The UK in the EU

As the debate on the UK’s membership of the EU intensifies, more and more people are stepping forward and making the case in favour of EU membership. See what they say


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EU Budget Reform

Discussions on the EU budget are always contentious and the last deal struck in December 2005 was no exception. After difficult negotiations, some changes were agreed to the overall limit of the budget, to the proportions of the budget allocated to different activities and to the method of calculating the UK rebate. But the basic structure of both income and expenditure, including the UK rebate, remained unchanged, if made even more abstruse. So it was a welcome addition to the deal, strongly urged by the UK, that the Commission should be asked to carry out a comprehensive review by 2008/9 of both the income and expenditure sides of the budget. If it is to be comprehensive, it must cover the size of the budget, how it is to be allocated, what methods should be used to finance it and what to do about the UK rebate.

Given the general desire to hold down public expenditure, there is no appetite for any large increase in total EU expenditure in real terms. As last time, debate is likely to stay within the range of 1 to 1.5% of GNI, with the so-called ‘budget disciplinarians’ – the UK, Germany, Sweden, the Netherlands, Denmark and Austria – wanting to keep the limit as low as possible and the Commission, the poorer Member States and the European Parliament wanting to be more expansive. The other two big net contributors, France and Italy are more equivocal.

The big argument about spending has always centred around the share of the budget taken by the CAP. Although successive CAP reforms have brought the cost down from a maximum of nearly 70% to a current 40% (and due to fall to 30% by 2012), there is a strong case for reducing the proportion further. Another look at CAP expenditure is due in 2008 and it is to be hoped that this will lead to further cuts in traditional expenditure on product support, on the direct payments made to farmers and in further shifts towards expenditure on the environment. With expenditure on the CAP increasingly in a form, which is not considered ‘trade distorting’, there is a case for leaving each Member State to run its own programmes or at least to meet more of the cost of Community programmes. Opposition from the newer member states to this shift to more national funding could be reduced if the richer member states paid a higher proportion than the poorer ones (or by the introduction of a general corrective mechanism as advocated later). With reductions in CAP expenditure there would be room for greater EU spend elsewhere. Candidates for increased expenditure are research and development and other programmes to improve the productivity and competitiveness of the EU economy, and more resources to back up the Common Foreign and Security Policy (CFSP). There is also room for a review of social and regional expenditure, currently distorted in the interest of achieving acceptable net balances.

While Turkey is unlikely to be a member during the next financial period, it seems difficult not to take some account of eventual Turkish accession. It may not greatly affect the budget system as such, but the prospect of such a large and under-developed country joining should add force to the arguments for shifting the pattern of expenditure as suggested above.

While less controversial than the pattern of expenditure, the forthcoming review will also raise issues about the ways in which the EU is financed. Only 15% of revenue now comes from the original ‘own resources’ of custom duties and levies on imports, with a further 15% from the rather complex system based on VAT-take. That leaves 70% which is made up by direct contributions from national governments according to the size of their GNI. GNI contributions are straightforward to administer and generally reckoned to be fair. The best way to simplify the system would be to have the whole of the budget funded by national contribution based on GNI shares, or at least all except the import duties and levies. This is the approach strongly favoured in a recent House of Lords report[i]. For some this would not be sufficiently ‘communautaire’, and there are those at the other end of the spectrum who want to give the EU its own tax, with perhaps some flexibility for the budget authorities i.e. the Council plus the European Parliament, to decide on the rate. In between lie proposals for hypothecating a share of some EU-wide existing tax (as with VAT) to be paid over to Brussels. This is the approach currently being advocated in the European Parliament. Candidates for one or other of these revenue sources include existing corporate taxes or a new tax on financial transactions, but with climate change high on the agenda a tax on the energy sector would be the most likely possibility. While an intellectual case can be made for such an EU tax, it would be strongly resisted by many Member States, including the UK, and would hardly make the EU any more popular.

A topic much discussed is the role of co-financing i.e. programmes paid for partly by the Member States and partly from the EU budget. This is already done in some rural and infrastructure development programmes. Where Member States have discretion to apply the programmes or not, co-financing may well be appropriate, and reduce total spending. But if applied to EU programmes, which operate across the board, it is hard to see the value of splitting the cost – total public expenditure will remain the same and only the distribution of the cost between Member States will change. It might be attractive to the UK but will be resisted by others. Whether it would help to improve budget control and reduce fraud is problematic. A variant of co-financing, favoured by the UK is to limit the EU’s regional programmes to the poorer Member States, leaving the richer Member States to run, and finance their own programmes if they so wish.

The UK rebate, still worth some £4 billion a year, will once again come under attack, particularly given that the UK now has one of the highest GNI per head. In its defence, the UK will argue that the rebate is needed so long as the imbalance in the budget remains. France, whose net contribution is now roughly the same as Britain’s, will no doubt argue that if CAP expenditure is cut then the rebate must go. Another stand off between the UK and France seems inevitable unless a new approach can be found.

Present perceived imbalances could be reduced by changing the pattern of expenditure or by adjusting the system of revenue collection. But the surest way would be a generalised corrective mechanism based on relative prosperity applying to all Member States and not just the UK (and the four countries which have a rebate on their share of the British rebate). Under such a system all Member States would have their net contributions or receipts adjusted each year according to their relative per capita wealth and the well-known fiscal principle of ability to pay. With such a mechanism in place, policies need not be distorted to correct imbalances. For example, the wealthier states could then cease to be recipients of structural funds.

Critics will argue that a generalised corrective mechanism would lead to the ‘juste retour’ with each country getting back what it puts in, but it need, indeed should not, do so. Instead of the existing arrangements which, through the various programmes and correctives, produce a haphazard redistribution between richer and poorer Member States, a generalised system – best called an adjustment rather than a corrective mechanism - would produce a structured and determinate redistribution with the richest Member State making the highest per head net contribution and the Member State with the lowest GNI per head receiving the most. The amount of ‘progressivity’ in the system would be a matter for negotiation. Unwelcome to the few remaining purists who do not even accept the concept of ‘net balances’, it would nevertheless respond to the political realities. It is worth remembering that the Fontainebleau settlement applies in theory to any Member State even though in practice it has only applied to the UK. How the UK’s net contribution under such a system would compare with the existing rebate system, would depend largely on its relative position in the GNI league table. But whatever the outcome, it could be well defended as rational and fair, and it would mean that Britain was no longer fighting a single-handed battle against the rest of the EU.

So there is plenty of scope for improvement. Hopefully, the Commission will encourage an open debate and eventually come up with sensible proposals. If the Commission is ambitious and imaginative in its approach, there is a reasonable chance that the Member States can be brought to agree on changes which will produce a simpler, more transparent, fair and defensible budget system. If the Commission is too cautious, there is no chance of the European Council deciding on anything more radical, and a good opportunity will have been lost.

Sir Michael Franklin




[i] ‘Funding the European Union’ House of Lords European Union Committee, 12th Report of Session 2006-7, HL Paper 64

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