Thank you for your letter of 10 October 2007[14] confirming that sub-Committee A has considered the update I provided on the outcome of Budget ECOFIN on 13 July. The European Parliament (EP) recently concluded its first reading of the 2008 Draft EC Budget and I am pleased to update you on the amendments adopted by the EP in plenary session on 25 October. In addition, this update covers two Amending Letters to the Preliminary Draft Budget (PDB) presented by the Commission since Council's first reading which will be discussed and adopted during the course of the 2008 budget procedure.

THE EUROPEAN PARLIAMENT'S AMENDMENTS

  The EP's amendments propose a total of €129.7 billion in commitment appropriations, and €124.2 billion in payment appropriations,[15] representing increases of €1.287 billion (or 1%) for commitments and €4.786 billion (or 4%) for payments over the Draft EC Budget. The amount of commitment appropriations corresponds to 1.03% of EU GNI, and is under the 1.24% EU GNI ceiling set by the Community's Own Resources Decision. Following the EP's amendments, the total margin left under the Financial Perspective (FP) ceiling for commitments is €2.615 billion.

  Under Heading la (Competitiveness for growth and employment), the EP increased commitment appropriations by €342.3 million and payment appropriations by €1,003.1 million compared to the Draft Budget, leaving a margin of €0.64 million below the FP ceiling for commitments. These increases for the large part reverse the Council's reductions to the PDB; the EP amendments to the Draft Budget also go beyond PDB levels for certain budget lines including:

— Galileo—placing €739 million in commitments and €400 million in payments into the reserve in support of the Commission's financing proposal—(these do not feature in the overall totals or margin figures because they have been placed in reserve pending a Council agreement on the issue of Galileo and EIT financing);

— Co-operation programme (Energy and Environment)—increased payments by €150 million;

— Capacities programme (Research Infrastructures)—increased payments by €50 million;

— People programme—increased payments by €100 million;

— Lifelong Learning—increased payments by €100 million.

  The EP amendments bring the total commitment and payment appropriations for Heading la to €10.346 billion and €9.993 billion respectively.

  Under Heading 1b (Cohesion for growth and employment), the EP left commitment appropriations untouched as Council had done, leaving a margin of €11.1 million. The EP increased payment appropriations by €2,322.7 million, above the Draft Budget. Again, this increase reverses the Council's reductions to the PDB and also goes beyond PDB levels for certain budget lines including:

— European Social Fund—increased payments by €361.4 million;

— European Regional Development Fund—increased payments by €1,252 million;

— Cohesion Fund—increased payments by €386.8 million.

  The EP amendments bring the total commitment and payment appropriations for Heading Ib to €46.878 billion and €42.447 billion respectively.

  Under Heading 2 (Preservation and management of natural resources), the EP increased commitment appropriations by €664.6 million and payment appropriations by €670.7 million compared to the Draft Budget, leaving a margin of €2,412.8 million below the FP ceiling for commitments. The EP restored PDB appropriation levels for the budget lines which Council had targeted for reductions and further increased the budget lines Council had protected relating to food programmes for deprived persons, the free distribution of fruit and vegetables and school milk. The EP amendments to the Draft Budget also go beyond PDB levels for certain budget lines including:

— Promotion measures—Payments by Member States—increased commitments and payments by €4.772 million;

— Specific aid for bee-keeping—increased commitments and payments by €4.264 million;

— LIFE+ (Financial Instrument for the Environment)—increased payments by €3.6 million;

— Financial contribution to the Member States for expenses in the field of control—increased commitments by €8 million and payments by €10 million.

  The EP amendments bring the total commitment and payment appropriations for Heading 2 to €56.387 billion and €54.888 billion respectively.

  Under Heading 3a (Freedom, security and justice) , the EP increased commitment appropriations by €41.3 million and payment appropriations by €55.048 million compared to the Draft Budget, leaving a margin of €18.966 million below the FP ceiling for commitments. The EP reversed the Council's reductions to the PDB on several programmes and agencies. For the FRONTEX agency (management of operational co-operation at external borders), the EP increased both commitments and payments by €31 million above the Draft Budget, more than doubling the levels proposed in the PDB. Increases above the PDB were also proposed for the Prince programme. The EP amendments bring the total commitment and payment appropriations for Heading 3a to €728.034 million and €533.196 million respectively.

  Under Heading 3b (Citizenship), the EP increased commitment appropriations by €30.9 million and payment appropriations by €58.420 million compared to the Draft Budget, leaving a margin of €157,000. The EP restored PDB appropriation levels and proposed further increases above the PDB for budget lines including:

— Civil Protection Financial Instrument—increased commitments by €2.11 million and payments by €1.63 million;

— Pilot scheme for artist mobility—increased comitments and payments by €1.5 million;

— Special annual events—increased commitments and payments by €1.88 million.

  The EP amendments bring the total commitment and payment appropriations for Heading 3b to €614.843 million and €708.253 million respectively.

   Under Heading 4 (The EU as a global partner), the EP increased commitment appropriations by €112.2 million and payment appropriations by €580.1 million compared to the Draft Budget, leaving a low margin of €15,000 below the FP ceiling for commitments. As a result of the EP's amendments, the €239.2 million payment appropriations for the Emergency Aid Reserve are effectively brought back on budget (accounting for a large part of the overall payments increase). The EP approved the Commission's Amending Letter 1 (more explanation of the detail below) which provided for substantial additional appropriations for Kosovo and Palestine. The EP proposes further commitment appropriations of €10 million for both Kosovo and Palestine. The other significant EP amendment reduces commitment appropriations for the CFSP by €40 million while calling for the Flexibility Instrument to be used to provide €87 million in commitments for the CFSP and other priorities (Kosovo €20 million, Palestine €20 million, the Global Fund to fight AIDS, Tuberculosis and Malaria €4 million, and Information programmes for non-member countries, £3 million). The EP restored PDB appropriation levels and proposed further increases above the PDB for budget lines including:

— Co-operation with third countries in the areas of migration and asylum—increased commitments by €8 million and payments by €10 million;

— Regional and horizontal programmes—increased payments by €25 million;

— Adjustment support for sugar protocol countries—increased commitments by €5 million.

