The British rebate to the EU budget was negotiated in 1984 by Baroness Thatcher at an EU summit meeting at Fontainebleau. It came about as a result of the culmination of negotiations over the size of the net contribution which Britain was paying into the EU budget. At the time, Britain was paying in about twice as much per year as we were receiving back, with net contributions in 2003 prices running at close to £2.5bn a year and set to rise fast.. The manifest unfairness of this burden led Mrs Thatcher, as she then was, to demand successfully that at least a proportion of this burden should be lifted. The result was that the net annual cost to Britain of our payments to the EU budget fell by about £2.5bn per annum on average each year since 1984 from what it would otherwise have been. The rebate is currently worth £3.2bn a year to the UK.
While the saving of £2.5bn was greatly to be welcomed, unfortunately the sums paid in to the EU by Britain continued to be much higher than the receipts we received. Over the last five years for which figures are available, 1999 to 2003, our gross contributions (at 2003 prices) have been £37.8bn and our receipts £20.0bn, leaving a £17.8bn gap, averaging £3.6bn per annum after taking the rebate into account. Cumulatively since we joined the EU, the total net cost of membership, even after allowing for the rebate, has been a huge sum. It has now cumulated up to over £100bn (again at 2003 prices) which is about one tenth of the entire annual British national income and roughly 50% more than the cost of running the National Health Service for a whole year.
There are two basic reasons why the net budgetary cost to Britain of our EU membership has always been so high. The first is that the way that the EU's finances are constructed has always been biased against key features of the UK economy. Much of the EU's revenue comes from import duties and imports from outside the UK form a much larger proportion of our national income than the EU average. A high proportion of the EU's expenditure is used to subsidise agriculture and Britain has a much smaller agricultural sector than most other Member States. Historically, Britain has also had a higher than average proportion of its national income subject to VAT payments, thus inflating the value of the fixed proportion paid to Brussels. For these reasons, it was always clear that there was going to be a heavy net budgetary cost to EU membership unless special arrangements were made to offset them. The second major problem, however, was that Britain was in such a weak negotiating position when we joined what was then the Common Market in the early 1970s that we were unable to achieve any amelioration of these conditions. Our desperation to join at almost any price made it impossible to agree a reasonable settlement of what was clear at the time was going to be an onerous ongoing problem.
While the British rebate - for obvious reasons - has never been popular with the other EU Member States they have reluctantly tolerated it for the last two decades. Now, however, the EU's budgetary position has become more critical and this has triggered calls for the rebate to be abandoned. The advent of ten new Member States with low living standards and large inefficient agricultural sectors has been a major factor. So has the steady increase in expenditure by EU bodies, which has been running at well above the low average rate of growth achieved by the EU economies. On the income side, the poor recent economic performance of Germany - for long the EU's main paymaster - has generated additional budget pressures which can only be addressed by increasing the net contributions elsewhere. Meanwhile, those countries that do best out of EU subventions such as Spain, Greece and Portugal, have shown extreme reluctance to see their net receipts reduced. The result has been to focus attention on the British rebate as a relatively easy target which all other EU Member States have an interest in seeing abolished.
So far the response from the British government has been to say that the rebate is non-negotiable. Government ministers have pointed out that Britain contributes two and a half times as much as France to the EU budget. About 40% of the EU's expenditure is on the Common Agricultural Policy which almost no-one in Britain supports. Much of the reason why the EU is short of money in the first place is that badly needed and long overdue reform of the CAP has been put off until at least 2013 by France and Germany. Much of the rest of the expenditure by the EU is on projects for which the government has little sympathy - an attitude shared by most of the British public. No doubt the government is also aware that caving in on the rebate would exacerbate still further the widely held scepticism about the EU in all its aspects held by a large section of the British electorate. Their votes may need to be solicited to agree to the proposed EU Constitution before the end of 2006. The results exhibited by current opinion polls strongly suggest that the government has a very strong interest in avoiding further erosion of support for the EU by making concessions on the rebate at least until the referendum on the Constitution has taken place.
Whether the line currently being taken by the government is going to be sustainable - at least beyond the time when the referendum is held before which our EU partners can be told that abolishing the rebate will heavily reduce the chances of the Constitution being accepted - remains to be seen. Budget details buried in Treasury projections for future years do not give cause for comfort. These show Britain's net contribution rising sharply over the coming years - rising to about twice the current level. Figures like this suggest that the government may be planning to avoid, if at all possible, making expensive concessions on the rebate prior to the Constitution referendum but that it has come to the view that thereafter the pressure from other EU Member States to allow the rebate to be eroded away or abolished altogether may become impossible for them to resist.
Is there, nevertheless, a rational and reasonable case for Britain giving up the rebate either wholly or at least in part? The strongest argument for such a change is that the British economy has performed much better than most of the rest of the EU, particularly since we left the Exchange Rate Mechanism in 1992. As a result, our living standards are now well above the EU average. We should therefore be prepared to see UK resources redistributed to poorer EU Member States at our expense. This is a line of argument which might appeal to those on the left of centre politically but for three key factors. First, the way that any redistribution would work is largely through the CAP, which is regressive, inefficient and counterproductive. Second, there is no sign that other relatively rich countries within the EU have any intention of embracing the same sort of generous stance that Britain is being asked to adopt. Third, the really key form of help which the poorer new members of the EU need is not subsidies but access to trade opportunities in the richer parts of the EU, which is, unfortunately, exactly what major countries such as France are intent on blocking. For these reasons, there is little cause for believing that, if Britain were to agree to make a still larger net contribution to the EU than we do at the moment, the result would be any redistribution of resources which was either fairer or more efficient than the arrangements in place at the moment.
The budgetary issues of which the British rebate forms an important part still comprise a policy area where the veto is applicable. In other words, it would not be possible to deprive the UK of our rebate without our agreement. Qualified Majority Voting would not apply in this case. The issue then is not whether we have the right to hold onto the rebate. We do. The question is whether the government is going to find itself being minded to make concessions on the rebate in return for some other policy objective within the EU which it wants to achieve. The pressure to do so is unquestionably going to be very heavy as Britain is bound to find itself isolated since our special circumstances mean that we are the only country with a rebate. The danger, however, is all too clear. It is that we agree to increase still further our already exceedingly onerous net contribution to the EU budget, from which we will receive no corresponding benefit. At the same time what we get in return is all too likely to be something which we only need to fight for because we are in the EU in the first place - such as exemption from more EU controls and regulations - which we would not have to bother with anyway if we were outside it.
The real significance of the rebate issue may therefore be the impact that a long battle between Britain and the other Member States over its abolition has on public opinion in the UK. An increasingly sceptical electorate is likely to see further heavy net costs of EU membership as yet another reason for wondering whether being in the EU at all is worth the candle. Any concessions made by Britain on the rebate can only increase still further the very heavy net cost of Britain's EU membership. A large majority of the electorate does not want to join the euro. The government is clearly going to have major difficulties in persuading the British people to support the new proposed EU Constitution. A stream of publicity about waste and corruption in Brussels is doing nothing to enhance the EU's reputation. Increasing the net financial costs of membership by a large additional sum, running into more billions of pounds per annum, might turn out to be the last straw.