Reform of the EU Structural and Cohesion Funds

Trade and Industry written statement – made on 20th December 2005.

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Photo of Alun Michael Alun Michael Minister of State (State (Industry and the Regions)), Department of Trade and Industry

As the Prime Minister explained in his statement to Parliament of 19 December, the European Council of 15–16 December 2005 succeeded in achieving agreement on the next EC budget for the 2007–13 Financial Perspective. As part of the package, the Member States reached agreement on future Structural and Cohesion Funds spending for the 2007–13 budgetary cycle. The deal is now subject to an Inter-Institutional Agreement with the European Commission and the European Parliament.

The European Council has agreed that there should be a Structural and Cohesion Funds budget of €308 billion, representing 0.37 per cent. of EU Gross National Income (GNI), for the 2007–13 Financial Perspective. This will be focused on three Objectives: a Convergence Objective for regions with a Gross Domestic Product (GDP) below 75 per cent. of the EU average; a Competitiveness Objective for other regions; and a Co-operation Objective for cross-border and trans-national projects.

The agreement constitutes an increase of 31 per cent. or around €73 billion in comparison with the current Structural Funds budget of around €235 billion for the 2000–2006 Financial Perspective, excluding expenditure under the European Agricultural Guidance and Guarantee Fund (EAGGF) and the Financial Instrument for Fisheries Guidance (FIFG). The new Structural Funds budget is 8.3 per cent. less than in the Commission's initial proposals of July 2004. The reformed budget will enable the EU to address priorities in the new Member States while still maintaining some funding for richer Member States, in particular their poorer regions.

In summary, the European Council has agreed to allocate: €252 billion (or 81.9 per cent. of the Structural Funds budget) to the Convergence Objective, including €62 billion for the Cohesion Fund (for Member States with a GNI below 90 per cent. of the EU average) and €12 billion for so-called "phasing-out regions" (the regions that no longer qualify for full Convergence funding, but would have done without enlargement); €48 billion (or 15.7 per cent. of the Structural Funds budget) to the Competitiveness Objective, including €10 billion for so-called "phasing-in regions" (the regions that no longer qualify for full Convergence funding, and would no longer qualify even if enlargement had not taken place); and €7.5 billion (or 2.4 per cent. of the Structural Funds budget) to the Co-operation Objective.

The Government have argued consistently that, following enlargement, it is right that the Structural Funds should be focused to a greater extent on the poorest EU Member States. Overall the 10 new Member States, together with Bulgaria and Romania, will receive a total of €158 billion in Structural Funds (or €174 billion including transfers to the EAGGF and FIFG). The 10 new Members will see a more than 250 per cent. increase in their Structural Funds receipts from an average of €7 billion per annum during the 2004–06 period to an average of €19 billion per annum in the 2007–13 period. We estimate this to be equivalent to an average increase in their domestic public sector expenditure of up to 7 per cent. In per capita terms, the new Member States will receive an average per citizen of around €1,500 in Structural and Cohesion Funds, and around €2,500 including other spending, over the next Financial Perspective.

The older EU Member States (the EU15) will face reductions in spending compared with current levels, reflecting their comparative prosperity and the need to support the economic convergence of the new Member States. However, the UK will continue to receive substantial funds for its poorest regions. We estimate that the UK will receive a total of approximately €9.4 billion (in 2004 prices) in Structural Funds receipts from 2007–13, in comparison with approximately €15.85 billion (in 1999 prices) in the current Financial Perspective, excluding funds now transferred to the EAGGF and FIFG.

Of this, the UK will receive approximately €2.6 billion in Convergence funding for its poorest regions. Cornwall and West Wales and the Valleys will receive full Convergence funding, while the Highlands and Islands will receive phasing-out Convergence funding averaging approximately two-fifths of the intervention rates for the UK's future full Convergence regions. The UK will also receive approximately €6.2 billion in Competitiveness funding for its other regions. Of this, South Yorkshire and Merseyside will receive phasing-in Competitiveness funding averaging approximately one-third of the intervention rates for the UK's future full Convergence regions. It will be for the Government, in agreement with the Commission, to decide how the UK's remaining Competitiveness funding should be allocated between its nations and regions. Finally, the UK will receive approximately €0.6 billion in Co-operation funding. The Government will also need to agree with the Commission how this should be allocated.

At this stage it is not possible to provide precise figures for the amounts to be received by UK regions. We will only know the precise figures after an Inter-Institutional Agreement has been reached on the final EC budget and once the European Commission has produced official Structural Funds allocations for the UK and its regions. Our initial estimate is that Cornwall is likely to receive full Convergence funding of approximately one-third higher than current allocations, West Wales and the Valleys should receive full Convergence funding approximately equal to current allocations, the Highlands and Islands should receive phasing-out Convergence funding of over half its current allocations, and South Yorkshire and Merseyside should receive phasing-in Competitiveness funding of approximately one-third of current allocations. These comparisons are in real terms and exclude allocations that have now been transferred to the EAGGF and FIFG.

In the light of this outcome, which means that the UK and its poorer regions will continue to receive substantial Structural Funds, the conditions for application of the domestic funding Guarantee, set out in the written statements to Parliament by the then Secretary of State, my right hon. Friend Ms. Hewitt, on 17 September and 11 December 2003, do not apply. As those statements made clear, the purpose of the Guarantee was to ensure that our nations and regions would not lose out if the Member States agreed a reform package where the Structural Funds were focused solely on the poorest countries, and it would apply only if the richer Member States no longer received Structural Funds allocations in the next Financial Perspective. It should be noted that spending on regional development from the UK's own resources already far exceeds the contribution from Europe as a result of increased allocations over recent years. Domestic regional spending allocations will be considered further in the Comprehensive Spending Review, taking into account the outcome of the negotiations, the needs of the regions and the overall fiscal context. The Devolved Administrations will receive the normal formula shares of changes in overall departmental provision.

As part of the reform negotiations, the Member States have agreed to strengthen the strategic focus of future Structural Funds spending by establishing Community Strategic Guidelines on Cohesion and National Strategic Reference Frameworks, which will set out the broad objectives for future programmes. The Government plan to consult on the UK's draft National Strategic Reference Framework early in 2006 and, as part of the consultation, they will also seek views on the methodology for allocating the UK's Competitiveness funding.