Select Committee on European Union Thirty-Third Report

PART 3: The 2004 EC Budget


23.  The 2004 Preliminary Draft Budget is the first to cover an enlarged European Union of twenty five Member States. Accession of the ten new Member States is planned for 1 May 2004. The Budget therefore includes two sets of figures: the first for the EU-15, the second for the EU-25. Presuming a successful conclusion of the accession process, the EU-25 budget will be formally adopted as a Supplementary and Amending Budget (SAB) in May 2004. Unless otherwise stated, the figures in this report refer to the enlarged Union of 25 Member States and therefore set out the real level of expenditure after enlargement.

24.  The Budget is split into two types of expenditure. The first covers legal obligations which the Commission has entered into during the current financial year for activities which will lead to payment in current and future years and is called "commitment appropriations". The second type of expenditure is called "payment appropriations" and covers actual transfers of cash from the Community Budget to creditors. As Table 1 shows, the Preliminary Draft Budget envisages a total of commitment appropriations of € 112.2 billion, which amounts to a 12.6% increase from the 2003 Budget.[8] All but 0.7% of this increase is due to Enlargement. The total for commitment appropriations in 2004 is € 3.2 billion below the revised Financial Perspective ceiling agreed at the Copenhagen European Council in 2002. The figures for the EU-15 have seen a modest increase by 0.7% to € 100.4 billion, which is € 3.3 billion below the Financial Perspective ceiling set at the Berlin European Council in 1999.

Table 1: Budget 2003 and PDB 2004 (EU-25)

Appropriations for commitments (in € million)
Appropriations for Commitments Adopted 2003 BudgetPDB 2004 (EU-25) % Change
1. Agriculture44,780 47,8746.9%
2. Structural Operations33,980 41,03520.8%
3. Internal Policies 6,796 8,64027.3%
4. External Action 4,949 4,9963.9%
5. Administration 5,360 6,11214,0%
6. Reserves 434 442 1.8%
7. Pre-Accession Aid 3,386 1,732-51%
8. Compensation 1,410
Total 99,686 112,24012.6%

25.  As Table 2 below illustrates, payment appropriations increase by 3.3% in the 2004 PDB to € 100.7 billion, which is € 10.9 billion below the Copenhagen Financial Perspective ceiling.[9] The payment appropriations for the EU-15 in 2004 show a 2% decrease in comparison with 2003 to € 95.6 billion, which is € 6.7 billion below the Berlin Financial Perspective ceiling. Total payment appropriations represent 0.99% of Community Gross National Income (GNI), which is a reduction from 1.04% GNI in 2003.

26.  We note with approval that the proposed 2004 PDB expenditure levels are within the ceilings set by both the 1999 Berlin European Council and the 2002 Copenhagen European Council.

Table 2: Budget 2003 and PDB 2004 (EU-25)

Appropriations for Payments (€ million)
Appropriations for Payments Adopted 2003 BudgetPDB 2004 (EU-25) % Change
1. Agriculture44,780 46,7864.5%
2. Structural Operations33,173 30,682-7.5%
3. Internal Policies 6,198 7,49620.9%
4. External Action 4,695 4,7922.1%
5. Administration 5,360 6,11214.0%
6. Reserves 434 442 1.8%
7. Pre-Accession Aid 2,863 2,9563.3%
8. Compensation 1,410


Compulsory Exp

Non-Compulsory Exp












The Government's priorities for the 2004 Budget

27.  The Government has identified its main priorities for negotiations on the 2004 Budget as external action and administration (spending categories 4 and 5 respectively). The Government considers improvements in the overall effectiveness of EC spending on external relations a main priority. Its second priority concerns administration costs. The figure in this category has increased by 14% over last year. The Government wishes to pursue value for money issues in this area.

