Blair to compensate new EU states for spending cuts

Britain will offer to sweeten the pill for the Central and Eastern European countries that face billion pound cuts in funding under a UK plan to unblock the EU's funding impasse.

The package, to be unveiled today, will include measures to help the new EU members states to spend more easily the cash they are allocated, a compensation for lowering their projected subsidies by about 10 per cent.

The British proposal will reduce the total amount of money to be spent by the EU from the 1.06 per cent of gross national income put forward in June to about 1.03 per cent. That means a cut of between €20bn and €25bn from the €871bn budget for 2007-13 proposed by the previous EU presidency, Luxembourg, in June and blocked by Mr Blair.

Significantly, the UK is offering to cut the value of its annual budget rebate from the EU, worth €5-8.3bn a year over the funding period, by about one fifth.

The new British proposal is gaining momentum despite complaints that it appears to penalise the poorest nations most. "It's a clever plan," said one senior EU official, "even if it is not a particularly nice piece of work." Britain plans to reduce the funds available to the eastern nations on the basis that they will never be able to absorb the cash within the 2007-13 timescale. Although the Luxembourg plan expected them to be able to spend around 3.7 per cent of their GNI, only one country has managed to do that for one year since 1992.

In exchange for a cut in the allocation, Britain will offer to lower the proportion that the nations have to raise nationally in matching funds, from about 20 per cent to about 15 per cent.

That will give the eight ex-Communist nations that joined the EU last year an instant benefit. The UK may also suggest extending the two years' grace they have to spend the cash.

Meanwhile, Britain will try to show that some of the pain will be concentrated in the old member states.

It will propose cuts in one area of farm subsidies for the old member states: rural development. France, the biggest beneficiary from the EU's Common Agricultural Policy, is less sensitive about reductions in rural development funds, which require matching funding from national sources.

The UK is likely to argue that all the €8bn money budgeted for farm subsidies in Romania and Bulgaria should fall under the CAP ceiling. That is an additional reduction of €2bn since, under the last plan, only €6bn of this would have come from the existing CAP budget.

EU diplomats say that the British proposal could still come unstuck, although there is mounting optimism about the breakthrough.

The key element is that the UK is offering to cut the value of the EU's annual budget rebate without fundamental reform of the CAP - although the UK may make changes to the rebate after 2013 conditional on reductions in farm spending. Britain will end up contributing about the same as France or Italy.

Reducing the overall size of the budget helps all the net contributors, including France and Germany as well as the three that vetoed a deal in June: the UK; the Netherlands; and Sweden.

However,Belgium's Prime Minister, Guy Verhofstadt, voiced his opposition yesterday and hinted that he might veto the deal.

He said: "I am for a fair budget that gives the needed funds to pay for the ambitions and problems now facing Europe and its citizens. A European budget which further falls to 1.02 or 1.03 per cent of European gross national income is unacceptable and unthinkable."

All 25 EU heads of government need to agree on the package, which will be discussed at a summit on 15 to 16 December.