Machiavellian machinations of the EU budget

The EU budget has long been one of the most contentious elements of the never-easy relationship between the UK and the EU. From Margaret Thatcher’s insistence in the 1980s that ‘I want my money back‘, to David Cameron’s irate statement at the end of a Brussels summit in October that ‘if people think I am paying that bill on 1 December, they have another think coming’, not to mention the glee with which the annual refusal by the European Court of Auditors to approve the EU’s accounts is denounced: our politicians are quick to seize any opportunity to have a go.

The irony is the EU budget is much less substantial than many assume. Although the headline annual total of around €140 billion is evidently a very large sum of money, it is roughly one percent of the GDP of the EU as a whole and even this proportion has fallen slightly since the 1990s. By comparison, the public expenditure of national and local governments in the EU is some forty times greater – yes, forty.

Nor does Britain pay a disproportionate share. On the contrary, the gross payment to the EU in 2015 is projected to be €16.4 billion, very slightly less than Italy will pay, but a long way short of the French contribution of €22.5 billion let alone the €30.2 billion that Germany will pay. The figure for 2014, as shown by the Treasury in its 2014 report on European Union Finances was a little lower, and the difference between the UK and Italy was larger.

Part of the reason for the higher UK figure this year is that a routine recalibration of GDP figures resulted in UK GDP being increased relative to other countries like Germany. This led to a demand for an additional €2 billion UK payment in 2014, triggering Cameron’s outburst. In the end, agreement was reached to delay the actual payment by the UK and, because the additional demand was always going to trigger an increase in the UK rebate, the amount was halved.

The principle governing payments into the EU budget is that what each country pays should be proportional to national prosperity as measured by gross national income (a close cousin of GDP). But because of the UK rebate, negotiated by Mrs Thatcher and some limited watering-down of its impact by the Blair government, the UK contribution has consistently been the lowest of all EU Member States on this metric.

That said, Britain has always been one of the net contributors to the EU’s finances. This is because of the simple reason that we receive relatively less EU spending than others, particularly for agriculture and for the Cohesion Policy, that supports social and regional policy interventions from Brussels, although the UK is also a net winner on funding for research.

The EU’s spending is set in a seven-year framework, painfully and painstakingly negotiated by armies of officials armed with spreadsheets programmed to show how a tweak here or a tweak there will translate into the net cost or benefit for each country. This multi-annual financial framework (MFF) sets limits on how much can be committed to different programmes in each financial year.

However, because many EU programmes are multi-annual, the actual amounts disbursed in a particular year (known in EU jargon as ‘appropriations for payments’) can differ from commitments, most often coming out lower. For example, delays in launching regional development programmes during the 2007-13 MFF meant low spending in early years and a subsequent surge. For this reason, the UK’s gross payment and net contribution can fluctuate from year to year, even though the mechanics of the rebate dampen these fluctuations.

It is against this backdrop that some of the claims and counter-claims about the politics of the budget have to be evaluated. The over-arching deal is the MFF prescribes how much EU money can be committed in each of the seven years it covers and predictable positions are adopted by the different actors involved. The UK, along with other net contributors such as Germany (and even, in the last round, France) invariably pushes for restraint in the headline amount, whereas the Commission, the European Parliament and the net beneficiaries tend to ask for more. France (backed these days by Poland and Romania) defends spending on agriculture, the Brits favour spending on research.

In the last three rounds of MFF negotiations, the Scrooges have won the day, successfully curbing the overall size of the budget as a proportion of EU GDP. Indeed the often repeated claim that the MFF for the current period is lower than for the 2007-13 period is strictly correct. In a press release following the European Council agreement of the deal in February 2013, Herman van Rompuy (then President of the European Council) revealed that the new headline total for commitments of €960 billion, was some €34 billion lower than the 2007-13 period. However, subsequent compromises in negotiations with the European Parliament included changes in how unspent funds were handled, enabling some of those involved to claim that it was not, in fact, a cut.

In any case experience shows that what is actually spent typically falls short of the ceilings. This is because a second level of negotiation takes place to agree the annual budget and there is, in addition, almost invariably a higher figure for commitments in any financial year than actual payments: the annual budget for 2015 is expected to undershoot the ceiling. As van Rompuy pointed out to the European Parliament in a speech shortly after the deal for 2014-20 was reached, actual spending for 2007-13 was lower than new target for actual spending for 2014-20.

If, by now, you are utterly confused, you are entitled to be. A Machiavellian interpretation is that the obscurity of the whole system suits everyone because somewhere in the details they can find a statistic that supports their case. What is clear, however, is that the EU budget is unlikely to offer fertile ground for a UK renegotiation, because most of our goals have already been achieved.

Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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