Documents considered by the Committee on 19 December 2017 Contents

2Draft EU budget for 2018

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; recommended for debate in European Committee B

Document details

Draft EU budget for 2018

Legal base

Article 314 TFEU; special legislative procedure; QMV

Department

Treasury

Document Number

(38836), 10812/17, SEC(17) 250

Summary and Committee’s conclusions

2.1On 13 November 2017 the Committee considered the draft EU budget for 2018.22 It was retained under scrutiny, pending a reply by the Chief Secretary to the Treasury (Elizabeth Truss) to our questions relating both to the spending commitments foreseen by that budget, and to the links between those commitments and the “financial settlement” being negotiated as part of the EU withdrawal talks under Article 50 TEU.

2.2The European Parliament and the Council reached agreement on the 2018 budget in the early hours of 18 November. On 29 November, at the Minister’s request, we granted a scrutiny waiver to allow the Government to take part in its formal adoption at the Competitiveness Council the following day.23

2.3The Minister has provided us with her reply to the questions we had put to her earlier that month.24 With respect to the substance of the 2018 budget, the Chief Secretary explained that, while reductions to the draft budget had been made, these were—in the Government’s eyes—not sufficiently substantial. She therefore indicated the Government would abstain rather than vote against the budget. We have set out the Minister’s position on specific aspects of the budget, in response to our questions, in more detail in paragraphs 2.14 to 2.31 below.

2.4We had also raised with the Minister the issue of the financial settlement as part of the UK’s negotiations on withdrawal from the EU. As we set out in some detail in our Report of 13 November, there has been no official information about the extent of the financial commitments the Government may be willing to honour, or how the size of that settlement is likely to be affected by both the 2018 EU budget or by the post-Brexit transitional period (during which the UK would, in all likelihood, participate in and contribute to EU spending programmes in the same way it does now as a Member State).

2.5In her letter the Minister refused to be drawn on any aspect of the Government’s negotiating position. However, in the same week the media reported that the Government and the EU had struck a provisional agreement on the scope of the financial settlement.25 Details of the draft settlement were leaked to the press in early December, and subsequently confirmed by the Government on 8 December, after the Prime Minister and the EU’s Chief Negotiator reached an agreement on the “phase 1” withdrawal issues.26 The draft agreement was submitted for consideration by the European Council at its meeting of 15 December.27

2.6The provisional agreement includes a commitment by the UK to pay, in annual instalments, for a share of the EU’s expenditure commitments agreed under the current Multiannual Financial Framework, many of which will only become due for payment well into the next decade (see paragraph 2.26 below for more details). The provisional deal does not include an overall figure for the size of the settlement, as this cannot yet be calculated. Although the Government has stated on the record it expects the sums involved to total between £35 and £39 billion,28 the final settlement will also depend on the decommitment rate for the EU budget, the extent to which contingent liabilities crystallise in the future, and “off-budget” contributions (primarily to the European Development Funds).

2.7Although there is an agreement on the table, its links to the broader Article 50 negotiations is still unclear. The Chief Secretary told the House in late November that “any settlement that we make is contingent on us securing a suitable outcome” in the negotiations on a transitional arrangement and a comprehensive trade agreement.29 By contrast, the EU’s position is that “the discussion on liabilities and commitments from the past” should not be “mixed up” with a discussion on the future relationship.30 It subsequently emerged that the EU is looking to include only a “political declaration” on the future UK-EU free trade agreement in the Withdrawal Agreement, but not any legally-binding commitments.31

2.8We thank the Minister for her swift and comprehensive reply to our questions about the substance of the 2018 EU budget. We note that the Government abstained from the vote on the budget at the Council meeting of 30 November.

2.9With respect to the financial settlement, we appreciate that the Article 50 negotiations were at a sensitive stage when the Chief Secretary last wrote to us. However, details of the settlement emerged that same week, and it has since been provisionally agreed by both the Prime Minister and the European Commission.

2.10The draft financial settlement is clearly of major financial and political significance. It commits the UK to substantial financial contributions to the EU well beyond the end of its membership (although less than if it had elected to remain a Member State). In return, UK organisations will remain eligible for EU funding on current terms in 2019 and 2020. We are concerned in this respect that the EU budget for 2020 will be decided when the UK is no longer represented in the Council or the European Parliament, reducing opportunities for the Government to reduce the EU’s spending commitments in that year. The legal and policy implications of continued participation in EU funding programmes are also intimately bound up with the scope of the transitional arrangement, which the Government hopes to negotiate with the EU in 2018.

2.11Although the Government insists that formal agreement on the financial settlement will be conditional on “securing a suitable outcome” in discussions on the future UK-EU relationship, in practice it will be extremely difficult for the Government to re-open the substance of the settlement further down the line. We also reiterate our conclusion that the Government’s “implementation period” after March 2019 will likely trigger further financial obligations vis-à-vis the EU if it lasts beyond the current MFF.

