• Facebook
  • Facebook
  • Facebook
  • Facebook

Search This Blog

Visit our new website.

Friday, October 24, 2014

Why is the UK being asked to pay in more to the EU budget and what can it do about it?

There are a number of headlines today around the EU’s request for a further €2.1bn from the UK in terms of its contribution to the EU’s budget.

Below we breakdown exactly how and why this has happened and what options the UK has now.

How has this happened?
  • The European Commission has launched a review of EU budget shares (based of VAT receipts and Gross National Income [GNI]) going back to 1995.
  • This is tied in with the introduction of the new European System of Accounts (ESA) 2010 which came into force in September. This is a new approach to assess the true value of a country’s economy (its GDP) by counting some activities which are often missed. Many of you will have read the countless headlines about how GDP will now try to quantify the value of prostitution and the drug trade. However, the new calculations also give more weight to research & development and other softer types of investment. The Commission has estimated that these adjustments will push most member states GDP up, albeit by varying degrees.
  • Essentially, since 1995 the UK has performed better than expected and better than many of the other EU member states. As such its economy is larger than originally thought. Under the review this means that its share of the EU budget – which is calculated off the back of GDP and population as a share of overall EU GDP and population – has increased.
  • The EU is also in the process of producing an amendment to the annual budget which we discussed here. At some point, very recently, the EU has decided to almost combine the two issues possibly causing a speed up in the payment date for this €2.1bn lump sum.
Why has everyone been caught off guard?
  • While the annual amendments to the budget are expected and usual (though often unnecessary and far too high as we have pointed out numerous times) this adjustment on GDP terms is unprecedented and seems to be largely a one off – as such it has caught most people off guard.
  • It also seems that the release has been kept under wraps for some time. While the amending budget has been known and discussed for some time, with the final details circulated to member states a week ago in preparation for the current EU summit, the details of this were only released to member states a day ago. Essentially it was somewhat sprung on them ahead of the summit.
  • This is exacerbated by the fact that this is clearly an extensive long term process and that the ESA 2010 adjustment has been running for years. To say the release and interaction with member states on this issue has been poorly handled would be a massive understatement.
What are the UK’s options now?
  • First, it’s clear the UK is not alone in its outrage. The Netherlands has been asked to pay in a further €640m, while Italy has been asked for €340m. Dutch Prime Minister Mark Rutte has called this “an unpleasant surprise which raises a lot of questions”, adding, “when I say go to the bottom of this, it means to look at all aspects, including legal ones. It is still too early to run ahead on this.”
  • The first option is to get an agreement to deduct any payments from future budget contributions. This would avoid having to pay in a lump sum now and also mean that it on net the UK does not pay any extra.
  • The second option would be to secure a political or legal agree to ignore these uprated GDP shares and stick with the originals. This should be doable through a vote in the European Council. That said, because some members are getting a rebate – France and Germany in particular – this could prove a very tricky agreement to strike.
  • As Rutte has already pointed out, countries may have legal recourse. Exactly what form this could take is unknown but the retroactive nature of the cost and its lack of discussion and warning could provide some grounds.
  • Lastly, the UK (and the Netherlands) could simply refuse to pay. As large net contributors to the EU budget, there is little that others can do to force them to pay. Obviously the EU could launch its own legal action in terms of infraction proceedings; however, the maximum fine for the UK is around €225m on an annual basis – much less than it is being asked to stump up here. This could also be combined with the point above, with the UK refusing to pay until the legal proceedings have run their course. ***see update below***
Open Europe’s take
While this does not necessarily seem to be a political stitch up from the EU there is no doubt that it is unreasonable and politically irresponsible. Retroactively taxing someone over 20 years is fundamentally unfair. The fact that the UK and Netherlands are being punished for doing better than expected and better than others almost encapsulates everything that is wrong with the EU’s approach – particularly when the Eurozone economy is struggling to find any growth.

