Select Committee on European Union Thirty-Third Report

PART 2: background

Introduction: what is the purpose of this report?

1.  The aim of this report is to inform the House of issues pertaining to the EC Budget generally and the 2004 Budget in particular.[1] We also scrutinise the Government's position before it enters into negotiations on the 2004 Budget in the Council of Ministers.

2.  This report is the first in a series of reforms that we are implementing (in conjunction with the Government) to develop the way in which we scrutinise the annual EC Budget and its implementation. This short report, which focuses on the Commission's Preliminary Draft Budget for 2004, introduces an element of parliamentary scrutiny where little effective scrutiny previously existed in this House.[2]

3.  For a long time there was dissatisfaction with the arrangements for parliamentary scrutiny of the annual EC Budget. Despite several reviews over the years,[3] and various improvements in how scrutiny of the Budget is handled, frustration remained. The annual budgetary process is complicated and involves many different stages (see below, paragraphs 17-20). Yet, although the overall procedure is lengthy, the short amounts of time between the different stages mean that the process does not lend itself to in-depth scrutiny at all junctures by a national parliament.

4.  At the start of this session, we carried out a thorough review of how we scrutinise European legislation.[4] One of our conclusions was that Sub-Committee A (Economic and Financial Affairs) should take oral evidence from the Government on an annual basis before the first reading of the Budget in the Council, and thereafter we should publish a short report for the House. Publication of a report at this juncture in the Budget-making process aims to inform the House of negotiations at an early stage and to ensure greater accountability, openness and transparency. We hope that this focused approach to the annual budgetary process will be constructive for all concerned. If this is indeed the case, we will make it an annual procedure. For the moment, we make this report to the House for information.

Why examine the Preliminary Draft Budget?

5.  The Commission's Preliminary Draft Budget (PDB) represents the first stage in the annual budgetary procedure, which results in the formal adoption of the following year's Budget at the end of each calendar year. In between these two stages, the Budget is negotiated between the Budget Council (the Member States in the Council of Ministers) and the European Parliament. The Committee has decided that scrutinising the PDB before the first reading in the Budget Council (which will take place this year on 16 July) is the best way that we can discharge our parliamentary responsibilities given the restrictions of the Budget timetable. It is before the first reading of the PDB at the Budget Council that we can best hold the Government to account and inform the House of the key issues pertaining to the EC Budget.

2004 is a significant year for the EC Budget

6.  2004 is of particular significance for the EC Budget for three reasons. First, this year's Budget is the first to be presented in an Activity-Based Budgeting (ABB) format, which means that for the first time spending is linked to objectives, outcomes and performance indicators. Secondly, the 2004 EC Budget is also the first to cover an enlarged Union of 25 members. The third reason why 2004 is significant is that the Convention on the Future of Europe has proposed a number of changes to the budgetary process, and these have been incorporated in the draft EU constitutional Treaty. The draft Treaty, which was presented to the European Council in Thessaloniki on 20 June by the Chairman of the Convention Valéry Giscard d'Estaing, proposes a budgetary process which aims to be simpler and more transparent.[5] However, the draft Treaty also includes a prospective change to the decision-making procedure that determines the level of individual Member States' contributions to the Union's resources. If adopted, this would have substantial implications. We examine the key proposals from the Convention in a separate section below (paragraphs 39-45).

Putting the annual Budget in context

7.  The annual EC Budget is one element in how European spending levels are determined. Expenditure in the annual Budget is tightly constrained by certain key items of legislation, and many important budgetary decisions are taken outside the annual budgetary process. Broadly speaking, decisions on European spending involve three levels of legislation, which can be considered to be in a hierarchy of importance.

The over-arching legal framework

8.  The annual Budget is not negotiated in a vacuum but is set within an over-arching legal framework, which contains three key elements: the Financial Perspective, the Own Resources Decision and the Financial Regulation.

The Financial Perspective

9.  The most important decision for the EC Budget is a multi-annual financial programme, known as the Financial Perspective, which lays down the revenue and expenditure parameters for annual Budgets. This financial framework is agreed by the Heads of State and Government in the European Council; it contains the Communities' medium-term expenditure plans and places clear limits on the annual Budget. The Financial Perspective sets out annual ceilings for the seven major categories of EC expenditure and is thus decisive in shaping the annual Budgets. Once agreed by the European Council, the Financial Perspective forms part of an Inter-Institutional Agreement between the Commission, the Council and the European Parliament, all of which are bound to respect its principles and ceilings when the annual Budget is set year by year.[6]

10.  The current Financial Perspective was set at the March 1999 Berlin Council and covers the period 2000-2006. It was revised at the Copenhagen European Council in December 2002, when new expenditure ceilings for an enlarged Union of 25 Member States were agreed.

