11EU budget 2019
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Committee’s assessment |
Politically important |
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Cleared from scrutiny; drawn to the attention of the Treasury Committee and the Public Accounts Committee |
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Document details |
(a) Statement of Estimates of the European Commission for the financial year 2019; (b) Letter of amendment No 1 to the draft general budget for 2019 |
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Legal base |
Article 314 TFEU; special legislative procedure; QMV |
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Department |
Treasury |
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Document Number |
(39886), 10365/18, COM(18) 600; (40120), 13199/18, COM(18) 709 |
Summary and Committee’s conclusions
The 2019 EU budget
11.1In June 2018 the European Commission presented its draft budget for the European Union for the 2019 calendar year. As proposed, the budget would allow the EU to make €166 billion (£147 billion) of spending commitments next year (a 3 per cent increase compared to the 2018 budget). Payment appropriations—the amount the EU can actually pay out in 2019—were provisionally set at €148.7 billion (£132.3 billion).
11.2The Commission described its priorities for the 2019 budget as “investing in a stronger and more resilient European economy” and—given the continued political controversy around inflows of people via the EU’s southern and eastern borders—”promoting solidarity and security on both sides of the EU’s borders”. For the latter, proposed spending in 2019 exceeded the initial limit for that year set by the Member States back in 2013—under the long-term Multiannual Financial Framework—by nearly a billion euros, resulting in extensive use of the Flexibility Instrument to make up the shortfall.141
11.3The annual EU budget remains of interest for the UK taxpayer despite the Brexit process because the draft Withdrawal Agreement, if ratified, would require the Treasury to continue making normal contributions until the end of 2020. After that, the UK would pay off a steadily decreasing share of the EU’s outstanding expenditure commitments made under annual budgets up to and including the 2020 EU budget, as well as for other liabilities (like EU staff pensions accrued during the UK’s membership and, should they crystallise, contingent liabilities on the EU’s books). If the Withdrawal Agreement is not ratified, both the Chancellor and the previous Secretary of State for Exiting the EU have hinted that the UK could still be liable for payments to the EU in respect of historic financial commitments.142
11.4Moreover, for 2019 the European Commission has also started proposing the use of EU funding for projects directly related to Brexit. For example, it is planning EU investment in a new shipping route between Ireland and the continent that would allow some freight transports to by-pass the UK more easily. It is difficult to see how that is a good use of UK public funds, given that the Treasury would effectively part-finance any projects which start before the end of the transitional period in December 2020. The Commission has also earmarked €10 million for the creation of an EU ‘delegation’ to the UK following the closure of the current EU ‘representations’ in London, Cardiff, Edinburgh and Belfast (which will result in much smaller savings of €700,000). Under the Withdrawal Agreement, the UK would therefore pay towards the establishment of a new EU diplomatic mission in London. We have described some of the most politically relevant areas of spending in our initial Report on the draft budget, published in July 2018.
11.5In its initial position, the Member States proposed to reduce the draft EU budget for 2019 by €1.6 billion (£1.4 billion) for new commitments, and by €500 million (£445 million) for actual payments.143 Compared to the original Commission proposal they sought cuts to a number of programmes, including most prominently the Agricultural Guarantee Fund (which covers direct payments to farmers), the EU’s research programme Horizon 2020,144 the Connecting Europe Facility for transport and energy infrastructure, and the fund for countries seeking accession to the EU. The European Parliament, by contrast, in October 2018 sought to restore almost all the funding commitments cut by the Council.145 That same month, the European Commission published an amendment to the draft budget to reflect a number of recent developments, including a decision to maintain a European Commission office in Belfast after Brexit (at a cost of €900,000 in 2019).146
11.6As is the case every year, it the Parliament’s proposed increases to the EU budget were not acceptable to the Member States and therefore triggered the statutory 21-day ‘conciliation period’ under the Treaties, during which representatives of the Parliament and the Member States have to negotiate an agreement on the budget for next year, (which must be in place by the end of 2018). The Chief Secretary to the Treasury (Rt Hon Elizabeth Truss MP) informed us of the outcome of the conciliation process by letter dated 20 December 2018. This explained that negotiations initially foundered in mid-November, centred on the Parliament’s insistence that de-committed research funding appropriations—money initially set aside for EU research funding which was subsequently cancelled for any reason—should be added to the pool of available funding for future scientific research projects.147
11.7To solve the impasse in the talks, the European Commission then presented a new draft budget to kick-start the talks, which led to an informal agreement on the 2019 EU budget on 4 December 2018. The Chief Secretary to the Treasury (Elizabeth Truss) informed us of these developments by letter dated [date]. The final budget will consist of €165.8 billion (£148.9 billion) in commitment appropriations, and €148.2 billion (£133.1 billion) in payment appropriations, 3.2 and 2.4 per cent more respectively than under the 2018 budget.
