Scrutiny of EU Financial Affairs: Memorandum
by Sub-Committee A
1. We are keen to improve our scrutiny of EU financial
affairs. In particular, we hope to develop the way in which we
scrutinise the annual Budget of the European Communities and the
implementation of that Budget.
For a long time there has been dissatisfaction with the arrangements
for parliamentary scrutiny of the annual EC Budget and, despite
several reviews over the years
and various improvements in how scrutiny of the Budget is handled,
frustration remains. The annual timetable for the Budget is complicated
and involves many different stages (see below paragraphs 14-16).
Yet, although the overall procedure is lengthy, the short amounts
of time between the different stages means that the process does
not lend itself to in-depth scrutiny work at all junctures.
2. We examine how we might best discharge our scrutiny
responsibilities given the restrictions of the Budget timetable.
We set out the background to the current scrutiny arrangements
for EC Budget documents and propose a number of changes that would
improve both our scrutiny of the Budget and the arrangements for
reporting to the House. We suggest a structure that will ensure
we systematically approach the Budget in a way which is well-timed
3. We conclude that short, focused scrutiny of the
Budget should take place at the earliest possible opportunity
in the annual cycle. Furthermore, our scrutiny of the Budget should
not distract us from other important inquiries on topics and legislative
decisions that have large budgetary implications.
BACKGROUND: PUTTING THE ANNUAL BUDGET IN CONTEXT
4. The annual EC Budget is one element that determines
European spending levels, but many important budgetary decisions
are taken outside the annual budgetary process. Broadly speaking,
decisions on European spending involve three forms of legislation.
These are as follows.
The legal framework
5. Expenditure in the annual Budget is tightly constrained
by certain key agreements and items of legislation. Foremost among
these is a multi-annual financial programme, known as the Financial
Perspective, which lays down revenue and expenditure parameters.
The Financial Perspective forms part of an inter-institutional
agreement between the Commission, the Council and the European
Parliament, all of who are bound to respect its principles and
ceilings when the annual Budget is set year by year. This financial
framework contains the Communities' medium-term expenditure plans.
The Financial Perspective sets out annual ceilings for the six
major categories of EC expenditure (agriculture, structural operations,
internal policies, external action, administrative expenditure,
and reserves) and is thus decisive in shaping the annual Budgets.
6. Another key piece of legislation is the Own Resources
Decision, which sets out the arrangements for financing the Community
Budget. This document 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 2002, this figure is equivalent
to 1.24% of Community GNI. These two legislative instruments constitute
the major financial decisions for the EC, as they set the boundaries
within which the annual EC Budget is negotiated.
7. Changes to this overarching legal framework are
very infrequent and are the focus of concentrated scrutiny by
the Committee. The current Financial Perspective was set at the
March 1999 Berlin Council and covers the period 2000-2006.
We examined the proposals for the current Financial Perspective
and the operation of the Own Resources System in our Report Future
Financing of the EU: Who pays and how? (Session 1998-99,
6th Report, HL 36), which was published at the beginning of March
1999 in the run up to the Berlin Council.
8. The negotiations on the next Financial Perspective
are set to be very complex and difficult. They will cover an enlarged
EU and will take place amid calls for reform of the CAP for and
a review of the UK abatement.
9. The decisions on the total level of EC expenditure
are of paramount importance and must remain the focus of concentrated
scrutiny by this Committee. We will continue to consider in detail
any changes to the overarching legal framework within which the
annual EC Budget is set. We undertake to carry out a full inquiry
on the subject of the next Financial Perspective soon after the
Commission publishes its proposals in this area (which are expected
in 2004). By connecting with this procedure at an early stage,
we will be able to publish our report whilst negotiations are
still ongoing, and thus we hope to have an influence on the process.
10. The Financial Regulation applicable to the general
Budget of the European Communities lays down the basic rules that
govern all aspects of the EC Budget matters that are referred
to in the Treaties. The 1977 Financial Regulation has this year
been revised 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 results. It also redefined the financial
actors, clearly separating the roles of authorising and accounting
officer. The Financial Regulation thus lays down the general guidelines
for the budget and the proposals for its revision were the subject
of scrutiny by Sub-Committee A. We will in the future look
at the ways in which the move to activity-based reporting is improving
budgetary effectiveness across the Community, and how objectives
and performance points are having an impact on the budgetary process.
