Britain will unveil proposals for a downsized European Union budget on Monday and agree to give up part of its rebate from Brussels in a drive it hopes will end a debilitating stand-off in the 25-nation bloc.
EU diplomats said London would propose cutting 15 billion euros ($17.6 billion) from planned aid to poor new east European member states, despite their protests to Prime Minister Tony Blair last week, and 5 billion euros off rural development funds for western Europe.
In a bid to clinch a deal on the 2007-2013 budget at a summit he chairs next week, Blair will offer to forego more than 1 billion euros a year of Britain's annual refund to share the cost of the bloc's eastward enlargement last year.
Failure to agree on a long-term budget at the December 15-16 summit would deepen a crisis of confidence, triggered by French and Dutch voters' rejection of the EU constitution, and could isolate Britain politically in Europe.
But EU officials voiced optimism that a deal was within reach because Blair was willing to touch the hitherto sacrosanct rebate and had dropped his insistence on a promise to cut farm subsidies, which mostly benefit France.
"Tony Blair has stunned everyone but he is close to winning his bet. Of course there will be the classic summit drama, but barring some last-minute hitch, he's almost got things wrapped up," one EU official said.
The partial concession on the rebate has drawn charges of a "Great Betrayal" from eurosceptical British media, but many EU partners will press for a deeper cut in the cashback won by Margaret Thatcher in 1984.
Blair has said the bulk of the rebate would stay because it is linked to farm subsidies, and the amount returned to Britain will still rise, not fall, from the current 5.6 billion euros a year as the overall EU budget grows.
"There will be rough parity between countries of equivalent size. The rebate will actually grow rather than diminish ... but at the same time we do recognise we've got a responsibility to make a contribution towards the costs of enlargement," British Europe Minister Douglas Alexander told BBC Television.
The British proposal will cut between 20 and 25 billion euros from the 871 billion euro budget proposed by previous EU president Luxembourg in June and accepted by most countries.
The lower overall expenditure figure of 1.03 percent of EU output rather than the 1.06 percent proposed by Luxembourg will help cut the payments of big net contributors Germany, the Netherlands and Sweden. The Dutch and Swedes joined Britain in voting against a deal in June, as did Finland and Spain.
But Blair has had to abandon hopes of persuading France to accept fundamental reform of EU farm subsidies, drawing fierce criticism from his Conservative opposition at home.
"Nothing has changed over the last six months. He has just caved in. He's not getting anything in return for the concessions he is making," Conservative party leader Michael Howard told Sky News television. Diplomats said the British proposal contains only a minor 2 billion euro adjustment in direct payments to farmers despite months of British calls for radical change.
French President Jacques Chirac has successfully clung to a 2002 deal pegging farm spending at its current level until 2013.
At most, Britain will secure a promise to review all EU spending in 2008-2009 with no guarantee that farm outlays, which take about 40 percent of the EU budget, will fall before 2014.
"It turned out to be easier to mug the east Europeans than the French because farm spending was already locked in, whereas the newcomers are desperate to get hold of their money," one Brussels diplomat said. Diplomats said Britain had left a margin to restore some of the proposed cuts and give the new member states a face-saving "victory" next week and is proposing to ease their cash-flow.
By changing the EU's matching funds rule, the newcomers will be able to invest more money from 2007 without having to put up as much of their own cash.
Britain has set a target of achieving rough parity in its net payments compared to those of France and Italy under the proposal, details of which are due to be announced by Foreign Secretary Jack Straw on Monday afternoon.
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