Select Committee on European Union Fortieth Report

EC BUDGET 2006

Letter from Ivan Lewis MP, Economic Secretary, HM Treasury to the Chairman

  As you are aware, the Council of the European Union concluded its second reading of the 2006 Draft Budget of the European Communities on 1 December, under the chairmanship of the UK Presidency. Parallel negotiations with the European Parliament on key elements of the Budget which require joint decisions began at the ECOFIN (Budget) Council on 24 November, and concluded in trilogue on 30 November.

  Council's second reading reinstated the Draft Budget in many Headings, and made modest amendments to agriculture, external actions and administration to take account of new information and adopt the Commission's Amending Letters 1 and 2 to the 2006 Preliminary Draft Budget. Separately the Council and the Parliament agreed to increase the spending envelopes of six co-decided programmes by €100 million, to mobilise the Flexibility Instrument for €275 million (to secure full funding for Iraq, post-Tsunami reconstruction, transitional assistance to ACP countries affected by the sugar reform, and the Common Foreign and Security Policy (CFSP)), and to set payment levels at €111,969 million (or 1.0100 per cent EU GNI). Council also adopted a number of changes to the Preliminary Draft Budget (PDB) proposed by the Commission in three amending letters.

  My Explanatory Memorandum of 1 June 2005 set out the Commission's 2006 PDB proposals in detail. It was followed by two update letters: on 26 August 2005[5] I provided details of the Draft Budget adopted by Council on 15 July 2005; and on 14 November[6] I wrote explaining the Parliament's first reading amendments to the Draft Budget and giving details of Amending Letters 1 and 2. The Council has now concluded its second reading of the 2006 Budget and taken account of Amending Letter No 3, and has also reached an accord with the Parliament. This letter sets out both outcomes. The Parliament will examine Council's second reading of the Draft Budget and adopt the 2006 Budget, including the joint agreement, at its plenary session in Strasbourg on 12-15 December 2005.

A.  COUNCIL'S SECOND READING

—  Overall: Council's second reading reduced commitments by €1,156 million to €120,653 million, and payments by €4,804 million to €111,422 million (equivalent to 1.005% of EU GNI).

—  Agriculture (Heading 1): Council accepted Amending Letter 2/2006, which reduces expenditure on Sub-Heading 1A (CAP) by €361.00 million (commitments and payments) compared to the PDB, and also reinstated the €150 million reduction in the Draft Budget. Expenditure on rural development (Sub-Heading 1B) remained unchanged. Council's second reading therefore set total commitments at €51,050.72 million and total payments at €50,991.02 million for Heading 1, reducing the Parliament's first reading by €399.73 million (commitments and payments) and establishing a margin of €1,567.28 million under the Financial Perspective ceiling.

—  Structural Operations (Heading 2): Council reinstated the Draft Budget for both commitments, which it reduced by €12.00 million compared to the Parliament's first reading, and payments, which were set at €35,489.60 million. The payments figure represents a reduction of €3,740.67 million compared to the Parliament's first reading, in order to reflect likely implementation capacity.

—  Internal Policies (Heading 3): Council's second reading reverted to the Draft Budget in all areas except for some research, SME and other lines (special events and a study proposed in Amending Letter 2), leading to a reduction of €251.99 million commitments and €303.64 million payments compared to the Parliament's first reading. Council's second reading converted the Parliament's negative margin of €50.74 million into a positive margin of €201.25 million.

—  External Actions (Heading 4): Council rejected all of the Parliament's proposed amendments, but did accept Amending Letter 1/2006, which budgets €40 million commitments and €21.2 million payments for sugar reform, assistance to the ACP countries. Council proposed to finance this from within the Draft Budget margin of €41.66 million, leaving a second reading margin of €1.66 million. Commitments and payments for Heading 4 were therefore set at €5,267.34 million and €5,295.84 million respectively, a reduction of €417.00 million commitments and €231.17 million payments compared to the Parliament's first reading.

—  Administration (Heading 5): Council partly accepted an amendment to the Commission budget (in order to take account of vacancy rates) and also accepted the Parliament's proposed reduction of €20 million to its own budget. Council's second reading therefore proposed a net reduction of €7.71 million (non-differentiated expenditure) compared to the Parliament's first reading, and set total administrative expenditure at €2,451.79 million.

