BRUSSELS (Reuters) - The European Union will maintain Britain's rebate and make further cuts in proposed spending under its next seven-year EU budget, according to the latest draft compromise seen by Reuters on Wednesday.
However, the proposals, made by European Council President Herman Van Rompuy, may not go all the way in satisfying Britain and other austerity-minded governments who are keen to limit their contributions as the bloc tries to reach a deal in time for a summit of EU leaders on November 22-23.
Deeper cuts to EU farm subsidies - supported by Britain, Sweden and others - are likely to face opposition from France, while a reduction in development funds for poorer regions will anger southern and eastern European countries such as Greece, Italy and the Czech Republic.
"The existing correction mechanism for the United Kingdom will continue to apply," said a draft proposal sent to capitals late on Tuesday. Linked rebates for Germany, the Netherlands and Sweden would also remain, but Austria would lose its refund.
An EU diplomat involved in the talks, who spoke on condition of anonymity, said there was an acceptance among negotiators that ending Britain's rebate would scupper any chance of a deal.
"People realize that no British prime minister can go back to the House of Commons and defend having given up the rebate," the diplomat said.
Following an agreement brokered by Margaret Thatcher in 1984, Britain receives a budget rebate to reflect the relatively small amount of agricultural subsidies it receives, with France and Italy picking up most of the tab.
But securing the rebate would come at a price, as under the proposal all EU countries would have to share the cost, meaning that Britain would have to pay for part of its own refund, in effect minor reduction.
The draft outlines further cuts of about 27 billion euros from a proposal drafted by Cyprus, holders of the rotating EU presidency, at the end of last month.
The proposal by Cyprus already shrank the roughly 1 trillion euro ($1.3 trillion) outlined for 2014-2020 by more than 50 billion euros, meaning the overall reduction from the European Commission's original plan is now about 80 billion euros.
That is unlikely to appease countries like Britain, Germany, Sweden and the Netherlands, who are pushing for cuts of 100-200 billion euros to the Commission blueprint.
The Commission said in a statement that it still believed in its original proposal, but would work with Van Rompuy to reach a budget that member states and the European Parliament could support.
The deepest cuts in the Van Rompuy compromise fall on EU cohesion funds used for building motorways, bridges and other infrastructure projects in less developed areas, which have been reduced by a further 17 billion euros.
Farm spending - left largely untouched by the Cyprus EU presidency - is reduced by nearly 15 billion euros, including a cut of 8 billion euros in direct subsidies.
France has threatened to veto any deal that reduces EU agricultural subsidies, which currently account for about 40 percent of all EU spending.
But Britain, Sweden and others would like the European Union to reduce farm spending to free up funds for research, energy projects and other measures to boost economic growth.
Van Rompuy took a step in that direction by reinstating about 6 billion euros of funding for research and small business promotion, which Cyprus had proposed to cut.
"The revised proposal means some small steps in the right direction but it's not enough," Sweden's EU Minister Birgitta Ohlsson said in a statement on the proposals. "We need a clear model for reducing agriculture subsidies."
The proposal also says two-thirds of revenues from a new financial transaction tax planned by about a dozen EU countries should be paid to the bloc's budget, in return for an equivalent cut in their national contributions. But the idea is unlikely to win the support of the states involved.
Britain is pushing the idea of reducing the current seven-year financial framework to five years - the minimum permitted under the EU treaty.
"Look at the last EU budget. The economic conditions in which the budget was agreed in 2005 were thrown into complete disarray by the financial crisis," Britain's Europe Minister David Lidington told German weekly Die Zeit, according to a preview of the interview due out later on Wednesday.
"There seems to me to be a good case for thinking about a shorter period."
Britain's enthusiasm for that partly stems from the fact that the current budget proposal factors in higher growth estimates for 2019 and 2020, and excluding those would lead to a deeper cut in average annual budget contributions.
But EU diplomats said while the idea could form the basis of a plan B if there is no agreement in November on the seven-year framework, the proposal was not currently under active consideration. ($1 = 0.7867 euros) (Additional reporting by Daniel Dickson in Stockholm and Gareth Jones in Berlin; Editing Rex Merrifield and Toby Chopra)