  The EP amendments bring the total commitment and payment appropriations for Heading 4 to €7.241 billion and €8.133 billion respectively.

  Under Heading 5 (Administration), the EP increased commitment appropriations by €95.6 million and payment appropriations by €95.4 million compared to the Draft Budget, leaving a margin of €171.140 million. The EP marginally increased its own overall administration appropriations (commitments and payments) by €16.12 and that of the European Economic and Social Committee by €0.55 million. In doing so it did not fully restore the reductions proposed by Council in the Draft Budget to the administration budgets of a few other EU institutions and bodies, namely the Court of Justice, the Court of Auditors, the Committee of the Regions and the European Data Protection Officer.

  The EP amendments bring both the totals for commitment and payment appropriations for Heading 5 to €7.286 billion.

  The EP made no amendments to Heading 6 (Compensations) and appropriations remain at €206.6 million for both commitment and payment appropriations.

  Tables summarising the changes between the PDB, Draft Budget and the EP's first reading amendments are set out in Annex 1 to this letter.

UK APPROACH AND THE NEXT STAGES OF THE EC BUDGET PROCEDURE

  Following discussion of the EP's amendments in the Council's Budget Committee and subsequently by Ambassadors in Coreper, a conciliation session between the Council and the EP will take place on 23 November during Budget ECOFIN. Both sides will attempt to reach consensus on the elements of the EC Budget. Council will then conclude its second reading of the 2008 EC Budget, when compulsory expenditure (mainly spending on agriculture) will be settled. The budget will then pass back to the EP for its second reading on 13 December, at which non-compulsory expenditure (the remainder of the budget) will be settled and the 2008 EC Budget finally adopted.

  The Government's objectives for the forthcoming Council discussions will remain consistent with those outlined to you in previous correspondence and with our position in the earlier stages of the negotiations—principally to reach agreement in as many areas as possible in a way which maintains budget discipline and does not compromise sound financial management. We will seek to reduce the overall level of payment appropriations to bring the budget closer to the likely implementation rate and to reduce the likelihood of another large surplus. The Government is very concerned by the Commission's proposal to revise the 2007-2013 Financial Perspective in the first year of its existence. We will work with like-minded Member States to press the Commission for further justification of this measure and seek to ensure that all alternative options to revising the Financial Perspective have been thoroughly explored. The Government will also work to agree allocations for Afghanistan and Iraq and other UK priority areas (Adjustment Support for Sugar Protocol Countries, Co-operation with Developing Countries in Asia, Humanitarian Aid and CFSP).

AMENDING LETTER NO. 1

  Amending Letter No. 1 (SEC(2007) 1140 final) to the 2008 PDB was presented by the Commission and discussed by Council Budget Committee on 27 September and concerns the mobilisation of funds to support Kosovo and the Palestinian Authority and the creation of a new budget article for Damage requests resulting from legal procedures against the Commission's decisions in the field of competition. The proposed amendments with financial impacts are as follows:

— An additional €120 million in commitment appropriations and €60 million in payment appropriations to support Kosovo through the "macroeconomic assistance" and "transition and institution-building assistance" budget lines;

— An additional €142 million in commitment appropriations and €85 million in payment appropriations to support the Palestinian Authority through the "European Neighbourhood and Partnership financial assistance to Palestine, the peace process and UNRWA" budget line.

  When this Amending Letter was discussed in Council Budget Committee a number of Member States including the UK found the creation of the new budget article contentious given that the financial impact could not be reasonably established and so it has been removed, Satisfied by the evidence that the amounts were justified, Member States approved Amending Letter No. 1.

AMENDING LETTER NO. 2

  Amending Letter No. 2 (SEC(2007) 1454 final) to the 2008 PDB was presented by the Commission and initially discussed by Council Budget Committee on 6 November and concerns a downward revision for agriculture expenditure based on the latest economic data available on market factors and legislative decisions since the PDB was presented. The revision results from a combination of more optimistic forecasts relating to agricultural markets, voluntary modulation (a transfer from direct aids to rural development) requested by the UK, additional revenue from the milk superlevy and from 2007 carry-over, and the higher euro-dolar exchange rate between July and September. The proposed amendments with financial impacts are as follows:

— An overall reduction of €970.3 million in commitment appropriations and €1,331.3 million in payment appropriations to Heading 2 (Preservation and management of natural resources);

— Within which the voluntary modulation requested by the UK amounts to an increase of €362 million in commitments for Rural Development.

  Amending Letter No. 2 will be further considered by Member States at Budget ECOFIN as part of Council's second reading. A sufficient number of Member States including the UK is satisfied with the evidence provided by the Commission and a vote in favour at Budget ECOFIN is likely.

