Select Committee on European Union Twenty-First Report

CHAPTER 1: The 2005 EC Budget in Context

Purpose and timing of the report

1.  The aim of this report is to inform the House of issues pertaining to the 2005 European Communities (EC) Budget, and to scrutinise the Government's position, before the Commission's Preliminary Draft Budget is considered at the Budget Council on 16 July 2004.

2.  The Preliminary Draft Budget (PDB) sets out the Commission's proposals for EC expenditure for 2005. It represents the first stage in the annual budgetary procedure and provides the basis for subsequent negotiations between the Council and the European Parliament.

3.  This is the second year running that Sub-Committee A (Economic and Financial Affairs, and International Trade) has scrutinised the annual EC Budget by publishing a short report on the basis of oral evidence from the Government, before the first reading of the Budget in the Council. The Committee decided in the last parliamentary session that taking evidence from the Government at such an early stage in the budgetary process was the most effective way in which we could fulfil our parliamentary obligation to scrutinise proposed EU legislation, and to ensure greater accountability and transparency[2]. We make this report to the House for information.

Budgetary Procedure

4.  The present 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, which together establish the annual budget.

5.  The different stages of the annual EC Budget procedure are as follows:

·  The Commission draws up a Preliminary Draft Budget (PDB) in May;

·  The Council conducts its first reading of the PDB in July and establishes a Draft Budget;

·  The European Parliament conducts its first reading in October on the basis of the Council Draft Budget;

·   In November, the Council conducts a second reading on the Draft Budget to consider any amendments or proposed modifications by the European Parliament; and

·   In December the European Parliament reviews the Council's proposals and the adopts the Budget.

The Council's second reading

6.  The Council conducts its 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 (for non-compulsory expenditure) or proposed modifications (for compulsory expenditure). As a general rule, the Council's decisions on second reading determine the final amount of compulsory expenditure. 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.

The European Parliament's second reading and the adoption of the Budget

7.  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.

8.  Under the present budgetary procedure, the Council has the final say on 'compulsory expenditure'. This is spending that is a direct result of treaty application or acts adopted on the basis of the treaties. In practice this mainly means spending on agriculture.

9.  The European Parliament has the final say on all other categories of spending, defined as 'non-compulsory' expenditure. Non-compulsory expenditure includes spending on regional policy, research policy and energy policy. However, the Constitutional Treaty agreed by the European Council in Brussels on 18 June 2004 removes the distinction between compulsory and non-compulsory expenditure, giving the Council and the European Parliament equal say in the EC Budget[3]. We comment briefly on the changes to the EU's Financial Provisions in paragraphs 55 & 56.

Individual Spending Programmes

10.  Spending in the annual EC 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.

11.  Exceptionally the 2004 and 2005 EC Budgets include an eighth category of expenditure: 'Compensation'. This money will be allocated to new Member States to ensure that they are net recipients of the EC Budget in the first years of their EU membership.

The Financial Perspective

12.  Most EC spending, including agriculture, structural funds and other multi-annual programmes, is largely pre-determined by a multi-annual funding agreement called the Financial Perspective. To that extent, the annual budget process merely provides the budgetary provision for policies previously agreed.

13.  The Minister told us that only a small proportion - approximately 10% - of the 2005 EC Budget would be open to debate in the Budget negotiations this year (Q 6). The other 90% of spending covers programmes that were agreed at the Berlin Council in 1999 for the years 2000 to 2006. (The Copenhagen Council in December 2002 revised the expenditure ceilings in light of an enlarged Union of 25 Member States).

14.  The Financial Perspective is an inter-institutional agreement between the Council, the Commission and the European Parliament. The Financial Perspective sets a total EC expenditure ceiling, defined in terms of a percentage of EU Gross National Income (GNI), as well as annual ceilings for the eight broad expenditure categories, currently for a period of seven years, up to 2006. In agreeing the Financial Perspective, the Council decides by unanimity the EU spending limits for a number of years (usually between five and seven) on the basis of a Commission proposal, and with consent from the European Parliament.

15.  The next Financial Perspective will cover the period 2007 to 2013. The Commission is expected to issue formal legislative proposals in July 2004 covering structural funds and the 'Own Resources' system (ways in which the Commission can raise funds, including Member State contributions) which may include proposals for a possible revision of the UK rebate. Council negotiations on the overall level of EC expenditure and the categories of funding, are expected to be concluded during the second half of 2005 when the UK holds the EU Presidency. This Committee plans to conduct a full inquiry into the future financing of the EU, in the context of the next Financial Perspective; we expect to conclude our inquiry early in 2005.

Resources for the annual EC Budget

16.  The money for the annual EC Budget has four main sources which are collectively known as 'Own Resources'; these are:

·  customs duties;

·  agricultural levies, including sugar levies;

·  a notional rate of 1% VAT applied to an identical range of goods and services in all Member States; and

·  contributions from Member States based on a proportion of Member States' Gross National Income (GNI).

17.  Under article 269 of the EC Treaty, the Council, acting unanimously, lays down the provisions governing the EC's 'Own Resources'. In 1988 a ceiling for the 'Own Resources' was set by the Member States as a percentage of EU GNP. The level agreed is 1.27% of EU GNP (now expressed as 1.24% of EU GNI[4]). This ceiling cannot be exceeded without unanimous agreement by the Member States and ratification by their parliaments.

18.  In 2004, 74 % of the EC Budget came from Member States' contributions, 14.5 % came from EU VAT resources, 10.3 % was raised by the EU through customs duties and 1.2 % came from agricultural levies.

The role of scrutiny

19.  Although for the most part the annual EC Budget is determined by policies previously agreed as part of the Financial Perspective, scrutiny of the EC Budget remains an important means of making the process more transparent. We appreciate the Government's continued efforts in arguing for the rigorous application of the principles of efficiency and effectiveness in spending at EU level, and in assisting us in our scrutiny of the annual Budget.

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

3   Provisional consolidated version of the draft Treaty establishing a Constitution for Europe (CIG 86/04): 2 en.pdf Back

4   The Council Decision 2000/597/EC of September 2000, which implemented the conclusions of the Berlin European Council of 1999, determined that the ceiling on 'Own Resources' should remain at 1.27% of EU Gross National Product (GNP). The Commission proposed to make a technical adjustment to this level in 2001 to take account of the introduction of a new statistical method for determining EU GNP, under Regulation (EC) No 2223/96. The new method uses Gross National Income (GNI) rather than GNP. The cash value of the 'Own Resources' ceiling was not altered, but the new method of calculation expresses the ceiling as 1.24% of EU GNI, rather than 1.27% of EU GNP.  Back

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