Rohan Jaitley: Central Gov't Standing Counsel for Justice
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1. The European Union budget
at a glance
What is the money spent on?
Where does the money come from?
How is the budget decided?
How is the money spent and controlled?
How is the money accounted for?
EUROPEAN COMMISSION
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2. What is the money spent on?
A small amount — around 1 % of the Union’s national time. These are grouped under broad spending cate-
wealth, which is equivalent to about EUR 235 per per- gories (known as ‘headings’) and 31 different policy
son — comes into the EU’s annual budget. is money areas.
is used with the aim of improving the everyday lives of
people. For students, this could be in the form of op- e EU budget nances actions and projects in policy
portunities to study abroad. For small businesses, it domains where all EU countries have agreed to act at
could imply easier access to larger markets and a fair Union level. Such decisions are taken for very practical
business environment. For researchers, it could mean reasons. Joining forces in these areas can yield greater
more chances to develop their ideas. For jobseekers, it results and costs less.
could be new training possibilities.
ere are other policies, however, where the EU coun-
Directly or indirectly, we all bene t from some activity tries decided not to act at Union level. For example,
funded from the EU budget, be it in the form of cleaner national social security, pension, health or education
beaches, safer food on our plates, better roads or the systems are all paid for by national, regional or local
guaranteeing of our fundamental rights. governments. e ‘subsidiarity principle’ ensures that
activities best managed at national, regional or local
Actions and projects funded by the EU budget re- level are funded at the most appropriate level and that
f lect the priorities set by the EU countries at a given the Union does not intervene.
44.2% Competitiveness and cohesion
43% Natural resources: Agriculture, rural development,
environment and sheries
1.2% Citizenship, freedom, security and justice
5.7% The EU as a global player
5.9% Other including administrative expenditure
% of EU spending (2007-2013 average)
50 45 40 35 30 25 20 15 10 5 0
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3. Growth and jobs
For the next seven years, the EU countries have decided
to dedicate a considerable part of their joint e orts and
of the EU budget to creating more economic growth
and jobs. Sustainable growth has become one of the
main priorities of the Union. e EU economy needs to
be more competitive and less prosperous regions need
to catch up with the others.
A more competitive economy requires more invest-
ment in research and education, extended transport and
energy networks and better employment conditions, all
at the same time. As a result, a simple idea developed
in a laboratory could be picked up by a small business
across the EU and marketed throughout the Union,
with full protection of consumers’ rights. In this case,
funding a simple idea provides employment to the re-
searcher, the entrepreneur, the distributor and protec-
tion to the consumer.
Achieving long-term growth also depends on tapping ing the regions to train their workforce and adopt the
and increasing the EU’s growth potential. is priority, latest technologies in production. e EU budget also
known as ‘Cohesion’, calls for helping especially less supports facilitating economic and social cooperation
advantaged regions transform their economy to face across regional and national borders. e EU action of-
global competition. Innovation and the knowledge econ- ten involves sharing experience and know-how, which
omy provide an unprecedented window of opportunity can be much more useful for the less prosperous re-
to trigger growth in these regions. gions.
e Union’s e orts are directed to achieving cohe- Over the period 2007–2013, out of every euro spent
sion focus on developing in- from the EU’s annual budget, 44 cents will go to com-
frastructures and help- petitiveness and cohesion activities.
Our natural resources
anks to their geographic and cli- have two main goals. First, what is produced must cor-
matic diversity, the EU countries respond to what consumers want, including high safety
produce a large variety of agricul- and quality for agricultural products. Second, on the
tural products, which European production side, the farming community should be able
consumers can buy at reasonable to plan and adapt production to consumers’ demands
prices. e EU e orts in this eld swhile respecting the environment.
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4. In addition, successful management and protection of do not stop at national borders. Such threats require ex-
our natural resources must also include direct measures tensive action on many fronts and in several countries.
to protect the environment, restructure and diversify Over the period 2007–13, 43 cents out of every euro
the rural economy and promote sustainable shing. will be spent from the EU budget each year in favour of
A er all, animal infections, oil spills and air pollution our natural resources.
