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The UK’s Contribution to the EU Budget

Introduction

From the negotiations on the UK’s accession in 1970-72 to the present day, Britain’s contribution to the EU budget has been the subject of controversy.  Although the percentage of our national income involved is small (under one per cent of GNI), the cash amount is still considerable.  In 2010, the UK’s adjusted net contribution - that is, after allowing for the UK rebate and receipts from EU programmes - was estimated to be £6.27 billion (the rebate was £3 billion).  In percentage terms, the UK’s net share of the EU budget in 2010 was 10.87 per cent, compared to 19.53 per cent for the largest contributor (Germany) with France and Italy both paying higher shares than the UK.[1]

The forthcoming negotiations on the future financial framework of the EU (the subject of a separate Senior European Experts paper, ‘The EU’s Financial Framework from 2013’) will raise the salience of the issue of the UK’s contribution once again.  This paper explains the history of the UK contribution to the EU, the details of the rebate scheme agreed in 1984 and the UK’s current contribution.

Background: the Accession Negotiations

The situation facing the Heath Government as it sought to negotiate the terms of the UK’s accession in 1970-71 was unfavourable.  The UK had made a late decision to join the European Communities, its two previous attempts at entry had failed and the Community was now well-established with its budget and financial arrangements agreed before the negotiations on UK entry began.  The financial arrangements already agreed had been made to suit the original six Members.[2]

The key feature of the EC budget was the dominance of Common Agricultural Policy (CAP) spending – over 90 per cent at that time - including export subsidies.  This put the UK in a disadvantageous position as it had a relatively small agricultural sector and thus would benefit less from the CAP spending and also because it was a net importer of food from outside the EC whereas other Member States were net exporters.  The two other countries seeking membership (Denmark and Ireland) were both agricultural exporters so their interests in the financial negotiations were different from those of the UK.[3]

Attempts to assess the final impact on the UK of the EC budget during the accession negotiations revealed a sizeable gap between the two sides.  The Community argued that the development of new spending areas would disproportionately benefit parts of the UK.  The UK thought that a very optimistic view and instead forecast a continuously rising net contribution. 

The 1972 Agreement

The political factors in the UK and the EC were different.  In the UK, the Government’s view was that the UK needed to join the EC and would have to pay the financial penalty of being late in doing so.  It was necessary, however, to get agreement to protect New Zealand food exports to the UK in order to satisfy Parliamentary opinion.  In the EC, the Members saw no reason to be generous to UK given, firstly, its late entry, secondly, the fact that budget shares were already decided and finally that they would be financially better off if the UK joined on the terms proposed by the Commission. 

After very difficult negotiations, the agreement reached was that the UK would pay 8.64 per cent of the EC budget in 1973 (our first year of membership) and our contribution would rise to 18.92 per cent in 1977; there would be two further years of transition (1978 and 1979) until the UK was paying 19 per cent of the Community budget.

During the negotiations the Six, in their response to the UK’s concerns about the Community’s proposals, stated that “should unacceptable situations arise within the present Community or an enlarged Community, the very survival of the Community would demand that the institutions find equitable solutions”.  This important statement was to prove valuable when the UK re-opened discussions about its contribution in 1979.

The UK paid a relatively high price for entry to the EC but that partly reflected the linkage that had become established in the negotiations between allowing New Zealand butter imports to continue and the UK’s contribution to the EC budget.  The UK got a good deal for New Zealand but a less good one on the budget.

The UK Rebate

The UK’s net contribution to the EC rose from £102 million in 1973 to £947 million in 1979.  Both the scale of the contribution and the rising trend were of concern to successive British Governments (those of Wilson, Callaghan and Thatcher).  By 1980 the UK had become the largest net contributor while being only seventh in the EC in terms of GDP per head.

The UK’s disadvantageous position in relation to the CAP remained; the UK was only receiving about 10 per cent of CAP spending whilst contributing 20 per cent of the gross cost.  As predicted at the time of accession, the UK had also been disproportionately affected by agricultural and customs levies because the UK’s agricultural trade with non-EC countries was higher than that of other Member States.  The Commission had predicted that the share of the EC budget spent on the CAP would fall by the late 1970s, which would benefit the UK; in fact, it had not done so and the total size of the EC budget had risen substantially. 

In 1974/75 the Wilson Government sought to resolve the UK contribution question during the “renegotiation” of the UK’s terms of accession which it had promised in its October 1974 election manifesto.  They did achieve a new corrective mechanism, an important principle, but the revised formula (which placed more emphasis on national wealth when calculating our contribution) in practice produced no real benefit to Britain. 

The transitional arrangements agreed to by the Heath Government came to an end in 1979 and coincided with election of the Conservative Government led by Margaret Thatcher.  The new Government launched fresh negotiations with the aim of getting the 1970 statement of “unacceptable situations” given reality in the form of a substantial rebate to the UK’s net contribution.  In May 1980 a first agreement was reached which provided for a lump sum rebate in 1980 and 1981 with a possible further rebate in 1982 if no agreement had been reached on a long-term solution.  While this was only a short-term solution, it reduced the UK’s contributions by a large amount.

In any negotiations to resolve the UK contribution question, it was obvious that we would be alone in seeking a solution because either other Member States would have to pay more (eg Germany) or they would receive less from the EC (eg France).  Moreover, the Commission resisted the very concept of “net contributions”, arguing that this was simply the result of Community policies. 