20 November 2007

TABLE 1

SUMMARY OF 2008 PDB, DRAFT EC BUDGET AND EP FIRST READING—EUR MILLION

Heading	Financial Framework Ceiling	2008 PDB		2008 DB Council First Reading		EP's First Reading EP1R		Difference EP1R/DB
		CA (2)	PA (3)	CA	PA	CA	PA	CA	PA
1.  Sustainable Growth	56,736	57,148	50,161	56,882	49,115	57,224	52,440	342	3,325
1a.  Competitiveness for Growth and Employment	9,847	10,270	9,539	10,004	8,990	10,346	9,993	342	1,003
Margin14	—	76.6	—	343.0	—	643.5	—	301	—
1b.  Cohesion for Growth and Employment	46,889	46,878	40,623	46,878	40,125	46,878	42,447	0	2,322
Margin	—	11.1	—	11.1	—	11.0	—	0	—
2.  Preservation and Management of Natural Resources	58,800	56,276	54,770	55,723	54,217	56,387	54,888	664	671
Margin	—	2,524.2	—	3,077.3	—	2,413	—	-664	—
3.  Citizenship, Freedom, Security and Justice	1,362	1,289	1,190	1,271	1,128	1,343	1,241	72	113
3a.  Freedom, Security and Justice	747	691	496	687	478	728	533	41	55
Margin	—	56.0	—	60.3	—	19.0	—	-41	—
3b.  Citizenship	615	598	694	584	650	615	708	31	58
Margin	—	17.7	—	31.1	—	0.2	—	-31	—
4.  European Union as a Global Partner15	7,002	6,911	7,917	7,129	7,553	7,241	8,133	112	580
Margin	—	329.8	—	112.2	—	0.015	—	-112	—
5.  Administration	7,380	7,336	7,336	7,190	7,190	7,286	7,286	96	96
Margin	—	121.2	—	266.8	—	171.1	—	-96	—
6.  Compensation	207	207	207	207	207	207	207	0	0
Margin	—	363.7	—	363.7	—	363.7	—	0	—
TOTAL (4)	131,487	129,167	121,581	128,401	119,410	129,688	124,196	1,287	4,786
Margin	—	3,137	—	3,902	—	2,615	—	-1,287	—
Appropriations for payment as % of GNI			0.97%		0.95%		0.99%
Notes
(2)   CA = commitment appropriations
(3)   PA = payment appropriations
(4)   Due to rounding, the sum of the lines may not equal the total
14  The margin for Heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (€500 million).
15  Excludes €234.5 million from the Emergency Aid Reserve.

TABLE 2

SUMMARY OF 2008 PDB, DRAFT EC BUDGET AND EP FIRST READING—GBP MILLION

Heading	Financial Framework Ceiling	2008 PDB		2008 DB Council First Reading		EP's First Reading EP1R		Difference EP1R/DB
		CA (2)	PA (3)	CA	PA	CA	PA	CA	PA
1.  Sustainable Growth	38,240.1	38,517.8	33,808.5	38,338.5	33,103.5	38,569.0	35,344.6	230.5	2,241
1a.  Competitiveness for Growth and Employment	6,636.9	6,922.0	6,429.3	6,742.7	6,059.3	6,973.2	6,735.3	230.5	676
Margin16	—	51.6	—	231.2	—	433.7	—	202.9	—
1b.  Cohesion for Growth and Employment	31,603.2	31,595.8	27,380.0	31,595.8	27,044.3	31,595.8	28,609.3	0	1,565.0
Margin	—	7.5	—	7.5	—	7.4	—	-0.1	—
2.  Preservation and Management of Natural Resources	39,631.2	37,930.0	36,915.0	37,557.3	36,542.3	38,004.8	36,994.5	447.5	452.3
Margin	—	1,701.3	—	2,074.1	—	1,626.4	—	-447.5	—
3.  Citizenship, Freedom, Security and Justice	918.0	868.7	802.1	856.7	760.3	905.2	836.4	48.5	76.2
3a.  Freedom, Security and Justice	503.5	465.7	334.3	463.0	322.2	490.7	359.2	27.6	37.1
Margin	—	37.7	—	40.6	—	12.8	—	-27.6	—
3b.  Citizenship	414.5	403.1	467.8	393.6	438.1	414.51	477.192	20.9	39.1
Margin	—	11.9	—	21.0	—	0.13	—	-20.9	—
4.  European Union as a Global Partner17	4,719.3	4,658.0	5,336.1	4,804.9	5,090.7	4,880.4	5,481.6	75.5	390.9
Margin	—	222.3	—	75.6	—	0.01	—	-75.5	—
5.  Administration	4,974.1	4,944.5	4,944.5	4,846.1	4,846.1	4,910.8	4,910.8	64.7	64.7
Margin	—	81.7	—	179.8	—	115.3	—	-64.7	—
6.  Compensation	139.5	139.5	139.5	139.5	139.5	139.5	139.5	0	0
Margin	—	245.1	—	245.1	—	245.1	—	0	—
TOTAL (4)	88,622.2	87,058.6	81,945.6	86,542.3	80,482.3	87,409.7	83,708.1	867.4	3,225.8
Margin	—	2,114.3	—	2,629.9	—	1,762.5	—	-867.4	—
Appropriations for payment as % of GNI			0.97%		0.95%		0.99%
Notes
(2)   CA = commitment appropriations
(3)   PA = payment appropriations
(4)   Due to rounding, the sum of the lines may not equal the total
Sterling figures converted at the exchange rate on 29 June 2007: €1=£0.674
16  The margin for Heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (£337 million).
17  Excludes £158.1 million from the Emergency Aid Reserve.

  On 23 November 2007, I represented the UK at the Budget Economic and Financial Affairs Council (ECOFIN). I am pleased to update you on the progress made at Budget ECOFIN at which the Council of the European Union formally agreed its second reading of the 2008 Draft Budget (DB) of the European Communities following conciliation with the European Parliament. The amended DB was agreed by Council by qualified majority with all Member States voting in favour apart from Germany and Spain, who voted against and abstained respectively.

