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Q&A: The UK budget rebate

The UK's EU budget rebate has no friends.

The European Commission and the 26 other member states all want to do away with it.

Even UK Prime Minister Tony Blair has described the rebate as an "anomaly".

The BBC News website explains why it came into existence and looks at the arguments for and against it.

WHY DOES THE REBATE EXIST?

The UK won the rebate in 1984, after the then prime minister Margaret Thatcher threatened to halt payments to the EU budget.

Margaret Thatcher
Margaret Thatcher is misquoted as saying: 'I want my money back!'
"We are not asking the Community or anyone else for money," she said at a summit in Fontainebleau. "We are simply asking to have our own money back".

The UK was then the third poorest member of the Community but was on course to become the biggest net contributor to the EU budget.

This was mainly because the UK had relatively few farms, so it got a relatively small share of farm subsidies, which at the time made up 70% of Community expenditure.

The formula for determining how much a country paid into the Community budget was also unfavourable to the UK. It was in effect penalised for raising more revenue from VAT than most other member states and importing more goods from countries outside the Community.

HOW BIG IS THE REBATE?

The rebate in any given year is equivalent to 66% of the UK's net contribution in the previous year.

rebate graphic
Between 1999 and 2001 it came to between 4.4bn and 4.9bn euros. Provisional figures for the years from 2002 to 2005 show it fluctuating between 5.2bn and 5.7bn euros.

However, the final calculation of the rebate for a given year is only made four years later. The rebate for 2000 is adjusted in 2004, the rebate for 2001 is adjusted in 2005, and so on.

This means that rebate for a given year and the the amount of rebate money received by the UK in that year are different things.

rebate graphic
The bar chart shown here gives UK Treasury's figures for the flow of rebate payments.

The European Commission says the high figure for 2001 is mainly due to adjustments to the rebate accounts for 1997 and 1999, which in both cases benefited the UK.

The rebate is on course to rise significantly after 2007, because net contributors to the EU budget will soon have to start paying more, to cover the growing cost of EU enlargement.

However, the UK's agreement in December 2005 to give up 10.5bn euros of the rebate between 2007 and 2013 means that it will not rise so much as it otherwise would have done.

Instead of averaging about 7.7bn euros per year, it will now be closer to 6bn euros per year.

WHO PAYS FOR THE REBATE?

Broadly speaking, the UK's 24 EU partners pay for the rebate in proportion to the size of their economies.

However, four major net contributors to the EU budget - Germany, the Netherlands, Sweden and Austria - pay only a quarter of what would otherwise be their share. In other words, they have a "rebate on the rebate".

The countries which pay for the rebate
The result is that France and Italy, between them, pay about half of the total. This may help explain why French President Jacques Chirac has campaigned so vigorously against the rebate.

Altogether, the 10 new member states paid a total of 290m euros towards the rebate in 2004. This may not be much, but they still resent having to contribute to the rebate of a country far richer than they are.

The UK's European Commissioner, Peter Mandelson, said in June 2005 that it was "surely wrong to ask the poorer new accession states to pay for any part of the rebate".

However, some British experts disagree.

One argues that as long as the poorer states remain net beneficiaries, and receive a fair share of EU funds, the question of how this share is calculated - and whether or not they contribute to the UK rebate - is a mere "book-keeping issue".

Another argues that it is just as reasonable for the new states to contribute to the British rebate as to the "French rebate" - the payments made to French farmers - or to the agricultural subsidies received by other wealthy countries, such as Denmark and Ireland.

WHO CONTRIBUTES MOST TO THE EU BUDGET?

Germany, with the largest economy in Europe, made the largest gross contribution in 2004.

It also made the largest net contribution - the amount a country pays in to the EU budget minus the amount it gets back in the form of EU spending.

Main net contributor countries

However, the UK's net contribution would have been bigger even than Germany's, had it not been for the rebate.

Although France and Italy made a larger gross contribution, the EU also spent a lot more money in those countries than it did in the UK.

If France had not paid 1.5bn euros towards the UK rebate, its net contribution would have been just 1.6bn euros, while without the rebate the UK would have made a net contribution of 9.9bn euros.

As a result of the deal reached in December 2005 on the EU's future financing, the UK and France will make roughly comparable net contributions in the 2007-13 period.

NET CONTRIBUTIONS AND NATIONAL INCOME

A country's net contribution can also be measured in other ways - as a proportion of gross national income (GNI) or the amount paid per head of population.

Chart showing net payments to EU as % of GNI
On both these scales, the Netherlands came top in 2004 - with a net contribution amounting to 0.68% of GNI or 194 euros per capita - followed by Sweden and Germany.

The UK's net contribution as a proportion of GNI (0.26%) and per head of population (77 euros, or 53) was the fourth largest in the EU in 2004.

But the European Commission has calculated that if the rebate had been preserved in its existing form, the UK would have been set to drop behind France, Italy, Austria, Denmark and Cyprus, to ninth place.

On the other hand, if the rebate had been abolished, the UK would have become the biggest net contributor as a proportion of GNI in the period 2008-13.

THE UK'S RISING PROSPERITY

The UK succeeded in winning its rebate in 1984 because it was one of the poorest countries in the EU yet one of the biggest net contributors.

The Fontainebleau summit agreed that any member state shouldering an "excessive" budgetary burden relative to its level of prosperity should qualify for a budget "correction".

However, the UK is now one of the richest countries in the EU. It is more prosperous than most of the old EU members (the EU15) and a lot more prosperous than the 10 members which joined in 2004 (the EU10).

Meanwhile, the amount of the EU budget spent on agriculture - the area where the UK loses out - has consistently declined.

It accounted for 70% of EU spending in 1984. Now it accounts for less than 50%, and it is destined to fall below 40% by 2010.

The European Commission argues that is unfair for the UK to get a rebate while other net contributors "with similar or lesser prosperity" do not.

Graph showing rising UK prosperity

WHAT DOES THE UK WANT?

In June 2005, Britain said it would give up the rebate if there was a fundamental reform of the EU budget, leading to the removal of the "imbalances" which led to the creation of the rebate in the first place.

BUDGET PRIORITIES (2005)
pie-chart showing breakdown of eu expenditure

It has also argued that, in order to meet the challenges of the 21st Century, more money should be spent on research, and less on agricultural subsidies.

The deal on the 2007-13 budget agreed in December 2005 paves the way for a review of the EU budget - both spending and revenue - in 2008/9, which will allow arguments about the rebate and farm subsidies to continue.

The UK has talked about passing responsibility for some subsidies to farmers and poorer regions (which together make up about 80% of the budget) back to national governments.

Foreign Secretary Jack Straw told the UK parliament in June 2005 that richer EU states should "finance their own regional policies".

He went on: "One proposal on the table to which we can certainly give some support is the nationalisation of part of CAP spending. In other words, individual member states would be given greater responsibility for financing their spending on agriculture."




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