6th REPORT: THE FUTURE FINANCING OF THE
EUROPEAN UNION
Letter from Ivan Lewis MP, Economic Secretary,
HM Treasury to the Chairman
I would to thank you for a copy of the Committee's
report into the Future Financing of the European Union. It is
both valuable and timely, representing a significant contribution
to the current debate on the next Financial Perspective.
Rt Hon Douglas Alexander MP and Stephen Timms
MP were grateful to have had the opportunity to appear before
the Committee during the course of its enquiry to discuss the
Government's position.
I now enclose the Government's response to the
report's conclusions.
24 May 2005
HM Treasury's Response
THE EC BUDGET
DEBATE IN
CONTEXT
131. We support the conclusions of the Sapir
Report and we hope that the Member States, in their negotiations,
will draw on the arguments of that report when making their decisions.
We welcome the clarity of the arguments, the logic with which
those arguments are underscored, and in particular, the focus
on meeting criteria for added value and subsidiarity for money
spent at the European level. (paragraph 16)
Response: The Government fully supports the
focus on EU value added and subsidiarity in the Sapir Report.
132. We believe that the current and proposed
allocation of resources to agricultural policies is disproportionate.
We also consider the agreement endorsed by the European Council
in October 2002 to fix agricultural support payments from 2007
to 2013 to be highly regrettable. We recommend that the Council
should never again seek to pre-empt negotiations on the Financial
Perspective in this way. (paragraph 19)
Response: The Government has been, and continues
to be, a leading advocate of further reform of the CAP. The Government
notes the Committee's recommendation about not pre-empting Financial
Perspective negotiations in the future.
133. We believe that proposals to continue
funding regional development after 2006 in all of the current
recipient Member States (with the exception of Portugal and Greece)
are inappropriate in the face of greater need in the new Member
States, as well as inconsistent with the principle of subsidiarity.
(paragraph 24)
Response: The Government welcomes this conclusion.
Following enlargement, it is essential that the EU's Structural
and Cohesion Funds be focused on the poorer Member States, which
are most in need of assistance and where EU intervention is likely
to have the greatest added value. In keeping with the principle
of subsidiarity, EC Funds should in future be focused on areas
where Community intervention is likely to be more effective than
purely national measures. Richer Member States have sufficient
resources to finance regional development programmes from their
domestic budgets. There is no evidence to suggest that the recycling
of Structural Funds receipts between net contributors to the EC
budget is likely to be more effective than what these countries
could have achieved through domestic measures.
134. While some headlines, and political
debates, have focused on the size of the budget, our evidence
suggests that it is the structure—and more fundamentally
the purpose of the budget—which urgently needs to be reviewed.
That is why in our view the Commission proposals represent a missed
opportunity. (paragraph 28)
138. The Commission's proposals are too
conservative and based on the continuation of past policies; they
fail to move the discussion beyond the haggling between 1 per
cent and 1.14 per cent of EU GNI, and towards a broader review
of the objectives and the instruments of the budget. (paragraph
44)
139. It seems to us that as an outgoing
Commission it had the opportunity—and the responsibility—to
address the bigger issues facing the European Union following
enlargement. Instead, tough policy decisions have been deferred
onto the next Financial Package, and a future Commission. It would
be unfortunate if the possible future accession of Turkey was
assessed against these spending proposals, whose fundamental premise
and structure is inappropriate for an EU of 25, 27 or 29. (paragraph
45)
Response: The Government agrees that the
Commission's proposals for the structure and aims of the EC budget
in the next Financial Perspective have failed to respond adequately
to the Union's new priorities, including Lisbon and enlargement.
It will therefore continue to push for policy reform. At a time
of fiscal consolidation in many Member States the Government also
believes that the Commission's proposals for a significant real
terms increase in the budget are unrealistic. With growth and
reprioritisation, a budget of no more than 1 per cent of EU GNI
(€815 billion (£544 billion) [2]in
commitments) over the Financial Perspective is more than adequate
to fund the Union's key priorities.