Council's agreed position ahead of conciliation was based on a package put together by the Portuguese Presidency (and supported by the UK) following discussions in Council Budget Committee. The Presidency package proposed overall reductions to both commitment and payment appropriations beyond Council's first reading of €485.68 million and €748.63 million respectively. The package proposed total commitment appropriations of €127.92[16] billion leaving a margin of €4.38 billion, and total payment appropriations of €118.66 billion, representing 0.94% of EU GNI, below the 0.97% EU GNI of the Commission's Preliminary Draft Budget (PDB) and the 0.95% EU GNI of Council's first reading. The package in large part reverted back to Council's first reading position, apart from:

— accepting both Amending Letters 1 and 2[17] which provide for additional appropriations for Kosovo and Palestine, and reductions to agriculture expenditure (for which more detail was provided in my last update letter of 20 November);

— accepting the European Parliament's first reading amendments—proposed increases for the FRONTEX agency (management of operational co-operation at external borders), and for the administration budgets of the European Parliament and the European Economic and Social Committee; and

— the increase for the CFSP budget of €85 million in commitment appropriations and €40 million in payment appropriations.

  Tables summarising the changes between the PDB, Draft Budget, the EP's first reading amendments and the Presidency second reading package are set out in Annex 1 to this letter.

  AGREEMENT REACHED BETWEEN COUNCIL AND EUROPEAN PARLIAMENT

Before proceeding with the second reading of the DB, the Council held its customary conciliation meeting with a delegation from the European Parliament. During the course of the Council's conciliation with the European Parliament, it became apparent that no agreement would be reached on the 2008 EC Budget without also reaching agreement on the multi-annual financing of the Galileo project and the European Institute of Technology (EIT). (I refer you to the letter I wrote to both scrutiny committees on this subject dated 28 November.)

  After lengthy negotiation, the European Parliament, the Council and the Commission reached broad agreement on several key elements of the 2008 EC Budget:

— Total payment appropriations were set at €120.35 billion, corresponding to approximately 0.96% EU GNI, below the level originally proposed by the Commission in its Preliminary Draft Budget (PDB). This incorporated the payment appropriations in 2008 for the Galileo project and a reduction of €300 million[18] in appropriations regarding clearance of agricultural guarantee fund accounts;

— Acceptance of Amending Letter 2 (reductions to agriculture expenditure) as proposed by the Commission;

— Political agreement was reached on the Commission's proposal to amend the Inter-institutional Agreement (IIA) of 17 May 2006 on budgetary discipline and sound financial management and regarding the multi-annual financial framework, with a view to financing the Galileo project and the EIT; and so—

— In order to finance Galileo and the EIT, agreement was also reached on a smaller revision of the Financial Perspective to that originally proposed by the Commission, whereby €1.6 billion would be reallocated from the 2007 margin of Heading 2 (Preservation and Management of Natural Resources), €600 million would be reprioritised within Heading 1a (Competitiveness for Growth and Employment) across 2008-13, €300 million would be made available from the 2008-13 margins of Heading 1a, and €200 million would be mobilised from use of the Flexibility Instrument;[19] and

— The amount of the CFSP budget for 2008 was set at €285.25 million in commitment appropriations for which purpose it was agreed to mobilise the Flexibility Instrument for an amount of €70 million to provide sufficient financing for the CFSP mission in Kosovo.

  In addition to agreement on these elements of the 2008 EC Budget, four Joint Statements were agreed at Budget ECOFIN. These concerned: the financing of Galileo and the EIT; Joint Undertakings; and the procedure to implement the budget agreement reached by the Council and European Parliament. The Government is supportive of these statements, which affirm the principle of fair and open competition and call for sound financial management and budget discipline in the areas they concern. My letter to you of 28 November provides further detail on the important commitments secured with respect to the financing of Galileo and open and competitive procurement for the project.

  UK APPROACH AND THE NEXT STAGE OF THE EC BUDGET PROCEDURE

In line with the approach and objectives I have outlined previously, I believe the UK achieved the best possible outcome from this stage of the EC Budget negotiations. The UK, working with other Member States, and in particular the Netherlands and Sweden, was instrumental in negotiating a budget deal that sets overall payment levels for 2008 below those of the PDB and well below 1% of EU GNI, that limits the extent of Financial Perspective revision to finance Galileo and the EIT, and that protects spending allocations for Afghanistan, Palestine, Kosovo and Iraq and other UK priority areas (Adjustment Support for Sugar Protocol Countries, Co-operation with Developing Countries in Asia, Humanitarian Aid and CFSP).

  The consensus reached at Budget ECOFIN has set the parameters for commitment and payment appropriations for the budget headings. Council has now concluded its second reading of the 2008 EC Budget and compulsory expenditure (mainly spending on agriculture) has been settled. The European Parliament will formally agree the non-compulsory expenditure part of 2008 EC Budget in its second reading culminating in the plenary session on 13 December. This will mark the formal adoption of the 2008 EC Budget and I will keep you informed of the final outcomes.