External Actions (category 4)

28.  Commitment appropriations for external action (spending category 4) for 2004 are € 4.9 billion, which amounts to an increase of 0.9% compared with the 2003 Budget. This figure is the same for EU-15 as EU-25, as external policies are unaffected by enlargement. € 174 million extra will be available in this category following the accession of Cyprus and Malta and because financial assistance to Turkey now comes under the different category of pre-accession aid. This means that there is a 4.5% increase in available spending on external actions. The Western-Balkans and the Middle East have been provisionally identified by the Commission as the main beneficiaries of this increase. Substantial increases of € 50 million each for both humanitarian aid and assistance to Asia, mainly to cover commitments to Afghanistan, have also been programmed. The other main beneficiaries of this increase are Eastern Europe and Central Asia where a € 30 million increase in spending on assistance has been programmed by the Commission. These figures leave a margin of € 86 million for unforeseen expenditure.

29.  The Government's priority is to assure an increase in this margin. This is because a larger margin will provide more flexibility to deal with foreseeable but as yet uncosted requirements in Iraq and the Middle East (Q 39). The Government also wishes to see a shift away from EC spending on middle-income countries such as the Western Balkans in favour of a "greater poverty focus" (Q 2). These concerns are part of a broader drive which the Chancellor has initiated through a UK action plan for reform of the whole category of external actions (Q 39) which he presented to the ECOFIN on 13 March 2003. The plan is divided into three sections:

30.  The Committee agrees with the Government that spending on external action should be a priority for the 2004 Budget. We are encouraged to hear that the Government is proposing a larger margin to deal with foreseeable, but as yet uncosted, spending in Iraq and the Middle East. We urge the Government to do everything in its power to ensure best use of EC spending on external action. The Committee supports the Government's initiative to develop a greater poverty focus for EC external action spending over the next few years, but this focus should not deflect from the EU's other objective of working towards stability in regions such as the Middle East and the Balkans. We would welcome greater clarity on how far the Government considers that the EU can take on ambitious plans for greater external action involvement without substantial increases in spending under category 4 of the EC Budget.

Administration (category 5)

31.  The Government's second priority is expenditure on administration (category 5). This category has been programmed for the EU-25 for the full calendar year to cover the additional administrative burdens in the run-up to formal accession between January and May 2004. The amount in this category is € 6.1 billion, which amounts to an increase of 14%. With a view to enlargement, each EU institution has bid for substantial increases in funding for staff and buildings, which amount to a total of € 725 million. The greatest increase is for the Commission, which is bidding for an extra € 104 million, of which € 9.5 million is to be spent on buildings and the rest is to cover recruitment of an additional 780 staff. Increases for the Council and the European Court of Justice amount to € 73 million each (Q 20).

32.   While emphasising its support for sufficient resources to deal with enlargement, the Government says that it is keen to see strict conditions for value for money applied to these institutional increases. The Committee fully supports the Government in this approach. We also wish to see efficient use being made of these increases in administrative costs through the application of modern management practices and techniques.

33.  On a related institutional matter, we would urge the Government, in the forthcoming Inter-Governmental Conference, to continue with attempts to reform the European Court of Auditors. We produced a report on the European Court of Auditors in April 2001,[10] and our view on the subject remains unchanged. In particular, we consider that the European Court of Auditors would be most effective in an enlarged Union if it had a highly-qualified chief executive who was appointed impartially. The chief executive would be supported by a large team of audit staff who would report to a part-time, non-executive board of representatives from each of the Members States. We will return to this issue as part of our work on the forthcoming Inter-Governmental Conference.

Other Spending Categories

Agriculture (category 1)

34.  The Common Agricultural Policy (CAP) is historically the most resource-consuming of the Community policies. The EC provides a large proportion of the funding for European agriculture: for 2004, agriculture is set to consume almost 43% of EC expenditure.

