The decisions taken in Brussels in December 2005, during the last month of the British presidency of the European Union, determined the budget framework for the EU for the seven years ending in 2013. Any rational outcome would have used savings from reform of the Common Agricultural Policy (CAP) to fund whatever was worth paying for. Unfortunately, an agreement brokered in 2002 between the French and Germans, and accepted at the time by the British government as the price to be paid for enlargement, had blocked off any serious reform of the CAP until 2013. All the new EU Member States in Eastern Europe were expecting large transfers of funds from the EU budget. Britain was the only country with a rebate in place designed to reduce its disproportionate contribution to EU funding. The British government therefore found that the only way to secure an agreement on the EU budget was to make substantial concessions on the British rebate, thus enabling funding to be made available to Eastern Europe without any of it coming from reform of the CAP. The very substantial concessions wrung out of the British negotiators in Brussels may have solved the EU budget crisis for the time being. The issue is whether this has been done at the cost of further destabilising Britain's membership of the EU, opening up a huge budget gap if UK funding was no longer available to keep the EU budget in balance.
The budgetary cost to Britain of our membership of the EU is already very high. The concessions made in December 2005 are going to make it much greater. During the last four years, the UK's payments into the EU budget have averaged £3.5bn a year more than we have received in return. Over the period from now to 2013 the net payment is scheduled to rise to an average of £6bn a year - the difference between an average of £10.5bn which we will pay in and £4.5bn we will get back - to finance, even then, projects chosen by Brussels rather than Westminster. The main reason why Britain does so poorly out of the EU budget is that we do not benefit to any significant extent from most of the EU's spending programmes. We therefore get less back per head from the EU than any other Member State - half what France receives, for example, and a quarter of the benefit obtained by the Irish, whose average standard of living is now more than 25% higher than that in the UK. The profile of the reduced rebate which the UK will receive on our payments to the EU budget is also crucially important. The reduction will be gradual for the first year or two but will then rise much more steeply to about £2bn a year towards 2013, putting us in a very weak negotiation position at the start of the next budget round.
All budget processes involve some degree of horse trading and accommodation of special interests but the EU budget is in a class of its own. More than 40% of its expenditure goes on the CAP, with most of the payments going to huge agribusiness landowners, who are the last people to need subsidies. Far from the total CAP budget going down, it is still rising - up 12% between 2004 and 2007, for example, with little prospect of the review promised in 2008 coming to anything worth having. Worse still, the trade distortion which the bizarre and irrational pattern of CAP disbursements produces then costs everyone a large multiple of the value of the subsidies paid out in the first place, not least with dire consequences for the Third World. The CAP is not, however, the only indefensible part of the EU budget. The biggest EU subsidies per head of the population go to Luxembourg, with the highest living standards in the EU. France, still one of the richest Member States, is now set to receive more from the EU budget than any other country. Ireland, with the second highest income per head in the EU, still gets more out of the EU than it pays in. Nor does EU administration come cheap. Its cost is expected to be £34bn between now and 2013 - equivalent in total to about 3% of the UK's entire GDP, and rising by 28% in real terms over this period. Meanwhile the EU's accounts remain without audit certification for the eleventh consecutive year.
Much of the rationale used to try to justify the outcome of the EU budget deal done in Brussels in December 2005 revolved round expectations among East European Accession Countries that they would become large scale recipients of EU funding. It is true that their living standards are well below those of the more long standing Member States, but this is also the case in much of the rest of the world. If the British taxpayer is to be asked to forego billions of pounds per annum, it is far from clear that the Accession Countries are the most deserving recipients of the funding which would then be available. Even if they were, it would surely be much better for payments to be made directly to them without channelling them through the expensive, inefficient and - too often - corrupt EU bureaucracy. There is also another key consideration. If the EU really wants to see the East European Accession Countries catching up the average living standards in the EU, by far the best way to achieve this objective is not through aid but by providing them with trading opportunities to exploit. Unfortunately, this is exactly the opposite to what many other aspects of EU policy are likely to achieve. Over regulation and requiring them to join the euro, for example, are all too likely to slow up the Accession Countries' growth rates and thus their ability to finance their own development.