  12 December 2007

TABLE 1

SUMMARY OF 2008 PDB, DRAFT EC BUDGET, EP FIRST READING AND COUNCIL SECOND READING PACKAGE—EUR MILLION

Heading	Financial Framework Ceiling	2008 PDB		Council First Reading		EP's First Reading EP1R		Council Second Reading Package
		CA (2)	PA (3)	CA	PA	CA	PA	CA	PA
1.  Sustainable Growth	56,736	57,148	50,161	56,882	49,115	57,224	52,440	56,882	49,115
1a.  Competitiveness for Growth and Employment	9,847	10,270	9,539	10,004	8,990	10,346	9,993	10,004	8,990
Margin22	—	76.6	—	343.0	—	0.64	—	343.0	—
1b.  Cohesion for Growth and Employment	46,889	46,878	40,623	46,878	40,125	46,878	42,447	46,878	40,125
Margin	—	11.1	—	11.1	—	11.0	—	11.1	—
2.  Preservation and Management of Natural Resources	58,800	56,276	54,770	55,723	54,217	56,387	54,888	55,102	53,236
Margin	—	2,524.2	—	3,077.3	—	2,413	—	3,697.67	—
3.  Citizenship, Freedom, Security and Justice	1,362	1,289	1,190	1,271	1,128	1,343	1,241	1,302	1,159
3a.  Freedom, Security and Justice	747	691	496	687	478	728	533	718	509
Margin	—	56.0	—	60.3	—	19.0	—	29.3	—
3b.  Citizenship	615	598	694	584	650	615	708	584	650
Margin	—	17.7	—	31.1	—	0.2	—	31.1	—
4.  European Union as a Global Partner23	7,002	6,911	7,917	7,129	7,553	7,241	8,133	7,216	7,738
Margin	—	329.8	—	112.2	—	0.015	—	25.2	—
5.  Administration	7,380	7,336	7,336	7,190	7,190	7,286	7,286	7,207	7,207
Margin	—	121.2	—	266.8	—	171.1	—	250.1	—
6.  Compensation	207	207	207	207	207	207	207	207	207
Margin	—	363.7	—	363.7	—	363.7	—	363.7	—
TOTAL (4)	131,487	129,167	121,581	128,401	119,410	129,688	124,196	127,916	118,662
Margin	—	3,137	—	3,902	—	2,615	—	4,388	—
Appropriations for payment as % of GNI			0.97%		0.95%		0.99%		0.94%
Notes
(2)   CA = commitment appropriations
(3)   PA = payment appropriations
(4)   Due to rounding, the sum of the lines may not equal the total
22  The margin for Heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (€500 million).
23  The margin for Heading 4 does not take into account €239.2 million from the Emergency Aid Reserve.

TABLE 2

SUMMARY OF 2008 PDB, DRAFT EC BUDGET, EP FIRST READING AND COUNCIL SECOND READING PACKAGE—GBP MILLION

Heading	Financial Framework Ceiling	2008 PDB		Council First Reading		EP's First Reading EP1R		Council Second Reading Package
		CA (2)	PA (3)	CA	PA	CA	PA	CA	PA
1.  Sustainable Growth	38,240.1	38,517.8	33,808.5	38,338.5	33,103.5	38,569.0	35,344.6	38,338.5	33,103.5
1a.  Competitiveness for Growth and Employment	6,636.9	6,922.0	6,429.3	6,742.7	6,059.3	6,973.2	6,735.3	6,742.7	6,059.3
Margin24	—	51.6	—	231.2	—	0.43	—	231.2	—
1b.  Cohesion for Growth and Employment	31,603.2	31,595.8	27,380.0	31,595.8	27,044.3	31,595.8	28,609.3	31,595.8	27,044.3
Margin	—	7.5	—	7.5	—	7.4	—	7.5	—
2.  Preservation and Management of Natural Resources	39,631.2	37,930.0	36,915.0	37,557.3	36,542.3	38,004.8	36,994.5	37,138.7	35,881.1
Margin	—	1,701.3	—	2,074.1	—	1,626.4	—	2,492.2	—
3.  Citizenship, Freedom, Security and Justice	918.0	868.7	802.1	856.7	760.3	905.2	836.4	877.5	781.2
3a.  Freedom, Security and Justice	503.5	465.7	334.3	463.0	322.2	490.7	359.2	483.9	343.1
Margin	—	37.7	—	40.6	—	12.8	—	19.7	—
3b.  Citizenship	414.5	403.1	467.8	393.6	438.1	414.51	477.192	393.6	438.1
Margin	—	11.9	—	21.0	—	0.13	—	21.0	—
4.  European Union as a Global Partner25	4,719.3	4,658.0	5,336.1	4,804.9	5,090.7	4,880.4	5,481.6	4,863.6	5,215.4
Margin	—	222.3	—	75.6	—	0.01	—	16.98	—
5.  Administration	4,974.1	4,944.5	4,944.5	4,846.1	4,846.1	4,910.8	4,910.8	4,857.5	4,857.5
Margin	—	81.7	—	179.8	—	115.3	—	168.6	—
6.  Compensation	139.5	139.5	139.5	139.5	139.5	139.5	139.5	139.5	139.5
Margin	—	245.1	—	245.1	—	245.1	—	245.1	—
TOTAL (4)	88,622.2	87,058.6	81,945.6	86,542.3	80,482.3	87,409.7	83,708.1	86,215.4	79,978.2
Margin	—	2,114.3	—	2,629.9	—	1,762.5	—	2,957.5	—
Appropriations for payment as % of GNI			0.97%		0.95%		0.99%		0.94%
Notes
(2)   CA = commitment appropriations
(3)   PA = payment appropriations
(4)   Due to rounding, the sum of the lines may not equal the total
Sterling figures converted at the exchange rate on 29 June 2007: €1=£0.674
24  The margin for Heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (£337 million).
25  The margin for Heading 4 does not take into account £161.2 million from the Emergency Aid Reserve.

  Following on from the Economic Secretary's letter to you of 12 December, I am pleased to update you on the outcome of the European Parliament's second reading of the 2008 EC Budget and its formal adoption which took place in the plenary session of 13 December. This marks the end of the 2008 budget procedure.

