Documents considered by the Committee on 15 December 2010 - European Scrutiny Committee Contents

4 EU Budget Review



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COM(10) 700

Commission Communication: The EU Budget Review
Legal base
Document originated19 October 2010
Deposited in Parliament22 October 2010
DepartmentHM Treasury
Basis of considerationEM of 22 November 2010
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionFor debate in European Committee B


4.1 There are three instruments setting the basic rules for the EU's finances. The first is an Inter-Institutional Agreement on budgetary discipline and sound financial management, which provides for many aspects of the planning, preparation, execution and control of the EU Budget. The agreement is between the Council, the European Parliament and the Commission — it has no legal base but is politically binding. It is an important tool of budgetary discipline and includes a multiannual Financial Framework. The Financial Framework is intended to ensure that, in the medium term, EU expenditure develops in an orderly manner and within the limits of Own Resources. It contributes to budgetary discipline by setting ceilings on the amount of funds available to the EU Budget in broad policy areas for each year it covers. The current Inter-Institutional Agreement was agreed in May 2006 and its Financial Framework (agreed in December 2005) sets spending ceilings for the period 2007-2013.[16]

4.2 The other two instruments are an Own Resources Decision, which governs the main sources of revenue — the current Decision was agreed in June 2007,[17] and the Financial Regulation of 2002, which sets out detailed provisions in relation to the preparation and management of the annual EU Budget.[18]

4.3 In December 2005 the European Council asked the Commission to "undertake a full, wide ranging review covering all aspects of EU spending, including the CAP, and of resources, including the United Kingdom rebate, to report in 2008/9". This request was incorporated into the current Inter-Institutional Agreement. Although the Commission initiated a public consultation on the issues in September 2007[19] it did not report on the review in 2008 or 2009.

The document

4.4 This Communication and the accompanying staff working document are an attempt by the Commission to provide orientations for the future of EU budget expenditure and financing. The Commission says that throughout the EU difficult choices are being made and public spending is being challenged in a way not seen for decades and that its priority for public spending is growth for jobs, concentrating on getting more people in jobs, boosting companies' competitiveness and building an open and modern single market.

4.5 The Commission asserts that the key lessons to be learnt from the EU's present budgetary arrangements are:

  • while the multiannual Financial Frameworks provide predictability of EU expenditure in the medium term, this has come at the price of inflexibility;
  • unforeseen events, such as the economic crisis, underline the interdependence of the EU's economies and the need to strengthen common rules, possibly linking sanctions to the EU Budget;
  • slow take up of cohesion spending in the first years of the Financial framework needs remedy;
  • controls have a tendency to assess programmes on the basis of inputs rather than performance, reducing incentives for effective results; and
  • domination of the grants approach may have limited the impact of the EU Budget.

4.6 The Commission suggests as principles for the EU Budget:

  • the weight of spending should mirror the EU's core policy priorities and should also reflect new policy dimensions of the Treaty of Lisbon. Above all, it should be designed as one of the most important instruments to help deliver the Europe 2020 strategy[20] for smart, sustainable and inclusive growth;
  • EU added value is a key test to justify spending at the EU level, although the added value of a political project cannot be reduced to a balance sheet. Coordination between EU and national budgets should be seen as crucial for the sake of improving economic governance, transparency and efficiency of public spending;
  • spending programmes must have a real impact, with investment feeding through into action — incentives and checks must be in place to ensure that spending fulfils its real purpose;
  • the EU Budget is an indispensible part of the expression of EU solidarity. Solidarity is a core principle and source of strength that confers benefits on all; and
  • reforming the financing of the EU Budget to re-establish the link between own resources and common EU policies. Financing should be realigned with the principles of autonomy, transparency and fairness.

4.7 In the third section of the Communication the Commission sets out its ideas in relation to the Europe 2020 objectives of smart, sustainable and inclusive growth. Under smart growth the Commission says on research and innovation that:

  • the priority for funding should go to the EU's core objectives and in particular the Europe 2020 strategy;
  • research and innovation offer high social benefits and clear EU added value through economies of scale and coordination;
  • small amounts of budget funding can be successful at leveraging private investment, such as the Risk-sharing Finance Facility[21] and public-private partnerships;
  • European Innovation Partnerships[22] will be launched to accelerate research, pool resources and boost EU competitiveness; and
  • it is important to create a genuinely unified European Research Area, raise the quality of research infrastructure, simplify the administrative burden and review existing education and training programmes.