135. The Commission needs to adapt to a
world where the resources available to it as a percentage of GDP
are in decline. No budgetary items must be sacrosanct or above
scrutiny. It would be wise to insert into the cycle of budgetary
negotiations a process of review, preferably conducted by an outside
body, assessing the value added, cost-effectiveness and relevance
to political priorities of every budget line. This review should
seek to replicate, to some extent, the role of national Finance
Ministries in querying the utility and effectiveness of existing
spending. We believe that money spent at EU level should be able
to demonstrate value added, and that expenditure should be subject
to the same test of subsidiarity as legislation. (paragraph 33)
Response: The Government has been a leading
advocate of Activity Based Budgeting, which is now being applied
to the EC budge. Its aim is to ensure that spending adds value,
is cost effective and reflects the priorities of the Union. To
the extent that all spending must be based in legislation, spending
is already subject to the subsidiary test. The Constitutional
Treaty would give legal recognition to the Financial Perspective
itself.
140. We recommend that once the current
Financial Perspective is agreed, a high level independent panel
is charged by the Council to review the budget, assessing evidence
for added value of EU level expenditure; the correct balance between
Member States and EU financing; and ways of combating fraud, maladministration
and inadequate accounting systems. It is essential that the agreement
of the next Financial Perspective, for the period after 2013,
is approached with a better understanding of the role of the budget,
and the added value of each spending proposal. (paragraph 46)
Response: The Government agrees that it would
be timely to examine the structure of the EC budget beyond 2013
sooner rather than later. The Government aggress this is an issue
for after agreement on the Financial Perspective.
136. We support the idea that in future
the period of the Financial Perspective should be tied to the
period of each Commission and each Parliament, lending a greater
degree of democratic accountability to the institutions which
are responsible for the agreement and implementation of he Financial
Package. We would support not more than five years for each Financial
Package, which could be allied to the institutional cycles. In
practice some degree of overlap between an existing financial
package and a new Commission and Parliament would be necessary.
But we would recommend avoiding the current situation where a
Commission can hold office for five years and be bound by a previously
agreed financing package for all of those five years. (paragraph
41)
Response: The Government believes that the
final decision on the length of the Financial Perspective starting
in 2014 should be made at the time it is negotiated.
137. We do not believe that these negotiations
should be rushed. We agree with the Financial Secretary's view
that "if it is going to take a little longer to get it right
then that is what we have to do" (Q 384). (paragraph 43)
Response: The Government welcomes this conclusion.
THE COMMON
AGRICULTURAL POLICY
141. The figures in the October 2002 deal,
and in the Financial Perspective, should be treated as ceilings,
not as firm spending proposals. (paragraph 52)
Response: The Government welcomes this conclusion
and is advocating this approach.
142. As we recommended in our report on
the Doha Round, it is vital that the EU continues and expands
these reforms to the CAP. The October 2002 agreement must not
become an obstacle to change. Saying this does not mean that we
think all support for agriculture is necessarily backward-looking
or that it should be scrapped. Rather, it should be linked directly
to wider objectives for rural areas and the environment. (paragraph
56)
Response: Following the October 2002 agreement
the Government led calls for further CAP reform. Major reforms
were agreed in 2003 and 2004 which moved the CAP towards a model
aimed at paying farmers directly for providing certain public
benefits. But there is still a long way to go and the Government
remains a leading advocate of further reform, with the next stage
likely to be reform of the sugar regime. The Government is also
a prominent advocate of transferring funds from direct subsidy
towards targeted environmental measures under "Pillar 2"
of the CAP, and is pressing for further transfers in the current
negotiations.
143. A move towards national financing of
the direct subsidies under CAP would also do much to eliminate
budgetary imbalances between Member States, since it is the uneven
distribution of CAP receipts that causes them. Those that are
arguing against retaining the special abatement for the United
Kingdom should be willing to accept that the need for such an
arrangement would be considerably reduced by a decision to finance,
or at least cofinance, the CAP at the national level. (paragraph
61)
Response: The Government view remains that,
given the continuing inefficiencies and inequalities on the expenditure
side, the abatement is fully justified and not up for negotiation.