The final budget totals are those agreed between the Council and European Parliament (EP) during conciliation at Budget ECOFIN on 23 November. As you may recall, commitment appropriations were set at €129.15[20] billion and payment appropriations at €120.35 billion—corresponding to approximately 0.96% EU GNI, below the level originally proposed by the Commission in its Preliminary Draft Budget (PDB) and significantly below the level put forward in the EP's first reading.

THE EUROPEAN PARLIAMENT'S AMENDMENTS

  While the agreement of 23 November set the overall totals for commitment and payment appropriations, and the Council determined the final level of expenditure for compulsory expenditure (mainly agriculture), the EP, at its plenary session on 13 December, had the final say on setting appropriations for non-compulsory expenditure.

  Under Heading 1a (Competitiveness for growth and employment), the EP set commitment appropriations at €11.086 billion, €1.08 billion higher than Council's second reading, leaving no margin under the FP ceiling for commitments. A further €200 million above the ceiling (for Galileo) is to be financed by the mobilisation of the Flexibility Instrument. Payments were set at €9.773 billion, €782 million higher than Council's second reading, though some €220 million lower than the EP's first reading.

  In comparison to 2007 payment appropriation levels, the sub-heading as a whole receives an increase of 49.3% or €3.228 billion. Within this there are significant increases to the following budget areas:

— Seventh Research framework programme—increased payments by €2 .402 billion or 63.4%;

— Transport and Energy Networks (Tens)—increased payments by €333.8 million or 88.1 %;

— Galileo—payments of €300 million to reflect the €790 million (790%) increase in commitment appropriations resulting from the additional financing and revision of the FP agreed by the Budgetary Authority; and

— Competitiveness and innovation framework programme—increased payments by €.165.7 million or 57.2%.

  There are also decreases on 2007 payment appropriation levels for:

— Customs 2013 and Fiscalis 2013 by €8.247 million or 13.4%;

— Other actions and programmes by €261.2 million or 38.5%.

  Under Heading 1b (Cohesion for growth and employment), the EP set commitment appropriations at €46.878 billion, at the same level of Council's second reading, leaving a margin of €11.06 million under the FP ceiling for commitments. Payments were set at €40.552 billion, €426.9 million higher than Council's second reading, though some €1.9 billion lower than the EP's first reading.

  In comparison to 2007 payment appropriation levels, the sub-heading as a whole receives an increase of 9.5% or €3.506 billion. Within this there are significant increases to the following budget areas:

— Structural Funds—increased payments by €1.058 billion or 3.2% (within which the Convergence objective is to have payments increased by €2.056 billion or 9.3%, while the Regional competitiveness and employment objective is to have payments decreased by €1.170 or 12.6%);

— Cohesion Fund—increased payments by €2.452 billion or 57.4%.

  Under Heading 2 (Preservation and management of natural resources), the Council and EP set commitment appropriations at €55.041 billion, €38.8 million higher than Council's second reading, leaving a margin of €3.759 billion under the FP ceiling for commitments. Payments were set at €53.177 billion, €41.3 million higher than Council's second reading, though some €1.7 billion lower than the EP's first reading.

  In comparison to 2007 payment appropriation levels, the heading as a whole receives a decrease of 1.9% or €1.033 billion. Within this there are significant decreases to the following budget areas:

— Market related expenditure on direct aids—decreased payments by €1.210 billion or 2.9% (within which Agriculture markets is to have payments decreased by €1.401 billion or 3.3% and Animal and plant health is to have payments increased by €190.35 million or 539.2%);

— European Fisheries Fund—decreased payments by £368.0 million or 44.9%.

  There are also increases on 2007 payment appropriation levels for:

— Rural development of £485.3 million or 4.5%;

— Life+ (Environment) of £37.1 million or 31.3%.

  Under Heading 3a (Freedom, security and justice), the EP set commitment appropriations at €728.0 million, €10.3 million higher than Council's second reading, leaving a margin of €18.97 million under the FP ceiling for commitments. Payments were set at €533.2 million, €24.0 million higher than Council's second reading and at the same level as the EP's first reading.

  In comparison to 2007 payment appropriation levels, the sub-heading as a whole receives an increase of 44.2% or €163.3 million. Within this there are significant increases to the following budget areas:

— Solidarity and management of migration flows—increased payments of €108.4 million or 77.9%;

— Fundamental rights and justice—increased payments by €368.0 million or 75.4%;

— Decentralised agencies—increased payments by €38.3 million or 44.1%.

  Under Heading 3b (Citizenship), the EP set commitment appropriations at €614.8 million, €30.9 million higher than Council's second reading, leaving a margin of £0.157 million under the FP ceiling for commitments. Payments were set at £708.3 million, £58.4 million higher than Council's second reading and at the same level as the EP's first reading.

  In comparison to 2007 payment appropriation levels, the sub-heading as a whole receives a decrease of 21.3% or €192.0 million (although this does not account for future mobilisation of the EU Solidarity Fund under this sub-heading, which should result in an overall increase in payments). Within this there are significant increases to the following budget areas:

— Culture 2007-2013—increased payments by €13.0 million or 31.2%;

— Decentralised agencies—increased payments by €19.1 million or 22.9%.

  There is also a decrease on 2007 payment appropriation levels for:

— Other actions and programmes (relating to Enlargement) of €35.2 million or 26.1%.

  Under Heading 4 (The EU as a global partner), the EP set commitment appropriations at €7.311 billion, €95.2 million higher than Council's second reading, leaving no margin under the FP ceiling for commitments. A further €70 million above the ceiling (for the CFSP mission in Kosovo) is to be financed by the mobilisation of the Flexibility Instrument. Payments were set at €8.113 billion, €375.2 million higher than Council's second reading, though some €20 million lower than the EP's first reading.

