Documents considered by the Committee on 13 November 2017 Contents

20EU finances: draft budget for 2018 and future of the EU budget

Committee’s assessment

Politically important

Committee’s decision

(a) Not cleared from scrutiny; further information requested; drawn to the attention of the Exiting the EU Committee, the Public Accounts Committee and the Treasury Committee; (b) Cleared from scrutiny; (c) Cleared from scrutiny; further information requested

Document details

(a) Draft EU budget for 2018; (b) Proposal for a Decision on the mobilisation of the Flexibility Instrument; (c) Reflection Paper on the Future of EU Finances

Legal base

(a) Article 314 TFEU; special legislative procedure; QMV; (b) Article 11 of Council Regulation 1311/2013; special legislative procedure; QMV; (c)—

Department

Treasury

Document Numbers

(a) (38836), 10812/17, SEC(17) 250; (b) (38777), 9805/17, COM(17) 271; (c) (38889), 11006/17 + ADD 1, COM(17) 358

Summary and Committee’s conclusions

20.1The European Commission presented the draft EU budget for 2018 in June 2017.246 It proposed commitment appropriations of €160.6 billion (£140.3 billion), and payment appropriations of €145.4 billion (£127.0 billion).247 This represents increases of 1.4% and 8.1% respectively, compared to the 2017 budget. The Commission has also proposed to use €817 million from the Flexibility Instrument to provide funding for the “Security and citizenship” category of the budget, in view of the pressures generated by the migration crisis.248 We have summarised the content of the draft budget in more detail in the “Background” section below.

20.2In parallel, the Commission published a “reflection paper” on the future of EU finances.249 The paper considers the evolution of EU finances and sets out several scenarios for how the EU financing system could be reformed to better address the challenges of the future. The overarching thrust of the proposals, which are yet to be discussed in depth by the Member States in the Council, is to lower spending on agricultural subsidies and cohesion policy, and to use the opportunity afforded by Brexit to abolish the complex system of budget rebates.

20.3The Council agreed its position on the draft budget on 4 September, proposing various changes to the draft tabled by the Commission.250 The Member States are seeking a decrease in commitment appropriations from €160.6 to €158.9 billion and in payment appropriations from €145.4 billion to €144.4 billion, primarily by reducing expenditure on Horizon 2020 and the European Agricultural Guarantee Fund. The European Parliament established its line-by-line position on 25 October,251 with formal adoption of the budget expected to follow in late November or early December following the formal “conciliation” process between the two institutions.

20.4The Chief Secretary to the Treasury (Elizabeth Truss) submitted Explanatory Memoranda on the draft budget252 and the reflection paper253 in July 2017. With respect to both documents, she simply reiterates the Government’s well-established position that it “wants to see real budgetary restraint in the EU”, to which end it is “committed to continue to work hard to limit EU spending, reduce waste and inefficiency, and ensure that where EU funds are spent they deliver the best possible value for money for taxpayers”. She has also said that “the UK has been very clear in working group discussions that substantial savings can be made in a number of areas”, in particular by ensuring that “any new proposals [are] funded entirely from reallocations away from lower priority spending”.254

20.5The draft budget for 2018 is the first EU budget to be considered since the UK formally submitted its notification of withdrawal under Article 50 TEU.

20.6The other Member States are seeking a commitment from the Government that the UK will, inter alia, make payments for a share of EU financial commitments made under every annual budget—including this draft budget—covered by the 2014–2020 Multiannual Financial Framework.255 Under the decommitment rule, many of those commitments will only become due for payment after the UK’s formal exit from the Union in March 2019. The European Commission estimates that there will be €254 billion (£224 billion) of such unpaid commitments (known as Reste à Liquider or RAL) outstanding by the end of 2020. No formal figure has been put forward by the EU as to what it considers the UK’s share to be.