2.12In light of these considerations, we recommend the 2018 budget for a debate in European Committee B, and consider that Members may want to use that debate to also discuss the details of the Article 50 financial settlement. The Committee will consider separately how this settlement, involving substantial UK payments into the EU budget after March 2019, should be subject to parliamentary scrutiny. To inform its thinking, and to further assess the scrutiny implications of the draft settlement, we have invited the Government to give oral evidence early in the new year.

Full details of the documents

Draft EU budget for 2018: (38836), 10812/17, SEC(17) 250.

Background

2.13The European Commission presented the draft EU budget for 2018 in June 2017. It proposed commitment appropriations of €160.6 billion (£140.3 billion),32 and payment appropriations of €145.4 billion (£127.0 billion).

2.14The Chief Secretary to the Treasury (Elizabeth Truss) submitted an Explanatory Memorandum on the draft budget in July 2017.33 This reiterated 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”.

2.15The Council agreed its position on the draft budget on 4 September, proposing various changes (mainly reductions) to the draft tabled by the Commission. The European Parliament established its line-by-line position on 25 October. Based on the respective positions of each institutions, the Committee considered the draft budget on 13 November and put various questions to the Chief Secretary about the Government’s priorities.

2.16In particular, we asked if there were any specific increases or reductions sought by the Government which had not materialised; whether the draft budget left enough flexibility for unforeseen events for which additional expenditure might be needed; its position on the Youth Employment Initiative, the budget for which has ballooned from €3.2 to €4.4 billion; the proposed reductions in the budget for Horizon 2020, the EU’s research and development funding instrument; and the substantial cut in funding for justice & home affairs programmes.

2.17On 29 November, the Minister replied that the final budget as agreed on 17 November is lower than both the European Parliament’s proposal and the Commission’s draft budget. Despite this, she indicated that the Government would abstain on the final vote on 30 November, on the basis that it had consistently argued for further commitments cuts across all headings and a higher margin of unallocated commitments.

2.18The Chief Secretary also reiterated the Government’s support for the use of the Flexibility Instrument (provided it respected the expenditure ceilings established by the Multiannual Financial Framework)34 to meet unforeseen demands, and noted that there had been no need to increase the money available for citizenship and security policies under heading 3 of the budget, since similar increases for the 2017 budget went unused.35

2.19The Committee had also asked the Minister for the Government’s position on the substantial increase in the budget for the Youth Employment Initiative (YEI), and the reduction in funding for Horizon 2020, the research & development programme of which the UK is the largest beneficiary. As regards the YEI, the Minister explained that the UK will not directly benefit from the increased budget, “as the scheme is focused in regions that are hardest hit by youth unemployment”. She also noted that the Government had not signed up to a joint statement36 welcoming the increased resources for this initiative.

2.20With respect to Horizon 2020, the Minister explained that, while the Council proposed cuts in this area, the overall level of funding it put forward “still represented a real term increase in both commitment and payment appropriations for Horizon 2020 in comparison to 2017’s budget”. In the final agreement on the budget, commitment appropriations were set €110 million (£96.7 million) higher than the Commission’s original draft budget.

Brexit implications

2.21In addition to scrutinising the substance of specific spending commitments set out in the draft EU budget for 2018, we also assessed the budget in light of the wider negotiations between the UK and the EU on a “financial settlement” relating to the UK’s withdrawal from the Union. In particular, we noted the specific demands made by the other Member States, represented by the European Commission, for the UK to make payments for a share of EU financial commitments made under every annual budget—including the 2018 budget—covered by the 2014–2020 Multiannual Financial Framework.37

2.22We therefore asked the Chief Secretary to clarify, broadly speaking, when the Government’s assessment of financial commitments to the EU would be completed and shared with Parliament, and to set out the likely or potential budgetary implications of the post-Brexit “implementation period”, during which EU law would continue to apply and the UK would continue to participate in EU programmes and policies.

2.23In her letter of 29 November, the Chief Secretary acknowledged that “discussions on the EU’s annual budget for 2018 take place in the context of the UK’s negotiations on withdrawal from the EU”, but added that “these matters are separate”. With respect to the Brexit financial settlement, the Minister noted that the Government and the EU are “currently making progress in building a common technical understanding on every item”, and reiterated that none of the EU-27 “will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave, and that the UK will honour commitments we have made during the period of our membership”. However, the Minister refused to address the substance of our questions. Most importantly, she did not indicate whether the Government’s reference to “the current budget plan” means that it recognises (or not) that the UK will have outstanding commitments which flow directly from that “budget plan”, i.e. the 2014–2020 Multiannual Financial Framework, but which become due for payment after 2020.

Provisional agreement on the financial settlement

2.24On 28 November, the day before we received the Minister’s letter, it was reported that the Government and the EU had struck a provisional agreement on the scope of the financial settlement.38 The resulting net payments from the UK to the EU, which would cover primarily outstanding expenditure commitments, pensions liabilities and a share of contingent liabilities should they crystallise, were said to total between €45 and €55 billion (£40 to £49 billion), although they would be spread out over many years, as and when the relevant payments come due.