35.  The total budget for agriculture (spending category 1) in 2004 amounts to € 47.8 billion. This is an increase of 6.9% compared with 2003, of which 4.7% is due to enlargement. € 41.3 billion of spending in this category is expenditure on the CAP, which amounts to an increase of 3.1%. The Commission included in the PDB the first tranche of savings that would result from its CAP reform proposals on the assumption that they would be agreed as proposed (Q 25). The Council has agreed to reform the CAP, but the reductions included in the 2004 PDB are small, as changes to the system of direct payments will not come into effect until the 2005 Budget. We ask the Government to explain exactly how the recently-agreed changes to the CAP will affect the final 2004 EC Budget. We call on the Government to use the recent agreement on reform of the CAP to make progress in the Doha round of world trade talks. Furthermore, we continue to urge the Government to push for further reform of the CAP.[11]

36.  Category 1 of the Budget includes a further € 6.5 billion for Rural Development spending, which is an increase of 39.1% up to the revised spending ceiling set by the Financial Perspective agreed at Copenhagen. The large increase in this figure reflects the fact that direct payments to farmers in the new Member States will not commence until 2005. In 2004, expenditure on agriculture in the new Member States is made up of market support measures and rural development measures (Q 16). The rural development programme consists of the following five areas:

  • early retirement schemes for farmers,
  • support for less favoured areas,
  • agri-environment programmes,
  • afforestation of agricultural land, and
  • transitional support for semi-subsistence farms to develop into commercially viable businesses (Q 28).

Structural Operations (category 2)

37.  The second largest spending category in the EC Budget covers the structural funds, which account for 37% of the total 2004 PDB and amount to € 41 billion. Structural operations aim to reduce inequalities in wealth distribution across the regions so that all European citizens can benefit equally from the large Community market. The 2004 PDB commitment appropriations in this category rise by 20.8%, of which € 6.7 billion is the result of the participation of the new Member States in the structural and cohesion funds. This figure reflects the level of expenditure in this area agreed at the Copenhagen European Council. The payment appropriations (actual cash payments in 2004) for Structural Operations have decreased by 7.5% due to the closure of programmes launched between 1993 and 1999. The Committee notes that the increase in this category is within the expenditure ceiling agreed at the Copenhagen European Council. We fully accept that the new Member States should benefit on an equal basis from structural funds. However, we were concerned to hear that when the 2002 Budget was closed, it emerged that € 4.8 billion less than forecast had been spent on structural funds. The Government told us that this did not constitute an underspend but was due to structural fund money being held back until the audits of the concluded projects were completed in 2003. A new system has since been introduced which is expected to solve this problem (Q 18). Nevertheless we urge the Government to make full use of the new Activity-Based Budgeting rules to ensure that structural fund money in all Member States is properly forecast and effectively spent in order to achieve clear outcomes.

Pre-Accession Strategy (category 6)

38.  Expenditure in category 6 (pre-accession aid) of the 2004 PDB is 50% lower than in the 2003 Budget and amounts to € 1.7 billion. This is because the pre-accession programmes for the ten accession countries will close on their joining the EU in May 2004. The remaining money is programmed for the other recipients of pre-accession aid: Romania, Bulgaria and Turkey. Payment appropriations amount to € 2.9 billion, a 3% increase over 2003. This reflects payment resulting form previous commitments to the PHARE,[12] ISPA[13] and SEPARD[14] programmes. As with the structural funds, there appear to have been complications in the absorption capabilities of pre-accession countries. The closing of the 2002 Budget also revealed that € 800 million less than forecast was absorbed by the pre-accession countries. We note with approval that there was a marked improvement during 2002 in the absorption capacity for funds such as the PHARE programme.

8   For a more detailed break-down of figures, see the Government's tables in Annex 1 to its Explanatory Memorandum (pp.5-12). Back

9   For a more detailed break-down of figures, see the Government's tables in Annex 1 to its Explanatory Memorandum (pp.5-12). Back

10   The European Court of Auditors: The Case for Reform (Session 2000-2001, 12th Report, HL 63). Back

11   cf. our report Mid-Term Review of the Common Agricultural Policy: External Implications (Session 2002-2003, 27th Report, HL 114). Back

12   Pre-accession aid for institution-building. Back

13   Pre-accession aid for transport and environment infrastructure. Back

14   Pre-accession aid for agriculture and rural development.  Back

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