20.7The UK Government has, understandably, taken a different position on the budgetary issue. Although it agrees that the UK has financial obligations to the EU that will outlast its membership,256 it has not specified which commitments would be covered. It also believes that a resolution of this matter can only come as part of a discussion about the new economic framework between the UK and the EU.

20.8In September, the Prime Minister promised to make payments into the EU budget in 2019 and 2020. However, we do not know how the Government proposes to come to a mutually acceptable solution with the EU on financial commitments undertaken during the UK’s membership which do not become due for payment until after 2020. To complicate matters further, the Government is seeking a standstill interim arrangement after March 2019 during which the UK would remain under “the existing structure of EU rules and regulations”.257 It is unclear what the precise budgetary implications of such an arrangement would be.

20.9The disagreement over the nature and size of the financial settlement has led to an apparently deadlock in the Article 50 negotiations. The European Council at 27 has refused to discuss the post-Brexit UK-EU relationship with the Government until it deems that “sufficient progress” has been made on agreeing a financial settlement. It declined to do so at its last meeting on 20 October,258 meaning that the next opportunity to make such a determination is at its annual winter session on 14 December 2017. Conversely, the Government wants the EU to agree to negotiations on the future partnership before the UK would consider any further contributions for past commitments after 2020.

20.10We thank the Minister for her Explanatory Memorandum on the draft 2018 EU budget. We have explored the contents of that budget, and its potential implications for any financial settlement under Article 50, in more detail in the “Background” section of this Report. Based on our assessment, we have a number of questions for the Chief Secretary. In anticipation of her reply, we retain the draft budget under scrutiny while the conciliation process takes place.

The draft 2018 budget

Implications of Brexit

20.11As noted, the draft budget for 2018 is the first EU budget to be considered since the UK formally notified the European Council of its intention to withdraw from the EU. At this stage, it is unclear what impact the commitments made under this budget would or could have on the final size of the “financial settlement” linked to our withdrawal, should one be agreed. However, if the principles underpinning the EU’s proposed methodology are accepted by the Government, the UK would pay for a share of EU expenditure committed via every annual budget under the 2014–2020 Multiannual Financial Framework until at least 2023. Given that the EU is planning to commit €160 billion of new spending in 2018 alone, the draft budget for next year could have a substantial impact on the final size of the settlement.

20.12We accept there are divergent views on whether the UK’s withdrawal from the EU should be subject to any financial settlement at all. As a Committee, we have not taken a position on this matter, but we note that the Government itself has accepted the UK has obligations towards the rest of the EU that will “survive” its withdrawal from the Union. It has not, however, published a position paper on this subject. In the absence of a clear Government approach other than acceptance of the principle of a financial settlement, and in light of our detailed assessment as set out in paragraphs 0.x to 0.y below, we ask the Minister the following questions:

The Government’s negotiating position thus far

20.13Overall, we are disappointed that the Government has been unable to clarify its position on the financial settlement in any detail. This issue is clearly a matter of public interest, as any such settlement would have significant implications for the public purse. While the EU’s rigid insistence on sequencing the negotiations is deeply unhelpful, the economic cost of leaving the EU without a deal should also be balanced against the size of a financial settlement which meets the criteria set out by the Prime Minister in her Florence speech.

20.14We are conscious of the fact that the Council and Parliament are likely to formally adopt the 2018 budget in the coming weeks. While we expect a speedy reply from the Minister to our questions, we will in any event consider the proposed budget again as soon as the outcome of conciliation process is known. We retain it under scrutiny in the meantime. We are content to clear the proposal to mobilise the Flexibility Instrument and the reflection paper from scrutiny. We do expect the Minister to keep us informed of any developments in the debate about the future of the EU budget, in light of the continued uncertainty about the size and scope of the UK’s contributions into the EU budget after Brexit.

20.15We also draw this Report to the attention of the Exiting the EU Committee, in the context of its scrutiny of the Government in relation to the financial settlement and the impact this budget may have on the UK’s obligations. We consider the Public Accounts and Treasury Committees may also have an interest.

