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Annex B - Estimating Scotland's Contribution to the EU Budget

This annex outlines how the European Union ( EU) Budget is funded and expenditure assigned. It also provides estimates of Scotland's contribution to the EU Budget, and the revenues received.

1. Background

In 2007 the EU Budget amounted to nearly €118 billion, covering the period 1 st January to 31 st December 32.

The EU Budget supports actions and projects in policy areas where EU countries have agreed to act at union level. Almost 80 per cent of EU funds, including the Common Agricultural Policy ( CAP) and EU Social Funds, are administered by Member State Governments. The European Commission ( EC) also issues grants and procurement contracts, in a number of areas including research policy, transport and energy policy to independent organisations 33. Expenditure is also allocated directly to both Member States and non- EU countries.

If Scotland became an independent member of the EU then, in common with all other member states, it would commit resources to the EU Budget and receive entitled resources from the EU.

2. Funding the EU Budget

The EU Budget is funded through 'own resource' revenue alongside other contributions including surpluses from previous years and other smaller sources of revenue. In 2007, nearly 94 per cent of EU revenue comprised of 'own resource' funding. 'Own resources' are revenues which are automatically transferred to the EU from Member States for the purposes of financing the EU Budget and do not require any subsequent action by national governments. Currently, the total amount of 'own resources' which can accrue to the EU Budget is capped at 1.24 per cent of the sum of all Member States gross national income ( GNI).

There are three components to own resource funding. These are:

GNI-based own resource;
VAT-based own resource; and
Traditional own resources ( TOR).

In the early years of the EU, TOR accounted for the largest share of revenues. However as highlighted in Chart 1, GNI-based own resource funding now accounts for the largest share, 62.9 per cent of all EU revenue in 2007. The mechanism used to determine each Member State's contribution to own resource funding is set out below 34.

Chart 1: EU Revenue Composition in 2007

Chart 1: EU Revenue Composition in 2007

Source: EU Budget 2007 Financial Report

GNI-based own resource

In 2007, each Member State made a contribution worth 0.5909 per cent of their GNI to the EU Budget. This is the last source of revenue received by the EU and the final percentage is adjusted each year, within predefined limits, to obtain the agreed budget.

The UK receives a rebate against its GNI contribution which is funded by all other member states. In addition, during the period 2007 to 2013, the Netherlands and Sweden will both receive gross reductions in their annual GNI-based contributions (€605 million and €150 million, in 2004 prices, respectively) to reduce the disparities in net contributions between Member States 35.

VAT-based own resource

The second largest source of revenue are VAT-based own source revenues. The VAT-based own resource is not directly related to VAT receipts in each Member State. As VAT rates and exemptions vary between countries, a formula is used to create a harmonised VAT base to represent the estimated value of all goods and services subject to VAT in each Member State on a consistent basis. The EU then receives a proportion of this tax base - the 'call rate'. 36, 37 The VAT call rate is currently set at 0.3 per cent for all Member States except Austria, Germany, the Netherlands and Sweden which have call rates of 0.225 per cent, 0.15 per cent, 0.1 per cent and 0.1 per cent respectively. This is to take into account the contribution these countries make to the UK correction (rebate).

The VAT base to which the call rate is applied is currently capped at 50 per cent of each Member State's total GNI. This is to ensure that less-prosperous Member States do not pay excessively relative to their economic capacity. In 2007, the 50 per cent 'capping' was applied to 13 Member States (Bulgaria, Czech Republic, Estonia, Ireland, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, Poland, Portugal and Slovenia).

Traditional own resources ( TOR)

Traditional own resources ( TOR) are received from agriculture duties and customs duties levied on imports of agricultural and non-agriculture products from non- EU countries. TOR also includes the sugar levy. Such tax revenues traditionally contributed the largest share of financial resources to the EU. TOR resources are collected by Member States but accrue directly to the EU Budget, with Member States retaining 25 per cent of their TOR to cover collection costs.