And in relation to infrastructure the Commission says that market failures mean projects with high EU value added fail to attract investment and that targeted financial support can help kick-start projects with high EU added value and good commercial potential in the long run.

4.8 Under sustainable growth the Commission says that tackling resource efficiency, climate change and energy security and efficiency are core objectives of the Europe 2020 strategy and that mainstreaming these priorities into different programmes may be more effective than creation of a dedicated fund. On the Common Agriculture Policy (CAP) it says that:

  • continuing the trend of CAP's falling share of the total budget will still leave agriculture representing a major public investment;
  • reforms have brought the CAP closer to the market and helped deliver food security, better management of natural resources and stable rural communities;
  • there is a case for progressively converging payments levels across Member States;
  • further reforms could support stronger environmental practices, foster a competitive and innovative agricultural sector, more reliance on the market to deal with shocks and better integration of rural development alongside other EU policies; and
  • more radical reform would transfer funding from income support and market measures to support climate change and environment objectives.

4.9 Under inclusive growth the Commission says:

  • cohesion policy stimulates growth in the least prosperous regions and catalyses change in all regions, the Europe 2020 strategy provides a clear framework to identify cohesion policy funding priorities, resources should be focused on the poorest regions and Member States, but is important for the rest of the EU to tackle issues like creating skills and jobs and environmental degradation, and transitional support would avoid an economic shock due to a sudden drop of funding;
  • Member States and regions should focus on a limited number of agreed priorities to maximise impact of cohesion spending, more developed regions could be required to focus their funds on two or three priorities, while less developed regions could focus on a slightly wider range of priorities, the Europe 2020 strategy should strengthen delivery by adopting a common strategic framework outlining how objectives translate to investment priorities and this framework would replace the current approach of separate sets of strategic guidelines for policies;
  • a Development and Investment Partnership Contract, between Members State and the Commission, would set out objectives, how progress is measured and the allocation of EU and national resources to priority areas — the result of the contract would be to link the potential allocation of resources at national and EU level;
  • allocation of financial resources should take into account the capacity of Member States and regions to effectively utilise the funds and respect the principles of co-financing and additionality — to improve the quality of spend, cohesion policy could invest institutional capacity or promote administrative reform or, alternatively, a small share of cohesion funding could be set aside as a performance reserve, allocated on the basis of progress to Europe 2020 strategy objectives;
  • in relation to skills, the European Social Fund promotes inclusion alongside growth through innovative approaches to employment, training and social inclusion — the fund could be refocused on securing Europe 2020 strategy objectives;
  • the European Globalisation Fund, currently used to tackle localised negative effects of economic structural change, should be simplified to become more reactive to changes of economic circumstances and could be put on a more permanent footing;
  • noting that for citizenship, EU action covers promoting fundamental rights and EU values amongst others, action could include fostering access to justice in the EU and promoting mutual recognition in criminal proceedings;
  • also in relation to citizenship, the EU Solidarity Fund, whilst demonstrating limitations and weaknesses, is a tool to respond to situations of crisis, and it is not funded on a permanent footing and funds are reallocated from unspent funds in previous years — a budget contribution would increase the effectiveness and responsiveness of the fund;
  • finally on citizenship, pooling resources and burden sharing between Member States can be a cost effective method to supporting effective border management;
  • pre-accession support, financial support for closer integration through enlargement should continue — the tool supports sustainable growth whilst helping ensure that candidate countries are prepared for eventual accession;
  • asserting in relation to "Global Europe" that EU citizens expect the EU to promote its interests and exert its influence on the international stage, which the new structures for external relations under the Lisbon Treaty should facilitate, other areas of important EU involvement are improving the EU's ability to respond to crisis situations, combating global poverty (citing clear evidence that development policy at EU level offers high added value) and fostering close and effective relations with the EU's closest neighbours, including comprehensive free-trade agreements — greater use of blending mechanisms can benefit from a multiplier effect, increasing resources for development goals, and budgetary inflexibility can hamper attempts to sustain the EU's humanitarian interventions; and
  • noting that it been operating a policy of zero growth to staff numbers since 2007 (other than posts related to enlargement and the European External Action Service), its administrative resources must be made to work better, including savings from back-office functions such as IT, translation and document management, and it will review its administrative budget as part of preparations for the next Financial Framework.

