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Cameron’s threat to veto the EU budget: What is it worth?

30 Oct 2012

Summary: Contrary to popular belief, the UK’s veto over the EU budget, though not watertight, is a powerful tool to force change. However, even under a “freeze”, the UK government is unlikely to achieve an actual reduction to the UK’s net contribution, due to a quirk involving the UK rebate. Though the UK is seeking important changes to the EU budget in on-going talks, it should push for the repatriation of the EU’s so-called structural funds from richer member states, which would reduce the UK’s net contribution and help Europe’s poorest member states.

Background: EU leaders will meet on 22 and 23 November to try to agree on the EU’s next long-term budget (MFF), to run between 2014 and 2020.  David Cameron is pushing for a “real terms freeze” based on the cash paid out from the EU budget in 2011 (as opposed to the money allocated). He has possible support from Sweden and the Netherlands (which also recently called for a real terms freeze), but few other countries.

The long-term EU budget is decided by unanimity, meaning that Cameron has a veto over the talks, and he has threatened to use it unless he gets what he asks for. On Wednesday, MPs will debate a motion calling for a cut in the EU budget, not only a freeze. Meanwhile, Labour yesterday came out in favour of a “real terms cut”. The motion is not binding, but if Labour MPs side with Tory backbenchers it could be embarrassing for the Government. The only binding vote on the EU budget in Parliament is a decision on “own resources” to fund the budget, likely to take place in 2014 (i.e. after the negotiations have been concluded).

What’s at stake?

  • The European Commission has proposed a 5% increase to the EU budget (on planned payments in 2007-2013) taking it to €972bn in the 2014-2020 period. There is also an additional €18bn increase in spending on ‘off budget’ items, taking total spending under the Commission plan to €990bn (a 7% increase). The treasury uses 2011 payments as its baseline figure – under this methodology, total EU spending increases by 11%. Governments and the Commission often disagree on the basic figures, as there are a number of different ways to calculate them (payments vs. allocations, the baseline year, off vs. on EU budget balance, net vs. gross contributions).

  • The UK says that its proposal will limit the EU budget to €886bn, including a freeze in spending on off budget items, marking a difference of €104bn between the two proposals.

Will Cameron’s demands reduce the UK’s net contribution? Unlike the gross contribution, the UK’s net contribution (what it pays in to the EU after the cash it gets back and rebate are taken into account) is likely to go up even under the government’s preferred real “payments freeze” scenario. This is because the share of the EU budget going to the new EU member states – the ones that have joined the EU since 2004 – will increase. Since this share is not covered by the UK rebate, Britain gets no cash back for its share of the money spent there. We estimate that, under the Government’s proposal, the rebate could lose between 4.2% and 10.2% of its value over the next budget period, which translates into an increase in the net contribution of between €1bn (2.2%) and €2.4bn (5.4%) over seven years. However, at the same time, more money would be invested in poorer member states, where it can have the most impact, rather than being recycled unnecessarily between rich member states, at a huge administrative and opportunity cost.

What happens now? At the moment, Cameron looks unlikely to back down, meaning that without other governments agreeing to his demands, or being able to reach a compromise allowing Cameron to save face, the UK government may have to pull the veto, perhaps as early as November.

The Cypriot EU Presidency recently proposed a compromise plan for the next long term budget, which looks to achieve €50bn+ savings on the Commission’s proposal. However, this proposal will still result in an increase of around €54bn (6.1%) above a real terms freeze in the current level of payments, with a total budget level of €940.5bn. The proposal also includes plans for revamping the UK rebate, potentially including removing it completely, turning it into a temporary lump sum payment or just adjusting it for the new budget period. This plan received a cool reception with Sweden already rejecting it and the Commission suggesting it has little support.