The Government also believes that a budget of €815 billion
(£544 billion) is feasible without co-financing or national
financing of the CAP. But if co-financing were to be introduced
it should not increase the fiscal burden—it should be fiscally
neutral compared to the cost of a budget €815 billion (£544
billion) without CAP co-financing. Also, any move towards co-financing
should not be at the expense of further reform to tackle the economic
ills of the CAP or its overall cost to consumers and taxpayers.
STRUCTURAL AND
COHESION FUNDS
144. We believe the Commission has failed
to focus the objectives of the EU regional budget on encouraging
growth and competitiveness in those areas where it can best add
value. (paragraph 68)
Response: The Government agrees that the
Commission's proposals have failed to focus sufficiently on either
the key drivers of growth and competitiveness or those Member
States most in need of assistance.
145. The Commission has failed to recognise
that in an enlarged EU the balance between expenditure programmes
and coordination programmes must shift. The next Financial Perspective
must prepare the way for possible future enlargement by focusing
expenditure where it is most effective. The Commission has instead
taken a conservative approach to EU regional funding that is both
economically and politically unsustainable. (paragraph 70)
146. We agree with the Government that Structural
Funds should be concentrated on the 10 new Member States, as well
as the two applicant countries Romania and Bulgaria. EU regional
funds for the wealthiest 13 Member States should be phased out
over the period of the next Financial Perspective. Greece and
Portugal are the only "old" Member States whose average
GDP per capita is still substantially below the EU 25 average.
For this reason, these Member States should continue to benefit
from EU regional development spending. (paragraph 71)
150. Using the same logic which argues for
shifting the burden of financing the Common Agricultural Policy
back towards the Member States, we believe there is a strong case
under the principle of subsidiarity for national governments to
fund and manage their own regional policy. There is no collective
benefit of EU-funded income transfers between richer Member States—which
could and should be funded nationally—whereas there are
tremendous gains to be made from enabling the new Member States
to catch up towards the average level of wealth in the Union.
(paragraph 80)
Response: The Government welcomes these conclusions.
It has argued for an EU Framework for regional policy where all
Member States would agree to high level objectives in support
of the Lisbon agenda. But EC funding would be focused on the poorest
Member States, where it would have greatest effect. The Government
recognises that there could be transitional support in richer
Member States, any such arrangements must be limited in both size
and duration. The Government also believes that there is a case
for EC funds to be used to support the cross-border and trans-national
cooperation programmes in all Member States, where there is significant
EU value added.
147. The Commission's proposed reforms of
state aid rues must balance the need to ensure the proper functioning
of the internal market with Member States' ability to pursue domestic
regional development policies. (paragraph 74)
Response: The Government agrees with this
conclusion. In order to minimise distortions to competition in
the Single Market, the Government has encouraged the Commission
to ensure that the maximum level of regional aid permitted in
under-performing regions is limited to the lowest level necessary.
The Government is also seeking to ensure that Member States have
the scope to target regional aid at the areas of greatest need
within their territory.
148. We believe EU regional expenditure
should focus on those economic and social areas where it is best
able to make a contribution to growth and solidarity in Europe.
In the period from 2007 to 2013 the potential for adding most
value will lie in the new Member States. However, even in the
new Member States, EU cohesion spending should remain transitional,
time limited and geographically focused to assist with economic
convergence, restructuring or diversification. The support should
be tapered and it should not become a permanent policy instrument
used by the EU to prop up regions on a continuing basis. (paragraph
75)
Response: The Government agrees that the
aim of the Structural and Cohesion funds must be to support the
rapid development of the poorer Member States of the EU through
economic convergence, restructuring or diversification. Member
States should ensure that the funds are sufficiently targeted
to achieve this aim, thereby ensuring that they remain transitional
and time limited.
149. We are not persuaded by the view of
the Commission that they are better placed than Member State governments
to lead regional development projects. (paragraph 79)
Response: The Government agrees with this
conclusion. It has argued that Member States should be given substantial
flexibility to design and implement their own regional policy
within an overall framework in support of the Lisbon Agenda.