We also need to remember that the direct budgetary contributions we make to the European Union, although highly visible, are actually still only a relatively small part of the total cost to us of belonging to the EU. Figures from independent sources such as the Organisation for Economic Co-operation and Development (OECD) show the CAP costing Britain about £14bn more per annum than if we were allowed to buy food on world markets. The cost of excessive regulation, most of it originating in the EU, is estimated by the government's own agencies to be an even higher amount, now of the order of £20bn a year. In total, the recurrent annual expense to the UK of our EU Membership is estimated to be of the order of £40bn per annum, which is about 4% of our annual GDP. Even more insidious, however, have been the dynamic effects of linking Britain more and more tightly to the slow growing and protectionist EU economy. This may have cost us as much as 0.5% per annum in our growth rate over the last ten years - making the UK GDP now £60bn smaller both this year - and thus the base for every year in future - than it would have been if Britain had been allowed to choose its own much more outward looking economic policies.
There is little doubt, reflected in the current opinion polls, that the outcome of the December 2005 agreement on the EU budget dealt another heavy blow to the credibility of the Labour government. Whereas, until comparatively recently, it seemed likely that Labour would win a fourth term in office, the odds in favour of this happening have now shortened considerably. The perception that a poor deal for Britain was achieved in the Brussels negotiations has clearly been a significant short term contributory factor. More important in the longer term may well be the budgetary implications of a significant part of our rebate being given up causing our steadily increasing net contribution to the EU. As Britain moves towards the next general election, the government is going to find well over £10bn of the taxpayers' money being paid to Brussels every year, with at least £6bn - and certainly more than this sum by 2013 - disappearing to Brussels with no return at all to the UK. £6bn is equivalent to 10% of the entire annual costs of the NHS or almost 5p on the standard income tax rate. At a time when all the indications are that the UK's public finances are, for a variety of reasons, going to be under significant pressure, the very large net payments we are due to make to the EU, negotiated by our government and for which we will get nothing in return, are all too likely to haunt the Labour Party when it next faces the electorate.
Britain's relationship with the EU has been fragile and fractious for many years. The manifest irrationality and unfairness of the EU budget, and Britain's very substantial net payments into it year after year, cumulating to date to a staggering £104bn in current money since the 1970s, have always been major factors in the EU's unpopularity in Britain. Now that the net budgetary cost per year is due to rise from £3.5bn to £6bn, it is hard to believe that negative perceptions on this score will not intensify. The more they do so, the more likely it is that Labour's major opponent, the Conservative Party, will capitalise on Britain's net payments into the EU budget, an issue which is bound to strike a significant chord with the electorate. If a Conservative government was then elected, it remains to be seen what would happen in terms of renegotiation of Britain's relationship with the EU. It is not that difficult, however, to envisage a scenario where Britain simply refused to continue to pay so much into the EU while receiving so little in return, on pain of withdrawal if radically different terms were not negotiated. If this were to happen, our fellow Member States would be faced with a much more serious problem than they had to contend with in Brussels in December 2005. Britain would no longer be there to plug the budget gap with massive subventions from the UK Treasury. Who would then fund the CAP? Where would France and Ireland then find the money coming from to pay their net receipts from the EU? Furthermore, if Britain by this time had kicked over the traces on the budget, what else in our relationship with the EU might be up for radical change? Britain may appear to have paid a heavy price for our continuing membership of the EU in the recent budget negotiations, but by driving the UK into such a bad deal that the British people might find it completely unacceptable, our EU partners may have pushed their luck too far. In a few years time, the paymaster on whom they have come to rely to plug the EU's budget gaps might no longer be there.
Go to Head of Page