Once again the EU has failed to learn any lessons from the previous budget negotiations and has helped to feed those who want to leave the EU, possibly ultimately shooting itself in the foot. Still, what's interesting is that in a debate marred by splits, the UK political class is almost entirely united in its outrage against this move. It is ironic that in the week when one poll found British support for EU membership at its highest since 1991, the Commission has managed to unite everyone from Lib Dem MEPs to UKIP in outrage. If Cameron manages to resist the demand somehow, he would be able to score a massive victory.

Update 24/10/14 12:05:
One point to add regarding the refusing to pay option and the potential fines. On top of the potential fine from infraction proceedings mentioned above, the amount of €2.1bn will be charged 2.5% interest (standard 2% above the Bank of England base rate currently 0.5%), which increases by 0.25% for every additional month which the outstanding amount is not paid off. Such interest could clearly mount up very quickly and become very expensive. If the UK is eventually forced to accept £2.1bn figure, then it could clearly turn out to be very costly. Ultimately, though, if the UK is prepared to play hard ball, it would lead to a stand-off that will would need to be resolved by a political negotiation. Such disputes rarely reach such escalated levels and resolutions are normally found before costs mount up. 


Average Englishman said...

There is another option that of course you have not mentioned; the UK could leave the EUSSR altogether and be a free nation again.

Jesper said...

The contribution based on VAT receipts is in itself pushing more obligations on the better governed countries. VAT-compliance in Sweden is extremely high, VAT compliance in some other EU-countries is at best dodgy....

Bad governance and low trust tend to go together so guess where the problem of the illegal/unregulated economy is growing the most.

GM said...

How did the recalculation of GDP give France and Germany a rebate? Were their economies performing poorer than expected after the recalculation?

GM said...

Err, I meant decrease in contribution rather than rebate.

Anonymous said...

'Calculated from GDP and population' - no wonder we are being hit so hard. We have the dregs of the EU pouring in. I would like to know if it is the tax-paying population or the total population. Otherwise, we are being penalised twice - just like UK taxes.

Unknown said...

What cameron is more likely to do is negotiate a slightly smaller figure, pay it, then claim it as a victory.

Anonymous said...

Of course there is another option - which could be directed at many rich people. Pay your taxes !

Anonymous said...

interesting interest calculation.
suggests that if 2.5% goes up 0.5% each month then would be 5.25% at month 12 (annualised rate c75% p.a.)
Interest cost for first 12 months delay is c46% of payment due.

Must be friends of Wonga

Anonymous said...

interesting interest calculation.
suggests that if 2.5% goes up 0.5% each month then would be 5.25% at month 12 (annualised rate c75% p.a.)
Interest cost for first 12 months delay is c46% of payment due.

Must be friends of Wonga

Anonymous said...

following up my "interesting interest calculation" comment
- reading the EU document referenced by OE blog the rate goes up .25% per month overdue but the rate at month of payment is the rate used for penalty so after 12 months is 5.25% so if compounded after 12 months fine c75%
- However what I do not see if that the interest is actually charged at a monthly rate & suspect it is an annual rate that goes up each month as OE says
-OE already quoted on " their comprehensive analysis but maybe they should check again !

JB said...

Our politicians are adept at promising one thing then not delivering of course- we haven't even been given a 'cast iron' guarantee on this. After Nov 1st the next phase of the Lisbon Treaty kicks in and it won't be Britain's decision any more anyway.

papajerry said...

Cameron said we wouldn't pay by the 1st December. He didn't say we wouldn't pay, full stop. Get out of the EU, it's too destructive.

jon livesey said...

Thinking about the economic effects of this, it boils down to making reform less attractive everywhere. Countries like the UK, which have managed to get back to strong growth now lose some of their national income, while countries like France get a rebate that just pushes off the day when they have no choice but to reform.

More and more, the EU seems to act as an engine to force bad economic policies on countries that they would not enforce on themselves.

Anonymous said...

WHO Gains? GERMANY and FRANCE..... Need we say any more????