The £1.7bn question - who's right: Osborne, Farage or the European Commission?

Below we give a blow by blow breakdown of what George Osborne did or did not secure at today’s EU finance ministers meeting. This basically comes down to the UK’s rebate and how it’s applied - and whether it was always going to apply to the £1.7bn.  Osborne claimed that:

As PM said EU bill unacceptable. Now we've halved the bill, delayed the bill & pay no interest on the bill. Result for Britain
— George Osborne (@George_Osborne) November 7, 2014

Whilst Ukip leader Nigel Farage has claimed that:

Osborne trying to spin his way out of disaster. UK still paying full £1.7bn, his credibility is about to nose dive.
— Nigel Farage (@Nigel_Farage) November 7, 2014

This is what EU Budget Commissioner Georgieva said at a press conference just now:

“As we all know the UK receives a rebate on their contribution, but in years when the UK has to pay additional because of GNI corrections, normally this payment would be on 31 December and it would be in the full amount. With the proposal [under discussion]…in exceptional years this period of time would be stretched into the next year, and when this happens, and it would be in these exceptional circumstances, then the payment and the rebate on the payment could converge. In a normal year, they would not. In a normal year, you have a payment on 31 December and then next year, in the spring, we have the calculation of the rebate on this payment.” 

So who’s right?

Well, Osborne is right that the UK will pay half of the initial £1.7bn demand, since the UK’s rebate will now knock off the difference. So in that sense, Farage is wrong. Britain “will not pay the full £1.7bn”. However, the Government’s position isn’t’ entirely what it seems either, since it’s possible (though still not clear) that the rebate was always going to apply to the £1.7bn.
 
Confused? Don’t worry. Few people know how the rebate actually works. Below is our attempt to clarify the issue.

What has actually been agreed?

• The UK secured a delay on its payments and will now have until September 2015 to pay. It will probably pay in July and September 2015.
• It was also agreed that the UK’s £1.7bn bill will have the UK’s rebate applied to it (in the same way all annual contributions do). The Government claims that it wasn’t ever clear whether the rebate would apply, however, Commissioner Georgieva’s suggest that it always would. Usually  the rebate operates on a one year time lag, but now it will be netted off at the same time when the payment is made. The UK government also claims that the rebate applied to the specific amount is above and beyond that which applies normally, due to the way different facets of the rebate are applied and the time period over which it was calculated (we're still looking into this one). 
• This accounts for the reduced the bill from £1.7bn to £850m.

So, Osborne has effectively achieved an ‘interest free’ payment plan for the surcharge, which will see it coincide with the rebate on said surcharge.

Would this always have happened?

• It has been unclear for some time how the rebate would factor in here. Either people were purposefully trying to obscure the question or it was genuinely unclear.
• However, now that it has been settled that the rebate would be applied, it can be said that this reduction would always have happened. The main change is that the rebate has been moved forwarded allowing the initial payment to be reduced.
• On net the UK will pay £850m, but this should always have been the case thanks to the rebate.

Does this impact other countries?

• Since other countries essentially pay for the UK rebate, they will on net be hit.
• Our understanding is that the countries will still get the full amount expected from the GNI calculations – i.e. France should still get €1bn.
• That said, since the rebate is being paid and also a year early, it is likely that their annual EU budget contributions will increase in 2015. On net then, the gains for certain countries (such as France) could actually be less than expected.

So are we looking at a cash flow problem for the EU budget?

• One outstanding question is how this will all work in practical terms. Judging from the European Council conclusions, countries who are getting a pay-out from the GNI calculations can still claim the money on 1 December.
• However, countries who are paying in large amounts can delay their payments until September 2015. It is not clear whether there is enough spare cash in the budget to smooth over this gap.
• Furthermore, the UK is using its rebate to offset its payment. This will not be covered until all countries have paid in their (higher) annual EU budget contributions next year. This further worsens the cash flow problem.

A political conspiracy or genuine uncertainty?

• Questions will now swirl around when all this was known. Surely, if the rebate applies, that was always known to be the case? Logically, since all UK contributions are subject to the rebate, it always was going to be. The only thing that wasn’t entirely clear was when and how it would be factored in. While this is tricky to work out, it’s not clear why the HM Treasury and the European Commission let the dispute run for two weeks. If this was a “set up” by the UK government to claim success, then the Commission was in on it.
• Maybe the handover in Commission has helped breed uncertainty.

So what’s the verdict? Who’s right, Farage, Osborne and Georgieva? Well, Farage is wrong, Osborne right on the amount but may be exaggerated the extent of the concession. The most right is probably Georgieva - though, we still don't have evidence that the rebate was always going to apply.

