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The EU’s Budget Procedure

Introduction

The Treaty of Lisbon laid down a new procedure for agreeing the Budget of the European Union.  This procedure, put into effect for the first time with the adoption of the 2011 EU Budget in December 2010, requires the agreement of the European Parliament to all EU expenditure, ending the exclusion of CAP spending from the Parliament’s agreement and oversight.

This paper briefly explains how the EU’s revised Budget procedure operates, the process for determining the EU’s spending over the medium-term and how the EU derives its income through the “own resources” system.

The EU’s financial year runs from 1 January to 31 December; the formal budget decision-making process starts on 1 September the preceding year and must be completed by 31 December that year.  The EU cannot set a deficit budget – Article 310 of the Treaty on the Functioning of the EU expressly requires that the revenue and expenditure sides of the annual budget must be in balance. 

The Annual Budget

The EU’s institutions and bodies all draw up their own draft budget for the following year by 1 July and pass these to the Commission, which has the task of consolidating these estimates.  The Commission’s draft budget must then be submitted to the Council of Ministers and to the European Parliament by 1 September.  In practice, the Commission aims produce a draft budget by a far earlier date – usually in late April or May. 

The Council considers the Commission’s draft budget and must adopt a position on it by 1 October.  This position is then passed to the Parliament.  The Parliament has 42 days to either agree to the budget unamended or to send amendments back to the Council.  The Council has 10 days in which to accept the amendments and adopt the draft budget or to reject some or all of the amendments and trigger the conciliation procedure, which is the process by which Council and Parliament try to reach agreement in these circumstances.

This procedure means the establishment of a Conciliation Committee, composed of equal numbers of members of the Council or their representatives - in practice led by the Presidency - and members representing the European Parliament.  The Conciliation Committee is expected to agree on a joint text for the budget within 21 days.  If it fails to do so, the Commission must come up with a new draft.

If the Conciliation Committee agrees on a draft budget, the Council and the Parliament have 14 days to approve or reject it.  At that stage, if the Parliament adopts the Conciliation Committee’s draft budget (by a majority and with three-fifths of the votes cast), but the Council rejects it, the budget becomes law.  If both the Council and the Parliament reject the Conciliation Committee’s draft or fail to make a decision, the budget is rejected and the Commission has to submit a new draft budget.

Finally, if no agreement is reached at all by the start of the new financial year, the EU is financed on the basis that each month it may spend up to one twelfth of the budget appropriations of the previous year (the “provisional twelfths regime”).  This presents particular difficulties if no expenditure was provided for in the previous year’s budget – as would have happened in 2011 had the budget not been adopted because it needed to reflect changes in spending resulting from the Treaty of Lisbon.

This new procedure ends the previous distinction in EU law between compulsory spending (that required by the Treaty, mainly agriculture, funding international agreements and staff pensions) on which the European Parliament had no say and the remainder, known as non-compulsory expenditure, on which it did. 

The Multi-Annual Financial Framework

The EU agrees an annual budget but it does so having previously agreed a financial plan for several years.  This medium-term plan must last for at least five years and the annual budgets have to comply with the multi-annual framework.  The Treaty states that the purpose of the framework is to ensure “that Union expenditure develops in an orderly manner and within the limits of its own resources”.

The Treaty requires annual ceilings on the amount the EU is legally contracted to paying (known as commitment appropriations) but which may not become due that year and the amount it will actually spend in payments (payment appropriations).  This approach reflects the fact that the EU may well be obliged by law – for example under the CAP – to pay out for certain items but the actual amount paid in any one year will be lower than the obligation.  The financial framework lays down those annual ceilings for commitment and payment appropriations for the main budget headings for the duration of framework.  The budget headings in turn must align with the EU’s main areas of activity. 

Article 312 of the Treaty states that the multi-annual framework must be adopted by unanimity in the Council after the European Parliament has approved the proposed framework.  In practice, political agreement on a new framework is usually reached at a European Council meeting with the Council and the Parliament agreeing the legal text later. 

The current multi-annual framework runs until 2013; work on the new version, from 2014, will begin in 2011.  There are six headings in the current framework:

- sustainable growth [includes funding for economic programmes];- preservation and management of natural resources [CAP and environmental programmes];- citizenship, freedom and security;- EU as a global player [aid, trade relations, CFSP and EDSP];- administration;- compensation [transitional funding for 10 new Member States].

The EU’s Own Resources System

The EU derives its income from three separate streams:

- customs duties and sugar levies [1] – about 12 per cent of the EU’s revenue comes from customs duties and other levies collected by Member States, who keep part of the proceeds in order to cover their collection costs;

- the VAT levy – a levy of 0.30 per cent is levied on Member States’ VAT base with a cap of 50 per cent of gross national income to protect less prosperous Member States from paying a disproportionate share; this levy produces about 11 per cent of EU revenue;

- a percentage based on gross national income – a levy on each Member State, based on its gross national income, generates just over three-quarters of the EU’s income, with a rebate for the UK (the latter has a veto over changes to the system including the rebate).

December 2010

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[1] Customs duties are on imports into the EU; sugar levies are paid by EU sugar producers.

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