Select Committee on European Union Twenty-First Report

CHAPTER 2: The 2005 EC Budget


20.  The 2005 Preliminary Draft Budget is the first full budget to be presented for an EU of 25 Member States (the 2004 Budget was adopted on the basis of figures for 15 Member States and was later amended with figures for 25 Members for the period May to December 2004). The 2005 Budget negotiations are therefore the first in which the ten new Member States will participate fully.

21.  The 2005 PDB is also the first to be presented exclusively in the new Activity-Based Budgeting format. Activity-Based Budgeting seeks to tie budgetary resources to clear policy objectives with appropriate performance indicators and evaluation measures. The Minister told the Committee that Activity-Based Budgeting is based on three principles. The first is economy, which obliges on-going review of whether money is being spent appropriately; the second principle is efficiency, focusing analysis on whether spending input leads to maximum results; the third principle is that of effectiveness or whether the approach to spending is the most appropriate in a given area (Q 10).

22.  We recognise that the Government has been very active in convincing the Commission and other Member States that all future budgets must be presented in the Activity-Based Budgeting format. The Committee welcomes this new approach to monitoring spending which should lead to greater transparency. We look forward to seeing the efficiency savings Activity-Based Budgeting will lead to over time, and we ask the Government to keep the Committee informed of progress made.

The Commission's Preliminary Draft Budget (PDB)

23.  In the Budget, a distinction is made between appropriations for commitments and appropriations for payments. Commitment appropriations are the total cost of legal obligations which can be entered into during the current financial year, for activities which will lead to payments in the current and future years. Payment appropriations are actual transfers of cash from the Community Budget to creditors available during the current year, arising from commitments made in the current or previous years.

24.  As Table 1 shows, the Commission's Preliminary Draft Budget envisages a total of €117.21 billion for commitment appropriations, an increase of €5.8 billion or 5.2% over 2004, due largely to increases in expenditure for agriculture and structural funds as a result of EU enlargement. This leaves a margin of €2.38 billion below the agreed Financial Perspective expenditure ceiling for 2005.


Budget 2004 and PDB 2005

Appropriations for Commitments (in € million)
Heading 2004 Budget 2005 PDB Change 04/05
1. Agriculture

1a. CAP

1b. Rural Development

46 781

40 245

6 536

50 675

43 834

6 841



2. Structural Operations

- Structural Funds

- Cohesion Fund

41 035

35 353

5 682

42 378

37 247

5 132



3. Internal Policies8 705 8 959
4. External Action5 177 5 234
5. Administration6 121 6 360
6. Reserves

- Emergency Aid Reserve

- Loan Guarantee Reserve









7. Pre-Accession Strategy


- ISPA[6]

- PHARE[7]

- Turkey

1 733





1 856









8. Compensations1 410 1 305

Financial Perspective Ceiling


111 404

115 609

4 204

117 214

119 594

2 380


25.  Table 2 illustrates that payment appropriations in the 2005 PDB are €9.7 billion or 9.8% higher than in 2004, and come to a total of €109.54 billion. This is chiefly due to enlargement which has added €3.8 billion to the Budget. However, expected improvements in the implementation rate for structural funds have also contributed to this increase (€2.66 billion). The margin remaining under the Financial Perspective ceiling is €4.7 billion.


Budget 2004 and PDB 2005

Appropriations for Payments (in € million
Heading 2004 Budget 2005 PDB Change 04/05
1. Agriculture

1a. CAP

1b. Rural Development

45 693

40 245

5 448

50 114

43 834

6 279



2. Structural Operations

- Structural Funds

- Cohesion Fund

30 822

28 022

2 800

35 396

32 391

3 006



3. Internal Policies7 510 7 729
4. External Action4 951 5 010
5. Administration6 121 6 360
6. Reserves

- Emergency Aid Reserve

- Loan Guarantee Reserve









7. Pre-Accession Strategy


- ISPA[9]

- PHARE[10]

- Turkey

2 856



1 604


3 180



1 634






8. Compensations1 410 1 305

Financial Perspective Ceiling


99 806

111 555

11 748

109 540

114 235

4 695


26.  The largest increases in expenditure are for Agriculture (Heading 1) and Structural Operations (Heading 2). The main factor in the increase in Agriculture is enlargement. However, a significant amount (€1.3 billion) is attributable to the CAP reform package agreed in July 2003 (see paragraphs 39-43).

27.  The proposed increase in payments for Structural Operations (Heading 2) is €4.57 billion or 14.8% compared with the 2004 Budget. This is mainly due to the rise in payments to new Member States. In addition, the Commission is hoping for an improved rate of implementation for Structural Fund commitments, accounting for €2.66 billion of the total increase.

28.  The proposed level of total payments for the 2005 EC Budget is 1.03% of EU Gross National Income (GNI), 0.04% higher than payments in the 2004 Budget, but still significantly lower than the ceiling of 1.24% of GNI agreed for the whole Financial Perspective period running from 2000 to 2006.

29.  We note with approval that the proposed total expenditure levels in the 2005 Preliminary Draft Budget are significantly lower than the agreed ceiling of 1.24% of EU Gross National Income.

