24 June 2015

In recent days there has been a lot of speculation as to what exactly David Cameron will ask for as part of his EU renegotiation, above and beyond the general four-point programme set out recently by Philip Hammond. One area not mentioned specifically by the Foreign Secretary was the EU budget although this is surely a crucial element of the wider ‘jobs, growth and competitiveness’ agenda. With Cameron set to make his opening pitch at this week’s European Council, the EU budget should very much be included in the reform drive.

While the cut to the EU’s 2014-20 budget negotiated by Cameron two years ago appears to have finally brought spiraling annual EU spending under control, the budget remains wasteful, inefficient and generally unfit for the 21st century. Below are a number of specific proposals that would not only save UK and EU taxpayers billions, but also allow Cameron to demonstrate that he has brought tangible powers back from Brussels.

The Common Agricultural Policy

The CAP remains the single largest item in the EU budget, accounting for around 40% of total spending. The CAP is inefficient and badly designed. The bulk of it goes on direct subsidies to landowners regardless of what they use their land for, meaning that, overall, the CAP fails to achieve its objectives of boosting farmers’ competitiveness, promoting rural jobs and economic development and delivering environmental benefits such as biodiversity.

Full liberalisation of the CAP would be economically viable but politically difficult to achieve. Instead, direct subsidies should be scaled back – a 30% cut would save around £63.5bn (€89bn) over seven years – and made conditional on the delivery of public environmental benefits such as biodiversity.

Regional Subsidies

The EU’s structural funds are the second largest spending item accounting for around 35% of the budget. While there is a rationale for providing assistance to less developed member states, involving all member states in EU regional spending, irrespective of their relative wealth and level of development, is economically irrational. The funds are also poorly designed and ineffective – in the previous EU budgetary period, the majority of the UK’s receipts went back to the same areas in which they were raised in the form of taxes, and 35 of the UK’s 37 regions were net contributors to the funds; this meant many relatively poor areas of the country lost out substantially.

Devolving regional spending back to wealthier member states, i.e. those with a GDP per capita above 90% of the EU average like the UK, would only cut the EU budget by £84.6bn (€118.6bn) over seven years. This reform would save the UK around £4.2bn (€5.9bn) in net terms, and these savings could be ploughed back into a new UK regional development strategy. Such a reform would not only have financial benefits but it would also free local authorities to tailor development programmes to best suit local circumstances as opposed by having to abide by one-size-fits-all EU rules.

EU administrative spending

Although the Commission constantly argues that EU administrative spending makes up ‘only’ around 5% of the budget, this still amounts to over £43.9bn (€61.6bn) in total spending commitments over the current seven year budget period. There are substantial savings to be made in this area including:

  • Cutting perks and pay: Pay and conditions for EU officials remain very attractive in comparison to many national administrations and much of the private sector. A modest reduction of 5% across the lowest salary bands, 10% across the middle salary bands and a 15% reduction across the upper salary bands would lead to a total saving of £279m (€391m) across all the institutions every year, or just shy of £2bn over seven years.
  •  Scrapping the expatriation allowance: The 16% expatriation allowance for non-Belgian EU officials should be scrapped altogether – if applied to the staff of European Commission alone, over £207m (€290m) could be saved from the EU budget annually or £1.4bn over seven years.
  • Abolishing unnecessary quangos: Getting rid of the EU quangos and institutions that serve no unique purpose and duplicate the work of others (such as the Economic and Social Committee and the Committee of the Regions) could save EU taxpayers almost £260m (€364m) every year over £1.8bn over seven years.

These changes would deliver around £187.3bn in total savings over a seven year period. The bulk of this could be transferred back to cash-strapped national treasuries although some should be re-invested in research and development, which only makes up around 10% of total EU spending. They would make the EU renegotiation more credible by cutting the cost of the UK’s membership – always popular on the doorstep – and allow Cameron to point to regional policy as a specific power he has brought back from Brussels.

The ideal opportunity to push for these ambitious changes is the second half of 2016, when the long-term EU budget due to be opened up for its mid-term review – another reason not to rush the referendum.