11.8Under the final agreement, the Parliament withdrew its demand to recycle the research funds, in return for higher levels of funding for “programmes […] considered key to boosting growth and jobs”, including Erasmus+ (€240 million), and the research programme Horizon 2020 (€150 million). These two budgets will receive a further funding boost through an amending budget in 2019, adding an additional €100 million. The Minister’s letter explains that these increases will be offset by reductions in appropriations in other headings, particularly in the EU’s external action (for example by reducing pre-accession assistance for Turkey, in view of the suspension of its negotiations to become an EU Member State).
11.9The Member States and MEPs also agreed on a substantial boost for the ‘Security and citizenship’ heading of the budget, using the EU’s Flexibility Instrument. As had been proposed by the Commission, this will allow the EU to fund nearly €1 billion more for policies related to the “refugee, migration and security crisis” than originally planned when the Union’s current long-term budget was adopted in 2013.
11.10The 2019 EU budget was formally approved by the Member States on 11 December 2018, to allow for final adoption by the European Parliament at its last Plenary Session of 2018 that same week. No override of scrutiny occurred, because the UK Government abstained when the budget was put to the Member States for approval.148
11.11Separately, the Government has also approved the budget for the European Defence Agency (EDA) for the first three months of 2019. The Agency’s role is to support the Member States149 in developing their military capabilities, but it has no executive or operational role. As the general EU budget cannot be used for any expenditure with ‘defence or military implications’, the EDA is instead funded by direct contributions from the Member States. As with most defence-related decisions taken at EU-level, each country has a veto over the Agency’s financial endowment. The UK is responsible for 16 per cent of the EDA budget.
11.12On 13 December 2018, the Minister for Defence Procurement (Andrew Stuart MP) informed us that the UK had unilaterally blocked a proposed 7.7 per cent increase for the Agency’s budget for 2019, which would have taken it to €35 million (£31.4 million).150 The Secretary of State for Defence viewed this proposed increase as “unacceptable”. Instead, the Government had approved of a continuation of the EDA’s 2018 budget on a monthly basis until the end of March 2019.151 However, in his letter the Minister also conceded that the remaining Member States could push through an increase as soon as the UK loses its veto on 29 March 2019, and that the Withdrawal Agreement would require the Treasury to pay for the UK’s share of the additional funding (irrespective of whether the Government would have blocked the budget if it still had the power to do so). Given that the UK was the only Member State to veto the budgetary increase, this is a likely outcome if the Agreement is ratified and the UK remains a contributor to the Agency’s budget until the end of 2020.152
Implications of the 2019 EU budget for the UK
11.13Despite the UK’s formal withdrawal from the EU in March next year, the 2019 EU budget will have significant financial implications for the UK. The financial settlement under the draft Withdrawal Agreement requires the Treasury to pay for a share of all EU expenditure to be committed under the Union’s general budgets up to and including 2020.153 However, as the UK will lose its voting rights in the Council on 29 March 2019—well before the 2020 EU budget will be negotiated and agreed—this 2019 budget is the last general EU budget over which the Government is likely to have a vote.
11.14The Chief Secretary previously explained that the UK’s financing share for the 2019 EU budget—should the Withdrawal Agreement be ratified—is expected to be 11.4 per cent. The UK’s net contribution would be lessened by EU investment in the UK and the application of the UK rebate. The disentangling of the UK and EU’s financial obligations to each other if the Withdrawal Agreement is not ratified will be a matter for debate, although—as we noted earlier—both the Chancellor and the previous Secretary of State for Exiting the EU have indicated that, even in such a scenario, the UK may be under an obligation to make payments to the European Union in respect of historical commitments.154
11.15The Chief Secretary has also said that, during the transitional period, the UK will get a “fair share of receipts” from the EU budget. However, this is not something the Government can unilaterally guarantee, there are a number of reasons to be sceptical of this claim.