—  Pre-accession aid (Heading 7): Council reverted to the Draft Budget for Heading 7, rejecting all of the Parliament's amendments. Commitments were therefore set at €2,480.60 million (no change form Parliament's first reading) and payments at €3,024.90 million (a reduction of €54.95 million).

  A set of tables summarising the changes between the Parliament's first reading and Council's second reading is attached as Annex 1 to this letter.

B.  AGREEMENT WITH THE EUROPEAN PARLIAMENT

—  Overall: During conciliation, the Parliament asked the Commission to submit an Amending Letter (AL 3/2006) in order to reduce payment appropriations in the PDB by €257 million. The two arms of the Budgetary Authority were therefore able to reach an agreement on the global payment level, as required by Article 272 of the Treaty Establishing the European Union. The final payments level was set at €111,969.00 million (or 1.0100 per cent EU GNI), compared to Council's second reading position of €111,421.88 million (or 1.0051 per cent EU GNI). The Amending Letter reflected the latest implementation rates, and would allow the Parliament Committee on Budgets to make a stronger case for a reduction in payments before the Plenary.

—  Co-decided programming: The Parliament requested a total increase to co-decided programming envelopes of €217.00 million for 10 programmes, across Headings 3 (Internal Policies) and 4 (External Actions) of the Budget. During negotiations, Council agreed to exceed the co-decided reference amounts for six of these 10 programmes by a total of €100 million on the basis of a joint statement, and on the grounds of favourable implementation rates and durable needs. Council nevertheless emphasised that co-decided reference amounts should normally be regarded as maximum levels of spending, and that such increases should not set a precedent. A list of these programmes is provided at Annex 2 to this letter.

—  PEACE II: During conciliation the Parliament agreed to finance the extension of the PEACE programme to 2006 from within the ceiling of Heading 2.

—  Flexibility Instrument: During conciliation, Council and the Parliament agreed to mobilise the Flexibility Instrument for a total amount of €275 million in order to finance reconstruction in Iraq (€100 million) and Tsunami-affected countries (€95 million), plus €40 million for sugar reform assistance in ACP countries and a further €40 million for the CFSP.

  Overall, the Government believes Council's second reading and the agreement with the Parliament represent a Budget-disciplined outcome secured under difficult circumstances. Council ensured that total payments did not exceed 1.01 per cent of EU GNI—compared to 1.05 per cent EU GNI proposed by the Parliament, a saving of €4.8 billion—and reduced the Parliament's initial proposal for use of the Flexibility Instrument from €493 million to €275 million. In addition, the Government secured funding for key external relations priorities such as reconstruction in Iraq and the Tsunami-affected countries, transitional assistance to ACP countries affected by the sugar reform and CFSP, and the extension of the PEACE programme for Northern Ireland to 2006 has been properly financed from within the Budget ceiling.

  Exceeding the annual €200 million limit for the Flexibility Instrument was regrettable, but inevitable to secure a deal. In any case, the amount would have had to be exceeded early in 2006 when the Commission brings forward proposals for Palestine. The final figure for 2006 remains within the total amount available under the Inter-Institutional Agreement (IIA), which permits unused Flexibility Instrument from previous years to be rolled forward. According to this definition of the IIA a further €218 million remains available for the current financial perspective.

10 January 2006

Annex 1

OUTCOME OF THE COUNCIL'S SECOND READING OF THE 2006 EC BUDGET

EUR (million)	Rectified Preliminary Draft Budget		Draft Budget		EP 1st Reading (EP1)		Council 2nd Reading (C2)		Change C2/EP1
	CA	PA	CA	PA	CA	PA	CA	PA	CA	PA
Agriculture	51,412	51,353	51,262	51,203	51,450	51,391	51,051	50,991	-400	-400
Margin	1,206		1,356		1,168		1,567
Structural Operations	44,555	35,640	44,555	35,490	44,567	39,230	44,555	35,490	-12	-3,740
Margin	62		62		50		62
Internal Policies	9,218	8,836	9,175	8,320	9,436	8,808	9,184	8,505	-252	-303
Margin	167		210		-51		201
External Actions	5,393	5,357	5,227	5,275	5,684	5,527	5,267	5,296	-417	-231
Margin	-124		42		-415		1.7
Administration	6,698	6,698	6,578	6,578	6,655	6,655	6,584	6,584	-71	-71
Margin	10		130		53		124
Reserves	458	458	458	458	458	458	458	458	0	0
Margin	0		0		0		0
Pre-Accession Aid	2,481	3,152	2,481	3,025	2,481	3,080	2,481	3,025	0	-55
Margin	1,085		1,085		1,085		1,085
Compensations	1,074	1,074	1,074	1,074	1,074	1,074	1,074	1,074	0	0
Margin	0.5		0.5		0.5		0.5
Total	121,288	112,567	120,810	111,421	121,805	116,223	120,653	111,422	-1,152	-4,801
FP Ceiling	123,695	119,292	123,695	119,292	123,695	119,292	123,695	119,292	123,695	119,292
Margin	2,407	6,725	2,885	7,871	1,890	3,0691	3,042	7,8701	+1,152	+4,801
CA = Commitment Appropriations; PA = Payment Appropriations. Figures may not add up exactly due to rounding.