UK Correction ( UK rebate)

The UK correction mechanism (or 'rebate') was introduced in 1985. It was intended to correct the perceived imbalance between the United Kingdom's share of payments to the EU Budget and its share of EU expenditure - largely as a result of only a small amount of UK agricultural production qualifying for financial support. The mechanism has been modified on several occasions to compensate for changes in the system of EU Budgeting, but the basic principles remain the same. Currently the UK is reimbursed 66 per cent of its budgetary imbalance, the difference between its payments to the EU and the revenue it receives. In 2007 the UK's rebate was worth approximately €5 billion, 33 per cent of the UK's GNI and VAT contribution for this year 38.

In December 2005, the UK agreed to increase its contribution to the EU Budget for the 2007-13 period to assist in the funding of EU enlargement. This reduction in the rebate cannot exceed €10.5 billion, in 2004 prices, for the period 2007-13 39.

The UK rebate is financed by the other 26 Member States, based on their share of total EUGNI. Austria, Germany, the Netherlands and Sweden currently all have their contributions to UK rebate caped at a quarter of their normal share, a so-called 'rebate on the rebate'. The cost of this correction is then redistributed across the remaining 22 Member States.

Member States Contribution to the EU Budget

Charts 2 and 3 below show how contributions, along with the adjustment for the UK rebate, are split across EU Member States.

As the largest Member States, Germany, France, Italy and the UK make the largest contributions to the EU Budget. On a per capita basis Luxembourg makes the largest contribution to the EU followed by Belgium. After accounting for the rebate, the UK makes the 4 th largest contribution to the EU and the 13 th largest contribution on a per capita basis. As a result of the rebate, Spain and Portugal are the only members of the original EU15 who make a smaller, per capita, contribution than the UK to the EU Budget.

Chart 2: Contributions by EU Member States in 2007

Chart 2: Contributions by EU Member States in 2007

Source: EU Budget 2007 Financial Report

Chart 3: Per capita contributions by EU Member States in 2007

Chart 3: Per capita contributions by EU Member States in 2007

Source: EU Budget 2007 Financial Report and Eurostat

3. Main Sources of Financial Assistance from the EU

This section outlines how EU expenditure is allocated between different programmes and between Member States.

Allocation of EU expenditure is split into 6 categories:

1. Sustainable Growth;
a. Competitiveness
b. Cohesion

2. Preservation and management of natural resources;

3. Citizenship, freedom, security and justice;
a. Freedom, security, justice
b. Citizenship

4. The EU as a global player;

5. Administration; and

6. Compensation.

Chart 4 below illustrates how the EU Budget was spent between these programmes in 2007. In total, EU Budgetary expenditure was worth €114 billion during this year.

Chart 4: EU expenditure composition

Chart 4: EU expenditure composition

Source: EU Budget 2007 Financial Report

Expenditure under the Natural Resource and Cohesion programmes accounts for over 80 per cent of EU expenditure. The natural resources category, which accounts for 48 per cent of the total EU Budget, covers expenditure in relation to the Common Agricultural Policy ( CAP), support for fishermen through the European Fisheries Fund ( EFF), and the development and implementation of environmental policy and legislation. By far the largest expenditure in this category is CAP expenditure. The Cohesion programme covers expenditure through the EU Cohesion Fund, European Regional Development Fund ( ERDF) and European Social Fund ( ESF) 40.

Charts 5 and 6 show the allocation of expenditure by Member States in 2007 in terms of both total finances received and finances received on a per capita basis. In 2007, the UK was ranked 7 th in terms of total EU expenditures received, with France receiving the most. On a per capita basis the UK was ranked 24 th in terms of total expenditures received, with the Netherlands being the only member of the original EU15 to receive less. The low per capita receipts received by Bulgaria and Romania reflects the phasing in of Structural and Cohesion Funds and agriculture payments after their accession in 2007 41.

Chart 5: Allocation of EU expenditure by Member States in 2007

Chart 5: Allocation of EU expenditure by Member States in 2007

Source: EU Budget 2007 Financial Report

Chart 6: Allocation of EU expenditure by Member States in 2007 (per capita)

Chart 6: Allocation of EU expenditure by Member States in 2007 (per capita)

Source: EU Budget 2007 Financial Report and Eurostat

Chart 7 shows the ratio of finances received to contribution to the EU Budget for each Member State. 42 A value above 100 per cent implies that a country receives more from the EU in expenditure than it pays in contributions. The chart shows that for the UK, the money received from the EU was equal to approximately 55 per cent of total contributions. This is the second lowest ratio in the EU, with only the Netherlands paying more in contributions than they receive in EU receipts.