Individual spending programmes
11. Spending in the annual Budget is divided amongst
six major categories: agriculture, cohesion policy and the Structural
funds, internal policies, external action, preparations for enlargement,
and administration. 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
from the decisions to adopt particular spending programmes. For
example, a decision to enter billions into the 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 the annual
Budget. 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: CAP spending
and the Structural Funds. Scrutiny of such decisions is certainly
as important as scrutiny of the annual Budget.
12. 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:
this year, agriculture is set to consume almost 46% of EC expenditure.
The Structural Funds aim to reduce inequalities in wealth distribution
across the regions so that all European citizens can benefit from
EMU and the large Community market. The Framework 6 programme
for Structural Funds made far-reaching policy decisions with large
budgetary implications. These funds are the second largest element
of EC expenditure, accounting for 34% of the 2002 Budget.
13. A number of new multi-annual programmes, including
indicative multi-annual spending volumes, have recently come into
effect. These include the Sixth Research and Development Framework
Programme (which will cost ?17.5 billion between 2002 and 2006)
the Public Health Programme (?312 million over the period 2002-06)
and the Employment Incentive Measures (?55 million, 2002-06).
These spending decisions themselves underwent United Kingdom parliamentary
scrutiny in the usual process, outside scrutiny of the annual
14. Our Sub-Committees take an active role in scrutinising
and reporting on these major spending decisions. In the build
up to the current Financial Perspective, we reported on the financing
and reform of the Structural funds.
Since then, we have reported on EU Aid to the Balkans,
which is a large element of the spending on external relations.
Furthermore, Sub-Committee D is currently conducting an inquiry
into the mid-term review of the CAP.
15. By prioritising these long-term policy decisions,
we act upon the strengths of the Sub-Committee structure and working
methods. In such considered inquiries we have time to stand back
and take a long-term perspective. In so doing, we hope to influence
policy makers and those who take decisions in a way which is extremely
difficult in the fast-moving process of the annual Budget cycle.
Such inquiries, if well timed, can add much value to our scrutiny
of the annual EC Budget. The major spending decisions will
remain a focus of concentrated and rigorous scrutiny for us and
will continue to form the basis of our inquiries. We will continue
to scrutinise in detail proposals for legislation that have budgetary
implications and will follow closely negotiations on such proposals
at Council meetings. For instance, with the prospect of enlargement,
we will scrutinise the proposals on Structural Funds before they
are settled in preparation for the next IGC.
The annual budgetary process
16. The budgetary procedure is set out in Article
272 of the EC Treaty, which stipulates the sequence of stages
and the time-limits which must be respected by the two arms of
the 'budgetary authority': the Council of Ministers (acting by
qualified majority) and the European Parliament, who together
establish the annual Budget. The Council has the final say on
"compulsory" expenditure, that is, spending that is
a direct result of treaty application or acts adopted on the basis
of the treaties, which in practice means spending on agriculture;
the European Parliament has the final say on all other categories
(defined as "non-compulsory" expenditure, which includes
spending on regional policy, research policy and energy policy).
17. The annual budgetary procedure, as defined in
the Treaty, extends from 1 September to 31 December of the year
preceding the Budget year in question. In practice, however, a
'pragmatic' timetable has been applied by the three institutions
since 1977. The different stages of the Budget procedure are as
The Commission draws up a Preliminary Draft
Budget (PDB) in May.
The Council conducts its first reading in
July and establishes a Draft Budget (DB), which is then passed
to the European Parliament for a first reading.
The European Parliament conducts its first
reading in October on the basis of the Council's Draft Budget.
18. The Draft Budget, with any amendments, then returns
for a second reading first to the Council and then to the European
Second reading by the Council
The Council conducts this second reading during the
third week of November, after a conciliation meeting with a delegation
from the European Parliament. The Draft Budget is amended in the
light of the European Parliament's amendments (non-compulsory
expenditure) or proposed modifications (compulsory expenditure).
As a general rule, the Council's decisions on second reading relating
to compulsory expenditure determine the final amount: unless the
entire Budget is subsequently rejected by the European Parliament,
the Council has the 'last word' on this category of expenditure.
The Draft Budget as amended is then returned to the European Parliament.
Second reading by Parliament and adoption of the
In December, the European Parliament reviews non-compulsory
expenditure, for which it can accept or refuse the Council's proposals.
The President of the European Parliament then declares the Budget
adopted and it can be implemented.
19. The 2002 general Budget, which was formally adopted
after its second reading in the European Parliament on 13 December
2001, amounted to ?98,635 million for commitment appropriations
and ?95,655 million for payment appropriations. The UK's gross
contribution, after abatement, to the 2002 adopted Budget was
about ?13.4. billion (14.3% of the total). In 2001, this figure
was ?12.6 billion (13.9%).