Full details of the documents

(a) Statement of Estimates of the European Commission for the financial year 2018: (38836), 10812/17, SEC(17) 250; (b) Proposal for a Decision on the mobilisation of the Flexibility Instrument to finance immediate budgetary measures to address the on-going challenges of migration, refugee inflows and security threats: (38777), 9805/17, COM(17) 271; (c) Reflection Paper on the Future of EU Finances: (38889), 11006/17 + ADD 1, COM(17) 358.

Background

20.16Each year, the Council and the European Parliament jointly establish the general EU budget for the year ahead, based on a proposal from the European Commission. It is organised under five “headings”, or broad categories of expenditure, with the total ceilings per heading set by the Multiannual Financial Framework 2014–2020:261

20.17The annual EU budget contains two types of expenditure: commitments and payments. Commitments cover the cost of all financial obligations the EU budget could be used for in a given financial year, such as contracts or grant decisions. Effectively, it is the total amount that the EU can commit to spending that year. Payments cover actual disbursement of funds to cover commitments (in many cases made in previous years). Over time the discrepancy between commitments made but not yet paid for, referred to as the “Reste à Liquider” (RAL), has grown substantially; it is expected to reach €254 billion (£224 billion) by 2020, mainly as a result from commitments made since 2014.263

20.18Expenditure from the EU budget is funded mainly from the EU’s “own resources”, which primarily encompass customs duties passed on by national customs authorities, a small proportion of all VAT collected within the EU, and a contribution by each Member State proportional to its gross national income (GNI).264 Together, these account for 98% of the EU’s revenues.265 The Member States’ GNI contributions are a balancing mechanism: it provides the revenue required to cover expenditure in excess of the amount yielded by other own resources in any particular year. In 2015, the UK made a net total contribution of €10.75 billion (£9.5 billion).266

The draft 2018 budget

20.19The European Commission presented the draft EU budget (DB) for 2018 in June 2017.267 It sets out the Commission’s priorities for the 2018 Budget; how the Commission intends to ensure proper implementation; how the 2018 DB fits with the 2014–2020 Multiannual Financial Framework (MFF);268 and detailed figures of proposed payments and commitments.

20.20The Commission explains that the two primary objectives of the draft budget are:

20.21The draft budget proposes commitment appropriations of €160.6 billion (£140.3 billion), representing 1.02% of the EU’s GNI and payment appropriations of €145.4 billion (£127.0 billion), corresponding to 0.92 % of EU GNI. This represents increases of 1.4% and 8.1% respectively, compared to the 2017 budget.269

20.22In terms of the substance of the proposed budget, the Commission asked for increased appropriations for Horizon 2020, the Connecting Europe Facility (which funds transport, energy and communications infrastructure) and Erasmus.270 Reductions are foreseen primarily in the “Security and citizenship” heading (notably a year-on-year decrease of 50% in payments under the Asylum, Migration and Integration Fund, amounting to a reduction of €587 million),271 although it still remains above its MFF ceiling due to the pressures of the migration crisis. Alongside the draft budget, the Commission has therefore formally proposed to use €817 million from the Flexibility Instrument272 to provide funding for this heading above the cap set by the MFF.273

Consideration of the draft budget by the Parliament and Council

20.23On 12 July, COREPER adopted the Council’s preliminary position on the 2018 budget, which was formally approved by EU Finance Ministers on 4 September.274 It proposes various changes to the draft tabled by the Commission, and would decrease commitment appropriations from €160.6 to €158.9 billion and payment appropriations from €145.4 billion to €144.4 billion.

20.24On the commitment side, the majority of these proposed reductions would come from a €500 million decrease for the Horizon 2020 programme and a €275 million reduction for the European Agricultural Guarantee Fund (EAGF).275 The Council is also calling for a reduction of €520 million of commitments for the European Solidarity Fund, which provides rapid financial support to a Member State in the event of a major natural disaster.276 On the payment side, the Council’s decrease would result primarily from reduced payments for Horizon 2020, Cohesion Policy programmes and the EAGF.