The Own Resources Decision

11.  Another key element of the legal framework surrounding the annual Budget is the Own Resources Decision, which sets out the arrangements for financing the Budget. This Decision determines Member States' contributions to the Budget and limits the amount of money that the Community can raise from the Member States. It is fixed in terms of a percentage of overall Community Gross National Income (GNI) that the Budget may absorb in any one year. For 2003, this figure is equivalent to 1.02% of Community GNI.[7] The Financial Perspective and the Own Resources Decision constitute the major financial decisions for the EC, as they set the boundaries within which the annual EC Budget is negotiated.

The Financial Regulation

12.  A third significant element of the over-arching framework is the Financial Regulation applicable to the EC Budget, which lays down the basic rules governing all budgetary matters that are referred to in the Treaties. The original 1977 Financial Regulation was revised in 2001, in an attempt to clarify and simplify the budgetary rules. The new Financial Regulation introduced Activity-Based Budgeting to the EC Budget, in an attempt to link proposed expenditure to clear objectives and outputs. The 2004 EC Budget is the first to be set on such a basis. The revision of the Financial Regulation also redefined the financial actors, clearly separating the roles of authorising and accounting officer.

Individual Spending Programmes

13.  Spending in the annual Budget is normally divided into seven categories:

1)  agriculture,

2)  structural operations,

3)  internal policies,

4)  external action,

5)  administration,

6)  reserves, and

7)  pre-accession aid.

14.  Whilst the ceilings for spending in each category are set in the Financial Perspective, the driver for how and where money is spent within each category in the annual Budget comes not from each year's Budget, but from decisions to adopt particular spending programmes. For example, a decision to enter billions into a particular year's Budget on a multi-annual research programme automatically follows from the decision to approve the research programme. The initial policy decision approving the spending programme therefore sets the dynamics for future annual Budgets. In this sense, the annual Budget process simply records budgetary provisions for previously considered and scrutinised spending and revenue decisions. This is the case for the two areas that together take up nearly 80% of the total EC Budget: spending on the Common Agricultural Policy and Structural Operations.

15.  Exceptionally, the 2004 Budget includes an eighth category of expenditure: 'compensation', which will be allocated to the new Member States to ensure that they are net recipients of the EC Budget in the period before they become fully part of all EU programmes.

1   The Budget is established and authorised under the Community pillar of the Union and its legal order; it is thus a Budget not of the Union but of the Communities. Back

2   From 1994 to 1996, Sub-Committee A took oral evidence from the Government on the Preliminary Draft Budget at the beginning of July, before the Budget Council, and we published short reports following each of these evidence sessions: Preliminary Draft General Budget for 1995 (Session 1993-94, 18th Report, HL 94); Preliminary Draft General Budget for 1996 (Session 1994-95, 20th Report, HL 100); Preliminary Draft Budget for 1997 (Session 1995-96, 14th Report, HL 104). However, the short inquiries for these reports were hindered by the limited amount of information available or the delay in the availability of the necessary information. Consequently, in two out of these three years the reports were not published until after the summer recess. It is our intention now to ensure that we always publish our report before the Council conducts its first reading on the annual Budget (the importance of scrutiny at this stage of the annual process is explained in paragraphs 4-5). The Government is proving helpful in coordinating with us to this end, but we urge it to continue to do more (see paragraph 21). Back

3   Over the years there have been several internal reviews in Parliament and numerous meetings between the officials of the two Houses and HM Treasury. These have led to several sets of correspondence and two published reports: one by the House of Commons Select Committee on European Legislation entitled Scrutiny of the EC Budget (Session 1997-98, 20th Report, HC 155-xx) and one by the House of Commons European Scrutiny Committee European Scrutiny in the Commons (Session 2001-02, 30th Report, HC 152-xxx). Back

4   Review of Scrutiny of European Legislation (Session 2002-03, 1st Report, HL 15). Back

5   CONV 820/1/03, Title VII. Back

6   One of the proposals in the draft Treaty is to change the legal basis of the Financial Perspective. We discuss this proposal below (paragraphs 42 and 45). Back

7   European Community Finances: Statement on the 2003 EC Budget and measures to counter fraud and financial mismanagement, HM Treasury, Cm 5800. Back

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