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Tuesday, October 28, 2014

Britain's £1.7bn budget bill: Who is to blame and what happens next?

Cameron has promised to invoke the spirit
of Thatcher over the EU budget
As EU leaders were agreeing the final details of the EU's new energy and climate change policies on Thursday evening, the FT's Alex Barker dropped the bombshell that the UK had been asked by the Commission to pay an extra £1.7bn surcharge into this year's EU budget. It was clear Cameron had not been expecting this and he angrily accused the Commission of a stitch-up, and refused to pay by the December 1 deadline.

By now, several explanation pieces have been published but there is still some confusion so here is one more try from us to clarify the situation:

Where did the demand come from?

There are effectively two things going on here, lumped together: the standard, annual revision of national contributions to the EU budget, and a one-off recalibration of the way in which national statistics authorities measure the size of their economies, going back several years. It is the combination of the two that have created a “perfect storm” for the UK:

1) Annual adjustment: Every year the EU member states and Commission work out respective national contributions to the following year's EU budget, once the actual economic data for the year in question is available. Member states' contributions can be revised upwards or downwards based on the performance of their economies. EU rules state that:
"The Commission shall inform the Member States of these adjustments in time for them to enter them in the account... on the first working day of December of the same year."
As David Cameron has rightly pointed out, these revisions are usually minor and therefore uncontroversial.

2) Changing the way the size of the economy is measured: Eurostat – the EU’s statistical body – recently reviewed the way in which member states auditing the way in which EU member states assess the size of their economies, concluding that under agreed EU rules (ESA95), several countries haven’t estimated their economies properly dating all the way back to 2002 (1995 in the case of Greece). In 2012, Eurostat instructed member states’ authorities to re-assess the figures – and to do so before 2014 . The ONS published its revised figures in May 2014, which among other re-valued the size and contribution of the UK's charity sector, which meant that overall. the UK economy was larger than previously thought, and had therefore been underpaying towards the EU.

The large UK bill is therefore primarily due to the one-off revision applied retroactively over 12 years, though effectively rolled in with the far less controversial annual adjustment. This is where a lot of the confusion comes from.

Who knew what when – and who is at fault?

This is what the debate has now shifted to, and there is a fair amount of blame to go around; no one really had their political radar switched on.

The European Commission: People within DG Budget (the Commission’s budget department) were briefing media on Thursday and well into Friday that the changes was due to the introduction of ESA10 – basically drugs and prostitution, something which left most people perplexed, and helped to fuel confusion and outrage.

It was also clear that the politics of the hefty bill would be lethal. Of course, Commission officials can claim the robot defense that “we are only following the rules”, but the Commission has always been a hybrid between an executive and a bureaucracy – so it should have handled this with far more care (the December 1 deadline was an over-kill), although some of this can be forgiven given that we’re between two Commissions.

The UK government: The exact figures were presented on Friday a week and half ago, a week before the EU summit. But it’s been clear since May this year that the UK economy was larger than expected following the ONS' revisions – indeed, the UK government itself triumphantly pointed this out. It’s also been clear for some time that other key countries were going to revise their figures. So while no one knew the full picture until 1 ½ week ago, different parts of the Government, including the Treasury, knew earlier a higher bill would be coming, albeit not the exact size. Perhaps the Government hoped this could have been snuck through somehow.

David Cameron: Probably hadn't been briefed until just before the EU summit but chose to adopt a very tough position, leaving himself limited room for manoeuvre. Some say this is a manufactured row to distract from other pressing EU issues like the European Arrest Warrant and EU free movement – a convenient row in which Cameron can ‘stand up to Brussels’ and claim some sort of success. We very much doubt it however,

What are Cameron’s options?