2.25On 29 November, the Chief Secretary to the Treasury told the House that “any settlement that we make is contingent on us securing a suitable outcome”, which she described as “an implementation period followed by an ambitious future economic partnership”. She did not dispute reports that a provisional agreement had been reached on the budgetary issue.39

2.26Indeed, on 8 December the Government and the European Commission announced that provisional agreement had been reached on the financial settlement. The settlement, which would only be made legally binding as part of the overall Withdrawal Agreement, contains the following elements:

2.27The provisional agreement does not include an overall figure for the total size of the settlement, as this cannot yet be calculated. However, the Government has stated it expects the settlement to amount to £35 to £39 billion. This figure could be higher depending on the decommitment rate of the EU budget (i.e. cancelled projects for which funding does not have to be paid), the crystallisation of contingent liabilities, and the inclusion of “off-budget” contributions to the European Development Funds.

2.28With respect to continued UK participation in EU funding programmes, UK public and private sector organisations would continue to be eligible for funding on the same terms as they are now in 2019 and 2020. The provisional agreement states:

“The UK will continue to participate in the Union programmes financed by the MFF 2014–2020 until their closure (excluding participation in financial operations which give rise to a contingent liability for which the UK is not liable as from the date of withdrawal). Entities located in the UK will be entitled to participate in such programmes. Participation in Union programmes will require the UK and UK beneficiaries to respect all relevant Union legal provisions including co-financing. Accordingly, the eligibility to apply to participate in Union programmes and Union funding for UK participants and projects will be unaffected by the UK’s withdrawal from the Union for the entire lifetime of such projects.”

2.29The exact policy and legal implications of this are unclear. Continued participation in the Common Agricultural Policy (CAP) would, for example, preclude the UK or devolved governments from introducing domestic agricultural support regimes. These issues will also be closely linked to the scope of any transitional arrangement. The draft European Council guidelines on such an arrangement state the UK would effectively have to follow EU law for its duration, including those establishing EU funding programmes, as if it were a Member State (but without political representation in the EU institutions).41 That would clearly run counter to the flexibility sought by the Government in introducing domestic reforms after March 2019.

2.30Participation in EU programmes after 2020 would need to be negotiated separately, either as part of the “implementation period” or through programme-by-programme agreements with the EU as part of the new “deep and special partnership”. This would trigger further financial liabilities not covered by this provisional agreement, which relates only to financial obligations arising before 31 December 2020.

2.31The full implications of this financial settlement are clearly far-reaching, and require further attention. We will therefore analyse the provisional financial settlement in more detail with respect to its financial, legal and scrutiny implications. We have also invited the Government to give oral evidence to us to assist us in that process. In addition, we have recommended the 2018 annual EU budget for debate in European Committee B, and consider that Members may also want to discuss the implications of the provisional financial settlement at that point.

Previous Committee Reports

First Report HC 301–i (2017–19), chapter 20 (13 November 2017).


22 See our Report of 13 November 2017.

23 Competitiveness Council, “2018 EU budget adopted“ (30 November 2017).

24 Letter from Elizabeth Truss to Sir William Cash (29 November 2017).

25 The Daily Telegraph, “Britain and the EU agree Brexit divorce bill“ (28 November 2017); the Financial Times, “UK bows to EU demands with breakthrough offer on Brexit bill“ (28 November 2017).

26 Joint Report from the negotiators of the European Union and the United Kingdom Government (8 December 2017).

27 European Council conclusions, 15 December 2017.

29 HC Deb 29 November 2017, vol 632, col 327.

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

32 £1 = €1.336, or £0.8821 = €1 as at 31 October.

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

35 In response to a particular question about the substantial reduction in funding for the Asylum, Migration & Integration Fund (AMIF) under heading 3, the Minister explained that delays in the implementation of the new Dublin IV Regulation on asylum applications has meant that commitment appropriations were decreased to provide a more “realistic, deliverable figure that can be fully utilised”. Some of the money originally earmarked for the AMIF will now be spent on “increasing the operational capacity for integration, improving cooperation on return/readmission within third countries and enriching the equipment pool available to the European Border and Coast Guard Agency”.

36 See Council document 14587/17, p. 6. The UK was the only Member State not to support the joint statement.

37 Due to the EU’s dual budgeting system of commitments and payments, many of its spending plans agreed to in recent years will only become due for payment after the UK’s formal exit from the Union in March 2019.

38 The Daily Telegraph, “Britain and the EU agree Brexit divorce bill“ (28 November 2017); the Financial Times, “UK bows to EU demands with breakthrough offer on Brexit bill“ (28 November 2017).

39 HC Deb 29 November 2017, vol 632, col 327.

40 For more information on the European Development Fund and Brexit, see our predecessors’ Report of [date]. We also wrote to the Department for International Development about the implications of Brexit for UK development policy more broadly on 22 November 2017.




22 December 2017