What happens if Cameron vetoes the budget? In the absence of a new long term budget there are effectively two broad scenarios:

Carry over the current EU budget:

  • If EU leaders fail to reach a deal before the end of next year, the 2013 budget ceilings are carried over, adjusted to the standard GDP deflator (i.e. a 2% increase to account for inflation).[1]

  • Under this ceiling member states would negotiation an ad hoc deal, based on a Qualified Majority Vote (QMV) rather than unanimity, circumventing the UK’s veto, which could see the budget increase or decrease.

  • Within this framework, if there is no deal, the 2013 budget allocations would be carried over and adjusted to inflation, rather than the substantially lower 2011 payments as in the Government’s proposal. This means the increase in the budget could be a lot higher than the €886bn that Cameron is pushing for but also than some of the compromise proposals floated (though the increase cannot exceed 1.23% of EU-wide GNI).

  • However, part of the increase in the gross contribution would be off-set by the limited rise in the UK’s net contribution, as the rebate dynamic described above will not kick in.

Tear up the budget completely and create a new proposal:

  • The European Parliament could go rogue, tearing up the so-called “inter-institutional agreement” between itself and EU ministers, meaning that each year the Commission has to table a completely new proposal for the annual budgets although without any spending ceilings. These will be subject to QMV.

So is Cameron’s veto pointless? Not at all. In all the scenarios where a new long-term budget deal cannot be reached, EU leaders will need to renew up to 55 regulations on EU spending in 2014, which expire after the current budget period since they are tied in with the MFF, in order to release new funds. These regulations will all have to be decided by QMV following hugely time-consuming talks and amid a cobweb of disagreements between member states over how the money should be spent. This represents a potentially very messy outcome for all member states.

A clear majority of member states also desperately want a new deal for different reasons. The powerful block of new member states that would lose out massively from the previous year’s deal being carried over (since under the new budget period they are expected to receive proportionately more money). At the same time, in net terms, the UK government would actually not lose that much cash under such a scenario. In addition, all other budget corrections – including the Swedish and Dutch rebate on the UK’s rebate – will expire in 2013, while the UK rebate remains constant, meaning many net contributors will be keen on a new deal.

For its part, it would take a lot of nerve for the European Parliament – which is already struggling with democratic legitimacy – to tear up the inter-institutional agreement altogether. So, although Cameron’s veto is not watertight, it is still powerful. 

Can Cameron do anything else? He could accept an increase, and face the wrath of backbenchers and risk being outmanoeuvred by Labour, which has called for a real terms cut. Instead, as Open Europe has argued repeatedly, Cameron should seek the repatriation of the structural funds for richer member states (with a GDP of 90% or above the EU average). This would reduce the UK’s net contribution substantially – possibly by several billions over next budget framework. At the same time, the UK would remain committed to supporting Europe’s poorest member states, while also getting a chance to update its own regional and regeneration programmes - as Lord Heseltine is expected to argue for in his report due to be published tomorrow on achieving sustainable and balanced growth throughout the UK.

However, the UK government is pushing for many other sensible changes to the EU budget talks, including reducing the framework period from seven to five years, which would make the budget more responsive to changing economic and political circumstances (particularly as the Eurozone is set for more integration) and help to keep the size of the budget in check. In addition, the government is seeking to align the allocation of funds to a country’s ability to absorb such funds, to avoid a scenario where a country can only spend a small share of the money it has been given. This so-called “payments guarantee” should help to better focus EU funds.   

Ultimately, this episode shows just how politically and economically unsustainable the EU budget is. It needs to be one of the first items up for re-negotiation as the UK seeks new EU membership terms.

For a more detailed break-down of the figures and a methodology see here.

For our proposal for CAP reform, see here.

For our proposal on structural funds reform, see here.

For more information please contact the office on 0044 (0)207 197 2333, or Mats Persson on 0044 (0)779 946 0691  

[1] The exact details of this are laid out in  ‘Inter-institutional agreement between the European Parliament, the Council and the Commission on budgetary discipline and sound financial management’, found here: Point 16 lays out the use of a 2% deflator for ‘technical adjustments’ such as accounting for inflation, while point 24 makes it clear that, if this agreement is kept, then the budget will be uprated using such adjustments.

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