£ (million)[7]	2006 Rectified PDB		2006 DB		Parliament		Council 2nd Reading		Change C2/EP1
	CA	PA	CA	PA	CA	PA	CA	PA	CA	PA
Agriculture	36,249	36,207	36,143	36,102	36,276	36,234	35,995	35,952	-282	-282
Margin	850		956		824		1,105
Structural Operations	31,414	25,129	31,414	25,023	31,423	27,660	31,414	25,023	-8	-2,637
Margin	44		44		35		44
Internal Policies	6,499	6,230	6,469	5,866	6,653	6,210	6,475	5,997	-178	-214
Margin	118		148		-36		142
External Actions	3,802	3,777	3,685	3,719	4,008	3,897	3,714	3,734	-294	-163
Margin	-87		30		-293		1.2
Administration	4,723	4,723	4,638	4,638	4,692	4,692	4,642	4,642	-51	-51
Margin	7		92		37		87
Reserves	323	323	323	323	323	323	323	323	0	0
Margin	0		0		0		0
Pre-Accession Aid	1,749	2,222	1,749	2,133	1,749	2,172	1,749	2,133	0	-39
Margin	765		765		765		765
Compensations	757	757	757	757	757	757	757	757	0	0
Margin	0.4		0.4		0.4		0.4
Total	85,516	79,368	85,179	78,560	85,881	81,945	85,069	78,560	-812	-3,385
FP Ceiling	87,214	84,109	87,214	84,109	87,214	84,109	87,214	84,109	87,214	84,109
Margin	1,697	4,742	2,034	5,550	1,333	2,164	2,145	5,549	+812	+3,385
CA = Commitment Appropriations; PA = Payment Appropriations. Figures may not add up exactly due to rounding.

Annex 2

INCREASES TO CO-DECIDED PROGRAMMES APPROVED BY COUNCIL

Programme name	Increase to reference amount (EUR million)
Small & medium enterprises	28.5
SOCRATES	33.0
LIFE	7.1
Youth	9.2
Research	21.2
Cultural organisations	1.0

Annex 3

AMENDING LETTER 3 TO THE 2006 PRELIMINARY DRAFT BUDGET

  Amending Letter 3 (AL 3/2006) was presented by the Commission on 1 December 2005, following a request made by the European Parliament during trilateral negotiations on the 2006 EC Budget on 30 November. The Parliament agreed to accept Council's proposed overall payment levels of €11,969 (exactly 1.01 per cent of EU GNI) on condition that the Commission amended their PDB estimates accordingly. Amending Letter 3 takes account of Amending Letters 1 and 2, and presents a total reduction in payment appropriations of €257 million. Payments in Headings 4 (-€70 million) and 7 (-€187 million) are affected. The following table sets out those Budget lines to which the reduction is applied:

Line	Description	Heading	Payment Appropriations
			(EUR million)
			PDB	Reduction	New Amount
01 03 02 02	MFA for the countries of the Western Balkans	4	58.0	15.0	43.0
19 06 01	TACIS	4	375.0	20.0	355.0
19 08 02 01	MEDA	4	660.0	20.0	640.0
19 10 01	Asia	4	324.0	15.0	309.0
		Total Heading 4			70.0
05 05 01 01	SAPARD	7	360.0	50.0	310.0
13 05 01 01	ISPA	7	275.0	27.0	248.0
22 02 01	Pre-accession assistance for countries of central and eastern Europe	7	700.0	80.0	620.0
22 02 04 01	Pre-accession assistance Turkey	7	200.0	30.0	170.0
		Total Heading 7			187.0

  The Government welcomes AL 3/2006, which demonstrates that the Commission is prepared to revise its payment forecasts to reflect real needs. The Commission has stated that the reductions to payments presented in Amending Letter 3 will not have an adverse effect on the 2006 Budget.

