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Wednesday, November 21, 2012

The confusion of EU budget maths

Confused by the various figures flying around in the EU budget talks? When is a freeze a freeze and not an increase etc? Don’t feel bad, everyone is confused. There are a number of ways to calculate the increase or otherwise in the EU budget, depending on whether one looks at:
  • payments or commitments
  • net contributions before or after rebate
  • gross contributions before or after rebate
  • on-budget items only or also EU spending outside the main budget
  • Current prices or constant prices 
In other words, enough to do your head in. Heading into tomorrow’s negotiations on the EU budget there are essentially two crucial elements to take into account when considering whether Cameron has managed to deliver what he has promised (a real-terms payments freeze): the level of “payment appropriations ceilings” versus “commitment appropriations ceilings”; and share of EU spending covered by UK’s rebate.
The first point is tricky because the UK Government has set its stall out using different measurements to everyone else.

Every annual EU budget includes a figure for ‘commitments’ (which are essentially ‘promises to pay’ or funds that can be earmarked that year) and ‘payments’ (the level of money actually paid out in the given year). The long-term budget on the other hand, which is being discussed tomorrow, includes ceilings that limit the maximum level of commitments and payments that can be made in the years 2014-2020, with payments always lower than commitments.

Now, all the plans on the table at the moment, except the UK’s, compare proposed commitment ceilings for 2014-2020 to the previous long term budget’s commitment ceilings for 2007-13. The UK has taken the level of payments from the 2011 budget (i.e. the money actually spent that year) and, after scaling the figure up to cover the full seven years, used this as its baseline. This helps explain the very large gap in the UK’s proposal compared to the others. Using everyone else’s baseline (2007-13 ceilings), the UK proposal looks a lot more like a real terms cut than a freeze.

Reports overnight suggested that the UK was ready to negotiate a deal based on the Herman van Rompuy (HvR) proposal – on the surface this looks like a significant U-turn given that the UK’s proposal totals around €886bn in payments compared to €1011bn in commitments under the HvR plan. However, this is comparing payments with commitments. New reports suggest that the new version of the HvR proposal includes a payments ceiling of around €938bn, significantly closer to the UK’s position and a slight real terms cut on the current payments ceiling (€4bn). This then is the figure to compare. This figure is likely to have to come down further to be accepted by the UK. But, although it wouldn’t be ideal, David Cameron might be able to sell this as a ‘cut’ or ‘freeze’ at home, because on everyone else’s terms it would be.

The main stumbling block with the HvR proposal falls under the second issue – the rebate. Currently, the plan would change the way the rebate is calculated, removing the UK’s compensation for ‘rural development’ spending in the new member states and requiring the rebate to be funded by all member states (including the UK). We estimate that this could cost the UK between €3.5bn and €7bn over the seven year period – this clearly makes it unacceptable to Cameron, who has pledged to defend the rebate. However, this proposal to change the rebate would appear to be a straw man to knock down (a domestic win for Cameron).

This is because, as we noted a few weeks back – featured by Newsnight - the UK rebate is already set to fall by a similar amount, simply by virtue of the way money is likely to be allocated in future and the way the rebate works. More money is set to go to the newer (poorer) member states and this means there will be less spending on which the UK receives a rebate. This means that the UK net contribution to the EU budget could rise even if there is a freeze or a small cut in the budget. This is unavoidable and much a result of previous rebate negotiations under Tony Blair.

Overall, the UK could end up with a deal where its net contribution increases (due to a fall in the rebate) and the overall budget is above its desired target. But, this is not as bad a deal as it might appear and could still represent a real terms cut in the budget (on all the other member states’ and the European Commission’s baseline). Of course a lot could still happen in the coming days.

That said, the EU budget remains an anomaly and an insult too all economic common sense. We would still much have preferred the UK to push for wider reform of the EU budget in terms of content as well as size, especially since (as our recent blog showed) plenty of other countries were upset at the potential spending increase.  The simple fact that we need to explain all of this speaks volumes about how the UK Government has communicated its strategy. It failed to properly express what it’s position was and why, which has probably made it more difficult to explain its position to both its EU partners and the general public alike. This could cost the Government when it comes home with a deal. 


Rik said...

Cameron main worry is getting a result sold at home. He simply has to rebuild credibility in general but especially on EU issues.
Getting it sold basically needs 2 things there has to be a fight (at least the impression thereof) and a result.

Re the financial result it is difficult to judge where the homeaudience will look at. A further complication is that the homeaudience is so fed up with EU stuff that even a brilliant result might still be seen as a failure.

With all due respect to OE. This is now a public domain issue which means the message should be as simple as possible. If you need an explanation as complicated as your's it will not work (at least that is highly unlikely). People look at amounts (and these are likely presented in a negative
way in the UK media).

My idea would be invest relatively much in the fight part. This you can do yourself, the other side will react you can be sure of that, no uncertainty about that.
In this respect he has promised a veto unless the result is absolutely brilliant he will probably have to use it. But probably better not directly now. People are more likely to accept a not so good financial result with a good fight than a good result achieved in the backroom without any outside noise. He need to restore his credibility, stepping in the ring for your country does that clearly a vage compromise will not.

Cameron should keep his eye on the ball. This is not mainly on the pennies. This is a credibility restauration exercise. Plus this is making the EU clear the UK will demand a change in treaty relations AND is determined to get it. Both are imho more important for Cameron than a direct financial result. A pitty by the way to miss the chance to demand change in other areas.

A good fight will distract the attention from the financial result (look at the earlier 'veto' all news was about that) AND will put the treaty reneg higher on the EU agenda.
Any financial result is likely disappointing for the homefront anyway. Voters see these kind of amounts as abstracts they only understand really (at least most of them) more or less than before.
Which also is a good indication that the fightpart is substantially more newsworthy than the financial outcome.
Also in this respect btw getting issues on the budget agenda that would have brought others over to make problems re the budget (likely behind the UK) would have been better a lot of countries simply donot like the budgetproposal.

Rollo said...

There is only one way to stop wasting our money and that is to get out.

Average Englishman said...

I am intrigued to see how Dave will try to deal with this. He will probably continue with his 'mission impossible' by trying to create the best possible presentation in the media to hide the truth that the UK will be paying the EU more cash, like it or not. However, his own back benchers will not be fooled.

I predict that there'll be lots of huff and puff and Dave will come back waving a piece of paper. The more I look at this situation, the more Dave looks like Chamberlain, Mr. Intelligent Reasonable with no real stomach for a fight, up against an army of unreasonable Eurocrats and EU loving politicos who are fanatically intent upon their purpose. I hope that I am wrong. We shall see. Events make Rollo's nuclear option more attractive by the day.

Anonymous said...

The insult to common sense is the mechanism underpinning the UK rebate. Does the UK expect the new member states of the EU, the inclusion of which was promoted strongly by Thatcher, to give it a free ride?

Blair had no choice but to recognise that such a position was untenable. Cameron will also have to recognise the fact {unless he wishes to shoot himself in the foot, as he did in the case of the fiscal treaty.) Watch this space!