II. Development of Expenditure

Expenditure needs have been estimated on the basis of the expenditure classification used in the current financial framework under the following six major categories:

• The common agricultural policy, expenditure on which is limited by the agricultural guideline
• Structural actions
• Other internal policies
• External action
• Administrative expenditure
• Reserves (monetary reserve and reserves for emergency aid and loan guarantees)

Where appropriate, requirements have been broken down into those needed for the existing fifteen Member States, pre-accession aid and expenditure following the accession of new Member States.

1. Agricultural expenditure

Maintaining the current method of calculating the agricultural guideline would not pose any difficulty in covering identified agricultural expenditure needs.

Expenditure under the reformed agricultural policy for the existing fifteen Member States would cover:

• market intervention measures and export refunds; following the reform (which is to bring Community prices closer to prices on the world market) these costs should fall by about ECU 3.7 billion (1.4 billion for cereals, 1.2 billion for beef and 0.9 billion for milk products) by the year 2006 compared with what they would be if there were no reform;

• direct compensatory aid; here the reform will entail additional expenditure of about ECU 7.7 billion by the same date (1.7 billion for cereals, 4.1 billion for beef, 3.0 billion for milk products and a saving of 1.0 billion as a result of direct payments for silage maize being abolished);

• existing accompanying measures (agri-environment, afforestation, early retirement); about ECU 2.8 billion a year plus the new rural development accompanying measures and the horizontal measures in the fisheries sector (FIFG), costing from 1.9 to 2.0 billion a year over the period, which are to be taken over by the EAGGF Guarantee section; on that occasion a proposal will be made for the appropriate adjustments to the EAGGF financial regulations.

At the same time, agricultural expenditure for the applicant countries would comprise:

• Pre-accession aid, currently estimated at about ECU 500 million a year, for modernizing farms and agri-foodstuff distribution channels in the applicant countries. Following the first accessions, the total amount allocated for this aid would remain the same, meaning that each of the countries not due to join until later would receive more.

• Expenditure relating to the accession of the new Member States to market organization measures (estimated at between 1.1 and 1.4 billion a year), enhanced accompanying measures and special modernization aid following on from the pre-accession measures (an additional amount rising from 0.6 to 2.5 billion over the period from the time of accession).

Application of the guideline as it stands would leave a margin that would grow from 2003 onwards, to reach a very substantial amount by the end of the period.

There are in any case good reasons for leaving a large margin in order to cover market uncertainties and to enable the reform of the common agricultural policy to continue before the end of the period covered by the financial perspective. In addition, it should be made feasible in due course to put an end to transitional arrangements for new Member States. The Commission nevertheless finds, irrespective of the accession effect (ECU 1.3 billion to ECU 1.4 billion), that it is not the right moment to review the way the guideline is calculated now, but that the issue should be reviewed in about 2005.

2. Structural expenditure

Financing for structural operations, including those for the new Member States, would be maintained, in relative terms, at the 1999 level, namely 0.46% of the Union’s GNP. The total allocation for the period 2000-2006 would therefore be ECU 275 billion at constant 1997 prices.

Of this amount, ECU 210 billion would be allocated to the Structural Funds proper for measures in the existing fifteen Member States in line with the changes proposed above:

• about two thirds would be allocated for measures in Objective 1 regions, including the transitional schemes for regions above the 75% threshold in terms of GDP per inhabitant, which would be gradually phased out of the Objective 1 arrangements;

• the remainder, for measures under other objectives, would slightly decrease over the period at the same time as concentrating greater funds on a smaller target population; this would be done without prejudice to the new rural development accompanying measures which are now included in the agricultural guideline.

Generally speaking, and in particular in areas where Community aid is to be appreciably reduced, ways will have to be developed to get the best leverage from operations funded by the Community budget by using public-private partnerships as well as combining subsidy arrangements, loans and venture capital contributions.

The new Member States would receive a total allocation of some ECU 45 billion, to be phased in over the period and accounting for about 30% of the total allocation for structural measures by the end of the period.

Pre-accession aid, to be drawn from the ECU 45 billion allocation for the new Member States, would be made available from the year 2000. This assistance, to be granted at a constant rate of ECU 1 billion per year, would initially be granted to all the applicant countries and would subsequently be focused on countries due to join the Union at a later stage. It would be primarily intended to help bring the applicant countries’ infrastructures up to Community standards, particularly in the transport and environment fields, along the lines of existing Structural Fund operations.

The allocation for the Cohesion Fund will be ECU 20 billion. A review of eligibility under the criterion of per capita GNP being lower than 90% of the Community average will be carried out half-way in the period.

3. Other categories of expenditure

The proposed figures for agricultural and structural expenditure and for the own resources ceiling are determined by reference to the growth in Community GNP, which must also be the benchmark for determining the development of other types of expenditure.

The 1999 budget should leave significant margins below the ceilings in categories 3 to 5. The ceilings could then be maintained in real terms at the same level in 2000 and would not need to be increased until after that date.

The growth in expenditure under categories 3 to 5 from 2000 onwards must be looked at in the light of the specific features of the measures concerned and their future development, as well as in the light of enlargement, which will affect expenditure on different policies in different ways.

• Internal policies

The development of internal policies over the period covered by the next financial perspective will have to satisfy two considerations, both designed to enhance the effectiveness of measures taken at Community level. First, the resources available for internal policies will have to be targeted so that they are not wasted on measures that are unlikely to have a significant impact. At the same time, allocations may be increased faster than GNP growth for certain programmes, which have been given priority because of the value-added they derive from Community-level action, for example in terms of growth, employment and the development and dissemination of new technologies. This would essentially mean the trans-European networks, research, education and training, the introduction of environment-friendly technologies and measures to support SMEs.

