UK would not be ‘biggest loser’ of EU budget failure

We have a letter in the FT today pointing out that the UK would not be the biggest loser if there is no positive outcome from the talks on the EU's long term budget - a fact we have noted at length in two recent flash analyses. We have also highlighted in recent blogs that the UK is far from alone in threatening a veto.

In an article a couple of days ago the FT suggested that if there was no deal on the long term budget the UK would be the biggest loser since the current budget framework would rollover (increasing for inflation), thereby taking it above the UK government's demands and increasing the UK's contribution.

See below for our full response letter:

Sir,

You say that “if there is no agreement” in on-going talks over the next long-term EU budget, the UK could become the “biggest loser” (“EUbudget: the trillion-euro split”, Analysis, November 21). This is incorrect. It is true that “the 2013 budget ceiling would be repeated – plus inflation – for each successive year” and that this would be higher than the freeze the UK has called for. However, this scenario would be far worse for other countries than for Britain.

First, newer member states would probably lose out on a large share of the cash that is due to be allocated to them in the new budget period. Second, unlike the UK’s rebate, all other correction mechanisms – such as the Swedish or Dutch – expire in 2013 and would need to be renegotiated under unanimity rule. Finally, and most importantly, the UK’s net contribution under a rollover is about €3bn higher than under the current proposal by European Council president Herman Van Rompuy. However, the Van Rompuy proposal also includes a reduction in the UK rebate of between €3.5bn and €7bn, meaning the UK contribution would overall be lower under a rollover.

The budget which austerity can't touch?

Amongst all the hustle and bustle of the budget, there's always the interesting side-story of how much, exactly, UK taxpayers contributed to the EU.

Combing through the latest figures released by the OBR today (yes, we're talking the very fine print, which only people with some sort of obsession look at), we noticed a massive discrepancy for the UK’s net contribution to the EU, compared to the figures produced in the pre-budget report back in November.

In fact, the estimate for 2010-11 increased by £1.1bn (13.6%) compared to what the UK government budgeted for in November, while the estimate for 2011-12 increased by £1.8bn (26%). Some of this is expected to be recouped over the following two years with lower contributions but overall the forecasts for the UK net contribution up to 2014 have increased by £1.8bn.

The table below sets out the new estimated net contributions to the EU budget (see here and here to compare the original tables):





Not a sum to be sniffed at given the savings which the government is looking to make and the overall amounts involved here.

So why were the forecasts from only four months ago so far off?

The OBR and Treasury reports from today provide little insight on this front. The main change comes from a fall in the public sector funds which the UK receives from the EU (e.g. farm subsidies and regional spending). Since this falls and the gross contributions stays roughly the same, on net the UK is contributing more.

Why have these funds fallen so suddenly?

Again, it’s difficult to say, but it seems strange given that all the EU spending has been negotiated and laid out well in advance. One reason could be that the UK government decided to shelve some projects which involved ‘co-financing’, where the government has to fund part of the project (between 25% - 50%) to release the EU funding for the rest of it. The government may have reduced such projects to reduce its spending, which would have resulted in it accessing a lower amount of EU funds. It also seems strange to us that the UK rebate did not adjust for this (or has not been forecast to) since part of its calculation relies on how much the UK actually gets back from the EU budget.

This also goes to show the perverse incentives inherent in the EU budget, where national governments have to spend money to unlock the funding (under co-financing) - or see the funds cancelled. Though there's an opportunity to recoup some of the cash further down the road, it puts any government that is trying to cut its deficit in a very difficult position. One way or another, it'll lose out.

In any case, it is more than a little concerning that the forecasts were so substantially wrong only a few months ago (particularly since the 2010-11 budget year had already finished by that point).

The EU budget contribution is clearly not the biggest or most important item on today's agenda - but it's definitely not becoming any better value for taxpayers' money.