4.10 In the next section the Commission discusses delivering results, saying:

  • leveraging investment is an area of genuine EU value added;
  • partnership between EU funds and private capital should become the norm for longer-term projects, with European Investment Bank and European Bank for Reconstruction and Development involvement;
  • commercial investors would only support those projects which demonstrate real EU added value and which address market failures;
  • infrastructure projects could also be a source of revenue for the EU budget, for instance through road tolls;
  • EU project bonds would use EU Budget funds to bolster market confidence and improve the credit-worthiness of major EU-level projects, with a view to repaying the money to the EU Budget once the projects reached viability;
  • large-scale projects such as Galileo and the International Thermonuclear Experimental Reactor (ITER) can be subject to budgetary uncertainties — given their long-term commercial vocation, they could be better managed by a separate support entity;
  • the EU Budget could make regular and predictable budgetary contributions, with no assumption that it should make up any shortfalls;
  • in line with the current debate on economic governance, the EU Budget could impose conditions to ensure effective delivery, such as setting aside an EU-wide reserve or adjusting rates of co-financing in line with performance — clear and transparent evaluation criteria would be required;
  • the EU Budget structure is a vehicle for reflecting and communicating broader EU-level priorities — the current system of budget headings could therefore be revisited;
  • the current seven-year Financial Framework could be reduced to five years, to better reflect the mandates of the Commission and the European Parliament, but the Commission believes the most attractive option is a ten-year period, with a major review after five years;
  • in relation to responding to changing circumstances, the EU Budget needs to strike a balance between predictability and flexibility;
  • a compulsory margin of 5% below Financial Framework ceilings could be considered, greater flexibility could also be achieved via transfers between headings, transferring margins from one year to another, greater use of front or back-loading of spending and changes to the Flexibility Instrument or Emergency Aid Reserve;
  • also the current 0.03% flexibility arrangement allowing limited deviations should be maintained; and
  • in the context of simplifying and minimising unnecessary administrative burdens, implementation of the EU Budget should combine effective spending with low administrative burdens for recipients;
  • a clear set of common principles could be considered, in the context of recent proposals to revise the Financial Regulation;[23]
  • strict budgetary control should also be balanced with effective spending;
  • more can be done to improve financial management, including implementing more local controls; and
  • further changes will be required if the Commission seeks to channel more funds through financial instruments.

4.11 In the fifth and sixth sections of the Communication the Commission touches briefly on the EU Budget as a tool to support economic governance and taking account of enlargement, saying that:

  • it believes it is natural to make a connection between economic governance and the EU Budget because macroeconomic stability and structural reforms reinforce each other; and
  • the next Financial Framework should not pre-empt any decisions on future enlargements of the EU.

4.12 In the next section the Commission discusses EU financing, saying that:

  • in recent times Member States have tended to focus more on net positions than on EU added value;
  • current arrangements for financing the EU Budget are opaque, complex and lack fairness;
  • introducing a new resource could mean that existing resources are phased out;
  • contributions should be simplified, including the phasing-out of correction mechanisms — although correction mechanisms may remain justified in the future on the basis of compositions of expenditure and reforms of the Own Resources system;
  • Own Resources based on VAT are perceived as being more complex than those based on GNI; and
  • a policy-driven own resource could derive from EU-level taxation on the financial sector, revenues from the Emissions Trading Scheme, air transport charges, VAT, energy taxation or corporate income tax.

4.13 In the final section of the Communication the Commission asserts that the EU and national budgets should be seen as complementary and not in competition with one another and that EU funding should be rational and fair, and perceived as such. It says that it will bring forward a draft Regulation setting the next Financial Framework and a draft Decision on Own Resources in June 2011.