Cameron has effectively promised not to pay by 1 December and not to pay a bill “anywhere near” the £1.7bn mark – he restated that position yesterday in the Commons. So it’ll be hard for him to climb down. At the same time, the annual adjustment is supposed to be automatic – not subject to a separate vote – and the new calculations have already effectively been signed off by the ONS, so Cameron’s practical options are limited:

Rally a coalition to block the change: As a result of the extra €9.528bn that the EU will get due to the revisions, it is cutting the budget by €9.948bn - a net cut of €420m, and the Commission has tabled a draft amending budget to implement these changes. This budget will be subject to a vote among member states and as we set out here, the UK and other net losers have a blocking minority. However, rejecting the amending budget would mean the UK actually paying more (€3.6bn as opposed to €2.1bn), but the flipside would be that almost every member state would pay more too - rather than a €1bn rebate for France and a €779m one for Germany, they would face bills of €562bn and €1.4bn respectively - this could give the UK some leverage, although it could also backfire.

Seek revision of figures: Cameron has said he will launch an "exhaustive" review into the methodology that was used, effectively challenging the basis for the calculations. The figures aren't exactly transparent – and maybe this process will expose something they can run with and muster political support around. It's complicated by the fact that the ONS itself signed off on the underlying figures.  

Unilaterally revise the figures: The UK could check if the ONS went further then it needed to in revising past economic performance under ESA95, and if so, revise its figures again.

Go to court: It is not clear whether the UK would have any grounds for taking the Commission to the ECJ but one potential avenue would be to challenge the retroactive aspect of the bill as well as its unprecedented nature. Either way, it could bog down the process and buy Cameron some much needed breathing space in which to work on alternatives.

Refuse to pay: That could well trigger a crisis However, and the worst-case scenario is that the UK will face potential fines and infraction (see here for the figures).

Veto unrelated EU measures: It has been suggested that the UK could play hardball by vetoing other EU measures such as changes needed for the Eurozone to integrate further- but there are no such measures imminent over which the UK has a veto.

Ultimately, because the money is not needed for the 2014 budget per se, the issue could be kicked into the long grass, allowing for a face-saving compromise to be agreed. Speaking in the Commons yesterday Cameron sounded pretty confident that something can be done. We hope he’s right.


Peter van Leeuwen said...

Developing the single market doesn't come for free. Roughly have of the EU members make net contributions which help the economies and markets in the other half, which in turn will benefit the richer countries. From 1976 to 2012 here are some total net contributions:
Germany €312,948,690,000
France €119,507,900,000
The UK €113,120,050,000
Over the UK membership period, Germany's net contribution was €200 billion more than the UK and France's net contribution although smaller, still €6 billion more than the UK. Maybe that will ease Mr Cameron's anger? Maybe he should be told that he is free to leave the single market and then he won't have to pay for it anymore.

christhai said...

Cameron certainly knew about this 2.2 billion euro sting before the Energy Summit.

Two words dictated Cameron's "performance" with his 'puce faced fury' in denouncing the EU's pickpocket team.

Those two words, the most threatening in Cameron's lexicon are "Rochester & Strood".

A strong UKIP victory is certain, it is even possible that the Conservatives may lose their deposit.

Despite fixed polls like Ipsos Mori with its selected interviewees and its loaded questions, the majority of Britons actively want to leave the EU.

UKIP is the only vehicle which can take them out.

It should be noted, to put some perspective on this Romanian style pickpocketing by the EU - that the 2.2 billion euro rip off is equal to the same amount the British taxpayer wastes in the EU every month.

Anonymous said...

This is a much better and more balanced contribution. A large question mark remains, however, over the coherence of UK policy as managed by Whitehall and Cameron's off-the-cuff reactions when a calmer approach would clearly allow him to avoid backing himself into corners; such as in this instance and on the European Arrest Warrant; not to mention the general question of immigration the "let'em drown" reported policy change regarding illegal emigrants in the Med.

An "omni-shambles" is the only way to describe the UK's involvement with the EU at the moment. Pie in the sky discussion about the possibilities of "reform" promoted, no doubt, with the best will in the world, by Open Europe has not helped.

Anonymous said...

no link for "(see here for the figures)."

