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The budget is central to EU decision-making and politics. The EU budget is the EUs principle source of funding and, although it is comparatively small, gives the organisation independent political power. Budget negotiations deal with sensitive topics such as theÂ Common Agricultural Policy (CAP), structural funds and regional aid, over which members are often fiercely split, therefore it is often a focus for disagreement amongst member states. The budget raises questions about how theÂ EU institutionsÂ themselves operate: it is at the centre of arguments about how far the EU should act as aÂ supranational(a form of organisation through which decisions are made by international institutions, not by individual states) government and about how accountable its largely unelected bodies are with public money.
Â in the 1970s, reflecting the expansion of the organisation's supranational roles, a new budget model was created with the EU having its own resources, which are based on member states' sales, agricultural and customsÂ taxes. This change increased the political scope of the European Community and made the budget much more important.
During the 1970s and 1980s, the budget was a very controversial issue. In 1984 this came to a head when Britain, which was paying more into the EU budget than it got out, demanded some of its money back as aÂ rebate. Although this meant that Britain got a better deal, the EU budget continued to grow rapidly, with the CAP and payments to poorer member countries like Ireland, Spain, Portugal and Greece being particularly expensive.
In the late 1980s, a new budget model was developed to reduce conflict, with the budget being agreed for a seven-year period, rather than annually. Meanwhile, in the 1990s, increasing concern was expressed about how accountable the Commissioners who controlled the budget were. In 1999 this led to the forced resignation of the entireÂ Commission. Although tension over the budget has reduced since then, negotiations over the 2007-13 budget saw old arguments, especially about the CAP, reappear.
How does the EU Budget work?
EU budgets are decided for periods of seven years. A budget plan is proposed by the Commission and then debated by theÂ European CouncilÂ and theÂ European Parliament, both of whom have to vote to agree on the budget. Budget negotiations often last for several years, with most of the discussions taking place behind closed doors between heads of government. Budget negotiations always have to take political concerns into account: Britain and France are especially prone to major disagreements. The principle items of the budget are theÂ CAP, regional policy, foreign policy, research and development, and administration.
mainly customs duties on imports from outside the EU and sugar levies.
VAT based resources
A standard percentage is levied on the harmonised VAT base of each EU country. The VAT resource accounts for around â‚¬14bn.
The VAT base to be taxed is capped at 50% of GNI for each country. This rule is intended to prevent less prosperous countries having to pay a disproportionate amount (in such countries consumption - and so VAT - tend to account for a higher percentage of national income).
GnÄ± based resources
A standard percentage is levied on the GNI of each EU country. It is used to balance revenue and expenditure, i.e. to fund the part of the budget not covered by other sources of income.
Although designed simply as a balancing system, this has become the largest source of revenue - â‚¬92.7bn in 2010
taxes on EU staff salaries
contributions from non-EU countries to certain programmes
fines on companies for breaching competition laws, etc.
Facts and Figures
Over the last forty years, the EU budget has grown very rapidly.
The EU budget for 2012 is â‚¬147.2 billion in commitments (â‚¬129.1 billion in actual payments). This is a 3.8% increase in commitments and a 1.86% increase in payments since 2011.
The UK will contribute â‚¬12.1 billion to the 2012 budget (taking the rebate, which is paid by other European countries to the UK, is expected to be approximately â‚¬3.6 billion, into account).
The EU will spend â‚¬6.7 billion in the UK in 2012.
The EU budget is small compared to other government budgets: the 2007-13 budget totals â‚¬862 billion while the US budget for 2010 alone is $2,480 billion.
The EU budget represents 1% of the EU's gross national income.
CAP remains the largest single budget item, amounting to one third of the total budget.
Almost half of the budget is spent on theÂ Common Agricultural Policy. Most of the rest of the budget is spent asÂ Structural and Cohesion Funds, which are designed to reduce disparities in prosperity across the Union.
The remaining funds are spent in areas such as the EU's large development budget (the EU is the world's biggest aid donor), maintaining the internal market, and administering the Union.
The EU's budget is set each year through an agreement between Member States and the European Parliament. But these annual budgets have to be set within overall ceilings agreed for a seven-year "Financial Perspective" period.
In December 2005, EU Member States agreed a budget for the 2007-2013 Financial Perspective. The budget agreed is worth â‚¬862bn over the seven years, or 1.045% of the EU's Gross National Income (GNI).
EU expenditure is classified in six different categories:
Heading 1: Common Agricultural Policy (CAP)
Heading 2: Structural operations
The aim of the EU's structural operations is to give support to less, and lesser, developed regions in the Member States of the European Union.
Heading 3: Internal policies
EU budget money is spent on a variety of internal policy activities such as training, youth, culture, audio-visual media and information; energy and environment; consumer protection, internal market, industry, and trans-European networks; research and technological development.
Heading 4: External action
Category 4 of the EU budget is dedicated to supporting the objectives of EU external policy by means of cooperation, development aid, conflict prevention and human rights programme and projects. These objectives include, alongside development cooperation, promotion of the EU's identity on the international stage, notably through implementation of the common foreign and security policy.
Heading 5: Administrative expenditure
Expenditure under heading 5 of the EU budget can also not be allocated to the Member States because it is used to cover the administrative costs of the EU institutions.
Heading 6: Pre-accession aid
The Instrument for Pre-Accession Assistance (IPA) offers assistance to countries engaged in the accession process to the European Union
(Heading 7: Reserve)
Net contributors and recipients
Net receipts or contributions vary over time, and there are various ways of calculating net contributions to the EU budget, depending, for instance, on whether countries' administrative expenditure is included. Also, one can use either absolute figures (which indicate that Germany is the largest contributor), the proportion of GDP (which show that Denmark is the largest contributor), or per capita amounts (which show that Denmark is the largest contributor). Different countries may tend to favour different methods, in order to present their country in a more favourable light.
The table shows the traditional calculation (with own resources), based on research byÂ Deutsche BankÂ Research (net contributors are shown in red).
As a proportion of GDP, net contributors pay from 0.09 percent (Ireland) to 0.53 percent (Denmark), and net recipients receive from 0.04 percent (Spain) to 5.33 percent (Lithuania).
The four largest net recipients in absolute terms are Poland, Greece, Hungary, Portugal.
The four largest net recipients in per capita terms are Luxembourg, Lithuania, Estonia, Greece
The four largest net recipients as a proportion of GDP are Lithuania, Estonia, Luxembourg, Hungary.
The four largest net contributors in absolute terms are Germany, France, Italy, UK
The four largest net contributors in per capita terms are Denmark, Finland, Germany, Italy.
The four largest net contributors as a proportion of GDP are Denmark, Italy, Germany, Finland.