Fundamental freedoms, security and justice
Similarly, the ght against terrorism, organised crime into the Union and extensive cooperation in criminal
and illegal immigration is much more e ective when and judicial matters as well as secure societies based on
EU countries share information and act together. e the rule of law. About one cent in every euro from the
EU strives for a better management of migration ows EU budget will be spent to this end.
Being European: Debate, dialogue and culture
More than 495 million of us live in the EU. We speak of the European Union: cultural diversity built on
many di erent languages and have di erent cultural common values. e EU budget promotes and protects
backgrounds. Together we form the invaluable wealth this cultural heritage and richness, while encouraging
Since its creation in 1987, the Erasmus programme has given more than 1.2 million European students the opportunity to pursue a part of their higher education in another EU country.
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5. In addition to the EU’s long-term assistance,
77 developing countries in the African, the Caribbean
and Paci c regions can also bene t from the
Help centre for children a ected by the earthquake in Algeria, funded by the Union’s
humanitarian aid department ECHO.
European Development Fund (outside the EU
budget) to reform their education, health and
transport systems and to strengthen their institutions.
active participation in social debates around us. It also During the period 2008–13, this extra assistance
aims to protect public health and consumer interests. will correspond to about 3 % of the EU’s annual
About one cent in every euro will go to such activities spending.
under this heading known as ‘Citizenship’.
Global player
e impact of EU funds does not stop at our external perity, stability and security. About six cents in every
borders. For many, the EU budget delivers the most euro go to cooperation with countries about to join the
needed emergency aid in the a ermath of a natural dis- Union, other neighbouring countries, and indeed to
aster. For others, it is a long-term assistance for pros- poorer regions and countries around the world.
Administrative costs
Around six cents in every euro from the EU budget European Parliament, Council of Ministers, European
are spent on running the Union. is covers the sta Commission, European Court of Justice and European
and building costs of all EU institutions, including the Court of Auditors.
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6. Where does the money
come from?
e European Union has its ‘own resources’ to nance • Traditional own resources (TOR) — these main-
its expenditure. Legally, these resources belong to the ly consist of duties that are charged on imports of
Union. Member States collect them on behalf of the EU products coming from a non-EU State. ey bring
and transfer them to the EU budget. in approximately 15 % of the total revenue.
Own resources are of three kinds (the gures below re- • e resource based on value added tax (VAT) is
fer to the 2007 revenue estimates and are given as an a uniform percentage rate that is applied to each
example). Member State’s harmonised VAT revenue. e
VAT-based resource accounts for 15 % of total rev-
enue.
Where does the money come from? • e resource based on gross national income
(GNI) is a uniform percentage rate (0.73 %) applied
80
to the GNI of each Member State. Although it is a
70
69 balancing item, it has become the largest source of
1996 revenue and today accounts for some 69 % of total
2007 estimates revenue.
60
51
50 e budget also receives other revenue, such as taxes
% of total revenue
paid by EU sta on their salaries, contributions from
40 non-EU countries to certain EU programmes and nes
on companies that breach competition or other laws.
30
30 ese miscellaneous resources add up to around 1 % of
19
the budget.
20
15 15
e total EU revenue foreseen for 2007 amounts to some
10 EUR 115.5 billion, while the total of the funds commit-
ted under di erent policies is slightly higher. e dif-
0
Traditional own VAT-based GNI-based ference mainly results from the budgetary practice of
resources resources resources the EU, where the European Commission commits,
i.e. blocks, the total amount required for a multiannual
Own resources of the EU budget
project in the rst year of the project. e actual pay-
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7. DID YOU KNOW?
EU budget revenue and expenditure is limited by…
— The treaties: the Union budget is not allowed
ments, however, are made in several instalments during to be in de cit, which means that revenue
the project period. has to cover the entire expenditure.
