Britain faces tax increases or spending cuts of £3bn as Francois Hollande, France's new Socialist president, prepares to ditch the EU budget ceiling freeze.
Francois Hollande, the Socialist French president, is preparing to a ditch a deal over the next European Union budget in a move which would force the British government to raise taxes or cut spending by £3bn.
In December last year Nicolas Sarzoky, Mr Hollande’s predecessor, signed a letter agreeing to freeze the EU’s spending from 2013 to 2020.
However, senior officials in Brussels have told The Sunday Telegraph that Mr Hollande is poised to withdraw from the agreement.
Angela Merkel, the German chancellor, is also reconsidering her support for an EU budget freeze and increasingly favours more spending to boost economic growth. Mrs Merkel recently gave her backing to a growth pact devised by the French leader worth €120billion (£95billion).
George Osborne, the Chancellor of the Exchequer, who would be forced to raise taxes or cut public spending to pay for the increased cost of the EU budget. But officials acknowledge but Britain will struggle to prevent it if the budget rise has the backing of both Germany and France.
“Paris and Berlin have shifted,” a senior Brussels-based official told this newspaper. “Only David Cameron is in the same place as two years ago. He is out of step and he will lose.
“In Brussels last week Mr Cameron talked up the preservation of the rebate because a budget freeze is a lost cause.”
The tabled European Commission demand for 2014 to 2020 spending would mean that the British government would have to find an extra £1.4bn a year for extra payments to the EU.
This would mean that almost £3bn in extra tax rises or spending cuts would have to be found before the next election, in the spending period which ends in 2015.
With UK economic growth still low, raising tax receipts by £1.4bn a year would not be straightforward. A 3p a litre increase in fuel duty would raise about £1.5bn a year.
French diplomats confirmed that Mr Hollande’s support for Mr Sarkozy’s commitment was “not automatic”, potentially causing a massive problem for Mr Osborne.
“We have not decided,” one French official said. “Of course the president has supported an increase as part of increased investment in jobs and growth. A lot will depend on an auditor’s review of French government debt in July.”
EU budget negotiations have always been fraught, but they are likely to prove more bitter than ever as many of the continent’s economies lie mired in recession, with member states inflicting deep public spending cuts.
Britain currently pays 12.4 per cent net share of all Brussels expenditure. Any further rise is like to step up pressure on David Cameron to hold a referendum on Britain’s future in the EU.
Writing in The Sunday Telegraph last weekend Mr Cameron said that he was not opposed to such a referendum, but that now was not the right time.
Stephen Booth, research director of Open Europe, the think tank, said: “There are clearly question marks over whether Hollande will stick to the deal signed by Sarkozy on freezing the EU budget.
“Although this would increase the likelihood of the negotiations becoming a political dogfight, it would also leave the UK with no excuse for not pushing harder for real reform of things like EU regional spending, which would actually reduce the budget rather than simply freezing it.”