Brown stands firm on UK budget rebate

The European Commission declared war on the British budget rebate last night, as it swept aside Gordon Brown's pleas for austerity and proposed a big increase in spending to cope with the Europe's eastward expansion.

Setting out its plans for the EU's next financing period the Commission proposed a new scheme to share out the benefits of the rebate, worth about €3bn (£2bn) a year to the UK, to prevent its effects becoming "excessive". In a clear reference to the UK, the Commission said that leaving the situation unchanged "would significantly increase a bias in favour of a single member state".

Ministers admit the Government will come under strong pressure from other EU member states as well as the Commission to surrender at least part of the rebate in hard fought negotiations on the EU budget. The demands will test Tony Blair's strategy of "positive engagement" in Europe, which he argues has brought Britain more influence.

But the Commission's move received a blunt response from the Chancellor, who said the UK would defend the rebate, which was won by Margaret Thatcher at a summit in Fontainebleau in 1984 at which she fought to "get our money back".

"The abatement [rebate] is fully justified," Mr Brown said in Brussels yesterday. "We made that clear in Berlin [in 1999 when the last EU budget was fixed] and that continues to be the British position."

All member states have to approve the next budget, which will run from 2007-13, so the UK can veto any change. However, its position will be weakened when 10 new, mainly ex-Communist nations join the EU in May, which will be forced to contribute to the UK rebate like all the other member states.

The rebate compensates the UK for the fact that it pays much more into the EU than it gets back, mainly because it receives relatively little in farm subsidies. But other big net contributors - including Germany, Austria, the Netherlands and Sweden - are angry they do not benefit. Hence the Commission's idea for a generalised system under which any country would get cash back if it is paying in much more than it gets back.

Mr Brown also launched a fierce attack on the Commission's spending plans, as it outlined proposals which the UK says would mean a €20bn increase in spending by 2013.

In December, six net-payers into the EU budget, France, Germany the UK, the Netherlands, Austria and Sweden said average expenditure during the next EU budget period should not exceed 1 per cent of gross national income. The current annual budget of nearly €100bn is equivalent to around 0.98 per cent of GNI even though the legal ceiling is higher at 1.24 per cent.

Yesterday the Commission suggested an increase well in excess of 1 per cent, equivalent to 1.15 per cent of GNI in terms of actual cash paid out and around 1.22 per cent if most cash allocations for work in progress are taken into account. Actual spending would rise to €143bn in 2013, around 25 per cent more than the UK thinks is necessary.

Mr Brown described the plans as "unacceptable" and called on the Commission to concentrate instead on "fiscal discipline and clear promotion of economic reform."

But the Commission president, Romano Prodi, argues that, if the plans for a budget freeze were implemented, the EU would have to shed some of its existing tasks, let alone those of modernising the new economies of eastern Europe.

"Making savings in the Union's budget does not increase national public resources; it simply undermines the foundations of the house we all live in," Mr Prodi said.

Yesterday's exchanges mark the opening shot in a lengthy battle over the EU budget which will be finalised next year.