And of course, the UK will still pay an additional £850 million.

We will update this as events unfold, but what a mess.

Growth in UK economy to increase EU 'stealth tax'

It's that time of year again. Chancellor George Osborne has delivered his latest budget. The EU geeks that we are, we have one question in mind: what does it say about the UK's contributions to the EU budget?

Well, as ever, this is complicated because there are lots of ways of measuring these contributions. The table below shows the main figures and how they compare to the OBR's previous estimates in December 2013 (click to enlarge):

It shows that the UK's total net and gross contributions to the EU budget are now expected to be around £2.3bn and £1.7bn higher over the next six years than previously forecast. However, the impact of this on the OBR's figures for the Government's Total Managed Expenditure (TME) and Public Sector Net Borrowing (PSNB) as shown in the Budget is neutral or even slightly positive over the same period, compared to the December forecast.

One of the reasons for this is that the OBR effectively treats the contributions that the UK makes to the EU via a share of VAT receipts, customs duties and sugar levies as a direct "EU tax" and the money therefore doesn't show up in the national accounts. UK contributions are also affected by the complex rebate calculations and how much the UK receives from the budget.

As the UK economy is now growing faster than others in the EU, the overall UK contribution increases. But because the rebate is calculated on the basis of the UK's VAT contributions and the UK gets a refund on some of the customs duties it collects, that will help reduce direct contributions from the UK Government's budget and balance out this figure over the six years.

Relative to GDP the increase is tiny and the good news is that it's due to a faster growing economy.  Nevertheless, UK plc still ends up contributing more due to the growth in the 'EU's tax base'...

Finally a deal on the EU long-term budget?

On Wednesday, European Parliament President Martin Schulz wrote to Irish Deputy Prime Minister Eamon  Gilmore warning him that the latest compromise on the long term EU budget agreed by EU leaders in February would be rejected. Yesterday morning, however, a deal was struck between the two negotiating teams. So had member states suddenly given in to all MEPs’ demands?

Although not all the details are fully clear, it looks as though MEPs have not secured anything substantial above and beyond the compromise they rejected last week.

Retaining unspent funds and ‘flexibility’ – A decent win for MEPs; member states have agreed that rather than taking back unspent funds as before, these can be rolled over to next year’s budget – although a) in recent years there has not been much of a surplus and b) while unlimited unspent funds can be rolled over at the start of the seven year period, this is capped towards the end. There is also scope for moving some cash around between budgetary headings.

Topping up the 2013 annual budget by €11.2bn – A big win for MEPs who demanded payment in full of the additional €11.2bn requested by the Commission to retroactively top-up the 2013 budget (although this is less down to MEPs themselves and more down to the fact that annual budgets are decided under majority voting). So far €7.3bn has been committed despite the UK voting against. This leaves €3.9bn outstanding and Martin Schulz has already warned that if member states renege on this, after MEPs have approved the budget, they will hold hostage the 70 or so individual pieces of implementing legislation for the EU's long-term budget.

A mid-term review: It looks as though MEPs have secured their demand for a compulsory review mid-way through the seven year budget but crucially it seems all but certain that this will take place under unanimity, not majority voting as MEPs had demanded, a scenario which could potentially have seen the spending limits increased. Intriguingly, this could coincide with a UK referendum should David Cameron still be in Downing Street.

Direct EU budget taxes – A big defeat for MEPs who pushed for a complete overhaul of the “own resources” system which would have seen the introduction of direct EU taxes and the scrapping of the UK and other rebates. This issue is completely left off the Commission’s press release and at a press conference following the agreement, the parliament’s negotiator only mentioned further “debate” on this issue. This was a clear red line for member states.

Extra help for youth unemployment – MEPs have also secured an additional €2.5bn to help combat youth unemployment, although this will be reallocated from existing funds, so it is not new money. Member states will also be able to voluntary commit additional funds in this area if they chose to.

So, despite a huge amount of posturing, overall the threat to veto the agreement proved to be an empty one and many of the MEPs' key demands were unmet - as we predicted at the time. They will now get two votes on the long term budget – a non-binding one next week and then a binding one come September or October. A lot could still happen between now and then, especially if MEPs decide they want another stab at obtaining further concessions or if member states refuse to pay more money into this year’s budget.

Even though the UK would not have been in a bad position had the parliament vetoed the agreement, politically it is better for David Cameron to be able to point to a concrete cut (as has already been proposed for the 2014 budget) as this adds credibility to his argument that he is able to secure a better deal for the UK in Europe.

