Voluntary Report - public distribution

**Date:** 12/8/2005

**GAIN Report Number:** E35232

E35232

**EU-25**

Trade Policy Monitoring

**UK makes new proposals for 2007-13 EU budget**

2005

**Approved by:**

![](media/image1.wmf)Norval Francis

#### U.S. Mission to the EU

**Prepared by:**

Peter Talks

**Report Highlights:**

In preparation for the EU Summit on December 15-16, the UK has presented
a paper setting out proposals for the EU budget from 2007 to 2013.
Reaction from other Member States as well as the EU institutions has
been negative as the paper calls for cuts to CAP expenditure of EUR 2 bn
and EUR 8 bn for rural development (over the six year life of the next
EU budget).

Over the next few days it will become clearer whether there will be
sufficient political consensus to quickly negotiate the EU budget
package or whether this issue will have to be decided later in Spring
2006. The UK will likely release a new version of the budget prior to
the Summit that smoothes out some of the Member States onbjections.

Includes PSD Changes: No

Includes Trade Matrix: No

Brussels USEU \[BE2\]Unscheduled Report

\[E3\]

The EU budget is agreed in advance over a multi-annual framework, known
as Financial Perspectives. With the current 2000-06 budget due to run
out next year, discussions have long been underway on the size and form
of the 2007-13 EU budget. Earlier this year, in June, the EU Council
(i.e. Member State governments) failed to agree on a new budget for the
EU from 2007-2013. The UK Prime Minister, Tony Blair, widely blamed for
the failure due to intransigence over the British rebate and his
insistence that CAP expenditure be cut[^1].

The next EU summit, on the 15-16 December, will see further debate on
the EU budget. The UK, who currently hold EU Presidency have tabled a
budget paper which presents some controversial options. The paper calls
for an overall budget of €847 bn for 2007-13, equivalent to 1.03% of EU
GNI[^2]. This represents a cut of €24 bn from the €871 bn package
proposed by the Luxembourg. These cuts would mean reductions of €14 bn
to the New Member States (NMS) structural spending (for example for
infrastructure investment such as roads), €7 bn less for rural
development, €2 bn less for CAP expenditure and €1 bn out of the costs
of running EU administration.

It is not yet clear whether the other Member States and EU institutions
will even accept the UK paper as a basis to start negotiations. Before
the Summit on the 15-16 December there will be a meeting of Foreign
Ministers on Tuesday 6 December and a General Affairs Council on Tuesday
13^th^ December. These will help to gauge reaction to the paper,
however, early reaction was negative, with French diplomats describing
it is 'cynical'. The Polish Prime Minister, Marcinkiewicz called it
'unacceptable', while the European Commission President, Barroso, called
it unambitious and unfair (to the NMS).

It is expected that a new paper will be released by the UK Presidency
prior to the Summit. However, it is too early to judge whether this
might be provide sufficient consensus for the Council to start
negotiating next week. If there is no budget agreement, the issue will
be passed to the Austrian Presidency in the New Year. Delay to agreement
could mean hold-ups for some programs, notably for structural aid and
infrastructure investment to the NMS. . Once the budget is agreed by the
Council there is still much procedural and institutional work to be done
in preparing the budget in time for January 2007, when it is due to
start. EU institutions have occasionally in the past operated under
'continuing resolution' type situations but in general do not have the
flexibility to cope with this

**Agriculture**

None of the budget proposals, either the initial Commission proposals,
nor the Luxembourg Compromise from June or the new UK paper seek to cut
CAP expenditure. The figure of EUR 43.1 bn (from 2007) reflects CAP
spending ceilings set by the Council in October 2002. Where changes are
being proposed is in how EU enlargement to include Romania and Bulgaria
in 2007 would be accounted for. The Commission allocated up to €1.6 bn
per year for them, the Luxembourg paper up to €700 m. The UK proposals
do not increase CAP spending which would effectively mean a spending cut
to the existing EU-25, as each country would get a slightly smaller
slice of the pie.

The figures presented in the table below ignore modulation. Modulation,
a concept which was agreed upon in the 2003 CAP Reform, will see the
reduction of direct income payments and the money channeled into rural
development spending. Modulation will see 4% of direct aids from 2006
(raised to 5% from 2007 onwards) from the EU-15, which will be
redistributed as rural development expenditure with some reallocation
from EU-15 Member States to the rest of the EU-25. This will shift
around EUR 8 bn from CAP expenditure to rural development over the
lifetime of the 2007-13 budget. There may be future changes to
modulation, for example increased modulation percentages or options for
Member States to choose.

**UK, Luxembourg and Original Commission Budget Proposals Compared**

  ------------------- ---------- ---------- ---------- ---------- -------------
  M EUR, 2004 prices  **2006**   **2007**   **2008**   **2013**   **2007-2013
                                                                  total**

  CAP Markets EU-25   43,735     43,120     42,697     40,645     293,105

  Commission RO+BU               380        976        1,648      7,969

  Lux Paper RO+BU                           100        700        2,000

  UK Paper RO+BU      0          0          0          0          0

  Rural Development                                               

  Commission EU-25    10,544     10,896     11,013     11,500     78,436

  Commission RO+BU               863        1,222      1,705      10,317

  Total for Rural     Of which                                    88,753
  Dev't               28.2 bn                                     
                      for the                                     
                      NMS-10                                      

  Lux Paper EU-25     10,544     9,328      9,271      9,256      64,678

  Lux Paper RO+BU                931        1,259      1,467      9,522

  Total for Rural     Of which                                    74,200
  Dev't               24.1 bn                                     
                      for the                                     
                      NMS-100                                     

  UK Paper EU-25      Of which                                    66,000
  Total for Rural     32.6 bn                                     
  Dev't               for NMS-10                                  
                      plus RO                                     
                      and BU                                      
  ------------------- ---------- ---------- ---------- ---------- -------------

Source AGRA FACTS compiled from Luxembourg and UK Presidency Compromise
Papers.

Notes: CAP Market expenditure includes direct aids, export subsidies and
all other market support instruments. RO = Romania, BU = Bulgaria.

The UK text is available from
[www.fco.gov.uk/Files/kfile/eu2005_FinancialPerspectives2007-13_Proposal.pdf](http://www.fco.gov.uk/Files/kfile/eu2005_FinancialPerspectives2007-13_Proposal.pdf)

**Visit our website:** our website
**[www.useu.be/agri/usda.html]{.underline}** provides a broad range of
useful information on EU agricultural policy, import rules and food laws
and allows easy access to USEU reports, trade and other practical
information. More information on the EU's Agriculture Budget can be
found at
[www.useu.be/agri/budget.html](http://www.useu.be/agri/budget.html).
E-mail: AgUSEUBrussels@usda.gov

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  These reports can be accessed through our website                                                                                                               
  [www.useu.be/agri](http://www.useu.be/agri) or through the                                                                                                      
  FAS website                                                                                                                                                     
  <http://www.fas.usda.gov/scriptsw/attacherep/default.asp>.                                                                                                      
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[^1]: The UK rebate dates back to 1984 and compensates the UK for paying
    far more into the EU budget than it receives in return. There is
    very little support amongst the other Member States for maintaining
    the UK rebate.

[^2]: Gross National Income.