DIFFICULTIES WITH SCRUTINISING THE ANNUAL CYCLE OF
THE EC BUDGET
20. There are a number of complexities in the structure
of the annual Budget cycle that make effective national parliamentary
scrutiny of it difficult. The Budget generates a very large amount
of paperwork that is often delayed in reaching Member States as
a result of translation. This means that documentation is often
dealt with at a national level at the same time as it is already
being negotiated at European Council fora. It is then too late
for national parliamentary scrutiny to be effective.
21. A number of years ago, the Chairman of the Select
Committee recommended radical reform of the timetable as the only
means to allow effective national parliamentary scrutiny of the
However, the prospect of any significant change to the annual
Budget timetable is remote.
22. The European Parliament Committee on Budgets
is responsible for matters relating to the definition and exercise
of the European Parliament's budgetary powers (Articles 268 to
273 of the EC Treaty) and the rules thereof dealing with the establishment
of the Budget. Acting in this capacity, the European Parliament
Committee on Budgets follows closely each stage of the annual
budgetary procedure. In contrast, it is difficult for a scrutiny
committee of a national parliament to keep pace with the fast-moving
annual budgetary process. It is our opinion that the scrutiny
system of a national Parliament should seek primarily to influence
its Government Ministers in the Budget Council and to hold them
to account for their decisions. The Committee does not have the
time or resources to undertake detailed scrutiny of every single
stage of the annual budgetary process without compromising its
other scrutiny work, including our inquiries into the budgetary
decisions that are taken outside the annual Budget cycle.
23. In deciding which stages of the annual budgetary
process to scrutinise, we must ensure that the Committee's handling
of budgetary matters does not simply duplicate the work we already
do when Sub-Committees consider the legislative proposals authorising
spending programmes or revenue raising powers. Given the 80% of
the annual Budget that is spent on the CAP and the Structural
Funds, and excluding a further 10% of the annual Budget that is
taken up by spending on multi-annual programmes, only a small
percentage of the total EC Budget is decided on an annual basis
and is relevant for detailed annual scrutiny. This low percentage
of EC spending does not merit the complicated procedure concentrated
scrutiny of every stage of the annual Budget process would entail.
The last point is borne out by the fact that the difference between
the Preliminary Draft Budget and the final adopted Budget is often
24. The House will, of course, always have the
opportunity to scrutinise the various stages of the budgetary
process, if it deems that this is essential. We consider, however,
that the Committee's efforts are best spent by focusing on particular
key stages and developments in the annual process. The crucial
question here is how a national parliament can best feed its views
into the European procedure of formulating the Budget. It is
important to understand when the Committee's opinions can best
contribute to the European discussion and affect the position
of the Government. In this respect, we consider that the key event
is the establishment of the Draft Budget by the Budget Council
in July, as this meeting sets the main features of the Budget
for the following year. It is at this early stage in the annual
budgetary process that our views could best influence the Government
and be of most use to them.
25. Between the Commission adopting its Preliminary
Draft Budget in May and the Council establishing the Draft Budget
before 31 July, there would be time for the Committee to take
evidence from a Minister or HM Treasury officials and scrutinise
how the Government are approaching the negotiations. In fact,
from 1995 to 1997, Sub-Committee A used to take oral evidence
from the Government on the Preliminary Draft Budget at the beginning
of July, before the Budget Council. The Select Committee published
short reports following each of these evidence sessions.
In two out of these three years, however, these reports were not
published until after the summer recess. It is our intention to
ensure a publication date before the Council conducts its first
reading on the annual Budget.
26. The Committee has a responsibility both to
hold the Government to account preceding the first reading at
the Council of the Budget and to inform the House of issues pertaining
to the EC Budget. We therefore propose to take oral evidence from
the Government on an annual basis before the first reading of
the Budget in the Budget Council in July and thereafter to publish
a short report.
Publication of a report at this juncture in the Budget-making
process, before the Draft Budget has been established, would also
inform the House of negotiations at an early stage and would introduce
an element of parliamentary scrutiny where little presently exists
in this House. By adopting this focused approach at an appropriate
time in the annual Budget process, we would ensure greater accountability,
openness and transparency. We hope thereby to ensure that the
scrutiny process is a constructive one for all concerned.