11.16First, we remain concerned that the uncertainty about the UK’s long-term relationship with the EU is already leading to a reduction in EU research funding for the UK (a major source of discretionary EU receipts that flow to the UK), because potential partners in other Member States are foregoing cooperation with British researchers for consortia elsewhere.155 Moreover, from March 2019, the Government will also lose its voting rights over EU work programmes that determine how the 2019 and 2020 budgets will be spent under particular EU programmes, and in some cases even its right to vote on individual funding decisions (for example under the European Defence Industrial Development Programme).156 The 2020 EU budget, and therefore the Union’s funding priorities for that year, will also be decided without the UK in the room. As can be seen from the developments around the European Defence Agency budget, expenditure is likely to be increased in areas where the UK would otherwise have argued for budgetary restraint.
11.17Moreover, as we noted in July 2018, the Brexit financial settlement also means British taxpayers would pay towards some of the EU’s own preparations for the UK’s withdrawal (in addition, of course, to paying for the Government’s domestic preparations). If the Withdrawal Agreement is ratified, the UK would contribute to the EU’s 2019 budget and, consequently, part-finance several areas of Brexit-related expenditure. These include, for example, investment in a shipping route between Ireland and the continent by-passing the UK; the staffing of a ‘UK desk’ in the European External Action Service, including of a larger EU delegation in London (at a net cost of €9.3 million);157 and the relocation of the European Medicines Agency and the European Banking Authority away from London. Other potential expenses partially borne by the UK will include the removal of the UK’s access from various EU IT systems, particularly those in the area of customs (to be funded from the 2014–2020 Customs Programme and, potentially, its successor).
Our assessment
11.18We thank the Chief Secretary for the information she has provided about the finalised 2019 EU budget. The UK would remain a significant net contributor to EU expenditure in 2019 should the Withdrawal Agreement be ratified, and we will continue to scrutinise information we receive from the Government about the implementation of the budget as necessary. We will also continue to press the Government about the financial implications of the post-Brexit transitional period, especially in relation to the 2020 EU budget—to which the UK, uniquely among all countries paying into it, will contribute without having a vote over its substance—and the post-2020 Multiannual Financial Framework.
11.19The UK’s exit from the EU also does not, by the Government’s own admission, mean that there will be no further UK payments to the EU budget in addition to the Brexit financial settlement as described above.
11.20First, the draft Withdrawal Agreement explicitly provides for the possibility of an extension of the post-Brexit transitional period beyond 31 December 2020. Although the Agreement makes clear the UK would not be bound by the Own Resources Decision—the EU law that governs Member State contributions to its budget and considered a ‘third country’ for the purposes of EU spending programmes—the extension would be subject to an agreement with the Union about further payments on top of the existing financial settlement.158 Obviously, a decision to extend transition would therefore inflate the size of the UK contribution to the EU budget after Brexit further, into the next Multiannual Financial Framework (2021–2027).159 Secondly, beyond the transitional period, the Government wants to stay involved in various EU programmes, including the Framework Programme for Research, which could require a continued financial contribution on an ad hoc basis that could run into billions of pounds annually.
11.21We also note with concern the developments around the 2019 budget for the European Defence Agency. While the Government has blocked the proposed increase for the Agency’s budget to €35 million for now, it only has the power to do so until 29 March 2019. The Ministry of Defence has acknowledged that the Withdrawal Agreement as drafted will allow the remaining Member States to increase the EDA’s 2019 budget to a higher level at any point after 29 March 2019, and the UK would be legally obliged to pay for a 16 per cent share (even if it considers it, as the Defence Minister put it in relation to the draft 2019 budget for the Agency, an “unacceptable” amount). Similar issues are likely to arise in relation to the general EU budget and the European Defence Agency funding arrangement for 2020: when those are decided, the UK will no longer have a vote or even a right representation during the preliminary negotiations, but the Treasury will nonetheless have to pay for a substantial share of whatever the remaining Member States decide are their EU funding priorities for that year.
11.22A detailed examination of these broader issues is, however, beyond the scope of this Report. We have already expressed our concerns about the financial implications of the Withdrawal Agreement, and the Government’s control over EU budgetary decisions that will have a significant impact on UK taxpayers, on numerous occasions.160 In view of the fact that agreement has been reached between the European Parliament and the Council on the 2019 budget, and given that the Government abstained from the vote when formal adoption took place on 10 December 2018, we are content to now clear next year’s EU budget from scrutiny.
11.23We also draw the EU budgetary agreement to the attention of the Treasury and Public Accounts Committees, given its financial and political implications for the UK.
Full details of the documents:
(a) Statement of Estimates of the European Commission for the financial year 2019: (39886), 10365/18, COM(18) 600; (b) Letter of amendment No 1 to the draft general budget for 2019: (40120), 13199/18, COM(18) 709
Previous Committee Reports
See (39886), 10365/18, COM(2018) 600: Thirty-sixth Report, HC 301–xxxv (2017–19), chapter 5 (18 July 2018).
