By Charlie Dunmore and Ethan Bilby
BRUSSELS (Reuters) - Britain and Germany warned on Friday there will be no summit deal on the European Union's proposed 1 trillion euro long-term budget without deeper spending cuts, after the latest compromise plan ignored their calls for further restraint.
British Prime Minister David Cameron dismissed a proposal to scale back tentative cuts to EU farm subsidies and regional aid to placate France and Poland, taking savings elsewhere to keep the overall budget cut at about 80 billion euros.
"It isn't a time for tinkering," he told reporters as he arrived for the second day of budget talks. "There hasn't been the progress in cutting back proposals for additional spending."
German Chancellor Angela Merkel said she didn't believe leaders would reach the unanimity needed to clinch a budget deal at this summit, but played down the consequences of failure.
"I have always said that it wouldn't be dramatic if today were only the first step," she told reporters. "I think the positions are still far apart and if we need a second round we will take the time to do it."
But EU officials warned that failure would divert time and resources away from efforts to shore up the faltering euro zone, and reinforce the impression among citizens and investors that EU leaders suffer from collective indecision.
It would also delay the programming of hundreds of billions of euros in investments in transport and energy infrastructure in poorer ex-communist eastern members of the 27-nation bloc, meant to help them catch up economically with the richer west.
Germany, Britain, Sweden and the Netherlands, all net budget contributors, are pushing for further cuts of between 30-75 billion euros on top of the 80 billion already trimmed from the European Commission's original spending blueprint.
Cameron, playing to Eurosceptical images of Brussels "fat cats", has targeted the roughly 60 billion euros earmarked for EU salaries and benefits in 2014-20 for deep cuts, insisting that European officials endure similar reductions in numbers and pay as national officials in some countries.
Cameron handed European Council President Herman Van Rompuy, the summit chairman, a paper setting out ways to trim the bloc's administration bill by 10 percent, including raising the retirement age for most officials from 63 to 68, and capping pensions at 60 percent of final salary instead of 70 percent.
"These are not dramatic changes," a British official said of the proposals. "The Commission and others are telling the Greeks, Italians and others that they should put the retirement age up to 68."
Van Rompuy ignored them in his latest draft compromise plan.
Negotiations on the EU's long-term budgets are always rancorous affairs, but the depth of Europe's present debt crisis has made the inevitable arguments over farm subsidies and rebates all the more bitter.
With national budgets being cut across much of the bloc, EU officials are having to contemplate the first ever real terms decline in future spending.
More than two-thirds of the EU's roughly 130 billion euro annual spending is paid out in subsidies to farmers and investment in new motorways, bridges and other public works in poorer southern and eastern European countries.
The current seven-year budget worth 1.034 trillion euros in EU financial commitments for the period 2007-2013 was agreed in 2005, at the height of a credit-fuelled boom in public spending.
The Commission initially demanded a roughly 5 percent increase in spending for 2014-2020, equal to 1.091 trillion euros. But this has already been reduced to 1.01 trillion euros under Van Rompuy's compromise, and many net budget contributors insist the total must dip below the trillion euro mark for a deal.
The current negotiations have seen a realignment of traditional factions in the budget debate. Previous deals have been built around Franco-German pacts to defend generous EU farm subsidies against attack from Britain and other northern states.
France receives more funds from the Common Agricultural Policy than any other country, while Germany is also a major beneficiary.
But the need for overall budget restraint appears to be a higher priority for Germany in the current talks than safeguarding farm spending, prompting France to ally itself with Poland and former-communist eastern European states to jointly oppose cuts to the two biggest areas of EU spending.
French President Francois Hollande welcomed the reversal of some proposed cuts in farm subsidies as progress but said he would press for more money to be restored for agriculture.
One area where Britain stands isolated is in its bid to protect its cherished budget rebate from any cuts. The annual refund worth 3.5 billion euros last year was first won by Margaret Thatcher in 1984, to reflect the lower share of farm subsidies received by Britain.
Paris, Berlin and others want to reform the complex system of rebates that also sees linked payments made to Germany, the Netherlands and Sweden.
But EU officials accept that Cameron cannot win the support of Britain's euro-skeptic parliament for any deal that scraps the rebate.
(Additional reporting by Andreas Rinke, Peter Griffiths, Catherine Bremer, Luke Baker, John O'Donnell, Justyna Pawlak, Robin Emmott, Robert-Jan Bartunek and Jan Strupczewski; Editing by Paul Taylor)