What deal was done? Simple
...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. Therefore, the UK government has to find some eighty-five percent of monies paid to farmers, leaving only fifteen percent to be paid out of Community funds. Crucially, with the UK's net contribution to the EU being a highly sensitive issue, the additional sums clawed-back show up in the UK's budget as an increased contribution to the EU. Payment of agrimoney, therefore, is politically unsustainable.
The Fontainebleau agreement.The key is the way that individual member states' contributions are and have been calculated and the way payments were made, originally mainly from the CAP (EAGGF) which in the early days accounted for more than ninety percent of the EEC budget.
The system which was in place prior to the UK's entry to the (then) EEC depended on direct contributions from the member states. Then, in 1971, two years before Britain's entry, a system of 'own resources' was introduced. Funding now came from two sources, customs duties and agricultural levies, which was to become known as the Traditional Own Resource (TOR), and levy on VAT (which was not actually introduced until 1979).
When the UK joined the Community in 1973, it adopted the TOR system. But, because our agricultural sector was relatively smaller and structurally different from those in other member states, the UK did not benefit fully from CAP funding. On the other hand, because a larger proportion of food was imported from outside the Community, our TOR payments were higher than those of other member state. As a result, a budgetary imbalance was created.
In 1979, the situation got worse when the (then) EC finally introduced its levy on member states' VAT income. This, combined with an inability to contain CAP spending arising from the accession of Greece and Spain, meant that the UK's budgetary imbalance increased. Thus, as the Commission observes, 'Persistent complaints on the part of the UK became a feature of the budgetary disputes that were prominent during this period'.
After much posturing and politicking, a temporary resolution of these difficulties was secured at the Fontainebleau Council in June 1984 when the (then) Prime Minister, Margaret Thatcher, negotiated a reduction in the UK's net contribution, amounting to a sixty-six percent rebate of the imbalance. Additionally, a 1.4 percent cap was placed on the VAT 'rate of call'. But, tied up in the small print, was the establishment of a 'correction mechanism' for dealing with the continuing budgetary imbalances. Its complexity was such that, according to Hugo Young, it was 'outside the comprehension of every normal European citizen'. Even in the dry terms of Commission-speak, it 'inhibited transparency in the financial relationships between the Member States and the Community budget'.
In 1988 at the Brussels Summit, 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 it worked was explained in a subsequent document produced by DGXIX of the European Commission. Taking the cue from Hugo Young, it is instructive to visit that explanation
'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.Clear?
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 emphasis).
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 agrimoney is drawn down by the UK, it brings it over and above the threshold level determined in 1984. This permits the Commission - through its 'correction mechanism' - to claw back a substantial proportion of the funds paid. Currently, this is of the order of seventy-one percent.
Because the "agrimoney" system then requires "matched funding" of 50 percent, 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. Therefore, the UK government has to find some eighty-five percent of monies paid to farmers, leaving only fifteen percent to be paid out of Community funds. Crucially, with the UK's net contribution to the EU being a highly sensitive issue, the additional sums clawed-back show up in the UK's budget as an increased contribution to the EU. Payment of agrimoney, therefore, is politically unsustainable.