141 The Flexibility Instrument is an EU budgetary mechanism, which can be used to provide funding in a given financial year for “clearly identified expenses which could not be covered by one or more budget headings without exceeding their expenditure ceilings”.
142 In evidence to the House of Lords EU Committee on 29 August 2018, Dominic Raab said there was still a “question around quite what the shape of those financial obligations were” if the UK left with no deal, and that the UK “always pays its dues”. Similarly, Philip Hammond is reported to have told Cabinet that the EU could have a strong legal case for demanding payments.
143 See Council document 11737/18 ADD 1 (7 September 2018).
144 Although the Council wanted to reduce the commitment appropriations for Horizon 2020 by €300 million compared to the Commission proposal, this would still be a €648 million increase compared to 2018.
145 The Parliament’s position set the overall level of appropriations for 2019 at €166.3 billion in commitment appropriations and €149.3 billion in payment appropriations (an increase of €721 million for commitments compared to the original Commission proposal). See European Parliament document P8_TA(2018)0404 (25 October 2018).
146 The European Commission’s offices in Edinburgh and Cardiff are due to be closed from March 2019. A proposal to formally open an EU delegation in London to replace the current ‘representation’ is being prepared.
147 The possibility to add de-committed EU research funding to its budget for scientific research in a subsequent year was made possible by amendments to the EU’s Financial Regulation, adopted in 2018. See Article 15(3) of Regulation 1046/2018. The Member States were opposed to making use of this option because they were of the view that the “agreed capacity of each budget heading should be used before the recycling of lapsed funds is considered”.
148 See Council document 15491/18, in which the voting result is recorded. The UK was the only Member State not to vote in favour of the budget. In her letter of 20 December 2018, the Chief Secretary motivated the UK’s vote by saying that the UK has “consistently argued for further commitments cuts across all headings and a higher commitments margin to allow space in the budget to respond to the uncertainty facing the EU. […] In recognition of the compromises made by all sides, including the removal of the reuse of recommitments, and the budget’s overall compliance with the 2013 MFF deal, we decided not to vote against”.
149 Denmark is not part of the European Defence Agency because of its opt-out from the Common Security & Defence Policy (CSDP).
150 Letter from Andrew Stuart to Sir William Cash (13 December 2018). Officials subsequently confirmed the UK was the only EDA Member State to vote against the proposed budget.
151 The EDA’s budget for 2018, approved by the UK and the other Member States in November 2017, was €32.5 million (£29.2 million). Concretely, this means the Agency will have a budget of €8.13 million from January to March 2019 (compared to the €8.75 million it would have had under the proposed budget for the same period).
152 We understand the Government also vetoed the proposed 2019 budget for the EU Satellite Centre (SatCen), which must likewise be approved by all participating Member States.
153 The reason provided by the Government is that none of the remaining Member States should receive less or contribute more over the lifetime of the current Multiannual Financial Framework (MFF), which runs from 2014 until 2020 and was adopted unanimously—i.e. with the UK’s agreement—in 2013.
154 In evidence to the House of Lords EU Committee on 29 August 2018, Dominic Raab said there was still a “question around quite what the shape of those financial obligations were” if the UK left with no deal, and that the UK “always pays its dues”. Similarly, Philip Hammond is reported to have told Cabinet that the EU could have a strong legal case for demanding payments.
155 To qualify for EU research funding, projects must typically be undertaken by participants from at least three EU Member States or ‘associated’ countries. Given that the UK’s position in the Framework Programme for 2019–2020 will not be certain until the Withdrawal Agreement is ratified, it remains unclear what would happen to EU-funded research projects involving UK organisations on 29 March 2019.
156 Similarly, while not strictly speaking a budgetary receipt, lending to the UK from the European Investment Bank (which the UK part-funds) has also decreased sharply since the referendum, which may be indicative of a wider issue.
157 The costs of the larger EU delegation are partially offset by savings generated by the closure of the much smaller ‘representations’ that the European Commission maintains in Cardiff and Edinburgh at present. The representation in Belfast is to remain open given the controversy around the position of Northern Ireland.
158 See Article 132 of the Withdrawal Agreement.
159 For more information on the EU’s next Multiannual Financial Framework, see our Report of 12 September 2018.
160 See for example our Reports of 19 December 2017, 4 July 2018 and 21 November 2018.
Published: 15 January 2019