Q&A: EU budget battle

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The EU's marathon negotiations in Brussels have resulted in a multi-year budget for 2014-2020.

For the first time the EU is imposing a real-terms cut in budget spending, as UK Prime Minister David Cameron and others argued that austerity at home must be matched by EU austerity. But many in the EU argue that this funding is vital to help relaunch growth in the 27-nation bloc.

So was the original proposal too big?

Yes, according to the UK, Germany, the Netherlands and Sweden. They are net contributors to the budget. No, according to the European Commission, the European Parliament and many of the new member states in Central and Eastern Europe, who want to catch up with the old EU core states and are net beneficiaries from the budget.

How much money is at stake?

The final total for the budget, officially called the Multi-Annual Financial Framework (MFF), is 960bn euros (£812bn; $1.3tn). That ceiling for spending is equivalent to 908bn euros in actual payments. The payments total is the one used by the UK government.

The hard bargaining whittled the budget down. At the November summit the chairman, European Council President Herman Van Rompuy, had proposed a compromise total of 973bn euros.

Earlier the Commission, which drafts EU laws, had proposed 1.025tn euros. That would have meant a 4.8% increase on the current 2007-2013 MFF. The new total of 960bn is a 3.3% cut.

The Commission's figure did have the support of the European Parliament, whose approval is required for the MFF to become law. There are now threats from MEPs to veto this new deal, which is well below the spending that the Commission wanted.

These figures are ceilings for spending, and usually the EU spends less than the agreed ceilings.

The MFF is equivalent to about 1% of total output (GDP) across the EU countries, and the combined national budgets are far greater.

The new budget envisages cuts to subsidies for farmers (the Common Agricultural Policy) and an increase for "competitiveness" - a category that includes innovation projects and research.

Outside the MFF the EU still intends to spend 37bn euros on aid - mostly for non-EU developing countries.

What is the argument for increasing EU spending?

The Commission said its draft MFF would boost funding for research and innovation - projects that could help revive growth in a Europe hit by recession and record unemployment. The governments are also asking the EU to do more, the Commission says, so those tasks need to be resourced. For example, the EU now has a new diplomatic corps - the European External Action Service - and new regulatory bodies will have to oversee Europe's banks and fund managers.

Unlike the current MFF (2007-2013), the next one also provides more money for three new member states - Bulgaria and Romania, which joined in 2007, and Croatia, on course to join in July.

Is this a victory for David Cameron?

Mr Cameron certainly thinks so. "I think the British public can be proud that we have cut the seven-year credit card limit for the EU the first time ever," he said.

He also said he had fought off attempts to change the UK's budget rebate, worth about 3.5bn euros annually. He declared it "safe".

However, the UK's net contribution is actually likely to rise, because of a previous agreement negotiated by former Prime Minister Tony Blair. Years ago the UK and other big contributors agreed that more would have to be spent to fund the EU's eastward enlargement.

Mr Cameron's main allies in demanding cuts were the leaders of Germany, the Netherlands, Finland and Sweden.

He had threatened to veto a deal if other EU leaders supported a budget rise.

Mr Cameron was loath to soften his line. At Westminster last October, 53 Eurosceptic Conservatives in a rare alliance with Labour MPs defeated him on this issue by voting for a real-terms cut - not a freeze - to the EU budget.

What happens if there is no agreement with the European Parliament?

The 2013 EU budget would be rolled over into 2014, with a 2% rise to take account of inflation. That would leave much uncertainty about the EU's long-term spending programmes. It would also mean the UK paying more than under Mr Cameron's plan, as his calculation is based on 2011 spending.

The roll-over method, with the EU funded month-by-month, has been done before, but it is messy and seen as an admission of failure. It makes budgeting for things like research projects tricky.

What are the most contentious areas of spending?

Agriculture, cohesion - that is, funding for the EU's poorer regions - and EU administrative costs.

EU staff costs are often criticised by Eurosceptics - and Mr Cameron is among the critics. But this has actually gone up in the new budget by a few billion euros. In any case, slashing the staff budget would not have delivered the size of cut demanded by the UK. Moreover, there is already a risk for the UK that senior British civil servants whose EU careers began in 1973, when the UK joined, will not be replaced when they retire.

Why is so much spent on agriculture?

While national governments manage most other policy areas, such as health, education and transport, it is the EU that provides the bulk of support for farmers, through the Common Agricultural Policy (CAP).

In 1985 about 70% of the budget went into the CAP - those were the days of butter mountains and wine lakes. There have been far-reaching reforms to the subsidy system since then and the budget has been cut. Farmers risk losing part of their subsidy if they ignore the EU's rules on the environment and animal welfare.

The EU's auditors have complained that the pattern of farm aid still "takes little account of the specific circumstances of the recipient", as the calculation is mainly based on the area of land farmed. Their report said much of the aid "still goes to large farms, as was the case under the previous system".

What about the UK rebate?

This was a red line for the UK government. In 2011 the UK's rebate was 3.56bn euros. It used to be bigger, but was reduced as the reforms to the CAP budget took effect.

It was Margaret Thatcher who persuaded the UK's EU partners in the 1980s that the British contribution was excessive, at a time when farm subsidies were bigger than now and France was a major beneficiary.

There is pressure in the EU to scrap the rebate. The Commission and some of the ex-communist countries, which rely heavily on EU funding, consider the UK rebate to be unfair and say more should be spent in the EU's poorest regions.

The current system of national contributions is complex and plagued by rivalry. The Commission wants the EU to be funded from "own resources" - that is, direct taxation - but that idea is anathema to Eurosceptics, who suspect a Brussels power grab and efforts to build an EU superstate.

Graph of EU contributions by member states

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