Friday, June 10, 2005

That Rebate

In the interests of keeping abreast of the debate on the UK rebate, I am sure our readers would appreciate knowing how it is calculated. Basically, it its simplicity itself, as secured by Margaret Thatcher at the Fontainebleau Council in June 1984.

It was then that she negotiated a reduction in the UK's net contribution, amounting to a sixty-six percent rebate of the budgetary imbalance, the excess paid in customs duties and agricultural levies, known as the Traditional Own Resource (TOR). Additionally, a 1.4 percent cap was placed on the VAT levy, known as the "rate of call".

However, that in itself led to further imbalances and the Commissions devised a system to adjust it, known as a "correction mechanism".

According to that great Europhile, Hugo Young, its complexity was such that it was "outside the comprehension of every normal European citizen" and even the Commission admitted that it "…inhibited transparency in the financial relationships between the Member States and the Community budget".

Of course, that did not stop the Commission making further adjustments to it on the back of the 1988 at the Brussels Summit, when further revisions were made to the funding system where what became known as the "Own Resources Decision" was made.

This provided for a reduced role of VAT in funding the Community and new system of payment based on each member state paying a proportion of its Gross National Product (GNP). This, in turn, created new distortions and required a new mechanism to calculate Britain's rebate.

How this worked was explained in a subsequent document produced by DGXIX of the Commission. Our readers, being of sterner stuff than average, will – I am sure – be anxious to commit this explanation to memory. The relevant passage goes as follows:

…the shares of the Member States in the VAT and GNP bases are not equal and the introduction of the GNP resource favoured some countries relative to others. The countries which desired to reduce further the role of the VAT resource, failing to obtain a reduction in its maximum call rate, obtained a reduction indirectly through the UK rebate mechanism. It was, in effect, decided to calculate the amount of VAT theoretically necessary to finance the UK rebate and not to call a corresponding amount of VAT.

The provisions of the Mode de Calcul determine an amount (called the "gross equivalent" and which is actually larger than the UK rebate) that must be left aside for the notional financing of the UK rebate. The percentage of the EU VAT base necessary to generate this amount (called the "frozen rate") is deducted from the maximum rate foreseen in the Own Resources decision to obtain the yearly rate of call. This rate of call changes every year depending on the size of, and shows the same high variability as, the UK rebate.

This situation creates additional complications every time the amount of the UK rebate is revised. An upwards or downwards revision of the UK rebate provokes a change in the opposite direction of the rate of call of VAT and in the amount to be called (or that [which] should have been called).

Given that the size of the budget to be financed remains the same, a change in the amount of VAT called must be compensated by a corresponding change of opposite sign in the amount of GNP called. Since Member States have different shares in the bases of the two resources, these changes are not neutral (this effect of the rebate on the VAT and GNP contributions of the Member States is usually called the "indirect effect").

If the amount of the UK rebate must be revised, it becomes necessary to compensate the Member States for the incorrect amount of VAT and GNP contributions that have been called. This calls for complicated calculations for each revision of the UK rebate and its budgeting in two different chapters… which produces the somewhat surprising result that the United Kingdom appears to participate in the financing of its own rebate (this author's italics).
Is that clear?

It is worth noting, incidentally that, while the Commission actually suggests that the amount of self-financing involves "very small amounts", the cumulative effects of the Brussels "adjustment" and the Fontainebleau accord resulted in a situation that, whenever funds are drawn down by the UK over and above the threshold level determined in 1984, the Commission – through its "correction mechanism" - is able to claw back a substantial proportion of the funds paid. Currently, this is of the order of seventy-one percent.

For matched-funding schemes like the rural development fund, when the UK's contribution is taken into account, the net cost to the Treasury is not the fifty percent or so that other member states have to pay, but eighty-five percent.

This has an interesting side effect in that, if the rebate was abolished the "claw-back" would also be abolished. If Britain then called down its full share of Community funds, to which it is entitled, the effect would be that the Community would only benefit to the tune of 29 percent of the notional British rebate. That is currently less than £1 billion – a lot less than is paid to France for its own share of the rural development fund.

But that, as they say, is another story.

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