  In comparison to 2007 commitment and payment appropriation levels, the heading as a whole receives increases of 7.3% or €498.8 million and 10.3% or €760.0 million respectively. Within this there are significant increases to the following budget areas:

— Instrument for Pre-Accession—increased commitments by €177.1 million or 14%;

— European Neighbourhood and Partnership Instrument—increased commitments by €144.7 million or 10.2%;

— Common Foreign and Security Policy (CFSP)—increased commitments by €126.1 million or 79.2%;

— Development Co-operation Instrument—increased commitments by €71.4 million or 3.3%;

— Instrument for Stability—increased commitments by €40.0 million or 28.7%.

  Under Heading 5 (Administration), the EP set commitment and payment appropriations at €7.284 billion, €76.9 million higher than Council's second reading, marginally lower than the EP's first reading. This leaves a margin of €173.14 million under the FP ceiling for commitments.

  In comparison to 2007 payment appropriation levels, the heading as a whole receives an increase of 4.4% or €306.0 million—significantly lower than the 5.7% increase proposed by the Commission in its Preliminary Draft Budget.

  The EP made no amendments to Heading 6 (Compensations) and appropriations remain at €206.6 million for both commitment and payment appropriations, unchanged through each stage of the budget negotiations.

THE UK'S OBJECTIVES AND THE ADOPTED BUDGET

  The formal adoption of the budget marks the end of the negotiations for the 2008 budget. The outcome of the EP's second reading finalising the 2008 EC Budget reflects the agreement reached between Council and the EP at Budget ECOFIN in November, and as the Economic Secretary's letter to you of 12 December set out, the UK achieved the best possible outcome given the circumstances. In respect of the Government's objective to contain budget growth, a budget deal was reached which set overall payments at under 1% EU GNI and below the level proposed in the Commission's PDB. Budget growth was also contained under Headings 2 (agricultural expenditure) and 5 (administration), where the adopted budget contains payment levels below those proposed in the PDB. In respect of maintaining budget discipline, the agreement reached by the Budgetary Authority limited the extent of Financial Perspective revision required to finance Galileo and the European Institute of Technology. Joint Declarations issued at Budget ECOFIN also emphasised the exceptional nature of this revision.

  The adopted budget also meets the Government's objectives on external actions where the UK sought to ensure sufficient resources were allocated for Afghanistan, Palestine, Kosovo and Iraq, co-operation with developing countries in Asia, and spending on the CFSP and Adjustment Support for Sugar Protocol Countries. In particular, the adopted budget allocates appropriations above those proposed in the PDB for:

— Palestine—allocated commitments of €300 million, €142 million above the Commission's original proposal;

— Iraq (within Co-operation with developing Middle Eastern countries)—allocated commitments of €98.4 million (as proposed in the PDB) and payments of €80 million, €18 million above the Commission's original proposal;

— Co-operation with developing countries in Asia—allocated commitments of €666 million, €24 million above the Commission's original proposal;

— CFSP—allocated commitments of €284.9 million, €85 million above the Commission's original proposal; and

— Adjustment Support for Sugar Protocol Countries—allocated commitments of €152.6 million, €3 million above the Commission's original proposal.

  Tables summarising the changes between the PDB, Draft Budget, the EP's first reading amendments, Council's second reading and the final adopted budget are set out in Annex 1 to this letter.

  I hope this information is helpful to the Committee.

 31 January 2008

TABLE 1

SUMMARY OF 2008 PDB, DRAFT EC BUDGET, EP FIRST READING, COUNCIL SECOND READING, AND ADOPTED BUDGET—EUR MILLION

Heading	Financial Framework Ceiling	2008 PDB		Council First Reading		EP's First Reading EP1R		Council Second Reading		Adopted Budget
		CA (2)	PA (3)	CA	PA	CA	PA	CA	PA	CA	PA
1.  Sustainable Growth	56,736	57,148	50,161	56,882	49,115	57,224	52,440	56,882	49,115	57,964	50,324
1a.  Competitiveness for Growth and Employment	9,847	10,270	9,539	10,004	8,990	10,346	9,993	10,004	8,990	11,086	9,773
Margin27	—	76.6	—	343.0	—	0.64	—	343.0	—	-200	—
1b.  Cohesion for Growth and Employment	46,889	46,878	40,623	46,878	40,125	46,878	42,447	46,878	40,125	46,878	40,552
Margin	—	11.1	—	11.1	—	11.0	—	11.1	—	11.0	—
2.  Preservation and Management of Natural Resources	58,800	56,276	54,770	55,723	54,217	56,387	54,888	55,102	53,236	55,041	53,177
Margin	—	2,524.2	—	3,077.3	—	2,413	—	3,697.67	—	3,759	—
3.  Citizenship, Freedom, Security and Justice	1,362	1,289	1,190	1,271	1,128	1,343	1,241	1,302	1,159	1,343	1,241
3a.  Freedom, Security and Justice	747	691	496	687	478	728	533	718	509	728	533
Margin	—	56.0	—	60.3	—	19.0	—	29.3	—	19.0	—
3b.  Citizenship	615	598	694	584	650	615	708	584	650	615	708
Margin	—	17.7	—	31.1	—	0.2	—	31.1	—	0.2	—
4.  European Union as a Global Partner28	7,002	6,911	7,917	7,129	7,553	7,241	8,133	7,216	7,738	7,311	8,113
Margin	—	329.8	—	112.2	—	0.015	—	25.2	—	-70	—
5.  Administration	7,380	7,336	7,336	7,190	7,190	7,286	7,286	7,207	7,207	7,284	7,284
Margin	—	121.2	—	266.8	—	171.1	—	250.1	—	173.1	—
6.  Compensation	207	207	207	207	207	207	207	207	207	207	207
Margin	—	0.364	—	0.364	—	0.364	—	0.364	—	0.364	—
TOTAL (4)	131,487	129,167	121,581	128,401	119,410	129,688	124,196	127,916	118,662	129,150	120,347
Margin	—	3,137	—	3,902	—	2,615	—	4,388	—	3,693	—
Appropriations for payment as % of GNI			0.97%		0.95%		0.99%		0.94%		0.96%
Notes
(2)   CA = commitment appropriations
(3)   PA = payment appropriations
(4)   Due to rounding, the sum of the lines may not equal the total
27  The margin for Heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (€500 million).
28  The margin for Heading 4 does not take into account €239.2 million from the Emergency Aid Reserve.