4.14 The Staff Working Document accompanying the Communication includes technical annexes on:

  • the main results of the public consultation on the Budget Review;
  • a description of the evolution of the EU Budget;
  • an inventory of the flexibility instruments available to reallocate funding;
  • data on developing trade and the internal market;
  • a summary of studies of the impact of cohesion policy expenditure on Member States and the EU economy — praising impacts over the 2000-2006 period;
  • a typology of the EU financial instruments;
  • results of a 2008 study of policy and programme evaluations;
  • a description of actions taken by the Commission to improve financial management; and
  • a qualitative and quantitative assessment of the new own resource proposals included in the Communication.

Points in this last annex are;

  • the list in the Communication is intended to be seen as an illustration of some issues that need to be considered;
  • the assessment is most favourable towards aviation taxes and Emissions Trading Scheme auctions to make up a new own resource, whilst relatively unfavourable about financial transaction taxes and an EU corporate income tax; and
  • a more refined analysis and concrete proposals are promised in 2011.

The Government's view

4.15 The Economic Secretary to the Treasury (Justine Greening) says that:

  • the EU economy has changed dramatically since the current Financial Framework was agreed in 2005;
  • the EU Budget has failed to adapt to these new and challenging conditions;
  • consequently, it is now a much larger share of EU income than anticipated when the current Financial Framework was agreed, owing to a fall in EU income growth below forecast levels;
  • the EU Budget must become more affordable;
  • the Government has continued to fight hard in the 2011 EU budget negotiations to reject the Commission's and European Parliament's calls for a 6% increase above 2010 levels and to ensure a budget more in line with the difficult economic climate across the EU;
  • it believes the next Financial Framework should be smaller in real terms than the current one; and
  • the Budget Review provides an opportunity to support this objective.