Rollo said...

What is this single market? We export 80% of our product to the whole world: except to the EU. The EU is all about protectionism. We cannot sell our hangars in bridges in Europe, we can to Ulan Bator and Santiago and Mozambique.
The single market only works for multinationals, while SMEs are 80%of the economy. And we import 50% more from the EU than we export to them. Mr Van Leeuwen can keep his single market.

Average Englishman said...

@christhai is quite right (as usual).

Dave's performance is just that, a performance to try and show the great British public that he is man enough to take on the evil manmdarins of Brussels and therefore, the people in Rochester and Strood should vote Tory in confidence.

Dave is a clever Public Relations man but no statesman. He will huff and puff until he can eventually push the story out of the headlines and agree to pay the EUSSR £5 less in 6 months time or whatever. He's still taking the UK voters for idiots and it won't work any longer. The game's up.

As for the amount itself, the commissars in Brussels have chosen to punish Dave for giving them a hard time. It's just another power play on their part to put Dave in his place. Yes I know the technicality of the figures but they haven't bothered to fine those EU countries who've exceeded their borrowing limits or broken other bank related rules now have they? And any result that involves the austerity suffering UK taxpayer sending money to bale out the French who are going broke because of their profligate socialist policies cannot be either fair or correct, no matter what the buffoons in Brussels may say.

Send us another bill Mr. Juncker, it's just what UKIP needs because the more you charge us the sooner we'll be free of you and the rest of the parasites in Brussels. Roll on Rochester and Strood.

Denis Cooper said...

As Prime Minister Cameron has now become an embarrassment for his country, and all those tame Tory MPs competing with each other to jump up in the Commons and make their little speeches to commend him are just showing their own worthlessness.

perdix said...

The irony of the situation is that the EU will do anything to promote ukip which will deny Cameron another term in government. In which case no referendum and no exit from the EU.
ukip is EU's friend!

Rik said...

Cameron gets a pretty good press on the continent. Probably as the media there know pretty that their (media's) customers will be very very angry.
Look at the numerous reactions in eg comments, nearly all are anti-paying (at least in countries that have to pay themselves) and often use Cameron as an example how to use it.

Probably Cameron really was informed at the last moment as somebody has been sleeping. Calculations cannot be that complicated that they could not have been done in London beforehand.
And everybody that has followed the budgetdiscussions should know that this is highly sensitive stuff.
So when you are talking 100 Mns politically sensitive stuff somebody should do his homework.

Same at the EU side. Also a complete moron has handled this and is still handling it.
They should know that this will alienate a few percent of the voters extra.
Same as the moronic reactions like: simply have to pay. This will urinate the UK public opinion even more off than it already did.

Rik said...

@Van Leeuwen
The internal market comes a lot cheaper than that. Most of the contribution goes into political pets of which the added value is doubtful to say the least.
Even your pro EU government put nearly all the added value of the EU in the single market. With a smaller part in the Euro (those were the days). The economical advantages of the rest wasnot even mentioned. With the Euro advantages now (and the forseeable future) gone negative.

Peter van Leeuwen said...

@Rik: Most of the budget is directly or indirectly related to the single market.

jon livesey said...

Peter van Leeuwen:

"Most of the budget is directly or indirectly related to the single market."

That's nonsense, and it shows you don't know what the Single Market is. In reality, about ninety percent of the EU's budget goes on transfer payments.

WJB said...

This isn't going to work David.
Open Europe's reasons for the £1.7billion final demand are interesting and varied. Among other possibilities it considers 'incompetence all round' , hardly an excuse of Dave's part in the shambles that's going to impress Joe Public much.
Another possibility, one which seems very popular in the UK blogosphere, is that the "with one bound Dave was free" scenario would kick in, where some stitch-up between Dave and the EU could be passed off as Dave's brilliant negotiation skill, Dave looks good, the EU looks stupid etc. The problem is that most of this type of story has already been discussed in detail in the UK.
No. Dave's problem is that he is a Europhile trying to act as a Eurosceptic where his core support is steadily leaking away to UKIP.
Poor Dave, he's been too 'cute' by half.

