EU plans budget shake-up, less cash for farms-draft

* EU faces tough talks on budget overhaul

* Sticking points are farm funds, scrapping British rebate

* CO2 emission allowances could help finance EU budget-draft



By Marcin Grajewski

BRUSSELS, Oct 26 (Reuters) - The European Union's executive arm will propose this year a radical overhaul of the bloc's budget that would shift spending away from agriculture towards innovation, climate and energy, a draft paper showed on Monday.

The proposal, likely to be made in late November, will set the scene for some two years of tough negotiations among the bloc's 27 governments, with Britain and France expected to fight especially hard to keep their current budget privileges.

The European Commission's draft proposal, obtained by Reuters, does not mention a size for the budget, now worth 125 billion euros ($188 billion) annually.

It calls for discipline, however, as governments will need to cut their fiscal deficits in the aftermath of the global economic crisis.

From 2013, when the EU's current long-term spending plan ends, there should be "a major refocusing of EU spending priorities, with more emphasis on growth and jobs, climate and energy security ... and less emphasis on agriculture".

Foreign aid would be another priority, assisting the EU to play a robust international role and helping foster reforms in developing countries, the Commission said.

More than 40 percent of the EU budget is now spent on the farm sector and about a third on regional aid, such as motorway construction, preserving the environment and job training.



FARM AID, BRITISH REBATE

The draft said regional aid should focus more on high-value projects such as research and development, innovation, training and trans-national programmes, rather than simple infrastructural schemes.

The proposal to cut farm spending is certain to irk France, which is the main recipient of EU agricultural payments, along with Ireland and Poland.

Less spending for poor regions could irritate Poland and other new EU members from central and eastern Europe, which lag western Europe in wealth after decades of communist rule.

In another potentially explosive proposal, the draft said Britain's cherished rebate from its contribution to the EU budget should be phased out gradually.

The rebate, worth billions of euros a year, was won in 1984 by the Conservative then-prime minister, Margaret Thatcher.

The proposal to scrap it will infuriate the Eurosceptic Conservatives, expected to win a forthcoming general election.

"The justification for the existence of the remaining correction in favour of the United Kingdom ... disappears progressively," the draft said.

The Commission said the current, complex system of collecting the budget should be radically simplified, possibly by linking it to a new or old tax or levy.

Proceeds from the sale of allowances for greenhouse gas emissions could be such a revenue source, it said.

On agriculture, the Commission said direct aid to farmers should no longer be based on historic production levels, but on promoting sustainable farming and rural development.

"Market intervention mechanisms could be rolled back further to become a genuine safety net," the draft said. (Editing by Dale Hudson)