4.16 In more detailed comments the Minister says that:

  • the Government welcomes the Commission's acknowledgment of the need for reform of the EU Budget to support the Union's priorities — in particular economic growth;
  • it is, however, disappointed that the Communication does not have a strong focus on prioritisation and identifying where savings can be made;
  • in line with its overriding objective of deficit reduction, the Government's priority when approaching the EU Budget is to reduce budget size;
  • it will defend the UK's abatement, which remains fully justified because of distortions to EU spending that cost the UK;
  • all budgetary proposals will be considered in the context of these priorities;
  • noting that the document introduces a broad range of policy proposals currently at the idea stage and contains little detail; this means that the content can be read with different interpretations depending on perspective;
  • for the majority of the proposals the document does not put forward a clear Commission view;
  • the Government is pleased to see that the document focuses on growth as a key challenge and welcomes references to the Europe 2020 strategy aims of increased competitiveness, greater employment and faster growth being embedded in expenditure objectives across all areas of the EU Budget;
  • it believes, however, that the EU Budget should only act where expenditure is the appropriate policy lever — many objectives of the Europe 2020 strategy can be achieved without expenditure, for example, deepening the single market or advancing the better regulation agenda;
  • the Government agrees that the EU Budget needs to be reprioritised, with a greater proportion spent on supporting growth and competitiveness, tackling climate change and tackling global poverty;
  • budget spending on research and innovation has EU value added by achieving economies of scale through a 'critical mass' of combined equipment or knowledge and internalising the spillover benefits of EU public goods, such as new low carbon technologies;
  • supporting research and innovation makes a significant contribution to growth and competitiveness;
  • therefore the Government agrees that this is an important area to continue budgetary support;
  • it supports a focus on energy and transport infrastructure where EU Budget action has a role in addressing pan-Union market failures — in particular the Government believes this is an area where loan financing can play a greater role, such as by the European Investment Bank;
  • the Government supports the Commission's strong focus on the role that the EU Budget can play in achieving its energy and climate change goals;
  • the Government believes it is important to provide the right type of funding to support and facilitate energy technology and infrastructure development and energy efficiency;
  • it also believes the budget has a role to play in meeting the EU's external climate and energy goals where there are significant EU externalities;
  • it is interested in the conclusion that funding for energy and climate objectives should be mainstreamed throughout the EU Budget — this seems like a good approach in general terms, but the Government would need to consider in more detail how this would impact on specific policy areas;
  • the Government supports an active role for the EU as a global player to address key global challenges;
  • it believes the EU Budget has a role to play in supporting the areas highlighted by the Commission in its passage on "Global Europe" — poverty alleviation, migration, terrorism, organised crime and conflict-affected states;
  • external expenditure should have a clearer focus on priorities areas but must be subject to improvements in effectiveness and outcomes;
  • the Government is supportive of proposals to use EU financing instruments to leverage and stimulate private investment — it supports a greater use of European Investment Bank lending in place of EU grants, helping to increase value for money and efficiency and to maintain activity while pursuing consolidation of the EU Budget overall, and the idea of EU project bonds merits further consideration;
  • proposals intended to improve the EU budget's ability to deliver results, including options on incentive reserves, structure of the budget headings, duration of the Financial Frameworks, a new structure for supporting large projects and flexibility in allocating funds, are floated at a high level without significant detail;
  • it is the detail that will determine whether proposals support the objective of a smaller budget and budget discipline — the Government is willing to consider further detail on the proposals, however it is important that discussions of these issues do not distract from more important and pressing issues of prioritisation and reform;
  • the Government wants to see development of a competitive, thriving and sustainable EU agriculture and food sector and is supportive of the further development of efficient, responsive international agricultural markets;
  • the Union needs an EU farming sector that is able to rise to the challenges and opportunities of the future, tackling climate change and meeting increasing global demand for agricultural commodities;
  • the Government agrees with the Commission's observation that Common Agricultural Policy expenditure could continue to reduce — the policy accounts for over 40% of the EU Budget and much of this expenditure is extremely poor value for money;
  • the Common Agricultural Policy budget must be affordable, meaning that it will need to fall substantially over the period of the next Financial Framework;
  • the Government therefore welcomes the Commission's acknowledgement of the scope for radical reform;
  • it hopes that the Commission's Communication on the Common Agricultural Policy[24] gives full consideration to the options for following through on the competitiveness agenda and for securing radical reform;
  • the Government supports a greater focus by the Structural and Cohesion Funds in helping the poorer regions to catch up with the EU average, where EU spending can significantly add value — receipts in richer regions, particularly in wealthier Member States, should fall significantly in the next Financial Framework;
  • the Government believes that Member States should have greater freedom to ensure that the Structural and Cohesion Funds both support Member States' own policies and are aligned with their own delivery mechanisms;
  • given this, the Government is concerned by proposals that would hinder this flexibility — top-down compulsory objectives and/or ear-marking of expenditure;
  • the Government agrees on the need to strike a balance between simplification and sound financial management and it also agrees that incentives and checks must be put in place to ensure spending fulfils its real purpose;
  • in this context, the recommendation for a more differentiated approach to the controls required in individual Member States should be explored further;
  • any sanctions that arise from the measures to reform economic governance do not apply to the UK by virtue of the provisions in Protocol 15 TFEU and the UK's opt out from membership of the single currency;
  • the Government welcomes the reiteration of the principle of fairness set out at the 1984 Fontainebleau European Council, at which the UK abatement was agreed;
  • the Commission underscores that expenditure policy is a key source of budgetary imbalances and notes that correction mechanisms may be justified in future Financial Frameworks, depending on the composition of EU expenditure and Own Resources; and
  • the Government will not support a new EU tax to fund the EU Budget — it believes taxation is a matter for Member States to determine at the national level.


4.17 Although, as the Minister says, what exactly the Commission intends to propose for the future of EU finances is not yet clear, we think a debate in European Committee B about the ideas floated in this Communication would be timely and we so recommend.

16   See  Back

17   See Back

18   See Back

19   (28967) -: see HC 16-iv (2007-08), chapter 30 (28 November 2007). Back

20   See Back

21   See Back

22   See Back

23   (31662) 10561/10 + ADD 1: see HC 428-ii (2010-11), chapter 1 (15 September 2010) and HC 428-x (2010-11), chapter 2 (8 December 2010). Back

24   (32233) 16348/10: see chapter 7 in this Report. Back

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