The EU budget is unmanageable

Every year we get a reminder of the state of the EU's finances, when the Court of Auditors publishes its annual report on the bloc's budget.

The report is about the management of the EU's accounts, and the implementation of the budget. But the publication also presents a valuable opportunity for citizens, media and policy makers to take a step back to evaluate the merits and drawbacks of the EU budget as a whole – or where their money is spent.

Not all people agree with that of course. Commissioner Siim Kallas, for example, thinks it "sad" that "rather than listen to what the auditors say, some quarters will yet again use the report to promote their own anti-EU agendas."

The Commissioner apparently equates scrutiny of how taxpayers' money is spent and a desire to reform the budget with an "anti-EU agenda". But political cynicism of this nature is not the way to achieve the serious and rigorous debate about the EU budget – or the EU more generally – that the Commissioner says he wants to see. Fortunately, it is not within the Commission's mandate to decide when and how we discuss how taxpayers' money is used.

Mismanagement and waste in the EU budget are two sides of the same coin. They both stem from the size, complexity and irrational nature of the EU budget. Both receive their thrust from the blurred line between spending and accountability, owing to the set-up of the EU's budget programmes. And both can be radically reduced by simplifying the budget, cutting down on the spending and by repatriating a large chunk of regional spending and the CAP to member states.

Commission should be congratulated

First, let's take mismanagement and fraud. In this year's report, the Auditors did give the reliability of the Commission's accounts a clean bill of health, and signed off the bulk of CAP spending for the first time. The Commission should be congratulated for this.

However, payments from the rural development programme, the structural funds and the overseas aid scheme were still subject to substantial errors. For instance, 11% of the total amount reimbursed from the structural funds should not have been paid out in the first place, according to the Auditors.

What are described as "material errors", in the Auditor's jargon, do not always indicate outright fraud. But what they do indicate is that something is clearly wrong with the budget.

The Commissioner blames lax financial controls in the member states for these errors, noting that "National authorities are the ones in charge of deciding which projects make sense, selecting and managing these."

Of course, the member states must tighten up their controls. But as the Auditors point out in this year's report, "In many situations the errors are a consequence of too complex rules and regulations".

In previous reports the Auditors have stressed that the EU budget – and especially cohesion policy – are particularly prone to errors because of its sheer size, complexity and the number of levels involved in its administration. The EU budget is simply unmanageable.

This is not rocket science: the bigger and more complex the spending scheme, the more sensitive it is to mismanagement, and the harder it is to hold policy makers and bureaucrats to account for how taxpayers' money is being spent.

The Commission could do itself a favour by urging member states to regain control of powers over regional policy and rural development spending. Although it runs counter to the Commission's natural impulse, this would make the budget much easier to manage, reduce the number of instances where mismanagement can take place and fully re-establish the link between the spending of public money and accountability.

Richest member states get most money

The same reasoning can be applied to the second – arguably more serious – problem: the waste. Currently, the EU budget is irrational in terms of where money is spent, where money is raised and what the money is spent on.

Firstly, for the EU-15 in particular, sending money to Brussels only to get some of it back, minus the administration cost, is becoming increasingly hard to justify from an economic point of view. This recycling exercise adds extra layers of administration, in turn adding unnecessary complexity and costs both for governments and recipients alike. This is particularly unfortunate for small players, which may not have the resources to absorb the administrative costs despite these being the people usually in most need of the money.

Secondly, the budget is off-target on many different levels. Some of the richest member states still cash in on the most money from the EU budget, meaning that the link between expenditure and need is weak.

In addition, every single area – no matter how rich – receives money from the structural funds in some form. Even within regions money is poorly targeted. Research by Open Europe found that as little as 10-30% of funds given to South East England, for instance, were spent in the poorest one-fifth of areas.

At the same time, the introduction of the Single Farm Payment has paved way for the bizarre scenario where non-farmers – such as multinational corporations, assorted European royalty and golf courses – are now paid not to farm.

Expensive solutions to invented problems

Thirdly, the process underpinning how EU money is spent almost encourages poor project selection. National governments are handed a pot of money that has to be spent, regardless of whether there's a real need or demand for a certain type of project.

In this scenario EU-funded projects can easily become expensive solutions to invented problems. And who can blame national governments for 'taking the money' when they have fought so hard to secure it in EU negotiations?

As the Court of Auditors have pointed out in a separate report, this tendency is exacerbated by the EU rules which state that allocated funds must be paid out within two years or the money will be cancelled. Taken together, the focus becomes on getting money out of the door rather than spending it when and where it is necessary.

Money could be spent far more wisely by simplifying, scaling down and injecting more accountability into the EU budget.

In practical terms this would mean fully repatriating regional policy to the member states except those with a GDP of less than 90% the EU average (which would target the funds on the poorer member states where the money actually can have a real impact); repatriating all parts of the rural development programme which are not related to promoting the environment (as the environment is inherently a cross-border issue); and establishing a better link between performance and receipt of subsidies.

As Commissioner Kallas himself points out: "One cannot reasonably expect an EU official from an office in the Commission's headquarters in Brussels to know what best fits the needs of a small town in the West Midlands - this is for the local authorities to say."

Exactly, but this begs the question why in the world the EU is involved in regional spending and rural development in the first place?

The writer is Research Director at the Open Europe think tank