Revenue ows into the budget in a way which is roughly — A maximum spending limit agreed by the Member
proportionate to the wealth of the Member States. e States’ governments and parliaments.
Known as the ‘own resources ceiling’, this limit is
UK, the Netherlands, Germany, Austria and Sweden,
currently set at 1.24 % of the Union’s gross national
however, bene t from some adjustments when calcu- income (GNI) for payments made from the EU
lating their contributions. budget. This corresponds to approximately
EUR 293 per EU citizen on average.
On the other hand, EU funds ow out to the Member
States in accordance with the priorities that the Union — A nancial framework agreed by the European
has identi ed. Less prosperous Member States receive Parliament, the Council of Ministers and the
proportionately more than the richer ones and most European Commission, which controls the
countries receive more than they pay into the budget. evolution of the EU budget by expenditure
category over a set period of time.
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8. How is the budget decided?
e Commission, Parliament and Council of Ministers
have di erent roles and powers in deciding the budget. IN FEW WORDS
As a rst step, these three institutions conclude a bind- The EU budget is decided democratically at all stages
ing agreement to ensure budgetary discipline and long-
In addition to the approval of the annual budget by
term planning and to enhance cooperation in connection
the European Parliament and the Council, almost all
with annual budgets. is ‘interinstitutional agreement’ activities require a Community law before they can
includes the multiannual nancial framework, which be carried out. This takes the form of an authorising
establishes annual upper limits (known as ‘ceilings’) per act or legal base, proposed by the Commission, and
heading. Annual budgets must respect these ceilings. approved by the legislative authority — the Council
alone or with the Parliament in many cases.
e most recent nancial frameworks cover the seven-
year periods from 2000 to 2006 and 2007 to 2013.
e budgetary procedure as established in the EU trea-
ties lasts from 1 September to 31 December. In practice, it begins much earlier. For example, preparations for the
2007 budget started before the end of 2005.
ere are two types of budget expenditure: compul-
sory and non-compulsory expenditure. Compulsory
expenditure covers all expenditure resulting from inter-
national agreements and the EU treaties. All other ex-
penditure is classi ed as non-compulsory.
e Council of Ministers has the nal word on compul-
sory expenditure and the European Parliament on non-
compulsory expenditure. e importance of this dis-
tinction has declined with successive interinstitutional
agreements as they collaborate closely at all stages.
Commissioner Grybauskaitė discussing budgetary issues at the European Parliament.
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9. Commission’s preliminary draft budget
All EU institutions and bodies draw up their estimates
for the preliminary dra budget according to their in-
ternal procedures.
e Commission consolidates these estimates and es-
tablishes the ‘preliminary dra budget’, which takes
into account the guidelines or priorities for the coming
budget year.
e Commission submits the preliminary dra budget
to the Council of the Union in April or early May before
the budget Council meets in July. e Council of Min-
isters and the Parliament must work on the basis of this
proposal from the Commission.
Council’s rst reading of the budget
A er a conciliation meeting with the Parliament, the
Council of Ministers adopts the dra budget with
amendments, if any, and it is forwarded to the Parlia-
ment in September. Economic and Financial A airs Council.
Parliament’s rst reading
At its rst reading in October, the Parliament may de-
cide to amend the Council’s dra . It will discuss contro-
versial matters in ‘trialogue’ meetings with the Council
Presidency and the Commission beforehand. Parlia-
ment’s rst reading, along with its suggestions, is then
referred back to the Council.
Council’s second reading
Before its second reading in November, the Council has
a further conciliation meeting with the Parliament and
tries to reach an agreement on the whole of the budget.
It then adopts its second reading.
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10. Parliament adopts or rejects the budget
(second reading)
e Parliament may modify the Council’s latest text be-
fore it votes on the nal budget in December.
If approved, the President of the Parliament signs the
budget into law. e Parliament may also reject the
budget.
Similar procedures apply to the adoption of letters of
amendment to the preliminary dra budget (presented
when new information comes to light before the adop-
tion of the budget) and of amending budgets (in the
case of inevitable, exceptional or unforeseen circum-
stances occurring a er the budget has been adopted).