Chart 7: Money received as per cent of contributions (with UK rebate)

Chart 7: Money received as per cent of contributions (with UK rebate)

Source: EU Budget 2007 Financial Report

4. Situation in other small EU countries

Table 1 below highlights the contributions to and the revenues received from the EU Budget in EU countries with either similar populations and/or GDP as Scotland. In 2007-08, Scotland's population was approximately 5.1 million and Government Expenditure and Revenue Scotland ( GERS) estimated that Scotland's GDP is between €166 billion (£114 billion) and €206 billion (£142 billion) depending on the treatment of North Sea GDP. 43, 44, 45

Ireland, Finland and Denmark all have broadly similar populations and GDP to Scotland but their net contributions (the difference between what they contribute to and what they receive in EU expenditure) varies. For example, Ireland is a net recipient, with a net contribution of -€580.3 million, Finland and Denmark make net contributions of +€206.0 million and +€769.8 million respectively.

However going forward, financial support for Ireland is likely to fall considerably as resources are diverted toward less prosperous regions of Europe (and particularly the relatively new accession countries).

Table 1: Contributions and receipts from the EU Budget for small EU Countries in 2007 (€ million)

Country

Ireland

Finland

Slovakia

Denmark

Bulgaria

Austria

Population (millions)

4.3

5.3

5.4

5.5

7.7

8.3

GDP (€ million)

190,603

179,659

54,857

226,544

28,899

270,837

Contribution to the EU Budget - Total own resources (€ million)

1,586.4

1,629.4

519.2

2,219.0

290.8

2,218.1

Revenue received from the EU Budget - Total Expenditure (€ million)

2,166.7

1,423.4

1,082.6

1,449.2

591.5

1,598.4

Net Contribution
(Total Own Resource - Total Expenditure)

-580.3

206.0

-563.4

769.8

-300.7

619.7

Source: EU Budget 2007 Financial Report and Eurostat
Note: A negative net contribution indicates that a country receives more from the EU than it contributes.

5. Scotland's illustrative contribution to the EU Budget

Under the current fiscal arrangements the Scottish Government does not directly contribute to the EU Budget. All payments currently made by Scottish taxpayers are channelled through the overall UK tax system.

The UK fiscal framework does not provide separate detailed intra-country or intra-regional fiscal accounts. An analysis of Scotland's contribution to the EU Budget has therefore to be estimated. There are multiple ways to estimate Scotland's current share of the UK contribution to the EU Budget. The examples below are illustrative and not official statistics.

In the analysis below, Scotland's estimated share of the UKGNI contribution is calculated by taking the ratio of Scottish GDP to UKGDP, and applying this to the UK's GNI contribution to the EU. Scotland's estimated GNI contribution, based upon the relative share of GDP, varies depending on the treatment of North Sea GDP. In the analysis below and consistent with the GERS analysis, three estimates are presented based upon three different treatments of the North Sea, (i) an estimate excluding North Sea GDP, (ii) an estimate including a per capita share of North Sea GDP and (iii) an estimate including an illustrative geographical share of North Sea GDP.

The methodologies used to estimate VAT own resource, TOR and the UK rebate are consistent with those used in GERS. 46 Scotland's share of the VAT contribution is estimated based on Scotland's share of UK household VAT expenditure from the Expenditure and Food Survey. The same proportions were applied to achieve Scotland's TOR payments. Scotland's share of the UK rebate is estimated by taking a per capita share of the UK rebate. The source for all UK data on EU transactions is Public Expenditure Statistical Analyses ( PESA) 47.

Based on the above methodology, it is estimated Scotland would have made a positive contribution to the EU of approximately €1.6 billion before the rebate, and €1.1 billion after the rebate, when North Sea GDP is excluded. When a population share of North Sea GDP is included Scotland is estimated to make a net positive contribution to the EU of approximately €1.6 billion before the rebate, and €1.1 billion after the rebate. When an illustrative geographical share of North Sea GDP is included in the analysis Scotland is estimated to make a net positive contribution to the EU of approximately. €1.8 billion before the rebate, and €1.4 billion after the rebate.