20.25The European Parliament adopted its position for negotiations with the Council on the budget on 25 October.277 While this does not yet include amendments to specific budget lines, the Parliament has called for an increased budget for the Youth Employment Initiative and sufficient investment to enable the EU to meet its obligations under the Paris Climate Change Agreement. It also opposes proposed reductions in expenditure under the “Citizenship and Security” heading, in view of the continued pressures generated by the migration crisis in Italy and Greece.

20.26The Chief Secretary to the Treasury (Elizabeth Truss) submitted an Explanatory Memorandum on the draft budget in July 2017.278 With respect to the merit of the Commission proposal, she simply reiterates the Government’s well-established position that it “wants to see real budgetary restraint in the EU”, to which end it is “committed to continue to work hard to limit EU spending, reduce waste and inefficiency, and ensure that where EU funds are spent they deliver the best possible value for money for taxpayers”. She adds that the draft budget “is consistent with the MFF payment ceilings”.

20.27The Council and Parliament are expected to formally adopt the draft budget in late November, provided they reach an agreement on all proposed expenditure. If the two sides do not come to an agreement by the end of November, the European Commission will propose a new draft budget to break the deadlock. If there is no agreement by the end of the year, the 2017 budget will automatically “roll over” in monthly instalments until a new budget is adopted.279

Reflection paper on the future of EU finances

20.28Alongside the draft budget for 2018, the European Commission published a “reflection paper” on the future of EU finances.280 The paper, one of a series of discussion papers produced by the Commission on the future of the EU, considers the evolution of EU finances and sets out several scenarios for how the EU financing system could be reformed to better address the challenges of the future.

20.29When examining options for the future of EU finances, the paper takes account of the fact that the UK’s withdrawal from the EU will create a gap in the EU’s finances. This is used to prompt a discussion on the choices that will have to be made between delivering on existing and new priorities, and between increasing the budget and scaling back activity. The Commission also suggests that, following Brexit, the system of rebates on national contributions to the EU budget should be abolished.281

20.30The Commission identifies five broad options for the future of the EU budget. In addition to maintaining the status quo (including the existing direction of travel in reducing spending on the Common Agricultural Policy and cohesion policy), these are:282

20.31The Chief Secretary to the Treasury (Elizabeth Truss) submitted an Explanatory Memorandum on the reflection paper on 27 July.283 After summarising its contents, she repeats the familiar refrain that, “while the UK remains a member, the Government will work hard to limit EU spending, reduce waste and inefficiency, and deliver the best possible deal for taxpayers”.

20.32The reflection paper was discussed briefly by EU Agriculture Ministers on 17 July with respect to its implications for the Common Agricultural Policy (CAP), as four of the five scenarios pit forward by the Commission would—to a greater or lesser degree—reduce funding for EU agricultural subsidies.284 It is unclear how and when the paper will be considered further by the Council and the Parliament, or when any changes to the way the EU’s finances are managed might take effect.

Brexit and the “financial settlement”

20.33The draft budget for 2018 is the first EU budget to be considered since the UK formally notified the European Council of its intention to withdraw from the EU. The Minister does not refer to this fact in her Memorandum, other than to say that “UK withdrawal from the EU will have no direct impact on the 2018 Budget as the UK is expected to be a full member of the EU for that year”.285

20.34Conversely, however, the 2018 budget may have a direct impact on the UK’s withdrawal from the EU, or more precisely the financial liabilities it may be expected to settle post-Brexit to account for commitments it jointly undertook with the other Member States while still part of the EU.