27. There is a huge amount of documentation on the
annual Budget that has to be deposited in Parliament. The 2003
PDB alone contains over 2000 pages. Not only is the documentation
lengthy, it is also of a complex, technical nature. The flow of
a large number of documents relating to the annual Budget, together
with the accompanying EMs and Ministerial letters, is inefficient
and produces a confusing and bureaucratic picture of the Budget-making
process and of scrutiny generally. Furthermore, duplication occurs
when the Committee considers each separate stage of the Budgetary
making process. This duplication is reflected in the repetitive
nature of successive EMs and Ministerial letters. There is
great scope for streamlining the flow of documents on the annual
Budget to Parliament, in order to produce a more efficient procedure
that is focused on the key stages where our scrutiny work can
have an influence on the Government.
Information for the proposed annual evidence session
with the Government
28. Our aim is to move a substantial part of the
scrutiny process to an earlier point in the annual cycle. In order
to ensure that the evidence session with the Government on the
Preliminary Draft Budget, before the Budget Council, is purposeful,
the Committee will need a certain amount of well-focused documentation
from the Government. The Commission's Overview document (Volume
0 of the Preliminary Draft Budget) contains a detailed summary
of the expenditure proposals that should be sufficient for the
purposes of making an overall assessment of the following year's
annual Budget. Discussion of the issues that will arise at the
Budget Council could begin on the basis of this document. We call
on the Government to summit an EM on the Commission's Overview
document at the earliest possible opportunity, preferably by the
middle of May. The Committee could then hold an evidence session
with the Minister and complete its formal scrutiny function as
required by the Scrutiny Reserve Resolution, before the Budget
29. For the proposed evidence session to be comprehensive,
it should look back at how money has been spent as well as looking
forward to spending in the next Budget. Each year, the Government
produces a very useful White Paper, entitled European Community
This document not only presents that year's Budget (fixed in the
negotiations the year before), it also covers the implementation
of the previous Budget, as it includes details of EC financial
management and the fight against fraud. If the Government were
to bring forward production of this White Paper, our evidence
session before the Budget Council would be more informed and could
entail a retrospective element. Consequently, we could monitor
the execution of the current year's Budget, as well as considering
the Budget for the following current year. Our consequent report
could therefore be more comprehensive and so hopefully be of more
use to Members of the House.
Information following the other stages in the
30. One strength of the current scrutiny process
of the annual Budget is that, by recording each of the separate
stages for the annual Budget-making procedures, a complete record
is provided for the House on each annual Budget. This must not
be lost. However, the supplementary comments that the Government
supply at each stage on every document are of marginal benefit
to the Committee if we are to focus our scrutiny efforts on the
Preliminary Draft Budget.
31. Once we have scrutinised the Preliminary Draft
Budget, the important thing is then for us to be informed of the
major developments in the annual Budget negotiations as soon as
possible. In practice, this would mean the Government quickly
updating the Committee by Ministerial letter after the various
stages of the annual Budget cycle (i.e., after the first reading
in Council, the first reading in the European Parliament and after
the second readings in the Council and the European Parliament).
This way we would not have to wait to receive the official translated
texts. The documents themselves, of course, should still be deposited
in Parliament, in order to maintain a complete record of each
EC Budget, but we see little use in having an additional EM at
each stage if the Minister has already written to the Committee
to update us.
Transfers of appropriations
32. Transfers do not change the total financial implications
of an annual Budget but are concerned only with the movement of
funds between chapters or Articles of the Budget. There seems
to be no requirement for scrutiny to be completed before the transfer
is effected and very little time in which this would be possible.
This means that the Committee is normally informed of the transfer
after the approval for the transfer has been given. Consequently,
the documents are usually cleared by the Chairman of the Committee
on the sift. There are more than 50 Transfers a year, many involving
very small sums of money.
33. Acknowledging this fact, it was agreed a few
years ago that transfers would be consolidated into quarterly
reports, which are clear, useful documents that are depositable
along with an EM. However, transfers which involve significant
sums still necessitate a separate EM (the threshold is currently
deemed to be over ?25m). This means that the Committee is often
merely informed of relatively minor decisions that have already
taken place. We no longer see the need for the Sub-Committee to
continue to be informed in this way of matters where it has no
power to alter, or even influence, the Government's position.
We recommend that all transfers should be recorded in a consolidated
report rather than deposited separately.
This reform would streamline the present bureaucratic system of
reporting transfers and would provide a more efficient procedure
so that we can concentrate our scrutiny work on the major financial
Supplementary and Amending Budgets
34. Supplementary and Amending Budgets (SABs) relate
to "unavoidable, exceptional or unforeseen circumstances"
(as defined by the Financial Regulation). This means that SABs
generally serve to alter the total level of payments, commitments
or contributions to an annual Budget. Like transfers, however,
there is normally no real scrutiny of SABs, as Parliament is often
informed only after a decision has been reached in the Council.