David Horton said...

I’m not really interested in whose fault it is, how it is made up and whether Uncle Tom Cobbley knew about it months beforehand. The fact of it is what occupies me.

Yes, it’s a pretty safe bet that DC is trying to use it to his advantage, but there are so many players and variables, that it is a very risky strategy. Maybe DC is playing win or bust for Rochester, I don’t know.

Or care overmuch.

What is energising me are two associated issues. Firstly, the lack of class, of statesmanship from the EU. UK and others member states have been issued with a demand, “pay us by 1 December 2014”. Who are the EU to talk to a member state in such a way? This money is NOT EU money. It is not even the UK government money. It is ours, the taxpayer. The single feeling in me when some faceless EU bureaucrat brusquely says pay up, is to tell him to sling his hook. In that respect DC has called it correctly, although I note with no little suspicion that he has left a door and a window open to allow for a change of date and/or a change of amount.

The second thing is the lack of any commonality with other member states. MEPs from countries destined to receive our ‘gift’ are indignant. “You will pay”, or “Pay what you owe”.

What we OWE? Owe for what? I use electricity. I pay for what I use. My children go to school. My taxes contribute to the costs of their schools. I pay for the groceries I take home from the shops. In short, I owe something to someone for goods that I have received. What pray, have the EU provided us that in any way predicates Britain OWING anything to the EU?

I have been all over Europe. Wherever you go, you will see signs in the local language saying that this bridge/road/park/etc was built on the back of EU funding. Except here in Britain where such signs are as rare as a visitors book entry for Har Juncker. We pay £9bn per year to the EU, and for what? To be hectored by jumped up, gleeful EUcrats and sneering MEPs about how much we owe?

My natural response would undoubtedly fall foul of the moderator, but it is two words, both single syllable, ending in “you”. It really is time to leave this organisation. It won’t change, it can’t change, so let’s stop pretending that there is any prospect that it will be amenable to meaningful reform. The EU wants our money, but not our input. I suggest that we accept the inevitable and withdraw both.

Peter van Leeuwen said...

@jon livesey: transfer payments help to develop the single market. You can export more to a Poland where the GDP has now doubled than to a very poor Poland. The EU isn't meant to be some super capitalistic Anglo-Saxon construct. I maintain that most of the budget is directly or indirectly related to the single market.
EU budget 2014 in million euros:
1a. Competitiveness for growth and jobs 11 441,3
1b. Economic, social and territorial cohesion 951,5
4. GLOBAL EUROPE 6 191,2

Average Englishman said...

Ref. @perdix
Very short term thinking here and those of us who want out of the EUSSR are thinking long term.

As @WJB said, Dave and his crew are fans of the EU pretending to be Eurosceptics. If he were to win the next general election Dave would either find some way of avoiding a referendum altogether (it would be his second and last term as PM so what the heck, he would have nothing much to lose on a personal level and could probably blame the Liberals) or if a referendum were held, he would campaign strongly for the UK to remain in, along with the BBC and big business.

No. Dave has to go or 'see the light' courtesy of the balance of power being held by UKIP. He is sufficiently lacking in principles to have a change of approach of that scale and then campaign to leave the EU if he sees that's the way the UK voters want to go. Continuing unrestrained EU immigration combined with ever increasing EU power grabs and unreasonable bills from Brussels will in turn continue to bring more voters into UKIP's camp, so if Dave or his successor want the Conservative Party to survive as a potential Government of the future a big change is required.

Also, if Dave or a new Conservative leader (either before or after the next election) were to have the sense to do a deal with UKIP and campaign to exit the EU they could between them ensure that Milliband's left wing Labour are defeated and the UK's economy does not suffer the same fate as that of France under the Hollande regime.

Rollo said...