The Government's priorities for the 2005 Budget

30.  The Minister identified three Government priorities for the 2005 Budget. The first priority is to ensure a realistic level for payments. This is relevant particularly to spending on structural operations, where the Government believes the Commission has been over-ambitious in thinking that Member States have the capacity to take on a 14.8% increase over 2004. The second Government aim is to reprioritise the external actions budget by developing a greater 'poverty focus', and keeping spending in this category within budget, while still maintaining spending on Iraqi reconstruction. The Government's third stated priority is to cut the European institutions' administrative budgets and apply stringent criteria for value for money (Q 3).

Reprioritise spending on External Actions (Heading 4)

31.  In negotiating the 2004 EC Budget, the Government had the same priority of developing a greater 'poverty focus', that is to reduce EC spending on middle-income countries such as the Balkans, and to focus external action expenditure on the more needy.

32.  The 2005 Preliminary Draft Budget proposes total commitments of €5.23 billion in this spending category, €57 million or 1.1% more than in 2004. The planned level of commitments exceeds the Financial Perspective ceiling for this category by €115 million. The Commission explains this by stating that the original financial programming for 2005 did not foresee any assistance to Iraq for reconstruction. The total allocation for Iraq envisaged in 2005 is €200 million, a €40 million increase since 2004.

33.  In our report on the 2004 EC Budget[11], we supported the UK Government in its argument for a greater margin in the external actions category precisely to avoid such overspends. It is disappointing that the Government does not appear to have succeeded in persuading the budgetary authority[12] to develop such an increased margin.

34.  The Government reports that other significant increases in external actions budget lines include €38 million on the Mediterranean/Middle East; €30 million on Asia and €17 million on Food Aid. In line with the Government's stated priorities, assistance to the Western Balkans has been cut by €61 million.

35.  As in our 2004 EC Budget report, we continue to support the Government in its efforts to improve the 'poverty focus' of EC spending on external actions. However, we continue to believe that this focus should not deflect from the EU's other objectives of working towards stability in regions such as the Middle East and the Balkans.

Efficiency of Administration Costs (Heading 5)

36.  As in the 2004 EC Budget, the Government wishes to examine the Administration spending category very closely to ensure that the Commission's proposals for 3900 extra staff by 2008, are based on genuine need and can be accommodated under the Financial Perspective ceiling for this Heading. Commitments and payments are budgeted up to the level of the Financial Perspective ceiling at €6.36 billion, leaving no margin. This is an increase of €239 million or 3.9% over 2004. This large increase is intended to cover the Commission's request for 700 additional posts in 2005, needed as a result of enlargement. Almost half (296) of the proposed new posts will be allocated to translation and interpretation services. 243 posts have been allocated to Internal Policies, the rest have been allocated to other operational areas.

37.  The Minister told us that the Government is seeking to deliver more efficient administration spending, with a margin that reflects the economies of scale that can be achieved through enlargement. The Government is also considering the scope for possible efficiency savings through better IT capacity and ways in which the Council, the Commission and the European Parliament could perhaps share facilities such as translation services
(QQ 3 & 9).

38.  Whilst accepting that enlargement necessitates some increase in administrative resources, the Committee strongly supports the Government's efforts to ensure that the principles of efficiency and value for money underpin any substantial increase. The Committee agrees with the Minister that before any increase in EC budget lines is agreed, consideration should be given to whether costs could be reduced through greater efficiency savings and the reprioritisation of existing resources (Q 9).

Other Spending Categories


39.  Historically, the Common Agricultural Policy (CAP) has been the most resource-heavy of the Community policies. Overall expenditure on Agriculture (Heading 1) is €50.68 billion for commitment appropriations, of which €43.83 billion is allocated to CAP. This is an increase of €3.59 billion or 8.9% over 2004.

40.  The main factor in this increase is enlargement, as 2005 is the first year in which direct payments amounting to €1.39 billion will be made to farmers from the new Member States. A further €1.3 billion increase is attributable to the CAP reform package agreed in July 2003, as a consequence of which new and additional payments in the dairy, rice, cereal, and nut sectors were introduced.

41.  For Rural Development (Heading 1b) commitments are set at €6.84 billion and payments of €6.28 billion. These figures represent increases of 4.7% and 15.3 % respectively compared with 2004. These increases are also due to enlargement.

42.  The Minister told us that CAP reform continued to be a priority for the Government, which they argued for 'in every corner'. The Government's aim is to reduce the spending on CAP overall, and to redirect the spending within agriculture toward rural development rather than payments for production (Q 11).

43.  We strongly support the Government in its continued efforts to switch CAP spending from crop subsidy to agricultural development that benefits the environment. We hope that the negotiations of the next Financial Perspective (2007-2013) which will take place over the next eighteen months may provide an opportunity to do so. We will return to the issue of CAP funding in our forthcoming inquiry into the future financing of the EU.