EU budget talks: The dust has settled - and they all won!

We've been listening to the national press briefings of several EU leaders following the deal on the EU budget (which we analyse here). And you got it - they all won! (well, almost). Here goes:

David Cameron (UK)

• The British Prime Minister said, "I think the British public can be proud that we have cut the seven-year credit card limit for the European Union for the first time ever." 

• He went on, "The only way you can best protect the British taxpayer is to keep overall spending down, and that’s what we’ve done, and also to keep what remains of the rebate, and it is completely untouched." 

• On the possibility of MEPs staging a secret ballot vote on the next long-term EU budget, Cameron said, "Of course the European Parliament has a role, and we should respect that. But I don't really understand secret ballots. Parliaments and votes should be open, should be transparent, people should be accountable for how they cast their votes."

Angela Merkel (Germany)

• As usual, the German Chancellor - the power-broker - did not give away too much during her presser. She said, "The effort was worth it…in my view this agreement is good and important." 

• She also warned that "the negotiations with the European Parliament won't be easy".

François Hollande (France)

• The French President, a bit sulky, said this was "the best deal" on offer given the circumstances.

• He repeatedly stressed that the UK wanted payment appropriations to be lower than €900bn over seven years, while France was insisting on €913bn (see here if you are not familiar with the commitments vs payments distinction). According to Hollande, given that the final compromise was reached at €908.4bn, "Everyone will say who made the bigger step" - a way to suggest that David Cameron had given up more than he did.

• According to Hollande, France will also save some €140m a year on its financing of the various rebates. On the rebates, the French President made his most interesting remark (see here, around 16:00 in). He said, "I knew that there was no possibility to put into question the British rebate, because you know that it is provided for by the [EU] Treaties [which, by the way, is incorrect]. Therefore, it is immutable" at least until the Treaties are re-opened for negotiations. The British, he added, "should keep this in mind, including when they demand treaty changes." If this is not a threat, then what is?  

• He said that funding for agriculture has gone down overall, but he has made sure that aid to French farmers will remain at the same levels as in 2007-2013. Now, that's what you call 'solidarité', right?

• Finally, the French President admitted that the UK was not on its own in these negotiations, as "other countries wanted more for themselves and less for Europe".  

Mario Monti (Italy)

• The (caretaker) Italian Prime Minister hailed a "particularly significant improvement" in Italy's net position compared to other big net contributors to the EU budget.

• He said Italy has secured an extra €3.5bn in funding compared to the compromise proposal on the table at the November summit.

• Furthermore, Italy will save around €600m a year on its financing of the various rebates.

Mariano Rajoy (Spain)

• The Spanish Prime Minister said the deal is "very good for Spain". Contrary to expectations, Spain will remain a net recipient from the EU budget over 2014-2020 - which is huge. 

• Rajoy was particularly pleased by the fact that Spain "will get almost 30%" of the new fund for youth unemployment included in the next long-term EU budget. 

Mark Rutte (Netherlands)

• The Dutch Prime Minister opted for a lower profile. He said, "Of course you never completely get it your way with 27 member states, but I think that we as the Netherlands can be satisfied." 

• He described the deal as a "sober" budget, and said that the Netherlands "worked well together" with Sweden, Germany, Denmark, and the UK.  

Helle Thorning-Schmidt (Denmark)

• The Danish Prime Minister said her country "came here with three priorities, and we satisfied all of them", pointing out that she had secured an annual rebate of €130m.

Fredrik Reinfeldt (Sweden)

• The Swedish Prime Minister said the deal was "a surprisingly good result".

• He argued that, contrary to fears that Sweden's contribution to the EU budget would increase, it is, in fact, set to drop slightly.

Donald Tusk (Poland)

• The Polish Prime Minister spoke of "a huge success" for his country, stressing that Poland's receipts will increase by €4bn despite the long-term EU budget facing a €38bn cut from the previous seven-year period.

• He went even further, claiming today was "one of the happiest days of my life". Wow!

Werner Faymann (Austria)

• The Austrian Chancellor was less enthusiastic than many of his counterparts. He said the deal struck this afternoon is "presentable" for Austria - which managed to secure a rebate, although it will be phased out by 2016 (see the final deal here).

Petr Necas (Czech Republic)

• The Czech Prime Minister was pleased about his choice to threaten a veto. He said, "If the Czech Republic had not seriously threatened to block the negotiations, then it would not have been possible to negotiate a better outcome."