The accounting details that could make or break the EU budget

Ahead of tomorrow’s EU summit, which will see the resumption of the tricky long term EU budget negotiations, we put out a briefing laying out our thoughts and expectations. See here for the full piece.

One issue that we did note only in passing in the briefing, but could prove significant: on top of cutting €20bn from his previous proposal in November, European Council President Herman Van Rompuy may also choose to widen the gap between the ‘commitments’ and ‘payments’ headings of the EU budget in the proposal he will submit tomorrow - a move which could help facilitate a compromise. Van Rompuy has kept his cards very close to the chest on this one, so it's difficult to say exactly how it'll play out.

This is all very techy but, for a quick recap, there are effectively two budgets, which are called 'commitment appropriations' and 'payement appropriations': 

• Commitments refers to amounts that can be authorised in a given year but which are often actually paid out later or over several years - some refer to it as the credit card limit.

• Payments refer to the amount of funds which will actually be paid out in a given year. This is traditionally what interests national treasuries in the short term - and particularly now the UK - as it is this figure that has an immediate impact on their contributions to the budget.

EU leaders will tomorrow be negotiating ceilings for both commitments and payments for the next budget period (2014-2020). The difference between the commitments and payments in the current 2007-13 budget is close to 5%. Some gap will remain due to projects which were scrapped and ones which are yet to be completed, but an artificial increase in the gap will always be closed somewhat over time (for the reasons below).

So what could an increased gap between the two mean?

-          As a handy Commission doc points out, "The level of commitments determines the payment level for the upcoming years", essentially payments simply "trail" commitments. "Controlling the level of commitments therefore assures control over the future level of payments."

-          For example, increasing the difference between commitments and payments in the 2014-2020 budget period could require higher payments in 2020-2026 period – and therefore just delays the eventual pay-outs and budget increase.

-          More critically, the annual payment ceiling can also be increased through a QMV vote in the European Council and a majority vote in the Parliament. This may be unusual but does present an avenue to increase payments to a level closer to the higher commitments headline.

-          It is worth noting that expenditure is limited by the Own Resources Ceiling (1.23% of EU GNI), which is the revenue side of the budget. However, this could still leave a significant margin. The difference between the own resources limit and the forecast payment ceiling can often amount to tens of billions – leaving scope for a sizable increase if the Council and EP so choose (for example see figures on the current budget period).

In any case, under the current proposals reportedly doing the rounds, the level of commitments will be reduced compared to the current period, which is good news. But, our point here is that, payments will inevitably catch up with commitments one way or another. So, if the level of payments is well below the level of commitments, this is more about finding a neat way of presenting two sets of figures to different audiences in the short term, particularly since the framework leaves scope for future adjustments. Let’s hope the government is aware of these subtleties ahead of tomorrow’s negotiations...