If the aim of the EU spending is to get sustainable growth, then it is a failure. And if the medicine is having the wrong effect, adding to the dose is no use.

Anonymous said...

Danish Prime Minister Helle Thorning-Schmidt argued that “Countries must follow the rules as they are.”

So in that case France and Germany should be fined (retrospectively of course) for breaking the Maastrict Treaty when their deficits exceeded 3% of their GDP.

But they will not be . So why should the UK? What hypocrites and double standards. Time to exit.

Charlotte Bull said...

How long do the Labour and Liberal parties, especially, imagine they can keep the British people believing that the EU is a good thing. For decades either misplaced party loyalty , general boredom with or ignorance of the world of politics or else a belief in EU related lies have kept those who can be bothered to vote at all, still sticking to the old three parties at elections. As has been said above, the truth is beginning to dawn. An EU in out referendum is the only peaceful, civilised way to deal with what would otherwise be an escalating rebellion. Thank God for the UK Independence Party which allows a peaceful way out of this farcical situation by putting on the pressure for that referendum and giving the chance for democracy to prevail.

christhai said...

Well said David. Thank you.

Unknown said...

I think he just do not want to become on he wrong side that is why it is hard to decide what way of behavior to chose. I read that UK has an increase in the economy, however I still see a lot of people who are lack of money and need instant loans on line. Also I think that relationships with EU can be over viewed due to the situation in Ukraine and with economical state in other countries.

jon livesey said...

Mr van Lueeven: we'll take your "directly or indirectly" as the climb-down that it is, since "indirectly" can mean anything or nothing. In this case nothing.

The fact is that it doesn't take trillions to run the Single Market.

The EU budget is mostly *not* to do with the Single Market. The biggest item in the budget is the CAP (46.7%) and the second is Regional Support (30.4%). Everything else is internal Policies, *including* internal market (8.5%) and finally administration (6.3%).

There is no doubt about these figures. They all come from EU sources and can be found on the EU Budget wiki page.


I suggest that in future you do a bit of research before laying down the law on the EU Budget.

Anonymous said...

@ jon livesey

I suggest that another way of looking at the matter would be to ask the question; why is there an EU budget in the first place? If the EU was simply a free-trade area, one could get by with just a budget for administration (as with the OECD and as many other rather ineffectual international bodies that you care to mention). But the EU is a single market with a common external tariff border i.e. also a customs union.

Countries of various levels of development agreed to this arrangement subject to three main qualifications (i) a commonly funded agricultural policy in a - effectively - managed market (ii) compensating payments through the policy of economic and social cohesion for opening up their markets (iii) various other sectoral policies e.g. research.

Anyone who has failed to grasp this has failed to grasp what the EU is all about.

One can, legitimately say that the budget is all about the single market; and vice versa.

Anonymous said...

Anonymous said...
"Danish Prime Minister Helle Thorning-Schmidt argued that “Countries must follow the rules as they are.” So in that case France and Germany should be fined (retrospectively of course) for breaking the Maastrict Treaty when their deficits exceeded 3% of their GDP. But they will not be . So why should the UK? What hypocrites and double standards. Time to exit."

Of course France and Germany should have been fined. The European Commission did propose appropriate sanctions. The only reason they were not was that the decision is not, in fact, taken by the Commision, but by the governments of all Member States. Which may -and did- by appropriate majority decide to reject the Commission proposal. It is exactly the kind of majority OE writes about in another post on that subject.

Of course it may lead to unequal treatment of differenr countries, and removes the focus from rule of law to political haggling.

Yet, in order to avoid it, one would have to increase the powers of the Commission (to impose the sanctions) and decrease that of the governmetns (to veto them). In short, do exactly the opposite of what eurosceptics want.

I agree that you should leave, and as soon as possible. If UK now manages to wiggle out of its obligations, it will be just another bad example for the others and further dimantling of the rule of law. Indeeed, why should anybody do anything if UK does not need to? Out out out with you, and ASAP.