence of a large budget surplus;
Financial Perspective ceilings are respected, with full regard given to the rules governing use of the Flexibility Instrument; and
Activity-Based Budgeting is fully factored into the budgeting process.

2.28 The Minister continues that the key spending areas in the 2008 budget which the Government intends to examine in detail include:

Heading 1a (Competitiveness for growth and employment) — although the Commission has presented the large increase, 35.4%, in payment appropriations as a reflection and acknowledgement of new challenges in this area, the issue remains as to whether there is absorption capacity for such large increases and the Government will be seeking full justifications for this extra expenditure
Heading 1b (Cohesion for growth and employment) — an increase of 7.5% for payment appropriations is presented but there have been significant levels of under-spend in previous years and the Government will also seek to achieve realistic levels of payments that take into account genuine implementation capacity;
Heading 4 (The European Union as a Global Partner) — it will be a Government priority to ensure that key spending on development cooperation and external relations in certain areas (including Afghanistan, assistance to sugar protocol countries and the CFSP) is maintained at sufficient levels; and
Heading 5 (Administration) — as last year the Government will scrutinise particularly closely this heading, what efforts have been made to find efficiency gains and economies of scale. Working with other like-minded Member States, the Government will also examine the level of vacancies, the redeployment of staff and the reprioritisation of work in the administrations of the Community's institutions, agencies and bodies.

2.29 Finally the Minister says that the UK financing share of the 2008 PDB is estimated as 17.1% before abatement, or 12.3% after abatement. The actual net financial cost to the UK of the 2008 EC 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

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 13 July 2007.

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 problem of absorption and implementation capacity and maintaining the levels of expenditure the Government thinks necessary under the European Union as a Global Partner heading for such matters as Afghanistan, assistance to sugar protocol countries and the CFSP.

Table 1: Summary of 2008 PDB Proposals - € million

Heading 2007 Budget 2007 PDB Change 2007/2008 Change 2007/2008

CA PA CA PA CA PA CA PA

1. Sustainable Growth
1a. Competitiveness for Growth and Employment
1b. Cohesion for Growth and Employment
54,854
9,368
45,487
44,837
7,047
37,790
57,148
10,270
46,878
50,161
9,539
40,623
2,294
903
1,391
5,324
2,492
2,832
4.2%
9.6%
3.1%
11.9%
35.4%
7.5%

2. Preservation and Management of Natural Resources
of which: market related expenditure and direct payments
56,250
42,712
54,719
42,436
56,276
42,499
54,770
42,447
26
-213
52
11
0.0%
-0.5%
0.1%
0.0%

3. Citizenship, Freedom, Security and Justice
3a. Freedom, Security and Justice
3b. Citizenship
1,271
624
648
1,202
474
728
1,288
691
597
1,190
496
693
17
67
-50
-12
23
-35
1.3%
10.8%
-7.8%
-1.0%
4.8%
-4.8%

4. European Union as a Global Partner 6,812 7,353 6,911 7,917 99 564 1.5% 7.7%

5. Administration 6,942 6,942 7,336 7,336 393 394 5.7% 5.7%

6. Compensation 445 445 207 207 -238 -238 -53.5% -53.5%

TOTAL (1)
Margin
Compulsory expenditure
126,575

44,597
115,497

44,487
129,166
3,137
44,053
121,581

44,057
2,591

-544
6,084

-430
2.0%

-1.2%
5.3%

-1.0%

Non-compulsory expenditure 81,979 71,010 85,113 77,524 3,135 6,514 3.8% 9.2%

Appropriations for payment as % of GNI 0.96% 0.97%

Notes

CA = commitment appropriations

PA = payment appropriations

(1) Due to rounding, the sum of the columns may not equal the totals.

Table 2: Summary of 2008 PDB Proposals - £ million

Heading 2007 Budget 2008 PDB Change 2007/2008 Change 2007/2008

CA PA CA PA CA PA CA PA

1. Sustainable Growth
1a. Competitiveness for Growth and Employment
1b. Cohesion for Growth and Employment
37,306
6,371
30,936
30,494
4,793
25,701
38,866
6,985
31,882
34,115
6,487
27,628
1,560
614
946
3,621
1,695
1,926
4.2%
9.6%
3.1%
11.9%
35.4%
7.5%

2. Preservation and Management of Natural Resources
of which: market related expenditure and direct payments
38,256
29,048
37,214
28,861
38,273
28,904
37,249
28,868
18
-145
35
7
0.0%
-0.5%
0.1%
0.0%

3. Citizenship, Freedom, Security and Justice
3a. Freedom, Security and Justice
3b. Citizenship
864
424
441
817
322
495
876
470
406
809
337
471
12
46
-34
-8
15
-24
1.3%
10.8%
-7.8%
-1.0%
4.8%
-4.8%

4. European Union as a Global Partner 4,633 5,001 4,700 5,384 67 384 1.5% 7.7%

5. Administration 4,721 4,721 4,989 4,989 267 268 5.7% 5.7%

6. Compensation 303 301 141 140 -161 -162 -53.5% -53.5%

TOTAL (1)
Margin
Compulsory expenditure
86,084

30,330
78,550

30,256
87,846
2,133
29,960
82,687

29,963
1,762

-370
4,138

-292
2.0%

-1.2%
5.3%

-1.0%

Non-compulsory expenditure 55,754 48,294 57,885 52,724 2,132 4,430 3.8% 9.2%

Appropriations for payment as % of GNI 0.96% 0.97%