Regardless of enlargement, redirecting internal policies in this way would in overall terms mean raising the category 3 ceiling slightly more than the rise in the GNP of the fifteen Member States.

The effect of enlargement will vary from programme to programme. Although increases in line with the new countries’ GNP would be appropriate for a good number of programmes, requirements may be greater in certain areas. This will be the case for policies where the population or the language concerned are more relevant as criteria than GNP (education and training, culture, information, etc.). The development of the trans-European networks will also necessarily have a different dimension in an enlarged Union. In addition, all the programmes that contribute to the proper functioning of the Single Market, and which are at the heart of Community action (such as statistics, standardization, administrative cooperation and controls in agriculture and fisheries) are also likely to be substantially affected by enlargement. Prior to enlargement the Phare programme will finance the applicant countries’ participation in certain internal policies, including the research and technological development programme, as part of the pre-accession aid, but once they have joined, this funding will have to come from within category 3 for the new Member States.

This means that the increase in the allocations for internal policies following enlargement will have to be more than just in proportion to the new members’ GNP. The increase will not only have to finance measures in the new Member States, but must also enable the Union to cope efficiently with a broader and less homogeneous whole without crowding out operations in the existing Member States.

The upshot of this is that the ceiling under category 3 will have to rise more rapidly than the GNP of the enlarged Community after the first accessions.

• External action

From the beginning of the next period, the Community should pay special attention to the development of pre-accession aid, one of the objectives of which, in addition to the measures under categories 1 and 2, is to help finance the applicant countries’ participation in Community programmes, including research programmes. After the first accessions, the total amount of this aid should remain stable at ECU 1.5 billion and be concentrated exclusively on the countries due to join at a later date.

As regards other external action by the Union, in contrast with what was done for the last enlargement, there will be no increase based on the new countries’ GNP, since the acceding countries will have been in receipt of external aid prior to accession.

For the whole period 2000-2006 the ceiling for category 4 should therefore on average rise in step with the GNP of the existing fifteen Member States. In this way, the Community will be able to develop its international cooperation, in particular with its closest neighbours, such as the former Soviet republics, the former Yugoslavia, Albania, the Mediterranean countries and Turkey. It will also be in a position to step up its humanitarian aid, given the primary responsibility it has acquired in this area. This assumes, however, that no large increases in Community financing for the common foreign and security policy will be required in the coming years.

• Administrative expenditure

The Commission’s efforts to modernize the way it operates should make it possible to keep any increases in administrative expenditure within tight limits. The ceiling for category 5 may therefore rise more slowly than the fifteen Member States’ GNP, if all the institutions apply the same budgetary discipline. This allocation will have to cover items such as buildings programmes already under way and pension commitments which will rise by about ECU 250 million over the period.

In contrast, enlargement will involve an increase in costs proportionately larger than the increase in GNP provided by the new Member States. The institutions will have to be equipped to work in new languages, to assume a bigger role in a more diverse Community and to accommodate nationals from the new Member States.

The Commission, nonetheless, feels that if the entry of the new Member States into the various institutions is made a sufficiently gradual process and is accompanied by the necessary rationalization measures, the overall administrative expenditure ceiling, after taking enlargement into account, may increase more slowly than the GNP of the enlarged Community over the whole period 2000-2006. This would make it possible to reduce the relative cost of running the Community institutions.

• Overall development of categories 3 to 5

The guidelines proposed above point to different developments for the three different categories. However, between 2000 and 2006, the overall rise in these headings taken together should be slightly below that of the GNP of the enlarged Community.

4. Reserves

The monetary reserve, which was set up in 1988, and the guarantee and emergency aid reserves set up in 1993 have, by and large, operated effectively.

It should, however, be possible to reduce the reserves during the coming period:

• The phasing-out of the monetary reserve by 2003 should be possible in view of the reform of the common agricultural policy, which is supposed to bring Community prices for several major products into line with world market prices, thereby significantly reducing the Community budget’s vulnerability to fluctuations in the dollar.

• The emergency aid reserve could be cut back to ECU 200 million. This reserve has been systematically used to supplement allocations available for external action and this runs counter to proper budgetary discipline. The relevant items under category 4 should be given bigger allocations and the emergency aid reserve should be restored to its original role as a reserve to be mobilized to deal with situations that were genuinely unforeseeable when the budget was drawn up.

5. Proposed reference framework

The figures for the broad categories of expenditure (in terms of commitments) at 1997 prices produce a 17% increase between 1999 and 2006 in total appropriations for commitments, which is less than the growth in GNP (24% according to forecasts for the same period, taking account of the first wave of accessions). However, because the increase in total commitments will be lower than in the preceding period, the increase in payments would be more marked (20,5%)  and the appropriations for commitments/appropriations for payments ratio would tend to fall in relation to what was used for drawing up the current financial perspective.

A significant margin would, nonetheless, remain available beneath an own resources ceiling maintained at 1.27% of Union GNP. This would most likely be more than sufficient to cover requirements should economic growth turn out lower than forecast. There are in any case good reasons for leaving such a margin:

• The integration of the applicant countries will not have been completed by the end of the next period. It would therefore be wise to leave some resources available to cover the end of the transitional arrangements for the first wave of new countries and the subsequent accessions.

• Political circumstances permitting, the issue of including the EDF in the budget may come up again in 2005, even though this would not have a significant impact on the appropriations for payments required until some time later.