The EU’s position on the financial settlement

20.35In April 2017, the European Council unanimously agreed its binding mandate to the European Commission for the Brexit negotiations.286 It instructs the Commission to seek inclusion of 10 different “separation issues” in any Withdrawal Agreement, of which one relates specifically to the EU budget:

“A single financial settlement—including issues resulting from the [Multiannual Financial Framework] as well as those related to the European Investment Bank (EIB), the European Development Fund (EDF) and the European Central Bank (ECB)—should ensure that the Union and the United Kingdom both respect the obligations resulting from the whole period of the UK membership in the Union. The settlement should cover all commitments as well as liabilities, including contingent liabilities.”

20.36In June 2017, the European Commission published a position paper on the “essential principles on the financial settlement”.287 It contends that the UK’s financial obligations to be settled as part of its withdrawal include, among other things,288 its share of RAL from previous and current Multiannual Financial Frameworks (meaning the difference between commitments entered into and payments actually made), as well as commitments yet to be made in 2018, 2019 and 2020 under the 2014–2020 MFF which the UK approved in 2013.289 The Commission also argues that the UK should pay in full its contributions to the European Development Funds, which are established by separate Treaty and not in a legal or accounting sense part funded from the EU budget.290

20.37The Commission has not indicated how it proposes to calculate what proportion of total outstanding EU liabilities and assets accrue to the UK, meaning that it cannot officially present the amount it believes represents the UK’s obligations. Its position paper states that the settlement “should be fixed as a percentage of the EU obligations calculated at the date of withdrawal in accordance with a methodology to be agreed in the first phase of the negotiations”. A House of Lords inquiry concluded that numerous baselines of calculating the UK’s “share” could be used, ranging from its gross contribution to the EU budget (15%) to its net contribution taking into account private sector receipts (5–6%).291

The UK’s position on the financial settlement

20.38The very notion of a settling of accounts by the UK and the EU as part of our withdrawal has been controversial. The House of Lords EU Committee concluded in March 2017 that even if the UK had no legal obligation to pay for any outstanding commitments made under the EU budget, “future market access on favourable terms as part of the discussions on the withdrawal agreement [is] likely to prove impossible (…) without also reaching agreement on the issue of the budget”.292

20.39The Government has acknowledged that, in its view, the UK has financial obligations to the EU that will outlast its membership. The Secretary of State for Exiting the EU (Mr David Davis) first explicitly acknowledged this in a Written Statement to Parliament on 13 July 2017:

“On the financial settlement, as set out in the Prime Minister’s letter to President Tusk, the Government has been clear that we will work with the EU to determine a fair settlement of the UK’s rights and obligations as a departing member state, in accordance with the law and in the spirit of our continuing partnership. The Government recognises that the UK has obligations to the EU, and the EU obligations to the UK, that will survive the UK’s withdrawal—and that these need to be resolved.”293

20.40In addition, in June, the Government had already agreed to Terms of Reference for the Article 50 talks which confirmed the financial settlement as one of three topics for discussion in the initial phase of the negotiations.294 As such, the principal point of contention in the negotiations is not whether there are outstanding financial liabilities which the UK must settle as part of its withdrawal, but rather the exact methodology to calculate the obligations to be “resolved” and the UK’s share of those (and by extension the size of the UK’s obligations to the EU and vice versa).

20.41It is unclear what the Government’s preferred methodology to establish the financial settlement is, including the calculation of the UK’s share of the EU’s total outstanding obligations. It has not yet published a position paper on this subject although it has, reportedly, produced a 43-page legal assessment of the Commission paper which apparently rejects much of the EU’s methodology.295

20.42The most detailed indication of the Government’s position came in September, when the Prime Minister used her Florence speech to try and assuage concerns among the EU-27 about a shortfall in the EU budget after Brexit:

“I do not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave. The UK will honour commitments we have made during the period of our membership.”296

