MEMO/13/1004

EUROPEAN COMMISSION MEMO

Brussels, 19 November 2013

The Multiannual Financial Framework 2014-2020 – Frequently Asked Questions

This MEMO explains the new Multiannual Financial Framework of the European Union for the years 2014-2020. It answers questions about the elements voted upon today in the European Parliament, its overall structure, the available amounts, the financing of the future budget and the correction mechanisms. It also provides useful tables and charts.

It complements the press release with the highlights of the future budget.

What is the Multiannual Financial Framework? The Multiannual Financial Framework (MFF) lays down the maximum annual amounts ('ceilings') which the EU may spend in different political fields ('headings') over a period of no less than 5 years. The upcoming MFF covers seven years: from 2014 to 2020.

The MFF as such is not the budget of the EU for seven years. It provides a framework for financial programming and budgetary discipline, ensuring that EU spending is predictable. It also allows the EU to carry out common policies over a period that is long enough to make them effective. By defining how much and in which areas the EU should invest over seven years, the MFF is an expression of political priorities as much as a budgetary planning tool. The annual budget is adopted within this framework and usually remains below the MFF expenditure ceilings in order to retain some margin to cope with unforeseen needs.

What precisely did the EP vote upon today? Today, the European Parliament gave its consent to the regulation laying down the MFF and voted on a number of related issues. As required by the Treaty, the MFF must be adopted by the Council by unanimity after obtaining the consent of the European Parliament (requiring an absolute majority of all its members). The MFF package voted today comprises the following documents: 1. MFF Regulation (MFFR): A set of rules and provisions specifying the structure and

the functioning of the overall mechanism of the Multiannual Financial Framework See: http://www.consilium.europa.eu/media/2060418/st11655.en13.pdf

2. Inter-institutional Agreement (IIA): The purpose of the agreement, adopted in accordance with Article 295 of the Treaty on the Functioning of the European Union (TFEU), is to implement budgetary discipline and improve the functioning of the annual budgetary procedure and cooperation between the institutions on budgetary matters as well as to ensure sound financial management. It further specifies some of the provisions in the MFF regulation, such as the modalities of mobilizing the Special Flexibility Instruments. http://register.consilium.europa.eu/pdf/en/13/st11/st11298.en13.pdf

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3. Declarations on

a. Own Resources b. Improving effectiveness of public spending in matters subject to EU's action c. Gender mainstreaming d. Youth unemployment and strengthening research e. National management declarations f. Review/revision of the MFF

Beyond these elements voted today, the MFF also comprises the decision on EU own resources (income to the EU budget) and the legal bases for the individual funding programmes defining the conditions of eligibility and the criteria for the allocation of funds.

Have all new funding programmes been adopted already? No, without the final adoption of the MFF Regulation it has not yet been possible to adopt legally the individual spending Programmes because the inclusion of a financial reference amount depends on the final MFF agreement. On a large number of programmes however political agreement has already been found in the parallel negotiations since 2011. So, in many cases the new programmes are only waiting for the final numbers. In some others, the negotiations are still under way. For an overview of the latest status quo on sectorial negotiations, please consult the following web page: http://ec.europa.eu/budget/mff/programmes/index_en.cfm

Has the decision on own resources already been adopted? The Own Resources Decision (ORD) and related implementing measures are still under negotiation. It will be adopted by the Council after the EP has submitted an opinion, presumably in the course of 2014. It will come into force only after ratification by all Member States in accordance with their constitutional requirements. Experience shows that this can take between one and two years but the formal involvement of national parliaments in line with Art.311 of the Treaty is an indispensable requirement because the ORD establishes legally binding entitlements for the EU budget for a period of seven years. Once in force, the Decision will apply retroactively from 1 January 2014. While it covers the same period, the Own Resources Decision is legally not linked to the MFF regulation.

Will the current MFF remain unchanged until 2020? The functioning of the MFF 2014-20 will be reviewed by the Commission in 2016 taking full account of the economic situation at the time as well as the latest macroeconomic projections.

Will beneficiaries be able to receive funding from the new programmes as of January 2014? The political intention is to have the new programmes up and running as soon as possible at the beginning of 2014. This will largely depend on the state of negotiations and the specificities of the management modes of each funding programme.

What is the structure of MFF and its content? The MFF is divided into six categories of expenditure ('headings') corresponding to different areas of EU activities:

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1. Smart and Inclusive Growth

1a. Competitiveness for growth and jobs: includes research and innovation; education and training; trans-European networks in energy, transport and telecommunications; social policy; development of enterprises etc.

1b. Economic, social and territorial cohesion: covers regional policy which aims at helping the least developed EU countries and regions to catch up, strengthening all regions' competitiveness and developing inter-regional cooperation.