Letter from Ivan Lewis MP to the Chairman

  The European Parliament (EP) formally adopted the 2006 EC Budget on 15 December. The final outcome was in line with the agreement reached between the Council (under the UK Presidency) and the EP on 30 November, which I explained in my letter of 10 January. Overall, commitments were set at €121.19 billion—€5.24 billion/4.5 per cent higher than the €115.96 billion budgeted in 2005[8]—and payments at €111.97 billion—€6.29 billion/5.9 per cent higher than the €105.68 billion budgeted in 2005.

  The tables attached as Annex 1 provide a breakdown of expenditure by heading in the 2006 Budget, and at each stage of the budget process. To briefly summarise the main changes between Council's second reading and the adopted budget:

—  Agriculture (Heading 1): The Agriculture heading of the budget consists predominantly of compulsory expenditure which is set by the Council. Commitments and payments were therefore unchanged from Council's second reading at €51.05 billion and €50.99 billion respectively, leaving a margin of €1.57 billion under the Financial Perspective (FP) ceiling.

—  Structural Operations (Heading 2): The figures agreed by the EP reflect the Commission's initial PDB proposal of €44.56 billion for commitments (which establishes a margin of €62.00 million under the FP ceiling) and €35.63 billion for payments. Although the figure for commitments is unchanged since Council's second reading, payments increase by €150 million. Heading 2 secures the full €60 million extension of the PEACE II programme for Ireland, which will run until the end of 2006.

—  Internal Policies (Heading 3): The EP agreed to reduce commitments by €63.02 million compared to its first reading position—to €9.37 billion—and increased payments by €80.74 million to €8.89 billion. This represents increases of €189 million and €384 million respectively compared to Council's second reading. At the EP's request, Council agreed to increase reference amounts for six co-decided programmes, by a total of €100 million. A margin of €12.29 million was established under the FP ceiling for Heading 3.

—  External Actions (Heading 4): The EP made significant reductions compared to its first reading position: commitments decreased by €140.34 million to €5.54 billion, while payments were reduced by €157.96 million to €5.37 billion. This nevertheless represents increases of €277 million and €143 million respectively compared to Council's second reading position. The Flexibility Instrument was mobilised for a total amount of €275 million, of which €95 was attributed to post-Tsunami reconstruction, €100 million to reconstruction in Iraq, €40 million allocated to finance the consequences of sugar reform in the ACP states, and €40 million allocated to finance an increase to the CFSP budget.

—  Administration (Heading 5): The EP increased its first reading position by €1 million for both commitments and payments, resulting in total expenditure of €6.66 billion. This represents an increase of €72 million (non-differentiated) compared to Council's second reading. A margin of €51.63 million was established under the FP ceiling for Heading 5.

—  Pre-accession aid (Heading 7): The EP made no change to the PDB proposal of €2.49 billion for commitments—leaving a margin of €1.09 billion under the FP ceiling—and agreed to a significant reduction compared to its first reading for payments, which were set at €2.89 billion (a decrease of €187 million). This nevertheless represents an increase of €55 million compared to Council's second reading.

  Overall, the Government believes the package represents a Budget disciplined outcome which was secured under difficult circumstances. In particular, with strong Council support the Government secured its key objective of a realistic, affordable level of payments at just 1.01 per cent EU GNI. Although deployment of the Flexibility Instrument exceeded €200 million for the first time, it was considerably less than the EP's initial proposal of €493 million. The €275 million will secure spending on Government priorities, including a significant €40 million increase to the CFSP budget. The EP also agreed to finance the PEACE II extension within the ceiling of Heading 2.

30 January 2006

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5   Correspondence with Ministers, 45th Report of Session 2005-06, HL Paper 243, p 30. Back

6   Correspondence with Ministers, 45th Report of Session 2005-06, HL Paper 243, p 33. Back

7   Converted at the December 2004 rate of £1 = €1.4183. Back

8   Figures for the 2005 Adopted Budget take account of Amending Budgets numbers 1 to 8. Back