20.43The Prime Minister tied these post-Brexit contributions explicitly to an “implementation period”, lasting at least two years after March 2019, during which UK-EU would have “access to one another’s markets (…) on current terms” under “the existing structure of EU rules and regulations”.297 The Government clarified subsequently that the offer of payments only referred to 2019 and 2020, and not as such to any purported UK share of the €254 billion (£224 billion) RAL estimated to be outstanding at the end of 2020. Moreover, the Secretary of State for Exiting the EU (Mr David Davis) said on 28 September that the UK was “not in a position yet to identify its commitments taken during membership”.298

20.44The Government has not provided any clarity about the potential budgetary implications the interim arrangement (or “implementation period”) would have. In particular, we do not know whether the UK would accept continued participation in (and therefore contributions to) the Common Agricultural Policy (CAP) and the investment programmes for economic, social and territorial cohesion,299 which together account for over 60 per cent of annual expenditure from the EU budget. As a result, we do not know if the options put forward by the Commission in its reflection paper—notably the proposed reduction in spending on the CAP—would have a direct impact on the UK in terms of any post-Brexit financial contribution.

20.45In any event, we note that the division between commitments and payments under the EU budget means that keeping the UK in the EU’s economic and regulatory structures for a temporary period after Brexit would most likely create additional financial obligations for the Treasury, in addition to those commitments accumulated during the UK’s actual membership which are to be the subject of the Article 50 financial settlement.

20.46As a result, during the Prime Minister’s “implementation period”, the UK’s contributions in 2019 and 2020 would primarily pay for commitments that were made before March 2019. However, new financial commitments would simultaneously be created, as the UK would continue to underwrite a share of new commitments made through (and remain eligible for funding from) the EU budget for programmes such as the CAP, Horizon 2020 and the Regional Development Fund during that period. These would mostly become due for payment at some point after 2020. In our view, such an interim arrangement would then, in effect, extend both the UK’s schedule of payments and the overall size of the final financial settlement. We have asked the Minister to confirm whether this is also the Government’s assessment.

Negotiations on the Article 50 financial settlement

20.47The methodology for the calculation of the UK’s financial settlement is one of three major topics for discussion during the initial phase of the negotiations under Article 50, alongside citizens’ rights and the matter of the border between Northern Ireland and Ireland. It is clear from the positions taken by the Government and the EU-27 respectively that it was always unlikely that there would be a swift resolution of this issue. At this stage, the EU insists this process is focussed solely on what the Prime Minister called the “commitments we have made during the period of our membership”, and not the impact any further transitional period may have on the UK’s financial obligations vis-à-vis the EU.

20.48Following the conclusion of the fifth round of talks on 12 October, it appears progress on the financial settlement remains very limited. The Government could not “[agree] specific commitments” as “this can only come later”.300 As a result, the negotiations were limited to “technical discussions”. EU Chief Negotiator Michel Barnier described the situation as one of “deadlock”, calling this “extremely worrying for European taxpayers and those who benefit from EU policies”.301

20.49Mr Barnier has also said that, as far as the EU is concerned, “the discussion on liabilities and commitments from the past—which are the subjects that make up the orderly withdrawal” should not be “mixed up” with a discussion on the future relationship.302 He has also referred to his instructions from the European Council that such a discussion can only take place when there has been “sufficient progress” on the budgetary issue. However, Secretary of State Mr David Davis has been clear that, in the Government’s view, agreeing the parameters of the financial settlement “can only be done in the context of and in accordance with our new deep and special partnership with the EU”.303

20.50The current impasse is thus centred on whether—as per the EU—the UK should give a firm assurance that it will honour past financial commitments as a precondition for negotiations with the EU on a future economic partnership (including the standstill “implementation period”), or whether—as the Government demands—the EU should agree to such negotiations, in particular on the transitional arrangement, before the UK will agree to any further contributions for past commitments after 2020.