2. Sustainable Growth: Natural Resources: includes the common agricultural policy, common fisheries policy, rural development and environmental measures.

3. Security and citizenship: includes justice and home affairs, border protection, immigration and asylum policy, public health, consumer protection, culture, youth, information and dialogue with citizens.

4. Global Europe: covers all external action ("foreign policy") by the EU such as development assistance or humanitarian aid. The European Development Fund also provides financial resources for the ‘EU as a global actor’. However, it is not part of the EU budget and therefore does not fall under the MFF.

5. Administration: covers the administrative expenditure of all the European institutions, pensions and European Schools.

6. Compensations: a temporary cash flow mechanism designed to ensure that Croatia, who joined the EU in July 2013, does not contribute more to the EU budget than it benefits from it in the first year following its accession.

What is the purpose of the so called "ceilings"? The "ceilings" are the maximum annual amounts which the MFF lays down. They limit the amounts of money that may be spent from the EU budget in these six policy areas and overall over the whole 2014-20 period. There are two types of expenditure ceilings:

1. An annual ceiling for each heading, expressed in commitment appropriations (legally binding promises to spend money which will not necessarily be paid out in the same year but may be disbursed over several financial years);

2. An overall annual ceiling:

• for commitment appropriations corresponding to the sum of each heading

ceilings; • for payment appropriations: the actual amounts authorized for disbursement in a

given year. (As a rule, budgeted amounts correspond to the sum of payments scheduled for each category.) The annual payment appropriations must be covered entirely by total annual revenue.

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The overall ceiling is also expressed as a percentage of the EU's estimated GNI. This percentage is updated every year on the basis of the latest available GNI forecasts in order to check that the EU's total estimated level of payments does not exceed the maximum amount of own resources which the EU may raise during a year (1.23 % of the EU's GNI).

How will the quality of spending be ensured? The quality of spending will for example ensured through the following measures:

1. A clear result-orientation across policy areas will be instrumental to achieve the objectives of the Europe 2020 growth strategy;

2. Simplification of policies and programmes will make them more user-friendly and less prone to errors;

3. Strict controls of EU funding through the European Union and Member States will continue to apply and the protection of the EU's financial interest will be further increased, including through the EU's anti-fraud office OLAF and the future European Public Prosecutor's Office;

4. Efficiency in cohesion policy, rural development and the fisheries fund will be linked to economic governance to encourage compliance of Member States with the EU's recommendations under the European Semester;

5. New Financial Instruments can increase the impact of EU funding by attracting private capital through leverage effects;

6. A new Performance Reserve will incentivise outstanding performance of projects by rewarding them under cohesion policy, rural development and the fisheries fund.

What happens if there are unexpected situations?

The new MFF will allow for more flexibility to react to unexpected situations:

Flexibility for payments: under certain conditions and within the overall ceilings set in the MFF, unused payment appropriations and margins can be carried-over from one financial year to the next. Such adjustments must be offset by a corresponding reduction of the payment ceiling for year n-1.

Flexibility for commitments in growth and employment: commitment appropriations left unused in 2014-17, will form a reserve for additional expenditure in 2016-20 in the area of growth and employment (in particular for youth employment).

Special flexibility for youth employment and research: in order to concentrate a maximum of funds where they are the most needed as early as possible, up to €2.1 billion can be brought forward to 2014-15 for the Youth Employment Initiative and up to €400 million for research, Erasmus and SMEs.

Flexibility for aid for the most deprived: on a voluntary basis, member states can increase their allocation for the aid for the most deprived by €1 billion.

Contingency Margin: this is a last resort instrument to react to unforeseen circumstances and amounts to 0.03 % of the EU's gross national income (GNI).

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As in the past, the margin between budgeted payment appropriations and the annual payment ceiling as well as the margin between the budgeted commitment appropriations and the expenditure ceiling per heading provide some room to manoeuvre in view of unforeseen needs and emergencies within the respective MFF ceilings.

Taking into account past experience, the scope for intervention for some special instruments, such as the Emergency Aid Reserve has been broadened, the maximum allocation increased and the carrying over of unused amounts to the following year(s) has been allowed. The following flexibility mechanisms are kept outside the MFF and the funding can be mobilised above the expenditure ceilings:

1. Emergency Aid Reserve (maximum €280 million per year) is designed to finance humanitarian, civilian crisis management and protection operations in non-EU countries in order to quickly respond to unforeseen events. For example, the Emergency Aid Reserve was mobilised in 2012 following events such as the outbreak of conflict in Syria, the conflicts in Mali and the drought in the Sahel.