THE LISBON
AGENDA
151. The Lisbon Agenda is mainly a Member
State initiative, and achieving its goals of growth and competitiveness
relies heavily on economic reforms which remain the responsibility
of individual Member States. Most policies that are needed to
achieve Lisbon do not require public expenditure at EU level or
indeed public spending at all. (paragraph 85)
Response: The Government agrees. As stated
below, one area where the EU can advance economic reform without
additional public spending is in fully realising the Internal
Market; in particular extending the Single Market to the hugely
important services sector.
152. However, while achieving the Lisbon
agenda depends largely on structural changes to Member State economies,
there is a place for collective EU investment in ensuring that
Europe has a dynamic economy—because that depends on the
EU as a whole improving capacity and therefore investment in innovation
and human capital. As long as the principle of subsidiarity is
respected, we believe there is a place for collective EU investment
in Research and Development (R&D), education and infrastructure
programmes, but this investment can only reach its potential in
a fully realised Internal Market. (paragraph 86)
Response: See answers below.
153. Research and Development is an area
where a concerted EU approach could reap economies of scale. (paragraph
89)
Response: The Government believes that there
is an a priori case for increasing EC expenditure on Research
and Development provided this is consistent with budget discipline,
EU value added and the ability to manage and absorb such funds.
154. Realising the full potential of EU
research network relies on education systems that prepare people
to achieve their full research capacity. (paragraph 90)
155. It is our view that there is a role
for the EU to encourage projects of educational and vocational
co-operation between Member States, as long as the principle of
subsidiarity continues to be fully respected. (paragraph 91)
Response: The Government agrees on the importance
of education and has therefore made it a funding priority. It
also agrees that there is a potential role for the EU in supporting
educational and co-operation, but such projects must add value
at the EU level and respect the principle of subsidiarity, Education
including vocational education is a national competence.
156. Infrastructure is the third area for
which we believe there is a place for EU collective investment.
(paragraph 92)
Response: The Government agrees that the
EU can play a role in infrastructure investment. However, the
Union's role should be limited to pump priming investment by countries
in projects with significant benefits across Member States. The
Government therefore supports the rigorous evaluation of all proposals,
and opposes the Commission's suggestion for a further increase
in intervention rates.
157. As with the other policy areas where
we believe EU collective investment is justified, infrastructure
expenditure should be focused on those regions where most value
can be added. In the period up to 2013 the main challenge will
be to provide the necessary infrastructure to allow the 10 new
Member States full access to the Internal Market. (paragraph 94)
Response: The Government believes that infrastructure
expenditure in support of the Lisbon agenda should be spent on
those projects that will provide the greatest economic return,
wherever they may be. Preallocated funding for particular regions
should come from the Structural and Cohesion Funds.
158. The Lisbon process needs to be reinvigorated
by Member State governments, and supported by EU co-operation
projects in the fields of research, education and infrastructure
where their added value is clear. (paragraph 95)
Response: The Government agrees that the
Lisbon process needs to be reinvigorated by Member State governments.
EC spending should be restricted to those programmes with significant
EU value added, within a budget of no more than 1 per cent of
EU GNI.
OTHER SPENDING
CATEGORIES
159. We agree that expenditure on programmes
which aim to secure the borders of the European Union, in order
to maintain internal security and to allow Member States to pursue
asylum and immigration policies, is in the interests of all Member
States. However, the doubling of spending under this overall heading
over the period of the Financial Perspective partly reflects the
general wishes of the Member States for the European Union to
play a more significant role in other aspects of policing and
justice systems across Europe. These additional areas clearly
need to be subject to national agreement on EU jurisdiction, and
properly justified against the criteria of EU value added. (paragraph
97)
Response: The Government agrees that freedom,
security and justice is a high priority policy area. The Government
strongly believes that EC spending in this areas should be based
on a full assessment of the appropriate action the EU might take
in the area. All action must be based on the principle of EU value
added and subsidiarity. In that respect the Government believes
that cooperation and coordination between national bodies can
be more useful than cumbersome new structures at the EU level,
and that common rules and sharing of best practice is likely to
be more fruitful in many instances than significant EC expenditure.