Hans-Gert Poettering, President of the European Parliament (2007-2009).
COMMISSION Preliminary draft budget in April/May (PDB)
Draft budget (DB) in July (quali ed majority)
THE BUDGET PROCEDURE
COUNCIL
PARLIAMENT First reading of the DB in October
Amendments of non-compulsory expenditure Proposed modi cations to compulsory expenditure
COUNCIL Second reading of amendents/modi cations
YES NO YES NO
Quali ed majority Quali ed majority
Council xes
PARLIAMENT Second reading of non-compulsory expenditure in December
YES NO
Amount and remarks voted First reading/New amount (Majority of members + 3/5 votes)
Majority of members/Majority of 2/3 votes: can reject the budget
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11. How is the money spent
and controlled?
Responsibility for managing the budget
Key thought
e ultimate responsibility for the implementation
of the budget lies with the European Commission. In EU funds must be used in accordance with the
practice, the lion’s share of the EU funds (some 76 %) principle of sound nancial management. Put simply,
this means that those managing the money must
is spent under what is known as shared management.
make every e ort to obtain the best possible value for
Under these arrangements, it is the authorities in the money spent. This requires strict adherence to all the
Member States, rather than the Commission that man- rules and regulations as well as regular evaluations to
age the expenditure. A whole set of checks and balances verify that this is the case.
is put in place to help ensure that the funds in question
Who manages EU funds?
100
are managed properly and in accordance with the rules
in force.
80 76% e Commission must recover amounts unduly paid,
whether by error, irregularity or deliberate fraud. e
Member States are equally responsible for protecting
60 the EU’s nancial interests. To this end, they work in co-
% of EU funds
operation with the Commission and with OLAF — the
European Anti-Fraud O ce — which carries out inves-
40 tigations into potential cases of fraud and helps ‘fraud-
proof ’ EU legislation.
22%
20
Activity-based budgeting
1% 1%
0 For greater transparency, i.e. over what policies are pur-
Commission Commission Third countries Commission
and jointly with sued, how much money is spent on each of them, and
Member States international
partners and how many people work on them, the EU budget is sepa-
others rated into 31 policy areas. Each of these policy areas is
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12. broken down to show the di erent activities nanced tection of forests activity is nanced under the environ-
under the policy and their total cost in terms of both ment policy heading). is way of organising the budget
nancial and human resources (for example, the pro- is called activity-based budgeting.
Rules governing expenditure
e main rules governing the actual spending of EU
funds are contained in the nancial regulation. A sec-
ond set of rules, implementing rules, explains in detail
how the nancial regulation is to be applied.
Furthermore, with very few exceptions, each and every
programme launched must be covered by a speci c au-
thorising act, or legal base, before funds can be released.
ese legal bases set out the objectives of the activity
in question and the cost, and o en impose multiannual
spending limits.
Management, audit and internal control
On the Commission’s side, EU programmes and activ- sta (usually the Director-General) is nominated as
ities are managed by the sta of the Commission’s policy ‘authorising o cer’ and has to assume full and nal re-
departments (called directorates-general) in liaison with sponsibility for operations in his or her eld of compe-
their counterparts in the EU Member States as necessary. tence, although all EU sta of course bear disciplinary
In each Commission department, one member of the and pecuniary responsibility for their actions.
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13. Internal controls are enhanced by a set of clear stand- Since 2002, all Commission departments issue an an-
ards, controls by management before and a er opera- nual activity report to the Members of the Commission
tions, independent internal auditing on the basis of risk setting out their achievements for the year in question
assessments, and regular reporting on activities to the and suggestions to remedy any shortcomings. A synthe-
individual Commissioners. sis report is then sent to the Parliament and Council.
is report now constitutes one of the pillars on which
the European Court of Auditors bases its annual decla-
ration of assurance on the EU’s management of its re-
sources.