20.51It is not apparent to us how this “catch-22” situation can be resolved without compromise from both sides. The current situation, which results from the rigid sequencing approach enforced by the European Council and not necessarily from any substantial difference of opinion between the Government and the Commission on the principles underpinning the final financial settlement itself, does not allow for constructive negotiations on a new UK-EU economic partnership. A UK withdrawal from the Union without an agreement on an interim arrangement and the framework for future relations would be highly damaging to both sides. These economic costs should be balanced against the possibility of reaching a financial settlement covering those commitments the Government agrees it should honour. We look forward to further information from the Minister about the Treasury’s progress in identifying precisely what those commitments are.

20.52Given the above, there remains substantial uncertainty about the Government’s approach to the financial settlement, the long-term financial implications of the 2018 EU budget for the UK Treasury, and the impact of the current impasse on the Brexit negotiations more broadly. We hope the Chief Secretary will urgently clarify the Government’s position in relation to the issues we have raised in this report.

Previous Committee Reports

None.


246 European Commission, Budget Documents 2018 (accessed 24 August 2017).

247 Commitments cover the cost of all financial obligations the EU budget could be used for in a given financial year, such as contracts or grant decisions. Payments cover actual expenditure to be made from the budget that year, to cover commitments made previously.

248 See COM(2017) 271, “Proposal for a Decision on the mobilisation of the Flexibility Instrument to finance immediate budgetary measures to address the on-going challenges of migration, refugee inflows and security threats” (30 May 2017). HM Treasury submitted an Explanatory Memorandum on the proposal on 6 July 2017.

249 See COM(2017) 358, “Reflection Paper on the Future of EU Finances“ (28 June 2017).

251 European Parliament resolution of 25 October 2017 on the Council position on the draft general budget of the European Union for the financial year 2018.

252 Explanatory Memorandum submitted by HM Treasury (6 July 2017).

253 Explanatory Memorandum submitted by HM Treasury (27 July 2017).

254 Letter from Elizabeth Truss to Lord Boswell (27 September 2017).

256 DExEU, Written Statement HCWS43 (13 July 2017).

257 Prime Minister, “A new era of cooperation and partnership between the UK and the EU“ (22 September 2017).

258 European Council conclusions on Article 50 (20 October 2017).

259 In 2015, UK-based organisations received €1.59 billion (£1.47 billion) in EU funding for research & development. This constituted 12% of all EU R&D expenditure that year. R&D funding also represented 21% of total EU expenditure in the UK in 2015, compared to an EU average of 10%.

260 With respect to commitments, this represents the biggest reduction for any individual programme in the Council’s position compared to the original draft budget.

262 Excluding the European Development Funds, which are “off-budget” and funded separately by contributions from the Member States.

263 See Commission staff working document SWD(2016) 299, accompanying the mid-term review of the Multiannual Financial Framework 2014–2020 (September 2016).

264 The system for the EU’s collection of revenues is laid down in the Own Resources Decision (Decision 2014/335/EU).

265 The remainder is funded by contributions from non-EU countries for participation in EU programmes,

266 European Parliament, “EU budget at a glance“ (accessed 30 August 2017).

267 European Commission, Budget Documents 2018 (accessed 24 August 2017).

268 The multiannual financial framework (MFF) lays down maximum amounts (‘ceilings’) for each broad category of expenditure within the EU budget (‘headings’) for several years. The Commission is expected to table a proposal for the next MFF (covering 2021–2027) in 2018.

269 The Commission says this increase in payment appropriations is due mostly to payments for cohesion policy programmes, disbursements for which were “at their lowest in the programme cycle” in 2017.

270 A more detailed breakdown of the proposed commitments and payments is available in the Minister’s Explanatory Memorandum.

271 This decrease has been back-loaded to 2019, when the Member States are expected to have to implement the new Dublin Regulation (not in 2018 as initially expected).

272 This represents 55% of the €1.5 billion available from the Flexibility Instrument (see COM(2017) 271, p. 2).

273 See COM(2017) 271, “Proposal for a Decision on the mobilisation of the Flexibility Instrument to finance immediate budgetary measures to address the on-going challenges of migration, refugee inflows and security threats” (30 May 2017). HM Treasury submitted an Explanatory Memorandum on the proposal on 6 July 2017.