TABLE 2

SUMMARY OF 2008 PDB, DRAFT EC BUDGET, EP FIRST READING, COUNCIL SECOND READING, AND ADOPTED BUDGET—GBP MILLION

Heading	Financial Framework Ceiling	2008 PDB		Council First Reading		EP's First Reading EP1R		Council Second Reading		Adopted Budget
		CA (2)	PA (3)	CA	PA	CA	PA	CA	PA	CA	PA
1.  Sustainable Growth	38,240.1	38,517.8	33,808.5	38,338.5	33,103.5	38,569.0	35,344.6	38,338.5	33,103.5	39,067.7	33,918.4
1a.  Competitiveness for Growth and Employment	6,636.9	6,922.0	6,429.3	6,742.7	6,059.3	6,973.2	6,735.3	6,742.7	6,059.3	7,471.9	6,587.0
Margin29	—	51.6	—	231.2	—	0.43	—	231.2	—	-134.8	—
1b.  Cohesion for Growth and Employment	31,603.2	31,595.8	27,380.0	31,595.8	27,044.3	31,595.8	28,609.3	31,595.8	27,044.3	31,595.8	27,332.1
Margin	—	7.5	—	7.5	—	7.4	—	7.5	—	7.414	—
2.  Preservation and Management of Natural Resources	39,631.2	37,930.0	36,915.0	37,557.3	36,542.3	38,004.8	36,994.5	37,138.7	35,881.1	37,097.6	35,841.3
Margin	—	1,701.3	—	2,074.1	—	1,626.4	—	2,492.2	—	2,533.6	—
3.  Citizenship, Freedom, Security and Justice	918.0	868.7	802.1	856.7	760.3	905.2	836.4	877.5	781.2	905.2	836.4
3a.  Freedom, Security and Justice	503.5	465.7	334.3	463.0	322.2	490.7	359.2	483.9	343.1	490.7	359.2
Margin	—	37.7	—	40.6	—	12.8	—	19.7	—	12.8	—
3b.  Citizenship	414.5	403.1	467.8	393.6	438.1	414.51	477.2	393.6	438.1	414.5	477.2
Margin	—	11.9	—	21.0	—	0.13	—	21.0	—	0.13	—
4.  European Union as a Global Partner30	4,719.3	4,658.0	5,336.1	4,804.9	5,090.7	4,880.4	5,481.6	4,863.6	5,215.4	4,927.6	5,468.2
Margin	—	222.3	—	75.6	—	0.01	—	16.98	—	-47.18	—
5.  Administration	4,974.1	4,944.5	4,944.5	4,846.1	4,846.1	4,910.8	4,910.8	4,857.5	4,857.5	4,909.4	4,909.4
Margin	—	81.7	—	179.8	—	115.3	—	168.6	—	116.6	—
6.  Compensation	139.5	139.5	139.5	139.5	139.5	139.5	139.5	139.5	139.5	139.5	139.5
Margin	—	0.245	—	0.245	—	0.245	—	0.245	—	0.245	—
TOTAL (4)	88,622.2	87,058.6	81,945.6	86,542.3	80,482.3	87,409.7	83,708.1	86,215.4	79,978.2	87,047.1	81,113.9
Margin	—	2,114.3	—	2,629.9	—	1,762.5	—	2,957.5	—	2,489.1	—
Appropriations for payment as % of GNI			0.97%		0.95%		0.99%		0.94%		0.96%
Notes
(2)   CA = commitment appropriations
(3)   PA = payment appropriations
(4)   Due to rounding, the sum of the lines may not equal the total
Sterling figures converted at the exchange rate on 29 June 2007: €1=£0.674
29  The margin for Heading 1 (sub-heading 1a) does not take into account the appropriations related to the European Globalisation Adjustment Fund (£337 million).
30  The margin for Heading 4 does not take into account £161.2 million from the Emergency Aid Reserve.

15   For Sterling equivalents of key figures quoted, please refer to the tables in Annex 1. Back

16   For Sterling equivalents of key figures quoted, please refer to the tables in Annex 1. Back

17   Apart from the budget line relating to the clearance of accounts with regard to shared management expenditure under the EAGGF (European Agricultural Guidance and Guarantee Fund) and the EAGF (European Agricultural Guarantee Fund), which is reduced by €200 million beyond Council's first reading. Back

18   This represented a further €100 million reduction on top of that proposed in the Council second reading package. Back

19   The Flexibility Instrument permits up to €200 million to be budgeted above the ceilings of the Financial Perspective and these funds may be carried over for up to two years. Back

20   For Sterling equivalents of key figures quoted, please refer to the tables in Annex 1. Back