Consequently, the documents are usually cleared by the Chairman
of the Committee on the sift.
35. SABs can come forward at short notice, in order
to deal with some sort of funding emergency. This means that there
is often a very short time lapse between the publication of the
documents and the time when decisions are made in Council. Indeed,
English versions for deposit in Parliament are not always available
before Council decisions are taken. The normal timetable for parliamentary
scrutiny as laid out in the Amsterdam Protocol is therefore not
36. SABs are usually related to high profile and
potentially contentious events. Recent events covered by SABs
include the situation in Kosovo, funding the 'Solana building',
financing the Convention on the Future of Europe and in reaction
to the floods across Europe over the summer. The number of SABs
produced each year is much smaller than the number of transfers.
Often there are only one or two per year.
37. There is an argument that the same scrutiny rules
should apply to SABs as to Transfers. That is, if the total amount
of money involved is significant, or if the issue involved is
novel or contentious, then a signed EM from the Minister is necessary.
If the total involved is less than this designated amount, then
they can be dealt with together in a single quarterly report.
The distinction between Transfers and SABs is a fine one and
a transfer dealing with ?30m could be said to be more important
than a SAB with limited financial impact. However, given the small
number of SABs produced each year and their discrete nature (they
deal with the Union's response to a distinct event which would
often be of interest to the House), we suggest that the arrangement
for the deposit of SABs remain unchanged. We recognise, however,
that these are matters that must be agreed between the Government
and both Houses of Parliament.
CONCLUSIONS ON THE SCRUTINY OF THE EC FINANCIAL AFFAIRS
38. We will continue to examine EU finances rigorously.
Our aim is to concentrate on our strength of conducting inquiries
and producing timely, considered reports. In doing so, we will
focus on the important, financial issues for the Union. We will
produce more reports that deal with the budgetary issues that
surround the annual EC Budget.
38. As regards our scrutiny we will reorganise our
timetable of the annual Budget so as to ensure that our scrutiny
is more focused and regularly takes place earlier in the annual
cycle, at a time when it can influence the Government. In particular,
we will call the Government to account each year in an evidence
session before the first reading of the Budget in the Council
and thereafter produce a short report for the House.
40. Taken together, these recommendations would result
in a shift in focus from documents that merely inform the Committee
of decisions previously taken to dealing directly with the Government
before decisions are made and asking the Minister to account for
decisions afterwards. In our opinion, this would be a sensible
move towards greater scrutiny and could be of more interest to
Members of the House.
45 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
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
The first financial perspective ran from 1988 to 1992. The second
one, which ran from 1993 until 1999, was agreed at the Edinburgh
European Council in December 1992. Back
The Financial Consequences of Enlargement, 10th Report, HL 41,
Session 1997-98. Back
CAP Reform in Agenda 2000: The Transition to competition: Measures
for rural development and the rural environment, 18th Report,
HL 84, Session 1997-98. Back
The Reform of the Structural Funds and the Cohesion Fund, 30th
Report, HL 138, Session 1997-98. Back
Responding to the Balkan Challenge: The role of EU aid, 20th Report,
HL 107, Session 2001-02. Back
Letter of 23 July 1997 from Lord Tordoff to Mrs Helen Liddell,
Economic Secretary to the Treasury (Correspondence with Ministers
Session 1997-98, 11th report, HL 60 pp 48-50). Back
Amendment of the budgetary procedure figured little in the Inter-Governmental
Conference that led to the Amsterdam Treaty. Working Group IX
(Simplification of legislative procedures and instruments) of
the Convention on the Future of Europe is examining the budgetary
procedures, but it seems unlikely that it will recommend significant
amendment or simplification of the timetable. Back
Preliminary Draft General Budget for 1995, 18th Report, HL 94,
Session 1993-94; Preliminary Draft General Budget for 1996, 20th
Report, HL 100, Session 1994-95; Preliminary Draft Budget for
1997, 14th Report, HL 104, Session 1995-96. Back
This process would work in much the same way as how the Select
Committee currently takes evidence every 6 months from the Minister
for Europe and the incoming Presidency of the Council and is proposing
to do every year on the Commission's Annual Work Programme. Back
The most recent White Paper, entitled European Community Finances:
Statement on the 2002 EC Budget and Measure to Counter Fraud and
Financial Mismanagement, Cm 5547, was published in July 2002. Back
The same could apply to Amending letters to the Budget. Back