275 The European Agricultural Guarantee Fund (EAGF) primarily finances direct payments to farmers and measures regulating or supporting agricultural markets.

276 The Commission had proposed a substantial increase in the commitments and payments appropriations for the Solidarity Fund (EUSF) to accelerate mobilisation when necessary, but the Council wants to retain the current practice of amending budgets for mobilisation of the EUSF under which the appropriations are redeployed from elsewhere in the annual budget on a case-by-case basis.

277 European Parliament resolution of 25 October 2017 on the Council position on the draft general budget of the European Union for the financial year 2018.

278 Explanatory Memorandum submitted by HM Treasury (6 July 2017).

279 See Articles 314 and 315 TFEU.

280 See COM(2017) 358, “Reflection Paper on the Future of EU Finances“ (28 June 2017).

281 The UK’s rebate is financed by additional contributions from other Member States. The largest contributors to the UK rebate (Germany, the Netherlands, Austria and Sweden) in turn receive a rebate on their contributions. In addition, there are separate “corrections” for Denmark, the Netherlands, Sweden and Germany to reduce their overall contribution to the EU budget.

282 An overview of the main features of each of the five scenarios can be found in the annex to the reflection paper.

283 Explanatory Memorandum submitted by HM Treasury (27 July 2017).

284 Council of the EU, “Outcome of the Council meeting“ (17–18 July 2017), p. 14.

285 This formulation is taken verbatim from the European Commission’s general introduction to the draft budget.

286 European Council, “Guidelines for Brexit negotiations“ (29 April 2017).

288 In addition, the Commission paper also argues the UK must pay its share of other liabilities such as EU staff pension costs and contingent liabilities (for the latter, as and when expenditure is actually incurred, with assets returned to the UK if the contingent liability ends), as well as reimburse the EU for any specific costs relating to the UK’s withdrawal (such as the relocation of the European Banking Authority and the European Medicines Agency). We do not consider these here as they are not relevant to the issue of the draft general budget or the RAL.

289 The quid pro quo offered by the Commission, should the Government agree to this, is that the UK would “continue to benefit from all programmes as before the withdrawal until their closure under the condition that it respects the applicable Union legal rules”. In other words, it would still be able to draw on EU funding programmes post-Brexit, such as the Common Agricultural Policy and Horizon 2020 for the duration of the MFF.

290 The previous Committee concluded that, based on information received from the Government, the distinct legal status of the European Development Funds (established by a separate Treaties outside of the EU framework) meant that the UK’s contributions to the Funds were not, de jure, covered by the Article 50 process. See our predecessors’ Report of 25 April 2017. The Department for International Development told our predecessors in April 2017 that the UK’s outstanding commitment to the EDF amounts to approximately €4.7 billion (£4.1 billion).

291 Brexit and the EU budget, 4 March 2017, HL 125 2016–17, p. 17.

292 European Union Committee, Brexit and the EU budget, 4 March 2017, HL 125 2016–17, p. 3.

293 DExEU, Written Statement HCWS43 (13 July 2017).

295 See Irish Times, “Huge gulf in negotiations on UK’s Brexit bill“ (30 August 2017).

296 Prime Minister, “A new era of cooperation and partnership between the UK and the EU“ (22 September 2017).

297 Idem.

298 Press statement by Michel Barnier (28 September 2017).

299 Primarily the European Regional Development Fund, the European Social Fund and the Cohesion Fund.

300 David Davis’ closing remarks at the end of the fifth round of EU exit negotiations in Brussels (12 October 2017).

301 Press statement by Michel Barnier following the fifth round of Article 50 negotiations with the United Kingdom (12 October 2017).

302 Introductory remarks by Michel Barnier at the press conference following the General Affairs Council (25 September 2017).

303 David Davis’ opening remarks at the start of the fourth round of EU exit negotiations (25 September 2017).




20 November 2017