After further tense negotiations lasting nearly four years, the solution agreed at the June 1984 Fontainebleau European Summit provided for 66 per cent of our net contribution (excluding expenditure outside the Community, such as development aid) to be paid back (technically this is 66 per cent of the difference between our share of VAT contributions and our share of EU expenditure).[4]  Crucially, the UK was able to ensure that this agreement was incorporated in the Community’s Own Resources Decision, which required unanimous agreement and ratification by all Member States (and would do so if it was ever to be changed in the future).  Overall, the UK has received £68 billion in rebates (up to the end of 2010). 

The major enlargement of 2004 led to an increase in the budget in order to help the new Member States bring their economic performance up to the EU average – with obvious long-term benefits to all Member States.  The UK agreed in 2005 that it would be illogical for new Member States to refund to the UK that part of the EU’s expenditure which was intended to tackle their relative economic under-performance, not least because the UK had been such a strong supporter of EU enlargement.  The EU’s Own Resources Decision in 2007 reflected that by reducing the UK rebate accordingly with the exclusion from the rebate calculation of non-CAP and related expenditure in Member States who joined after 30 April 2004.  This reduction in the rebate was phased in from 2009 with the UK no longer receiving any rebate on that part of EU expenditure from 2011.  It was also agreed that the contributions of three other Member States - Germany, the Netherlands and Sweden - should be reduced by rebate mechanisms.

The 2005 decision was not easy for the Blair Government to agree to and was sharply criticised by the-then Conservative Opposition.  Nevertheless, it reflected not only the UK’s strong support for enlargement but also the fact that, since the 1984 agreement, the proportion of the EU budget spent on the CAP had fallen from over 80 per cent to around 40 per cent and that the UK’s prosperity had risen relative to that of the other net contributors.  In 1984 the UK had been one of the poorest members of the EU but by 2004 was the wealthiest on the basis of GNI per capita (by 2010 that was no longer the case but the UK was still wealthier than the eastern and central European Member States)[5] .  Indeed, if the rebate formula had not been adjusted, the UK would have received an increase in her rebate and her net contribution would have fallen to around 0.25 per cent of GNI – less proportionately than that of Cyprus or Italy. 

The UK Contribution Today

The following table gives the amount per capita of net contributors in euros in 2009:

Luxembourg                          266.06

Belgium                                  250.89

Denmark                                221.93

Netherlands                          150.02

Finland                                   139.41

Germany                                115.32

France                                    111.43

Italy                                          102.49

Ireland                                      84.45

Austria                                     78.01

United Kingdom                     71.55

Sweden                                    53.87

Cyprus                                     50.74

Malta                                        27.02

Our position in the league table of contributors and the exact amount of our net contribution will vary from year to year as it depends on public spending receipts, national income, the exchange rate and other factors.  As has been explained, our contribution has risen since 2009 as a result of the change in formula for calculating the rebate.     

In terms of receipts from EU programmes, the UK received around £5.5 billion in 2010.  The EU and its agencies also purchased goods and services worth about £850 million from UK businesses, which is in addition to that £5.5 billion and is not included in the Treasury’s published estimates of our net contribution.[6]

Future Developments

Discussion of the UK rebate will inevitably form part of the process of agreeing the new Multi-annual Financial Framework.  The European Commission, in its proposals for the period beyond 2014, suggested retaining the UK rebate (and those for Germany, the Netherlands and Sweden) but making it less generous, reflecting the fall in CAP spending as a share of the budget and Britain’s improved prosperity since 1984. 

The Commission’s proposal for the UK rebate in the new MFF is that it should be in the form of an annual lump sum (£3.249 billion at June 2011 exchange rates) with Germany, the Netherlands and Sweden eligible for smaller annual lump sum payments.  This is no more than a temporary arrangement, as the Commission admits.  A similar lump rebate was granted to the UK in the early 1980s but it did not benefit the UK.  The UK rebate needs to continue to be a percentage of our net contribution.  The UK Government has made it clear that it will not accept the Commission’s proposal for a lump sum system.

The UK rebate has for long had totemic significance in British politics.  Although the Blair Government’s acceptance of the reduction in the rebate was objectively justified, it did not persuade other parties to support it.  Nor did the promised mid-term budget review produce significant further CAP reform.  The coalition Government can therefore be expected to continue to take a hard line in defence of the rebate in the knowledge that both the new Multiannual Financial Framework and any change to the Own Resources Decision will require unanimity.

October 2011

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[1] “Net contribution” means after deducting from the gross contribution the UK’s receipts from the EU and then the rebate; “net” share means the percentage of the EU Budget paid by a Member State after deducting receipts and reduction in contribution due to a rebate.

[2] The details of the negotiations can be found in the official account, published in 2000: Britain’s Entry into the European Community: Report of the Negotiations of 1970-72 by Sir Con O’Neill, ed. David Hannay.

[3] Details of the agriculture negotiations can be found in, Joining the CAP: The Agricultural Negotiations for British Accession to the EEC 1961-73, ed. Sir Michael Franklin, Peter Lang, 2010.

[4]  See, Europe More than a Continent, Michael Butler, Heinemann, 1986, for an account of the negotiations at Fontainebleau.

[5] See Proposal for a Council decision on the system of the European Communities’ own resources, COM 2004/501, 03.08.04.

[6] See HM Treasury statement on EU finances, p.21: http://www.hm-treasury.gov.uk/d/european_union_finances_2010.pdf 

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