Table 2: Scotland's Illustrative Contribution to the EU Budget in 2007

£ million

€ million

GNI

GDP share (excluding North Sea GDP)

726

1,061

GDP share (including per capita share of North Sea GDP)

743

1,085

GDP share (including geographical share of North Sea GDP)

896

1,310

VAT

212

310

TOR (net of collection costs)

157

229

Total - before rebate

GDP share (excluding North Sea GDP)

1,095

1,600

GDP share (including per capita share of North Sea GDP)

1,111

1,624

GDP share (including geographical share of North Sea GDP)

1,265

1,849

Rebate

-328

-479

Total - after rebate

GDP share (excluding North Sea GDP)

767

1,121

GDP share (including per capita share of North Sea GDP)

784

1,145

GDP share (including geographical share of North Sea GDP)

937

1,370

Source: PESA and Scottish Government Calculations
Notes: Average annual exchange rate for 2007 is used to convert to euros

6. Scotland's illustrative receipts from the EU Budget

Section 3 of this annex examined the different expenditures of the EU. As discussed, there are four elements which account for the majority of EU expenditure. These are the Cohesion Fund, European Regional Development Fund ( ERDF), European Social Fund ( ESF) and the Common Agricultural Policy ( CAP). Table 4 groups the Eligibility for the Structural and Cohesion Funds under the three objectives of the EU cohesion policy 48. This has been used to estimate Scotland's current eligibility for the main EU funds. Scotland also benefits from funding from EU programmes which are allocated on an industry basis or to specific organisations rather than to the country as a whole. These are not reflected in Table 4.

GERS provides estimates of Scottish receipts from the EU using actual data where possible and estimates in all other cases. Again these figures are not official statistics, and are therefore illustrative. Table 3 highlights that the largest share of this funding, nearly €550 million, was received through the Common Agriculture Policy ( CAP). Both non- CAP and CAPEU Department Expenditure Limit ( DEL) receipts are easily identifiable to a particular location and reflect expenditure on these items specifically for Scotland based on the actual receipts reported in the Scottish Government's Consolidated Accounts.

Table 3: Scotland's Illustrative Receipts from the EU Budget in 2007

£ million

€ million

EUDEL receipts (non- CAP)

212

310

EUDEL receipt ( CAP)

375

548

Total

587

858

Source: PESA
Note: Average annual exchange rate for 2007 is used to convert to euros

Table 4: Eligibility Criteria for Structural Funds and CAP in 2007-13

Objective

Fund

Main eligibility criteria49

Current Entitlement

Convergence objective

Cohesion Fund

To be eligible for such funding, a Member State has to have GNI per capita of less than 90 per cent of the average GNI of the EU-25, based on the Community figures for the period 2001-2003.

Scotland is currently not eligible for this funding.

Transitional support for Member States that would have remained eligible for this fund if the threshold had remained at 90 per cent of the EU15 GNI per head average and not the EU25 is also available.

ERDF
and
ESF

NUTS2 regions with GDP per head less than 75 of the EU average are eligible for this funding.

Scotland is currently not eligible for this funding.

Statistical affect support for NUTS2 regions that would have remained eligible for this fund if the threshold had remained at 75 per cent of the EU15 GNI per head average and not the EU25 is also available.

The Highlands and Islands of Scotland are currently eligible for statistical affect support.

Regional Competitiveness and Employment Objective

ERDF
and
ESF

Transitional support is given to NUTS2 regions which were covered in the 2000-2006 Objective 1 region status (comparable to the Convergence objective) but whose GDP per head now exceeds 75% of the EU15 GDP per head average.

Scotland is currently not eligible for funding under this heading.

NUTS2 regions not covered by the Convergence objective or transitional support.

Scotland currently receives funding under this heading.

European Territorial Cooperation Objective

ERDF

Cross border cooperation: NUTS3 regions that have maritime, national or EU borders

Scotland currently receives funding under this heading.

Trans-national cooperation: All European NUTS3 regions are eligible but the Commission has identified 13 cooperation zones.

