I’ve been reading ‘Britain and Europe: A City minister’s perspective’ by Ed Balls MP [more details from the CER]. It all strikes me as reasonably standard Brownite fare – realising that Britain has to be part of the EU, but not really enthusing about the European Union all that much. Balls calls his line ‘hard-headed pro-Europeanism’.

Yet there is one really interesting section – although just 4 pages – devoted to the issue of the EU budget. With the 2007/08 Budget Review ongoing, Balls’s ideas give an interesting insight into what the UK’s negotiating position might be. I’ve done some very rough calculations, and I reckon the UK’s budgetary position would be so horribly bad if Balls’s principles were applied that there’s no way the government could ever sell such a deal to the British population.

OK, to the detail. Balls states 3 principles of the future budget:

First, the EU should act only where there are clear additional benefits from collective efforts, compared with action solely by individual member-states – rather than ‘more EU’ for the sake of it.
Secondly, where EU-level action is appropriate, it should be proportionate and flexible.
Thirdly, […], we need the highest standards of financial control and independent audit – alongside continuing budget discipline.

What does each of those points mean? The first covers the 2 issues that have annoyed and vexed the Treasury about the EU budget for some years – CAP and the EU’s regional and cohesion funding mechanisms. It is well known that the UK wishes to eliminate so-called Pillar I CAP payments (Market related expenditure and direct payments in the Financial Perspective – essentially the payments for production). In addition Balls states clearly that “there is a strong case for budgetary assistance to well off member-states” (my emphasis), underlining the UK position that recycling of EU funds within rich member states via Brussels is not supported by the UK. Payments should be from rich to poor countries, not rich to poor regions.

The second principle sounds fine, but is a little more difficult to fathom. The need for spending that is proportionate would seem to further underline that CAP spending should not be disproportionately large, and there also seems to be an implication that funds need to be allocated swiftly and effectively according to the political priorities of the European Union. Balls uses environmental issues as an example, and also speaks of the need to use instruments other than the budget – the European Investment Bank for loans, rather than grants from the budget. This might mean a lessening of the total size of the budget – see below.

The third point is very standard. The EU still has book-keeping problems, and the Court of Auditors has not given a statement of assurance on the accounts for 14 years. I don’t want to go into these issues here – the pros and cons are well known. I would just like to point out the position of Sir John Bourne, the Comptroller General in the UK, who stated in his evidence to the House of Lords that he would be unable to give a similar positive Statement of Assurance if asked to do so about the UK government’s accounts – so it’s far from the case that the UK government is whiter than white on this one.

Beyond the principles
The UK budget rebate is also up for debate, according to the terms of the Budget Review, and – so it seems – you can see a kind of theme emerging from Balls’s words – give us sufficient reform of the budget (especially reductions in CAP spending), and then we might be able to compromise on the rebate too. The whole idea of the rebate was to rebalance things in the 1980s as the UK received so little CAP funding, so reform CAP and reform the rebate has been a central tenet of UK argumentation.

Doing the sums (all using annual figures, unless stated)
Let’s start with CAP (Heading 2 in the Financial Perspective). The UK receives roughly 9% of the CAP funding, a combination of direct payments and rural development. Using the 2013 total of €51 billion, the UK would receive €4.6 billion. If market related expenditure and direct payments were to be removed (as Balls’s plan implies) from 2014, the UK would get only in the region of €946 million. If we assume CAP reforms would have been agreed, the UK’s annual debate of €5.5 billion would be eliminated after 2013.

When it comes to regional funding the picture is harder to judge, as the UK’s share of the cash is dropping anyway. The UK will receive approximately €9.4 billion of cohesion and competitiveness funding for the period 2007-2013 (Heading 1 in the Financial Perspective, using stats from ESF), equating to €1.34 billion a year. The UK will be one of the very richest Member States by 2013, so under current arrangements the UK may stand to gain perhaps €750 million a year from 2014 if current arrangements were maintained. Under Balls’s plans the UK would get €0.

Headings 4 and 5 of the Financial Perspective are not spent in the UK – they cover external actions and administration. For heading 3 – Citizenship, freedom, security and justice – I will assume equality (i.e. UK will pay in as much money as it gets back, around 15% of the total for the heading).

UK figures in the context of the reformed budget
So, if the UK’s spending is put in the context of the complete budget organised according to Balls’s principles, how do things look?

Heading 1 – funding may decrease overall to a certain extent, but poorer nations would not sanction a decrease of more than about 1/5. So the total budget for the heading in 2014 would be around €46 billion, of which the UK would receive nil.
Heading 2 – elimination of direct payments would slash the overall CAP annual budget to around €11 billion from 2014, of which the UK would get €946 million.
Headings 3 – budget of around €2 billion maintained, UK share stable at around €300 million.
Headings 4 and 5 – UK gets no cash here and would contribute €2.4 billion to the €16 billion annual total for these headings.

UK’s relative position: 2013 vs. Balls’s plans
2013 – UK gets €4.6 billion from CAP, €1.34 billion from regional funding, €300 million from Heading 3, and €5.5 billion from the rebate. That equates to receipts of €11.74 billion. Payments to the EU are in the region of €15 billion per annum, so the UK’s net contribution in 2013 will be in the region of €3.26 billion Euro, or 21% net contribution.

If Balls’s principles were to be applied in the 2014 budget, the UK would get €946 million from CAP, €0 from regional funding, €300 million from Heading 3, and €0 from the rebate. The total size of the EU budget would be reduced overall due to CAP reform and changes to regional funding, coming in at a total of around €76 billion, approximately 60% of the 2013 level. UK contributions would hence be €9 billion (60% of the €15 billion from 2013). Total UK receipts would however plummet to only €1.3 billion, giving a net contribution of €7.7 billion, or 86%!

OK, so I’ve done plenty of rough estimates to get to this figure, but the overall answer is clear to me: apply Balls’s principles to the budget and the UK’s relative budgetary position would be extremely imbalanced. Now how will the Government get out of that one? I think some of those principles might be quietly re-examined. Or maybe they might re-open the issue of EU-taxation? I can but hope.

[This article is now also posted on the Social Europe Blog]