2. Solidarity Fund (maximum €500 million per year) aims to release emergency financial aid following a major disaster in a Member State or candidate country, such as the 2009 earthquake in the Italian Abruzzo region or the 2012 floods in Germany. Aid is managed by the recipient country, and should be used to rebuild basic infrastructure, fund emergency services, temporary accommodation or clean-up operations, or counter immediate health risks.

3. Flexibility instrument (maximum €471 million per year) provides funding for clearly identified expenses which cannot be covered by the EU budget without exceeding the maximum annual amount for expenditure set out in the MFF. The Flexibility instrument has for example been used in 2009 to contribute to the financing of energy projects in the context of the European Economic Recovery Plan and to the decommissioning of a nuclear power plant in Bulgaria.

4. European Globalisation Fund (maximum €150 million per year) aims to help workers reintegrate into the labour market after they have been made redundant as a result of major structural changes in world trade patterns (i.e: delocalisation, financial and economic crisis). For example, it supported Belgian workers after the General Motors Antwerp plant closed-down.

Own resources

How will the future MFF be financed? In February 2013, the European Council agreed on some changes to the own resources system for the period 2014-20. However, the current system remains in force until a new Council Decision on own resources is formally adopted and ratified. In general, and without prejudice to the outcome of the ongoing legislative procedure, the following principles will be applied under the next Own Resources Decision:

• The current financing system will be largely 'rolled over' • collection costs (what Member States retain) for traditional own resources (customs

duties) will be lowered to 20 % from 25% which means that 80% of amount collected will form revenue to EU budget;

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• enhanced – albeit very limited – rationalisation of the System of Financial Corrections

In addition, a high-level group is being set up to review the own resources system. On the basis of the results of this work, the Commission will assess if a new reform of the own resources system is appropriate.

EU own resources are the EU revenue. Annual expenditure must be completely covered by annual revenue. The EU budget cannot run a deficit. The different types of own resources and the method for calculating them are set out in a Council Decision on own resources. It also limits the maximum annual amounts of own resources that the EU may raise during a year to 1.23 % of the EU gross national income (GNI). There are three types of own resources:

• Traditional own resources: consist mainly of customs duties on imports from outside the EU and sugar levies. EU Member States keep 25 % of the amounts as collection costs.

• Own resources based on value added tax (VAT): a uniform rate of 0.3 % is levied on the harmonised VTA base of each Member States.

• Own resources based on GNI: each Member State transfers a standard percentage of its GNI to the EU. Although designed simply to cover the balance of total expenditure not covered by the other own resources, this system has become the largest source of revenue of the EU budget.

Other sources of revenue (around 1%) include tax and other deductions from EU staff remunerations, bank interest, contributions from non-EU countries to certain programmes, interest on late payments and fines.

Financial correction mechanisms Financial correction mechanisms are designed to correct contributions by certain Member States deemed excessive as compared to their national wealth. The new provisions will provide some rationalisation of the current system of financial corrections. Until the final adoption and ratification of the Own Resources Decision (ORD), the status quo system will continue to apply. Once adopted, the respective Member States having the right for corrections will get reimbursed retrospectively as of 1 January 2014.

Current correction mechanisms (ORD 2007-2013):

• the UK rebate: the UK is reimbursed by 66 % of the difference between its contribution and what it receives back from the budget. The cost of the UK rebate is divided among EU Member States in proportion to the share they contribute to the EU's GNI. However, Germany, the Netherlands, Austria and Sweden, who considered their relative contributions to the budget to be too high, pay only 25 % of their normal financing share of the UK correction;

• lump-sum payments: the Netherlands and Sweden benefit from gross reductions in their annual GNI contribution of €605 million and €150 million respectively;

• reduced VAT call rates for Austria (0.225 %), Germany (0.15 %), the Netherlands and Sweden (0.1 %).

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Future correction mechanisms (ORD 2014-2020) subject to approval:

• the UK rebate will continue to apply; • Denmark, the Netherlands and Sweden will benefit from gross reductions in their

annual GNI contribution of €130 million, €695 million and €185 million respectively. Austria will benefit from gross reduction in its annual GNI contribution of €30 million in 2014, €20 million in 2015 and €10 million in 2016;

• reduced VAT call rates for Germany, the Netherlands and Sweden will be fixed at 0.15 %.

Further information: Read today's press release: http://europa.eu/rapid/press-release_IP-13-1096_en.htm Visit the website on the Multiannual Financial Framework 2014-2020 and the individual EU funding programmes

Know more about the figures per programme in current and 2011 prices

Know more about national allocations under the Common Agricultural Policy and Cohesion Policy

Read MEMO/13/1006 with full text of President Barroso's video message

Read the MEMO/13/79 about the MFF

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