Scotland currently receives funding under this heading.

Inter-regional cooperation and setting up networks and exchanges of experience: All European NUTS3 regions are eligible.

Scotland currently receives funding under this heading.

Common Agricultural Policy ( CAP)

There are two pillars under which CAP funding is provided:

  • Pillar I - Direct Payments and Market Support
  • Pillar II - Rural Development:

Scotland currently receives CAP funding.

Using the data in Tables 2 and 3, it is possible to estimate Scotland's contribution to the EU in 2007.

It should be noted that the figures presented here are estimates, derived from a number of assumptions, and should be viewed accordingly.

Depending on the treatment of North Sea GDP in the analysis, Scotland is estimated to have made an illustrative contribution of between €742 and €991 million before accounting for the UK rebate in 2007. When a population share of the UK rebate is included, Scotland is estimated to have made an illustrative contribution to the EU of between €263 million and €512 million in 2007. 50

Table 5: Scotland's Illustrative Contribution to the EU in 2007 (£million)

Payments to the EU Budget

Receipts from the EU

Contribution

before rebate

after rebate

before rebate

after rebate

Excluding North Sea GDP

1,095

767

587

508

180

Including a per capita share of North Sea GDP

1,111

784

587

524

197

Including a geographical share of North Sea GDP

1,265

937

587

678

350

Source: PESA and Scottish Government Calculations

Table 6: Scotland's Illustrative Contribution to the EU in 2007 (€ million)

Payments to the EU Budget

Receipts from the EU

Contribution

before rebate

after rebate

before rebate

after rebate

Excluding North Sea GDP

1,600

1,121

858

742

263

Including a per capita share of North Sea GDP

1,624

1,145

858

766

287

Including a geographical share of North Sea GDP

1,849

1,370

858

991

512

Note: Average annual exchange rate for 2007 is used to convert to euros

7. Impact of exchange rate fluctuations

In 1999, the euro became the official currency for 11 of the 15 EU Member States. Since then, 16 of the now expanded 27 Member EU have adopted the euro. A number of other EU members are expected to join the euro in the near future once they have met the entry requirements. Both Denmark and the UK have agreed an opt-out clause exempting them from participation in the single currency.

Contributions to the EU Budget are made in a country's national currency whilst receipts from the EU are paid in euros. Therefore, for countries such as Denmark and the UK, who have not adopted the euro, their exchange rate with the euro affects the final amount they contribute to, and receive from, the EU Budget.

UKVAT-based and GNI-based contributions to the EU are converted for the whole budget year using the sterling/euro exchange rate on the last working day prior to the start of the budget year. Member States pay only what they collect in TOR which is then converted at the rate when they are paid to the EU. 51 Therefore, as own resource funding is related to either actual receipts (in relation to TOR), a proportion of the VAT base or GNI, exchange rate fluctuations do not affect the amount paid in sterling. However, the amount received by the EU in own resource funding will be affected by exchange rate fluctuations.

Receipts from the EU are paid in euros and converted to sterling using the exchange rate at the point in time when payment is made. Therefore, the value of the receipts in sterling varies depending on the exchange rate at time of payment.

For instance, there are two dates where conversion of Structural Funds take place. The first is when the Scottish Government requests payment (in euros) from the EC to reimburse approved claims from project sponsors. The exchange rate used is the exchange rate at the time the project sponsors put forward their claims to the Scottish Government. The second is the date on which the EC actually transfers the funds to the Scottish Government. These lags mean that differences can emerge between expenditure commitments and receipts of funds.

The recent depreciation of sterling against the euro has therefore increased the sterling denominated value of the funding received by Scotland through Structural Funds. For the 2007-13 programmes, Scotland has been allocated approximately €820 million from the European Regional Development Fund and the European Social Fund. At the time of the formal launch of the programmes, the exchange rate was £1 to €1.4343 (November 2007 average) 52, implying that the equivalent sterling value was £572 million. However, using the June 2009 average exchange rate (£1 to €1.1494), would imply that Scotland's total allocation of €820 million translates into £713 million. On this basis, other things being equal, sterling's depreciation over this period suggests that the nominal value of the 2007-13 programmes has increased by £141 million. 53