44.  Structural Operations is the second largest spending category in the EC Budget amounting to proposed commitment appropriations of €42.38 billion, and payment appropriations of €35.4 billion. The Preliminary Draft Budget proposes a margin of €62.5 million in 2005, mainly because Ireland became ineligible for assistance from the European Cohesion Fund in 2004.

45.  The overall increase in commitments is €1.34 billion, or 3.3% compared to 2004. Payments in this spending category represent a sharp increase of €4.57 billion, or 14.8%. This increase is partly due to a significant rise in payments to the new Member States. In addition, the Commission also expects an improved rate of implementation for outstanding Structural Funds commitments, accounting for €2.66 billion of the total increase.

46.  The Government has published its own proposals for reform of the Structural and Cohesion Funds, which would effectively focus spending on the poorer eastern European countries, and require richer Member States to fund their own regional development projects, rather than 'recycling money' from poor Member States to rich ones (Q 11).

47.  We note the Government's proposals for reform of the European Structural and Cohesion Funds. We shall return more fully, as part of our forthcoming inquiry into the future financing of the EU, to the proposals put to us by the Minister that European Structural Funds should be targeted only at poorer nations to assist them in achieving the Lisbon Agenda goals (Q 11 & Q 20).


48.  In line with the strategic priorities of 'Competitiveness and Cohesion' and 'Security and European Citizenship' which the Commission outlined in its Annual Policy Strategy for 2005, the Preliminary Draft Budget foresees an overall increase of €254 million or 2.9% compared to 2004 for commitment appropriations in spending on Internal Policies. Payment appropriations are set at €7.73 billion, €218 million or 2.9% higher than in 2004. These increases are offset by total savings of €177 million.

49.  The Government lists the following increases in individual programme spending:

·  €232 million for the 6th Framework Programme for Research;

·  €51 million for nuclear decommissioning and waste management;

·  €44 million for justice and home affairs (in particular for the Visa Information II and Schengen Information System programmes, the creation of a European Police College, and extension of the European Refugee Fund);

·  €37 million for education and culture ( in particular for the Socrates and Erasmus Mundus student exchange programmes);

·  €35 million for transport and energy (in particular for Trans-European Networks and transport safety);

·  €13 million for health and consumer protection;

·  €9 million for Information Society; and

·  €8 million taxation and customs.

50.  The Minister told us that the Government wants to see EU programmes 'robustly' assessed for the value they are adding, and on how they meet the criteria of the subsidiarity test. The Minister argued that it was correct to apply the same 'tough and rigorous criteria' for evaluating EU programmes as would apply to any domestic funding decision (Q 20).

51.  The Committee agrees with the Minister that spending at EU level should be evaluated against evidence that it adds value beyond what a Member State can achieve on its own (QQ 12 & 21), and believes that the Commission should be committed to analysing the need for expenditure on this basis.


52.  The Preliminary Draft Budget proposes commitments totalling €1.86 billion, an increase of €123 million or 7.1% over 2004. Of this €1.5 billion is allocated to Romania and Bulgaria. This is a 10% rise over 2004 in preparation for their future accession to the EU. €300 million has been set aside for Turkey, amounting to a 20% increase, in accordance with existing programming. In addition €50 million has been budgeted for decommissioning the Kozloduy nuclear plant in Bulgaria, and € 4 million for administrative expenditure relating to the phasing out of pre-accession assistance in the new Member States.

53.  As no further commitments can be made to new Member States from this Heading, a large margin of €1.62 billion is left under the ceiling for commitment appropriations established by the Financial Perspective.

54.  Payment appropriations total €3.18 billion, a rise of €324 million or 11.3 %. This is explained by ongoing implementation of outstanding commitments to new Member States from the ISPA[13]; SAPARD[14] and PHARE[15] programmes.

Changes to the Financial Provisions introduced in the Constitutional Treaty

55.  In our report on the 2004 EC Budget of 14 July 2003, we commented on three main proposals for reform of the budgetary process that the Convention on the Future of Europe had put forward. These proposed reforms were:

·  changing the decision process for determining Member States' contributions to the EU resources;

·  providing a Treaty base for the Financial Perspective, and

·  simplifying the annual budgetary procedure by removing the distinction between compulsory expenditure and non-compulsory expenditure.

56.  The European Council agreed the final text for a Treaty establishing a Constitution for Europe on 18 June 2004. The Committee is satisfied that the status quo for decision-making in the area of 'Own Resources' has been maintained in this Treaty. The Committee will consider in more detail further changes to the EU's Financial Provisions in its forthcoming inquiry into the future financing of the EU.

5   Pre-accession aid for agriculture and rural development Back

6   Pre-accession aid for transport and environmental infrastructure Back

7   Pre-accession aid for institution-building Back

8   Pre-accession aid for agriculture and rural development Back

9   Pre-accession aid for transport and environmental infrastructure Back

10   Pre-accession aid for institution-building Back

11   The 2004 EC Budget (Session 2002-03, 33rd report) HL Paper 141. Back

12   See paragraph 4.  Back

13   Pre-accession aid for transport and environmental infrastructure Back

14   Pre-accession aid for agriculture and rural development Back

15   Pre-accession aid for institution-building Back

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2004