The Union monitors its subsidised agricultural activities by remote sensing
(Monitoring Agriculture through Remote Sensing - MARS project).
How does the Commission make payments?
e Commission has bank accounts with Member State e Commission deals with over 200 000 third parties,
treasuries, central banks and commercial banks and mainly bene ciaries of grants and suppliers of goods
is a participant in SWIFT (the Society for Worldwide and services. To handle these transactions, it uses what
Interbank Financial Telecommunication). All payment is known as a computerised legal entity le (LEF) for
instructions and other related messages are sent elec- each third party (which can be an individual or a com-
tronically in encrypted form and with a coded authen- pany). All of these legal entity les have to be authorised
ti cation key. and validated before any payment can be made.
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14. How is the money accounted
for and to whom?
The dual nature of EU accounting
and reporting Key thought
e EU accounts consist of two types: (a) budgetary Every year, the EU accounts are published and
submitted for external audit by the Court of Auditors.
accounts (which provide a detailed record of budget
The nal assessment, called ‘discharge’, is given by
implementation) and (b) general accounts (which are the Parliament after taking into account the Council’s
used to prepare the balance sheet and economic out- recommendations.
turn).
e budgetary accounts are based on the modi ed cash
accounting principle, which means that transactions
(expenditure and income) are recorded only when cash expenditure throughout the nancial year. e general
is paid out or received. accounts are used for establishing the economic outturn
and the balance sheet of assets and liabilities, which is
e general accounts (or general ledger) use the double- drawn up to show the nancial position of the EU at
entry method of bookkeeping to record all revenue and 31 December of each year.
Reporting on the implementation
of the budget
e Commission publishes the state of budget imple-
mentation every month on its website. ese monthly
reports show how the money is actually being used. e
information is given for each chapter of the budget and
by policy area. Weekly gures are also kept by the rel-
evant policy departments. An overview of the results of
evaluations made during the year and of the planned
follow-up is provided in the annual evaluation review.
José Manuel Barroso, President of the European Commission e Commission also publishes the annual accounts
and Hubert Weber, President of the Court of Auditors. of the European Communities, which include consoli-
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15. dated reports on the implementation of the budget and On 1 January 2005, the Commission took a crucial
the balance sheet. Prepared in accordance with the In- step in modernising its accounts with the move from
ternational Public Sector Accounting Standards (IP- cash-based to accrual accounting. Accrual accounting
SAS), they consolidate the accounts of all the EU insti- recognises transactions when they occur (and not only
tutions and bodies, as well as those of most agencies. when cash is paid), and it gives a full view of all the EU’s
assets and liabilities. As a result, policymakers, budget
A er a preliminary audit of the provisional accounts by control authorities, managers of EU funds and EU citi-
the Court of Auditors, the Commission approves the zens now have access to more accurate nancial infor-
nal accounts, which are then sent to the discharge au- mation, which is essential to e ective management and
thorities: the European Parliament and the Council. control of public money.
External audit
In addition to regular internal audits and controls, • the reliability of the accounts (i.e. if the books are
the EU’s annual accounts and resource management kept well); and
are subject to an external and independent audit by
the European Court of Auditors. Each year the Court • the legality and regularity of the underlying trans-
of Auditors draws up a report for the Parliament and actions (i.e. the revenue collected and payments
Council of Ministers. Together with this annual report, made).
it issues an opinion called statement of assurance on:
Accountability to
the European Parliament
Following the publication of the Court of Auditors’ an-
nual report and the nalisation of the annual accounts,
the Council submits its recommendations to the Par-
liament. Based on these, the European Parliament
pronounces on the Commission’s management for the
nancial year in question. If the Parliament considers
that the Commission managed the EU budget appropri-
ately, it grants discharge to the Commission.
When granting discharge, the Parliament o en rec-
ommends follow-up action to be taken by the Com-
mission. In response, the Commission identi es the
measures it could take and informs the Parliament and
the Council.
European Parliament grants discharge for the EU budget.
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