160. We recognise that there are benefits
to the EU taking a common approach to policies affecting neighbouring
countries. The recent events in the Ukraine demonstrate the role
the EU can play. We also acknowledge that there may be economies
of scale to be reaped when the European Union acts jointly in
the wider development arena, provided that programmes funded at
EU level genuinely add value. (paragraph 101)
Response: The Government fully recognises
the potential added value of EU external action over the individual
development spending of Member States. The external actions budget
has the potential to deliver economies of scale, avoid duplication,
improve coherence and deliver the scale of resources which might
significantly improve the impact of development spending. However,
the Government remains concerned about the effectiveness and efficiency
of EC development spending. Until improvements are demonstrated,
especially in the focus of resources on the Millennium Development
Goals, the Government does not want to increase the EC budget
at the expense of more effective bilateral development spending.
OWN RESOURCES
AND A
EUROPEAN UNION
TAX
161. The present system of Own Resources,
while complex and not particularly logical, is in our view perfectly
sustainable into the foreseeable future. We were not persuaded
by any of the arguments presented to us in favour of changing
the system to give the EU a new tax of its own. (paragraph 108)
Response: The Government agrees with this
conclusion.
162. We believe that raising the EU's money
through contributions based on GNI is as fair and equitable a
financing method as any other that has been suggested. (paragraph
109)
Response: The Government agrees that gross
contributions to the EC budget primarily based on GNI are fair.
163. For all these reasons, we recommend
that any idea of a special European Union tax, whether based on
corporate income, energy, VAT or any other revenue source, should
be dropped. (paragraph 111)
Response: The Government agrees that an EU
tax would be unacceptable. Taxation is a matter for individual
member states.
THE UNITED
KINGDOM ABATEMENT
AND A
GENERALISED CORRECTION
MECHANISM
164. The Commission's own proposal seems
to us flawed in several major respects. (paragraph 128)
Response: The Government agrees with this
conclusion. The Commission's proposal for a Generalised Correction
Mechanism (GCM) is deeply flawed and totally unacceptable. According
to Commission figures, the proposed GCM, rather than correct excessive
net balances, would widen disparities between net contributors.
165. On all these grounds, we recommend
that the Commission's proposal for a Generalised Corrective Mechanism
should be rejected. We also think that, so long as the predominant
weight of the CAP in the budget continues, the United Kingdom
abatement is justified. Only when the CAP has been further reformed
would it be sensible to consider a Generalised Corrective Mechanism.
(paragraph 129)
Response: The Government agrees that the
Commission's proposal for a Generalised Correction Mechanism should
be rejected, and notes that it has received little support from
other member states.
166. We believe the Government's insistence
on the rebate is entirely legitimate in the context of an inadequately
reformed CAP. We urge the Government to persuade other Member
States of the logic of this position: if reform of the expenditure
side of the budget was achieved, the need for a rebate would be
far less pressing. Under current expenditure proposals the rebate
must be non-negotiable; but if real reform of the budget was offered,
the Government should be prepared to negotiate. (paragraph 130)
Response: The Government believes that the
continuing inefficiencies and inequalities on the expenditure
side of the EC budget mean that the abatement is fully justified
and not up for negotiation. Policy reform, particularly of the
CAP and Structural and Cohesion Funds, is important in
its own right and the Government is, and will continue to be,
a leading proponent of such reform.
Letter from the Chairman to Ivan Lewis
MP
Thank you for your letter of 24 May 2005 enclosing
the Government's response to the Committee's Report on the future
financing of the European Union. Sub-Committee A considered this
document at its meeting on 7 June.
The Committee would like to seek further clarification
of your response to paragraph 143. You assert that, "if co-financing
were to be introduced it should not increase the fiscal burden—it
should be fiscally neutral compared to the cost of a budget €815
billion (£544 billion) without CAP co-financing". Does
the Government agree with the Committee that under co-financing,
the fiscal burden should be reduced?
13 June 2005
2 Using an exchange rate of €1 = £0.66750
as on 29 April 2005. Back
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