The UK’s EU surcharge

Debate over the UK’s EU budget surcharge of £1.63bn1 has raged since the end of October, culminating in an urgent question in the House on Monday (11th November). The Chancellor of the Exchequer claims to have, amongst other things, halved the surcharge – his opponents say that this is based on a rebate which was always due.

Why does the UK owe this money, what has been negotiated and what’s the rebate got to do with it?

The surcharge: the why and what

Why a surcharge?

Member States make a contribution to the EU budget based on their Gross National Income (GNI). Member States have revised their method for measuring GNI to achieve greater consistency and ensure that all have paid their correct share. In light of revised GNI figures, going back as far as 1995, Member States’ budget contributions are being revised.

The UK has revised its GNI upwards. The UK’s previous method had, between 2002 and 2013, under-estimated GNI relative to other countries. An EU amending budget has requested a payment of £1.63bn from the UK which largely reflects this change.

All Member States are impacted upon, whether positively or negatively, by the amending budget. The EU operates a balanced budget with annual expenditure met by revenue raised. With expenditure unchanged, the EU budget windfall arising from upward revisions to past GNI must be shared amongst Member States. This means whilst some countries like the UK will make a net contribution, some including France and Germany will receive a payment.

What’s GNI got to do with the EU budget?

74% of Member State’s payments to the EU budget are based on GNI contributions: each Member contributes a set percentage of its GNI. Members also make payments based on harmonised VAT base (12% of the budget) and customs duties and sugar levies (14% of the budget).

Member States pay budget contributions in twelve monthly instalments. Contributions can be adjusted, through amending budgets, as new information becomes available.

Amending budgets usually feature relatively small adjustments and pass by with little public comment. However, Draft Amending Budget No. 6 of the 2014 EU Budget is different: on top of the normal revisions, it includes payments resulting from upward revisions to all Member States’ GNI since 2002 (1995 in the case of Greece) and shares this windfall amongst Members States.

The UK must contribute £2.87bn to make good the underpayments that were a result of the lower pre-revision GNI. It is also set to receive a payment of £1.24bn as the EU shares this overall windfall amongst Member States according to their share of EU GNI in 2014.

2002 – that’s a while ago

Revisions were allowed back to 2002 as ‘reservations’ had been placed on the GNI data; without these reservations a statutory time limit of 4 years would exist.

Reservations were placed as Eurostat (the EU’s statistical body) did not agree with the way that GNI was being measured. Member States have improved their GNI measuring methods and revised GNI figures. Reservations can now be removed.

Negotiations and the rebate

The Chancellor of the Exchequer emerged from Friday’s (7th November) meeting of EU Finance Ministers (ECOFIN) claiming to have halved the surcharge to £850 million, delayed its payment, and ensured no interest would be paid. Mr Osborne discussed these concessions as a ‘real win for British taxpayers’.

Claims about a reduced bill have been hotly debated, other concessions have been less contentious.

The £850 million question: what part the rebate?

As it pays more to the EU budget than it receives from it, the UK receives a rebate on its contributions. Applying the rebate reduces UK’s surcharge to the £850 million reported by the Chancellor.

Whilst all agree that the rebate will reduce the net cost of the surcharge, debate has moved onto whether it would always have applied or whether it was won through negotiation.

The Chancellor claims that there was real doubt over whether the rebate would apply to the surcharge, and that assurances were only gained after intensive discussions with the European Commission. The Chancellor’s opponents claim that this cannot be described as a “real win” as the rebate would have always applied, quoting other EU finance ministers to back up their claims.

Timings and interest

Concessions have been reached on the timing and staging of payments. Member States will be able to pay in stages with payment completed by 1 September 2015. The original amending budget required a single payment to be made by 1 December 2014.

Member States paying later will not incur interest charges for doing so. Regulations would have allowed for interest payments of 2 percentage points above the base rate, increasing by a 0.25 percentage point for each month of delay.

Questions unanswered

The European Commission has been fairly quiet on consequences of deals struck on the EU budget and the rebate. Little has been said or published about how exactly the figure of £850 million has been reached and how the budget will remain balanced if some Member States receive payments on 1 December 2014, whilst some will pay for these by 1 September 2015.

On the political side of things it is unlikely that any concrete details will emerge from the Commission on the extent of rebate negotiations, leaving that particular argument open. And whilst the net result is the same, the related timings of the rebate and surcharge remain unclear.

Footnotes:

  1. This figure has often been referred to as £1.7bn in the press. The figures in this post come from the Nineteenth Report of Session 2014-15 from the House of Commons Scrutiny Committee.

 

Author: Matt Keep