UK rebate

History

In April 1970 the six founding member states of the European Economic Community (EEC) adopted the so-called 'own resources system' as the means of funding the EEC budget. Under this system revenues were to flow automatically to the EEC budget rather than through agreement of the national parliaments, as had been the case until then, and calculated based on three elements:

As the UK’s VAT base in comparison with gross national product (GNP) was proportionally higher than in other member states, and the UK was more open than other member states to trade with non-EEC countries, this system implied a disproportionate contribution by the UK when it joined the EEC in 1973. Additionally, the fact that around 70 per cent of the EEC budget was used to finance the Common Agricultural Policy (CAP), and that the UK had a small agricultural sector meant that the UK gained few receipts under the EEC's redistributive policies.

To address this, at the Fontainebleau European Council in June 1984 Prime Minister Margaret Thatcher successfully negotiated the UK Rebate which was adopted in the May 1985 European Council decision. It has been in place ever since.

In 2005, Prime Minister Tony Blair agreed to exclude from the calculation most enlargement-related expenditure (with a progressive phasing-in of the change from 2009 onwards), so as to contribute to the financing of the enlargements to the European Union, with the accession of Central and Eastern European states, that the country itself had strongly supported. The objective was to address what was widely perceived as an unfair effect of the rebate, since the original mechanism would have resulted in the UK contributing little to the costs of enlargement. These changes were adopted in the June 2007 European Council decision.

Calculation and mechanics

Calculating the size of the UK's annual rebate is complex. Broadly, the UK gets back 66% of the difference between its share of member states' VAT contributions and its share of EU spending in return. The European Commission sets out the detailed calculations in a working document.

The calculation of the rebate for any one year is budgeted and paid for the following year, and the payments are subject to revision for up to three further years. There is no transfer of money from the European Commission to the UK Treasury involved; the effect of the rebate is to reduce the size of the UK's payments.

The effect of the rebate is to increase contributions required from all other member states, to make up the loss from the overall budget. Germany, the Netherlands, Sweden and Austria all have their contribution to make up for the rebate capped to 25% of the figure which would otherwise apply.

Pressure for change

There has been growing pressure in recent years from various EU member states for the rebate to be scrapped. This is partly because the recent additional member states of the EU, which are considerably poorer than the fifteen pre-2004 states, will be a considerable expense on the CAP and the EU budget in general. The view is put forward by many that this makes the UK rebate harder to accommodate within the EU budget, leveraged with the moral argument that all the new entrants are substantially poorer than the UK. The new entrants, however, are likely to be net recipients of EU funds and not net contributors like the UK and only Germany will make a larger contribution to these poorer entrants.

The rebate distorts UK funding negotiations with the EU. Normally, countries and independent agencies within each country bid to receive central EU funds. The UK government is aware that two-thirds of any EU funding will in effect be deducted from the rebate and come out of UK government funds. Thus the UK has only a one-third incentive to apply for EU funds. Other countries, whose contributions into the budget are not affected by funds they receive back, have no incentive to moderate their requests for funds.

Furthermore, many EU grants are conditional on the recipient finding a proportion of funding from local sources, frequently national or local government. This increases the proportion coming from UK government revenue even further. This has the effect of artificially reducing EU expenditure returning to the UK and worsening the deficit which the rebate is intended to redress.

The British government has resisted campaigns to abolish the rebate and the UK has a veto on any decision by the EU to do so. Former Prime Minister Tony Blair said that he would veto any attempt to scrap the rebate. He was supported by many in his Cabinet and by the main opposition party, the Conservatives, as well as the majority of the British public. Supporters of the rebate argue that the distortion created by the rebate is minor compared to that created by the Common Agricultural Policy, which is expensive and has implications for free and fair trade in the EU. In addition, they point out that without the rebate, the UK would pay much more into the EU than comparably wealthy countries like France, due to structural differences between their economies.

As of 2004, France gets more than twice as much CAP funds as the UK (22% of total funds compared to the UK's 9%) which in cash terms is a net benefit that France gets over and above what the UK gets from the CAP of €6.37bn. In comparison, the UK budget rebate for 2005 was scheduled to be approx €5.5bn. Agricultural expenditure for new member states is included in the 'other' segment of the graph. This was limited in 2004 to 25% of payment rates applying to existing member states, rising to 30% in 2005 and 100% in 2013. Total CAP expenditure is capped, so in the absence of further changes, payments to all the pre-2004 member countries will fall by 5% over this period. Some commentators claim that to a large extent, France gets twice the CAP payment received by the UK because it has twice the amount of farmland, although the extent to which there is a correlation between the two is disputed.

The underlying reason why the UK insists on retaining its rebate is that if it were reduced with no change to the CAP, then in its view the UK would be subsidising an inefficient French farming sector. However, France itself remains a net payer to the EU budget, contributing €9.05 billion more than it received in 2013.

If the rebate were removed without changes to the CAP then the UK would pay a larger net contribution than France. The UK would make a net contribution of approximately €10bn compared to the current contribution of €3.86bn, versus a current French net contribution of €6.46bn. Germany has a GDP approximately 25% higher than either France or the UK, but per capita income is comparable to the other two countries. France technically makes a net contribution to the EU budget about twice that of the UK, and is the greatest contributor towards the UK rebate, which means it would benefit most from its abolition. It should be noted however that if France were not required to contribute towards the rebate it would still contribute more to the EU budget than the UK.

These contrasting positions led to deadlock at the June 2005 EU budget negotiations in Brussels. France and other states demanded the abolition of the UK rebate at this meeting. Britain dismissed this as a diplomatic manoeuvre by France to save face after their rejection of the European Constitution in a referendum two weeks before the meeting. The UK made CAP reform a prerequisite of removal of the rebate, a proposal their opponents rejected. The negotiations thus ended without an agreement being reached. In December 2005 the UK Prime Minister Tony Blair agreed to give up approximately 20% of the rebate for the period 2007–2013, on condition that the funds did not contribute to CAP payments, were matched by contributions from other countries and were only for the new member states. Spending on the CAP remained fixed, as had previously been agreed. Overall, this reduced the proportion of the budget spent on the CAP. It was agreed that the European Commission should conduct a full review of all EU spending.