Financing the EU Budget: Moving Forward or Backwards?

Financing the EU Budget: Moving Forward or Backwards?

by Gabriele Cipriani

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ISBN-13: 9781783483303
Publisher: Centre for European Policy Studies
Publication date: 11/20/2014
Pages: 112
Product dimensions: 5.90(w) x 9.00(h) x 0.40(d)
Age Range: 18 Years

About the Author

Gabriele Cipriani is an official of the European Court of Auditors.

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Financing The EU Budget

Moving Forward or Backwards?


By Gabriele Cipriani

Rowman & Littlefield International, Ltd.

Copyright © 2014 Centre for European Policy Studies
All rights reserved.
ISBN: 978-1-78348-330-3



CHAPTER 1

THE EU BUDGET REVENUE SYSTEM


The EU revenue system should be considered in the context of the highly innovative and evolutionary nature of the European Union, which is neither an international organisation nor a federal state. Originating from the decision by its member states to pool selected aspects of their respective sovereignties, the EU's powers are founded on the principle of representation of interests.

The EU framework is based on a dual legitimacy, which "brings together states and peoples via a unique form of political integration", in a process of governance 'without government' organised around a single institutional framework. The European Union constitutes a new legal order of international law, the subjects of which comprise not only member states but also their nationals.

The EU revenue system has been a subject of intense debate for years, in particular concerning the nature of the resources financing the EU budget. Many academicians have provided detailed reviews of the functioning and peculiarities of the system and have formulated a number of proposals to address its drawbacks. Still, the EU revenue system seems unalterable. In particular, no satisfactory solution has been found to make visible to citizens their contribution to the EU budget (some &8364;140 billion in 2013, or an average of almost &8364;280 per capita).


EU revenue: A short history

The evolution of the EU budget financing can be charted along the following timeline.

1952-1969. The European Coal and Steel Community (ECSC, 1951, Treaty of Paris) was entitled to procure the funds necessary to carry out its tasks by setting levies on the production of coal and steel, which might be defined as the first Community tax (Article 49 ECSC). By contrast, the Treaty of Rome (EEC, 1957) provided that the budget of the European Economic Community would be initially financed from member states' contributions (Article 200 EEC), as shown in Table 1, with the option of replacing them by Community's own resources at a later stage (Article 201 EEC).

Member states' contributions were based on a percentage scale provided for in the Treaty, differentiated according to the type of expenditure (administrative or operational). These scales were the result of a political agreement, although close to countries' share in gross domestic product (GDP) at that time. The Council was entitled to modify the scales, by unanimous agreement. This happened notably in order to fund agricultural spending.

1970-1984. In 1970, after long and difficult negotiations, member states agreed that "the Communities shall be allocated resources of their own" and that "from 1 January 1975 the budget of the Communities shall, irrespective of other revenue, be financed entirely from the Communities' own resources". As a result, from 1971, customs duties, agricultural duties, and sugar and isoglucose levies (called 'Traditional own resources' or TOR) collected at EU entry were gradually transferred to the EU budget. In order to cover the administrative expenses for their collection, 10% of TOR was retained by the member states. Member states' contributions from the value added tax (VAT)-based resource (1% of the taxable base) were made in full for the first time in 1980, covering around 50% of EU expenditure.

1985-1987. The call-up rate for the VAT-based resource was increased from 1% to 1.4% and the principle was formalised that any member state bearing an excessive budgetary burden in relation to its relative prosperity may benefit at the appropriate time from a correction. A correction was granted to the United Kingdom (the UK rebate), in the form of a reduction of its VAT-based resource payments, to be financed by the other member states (with Germany paying two-thirds of its share).

1988-1994. The principle of a multiannual financial framework (MFF) was introduced as a budgetary planning tool. Appropriations for payments were set by a global ceiling expressed as a percentage of member states' total gross national product (GNP), increasing from 1.15% for 1988 to 1.20% for 1992. A new resource was levied at a uniform rate in proportion to the GNP of each member state, as a measure of a country's prosperity. The GNP-based resource was also meant to function as a 'top-up' source of revenue to balance the budget, thus guaranteeing sufficient funding for the EU budget. In addition, while the maximum call-up rate for the VAT-based resource was maintained at 1.4%, member states' VAT base was capped at a percentage (55%) of each national GNP. The reason invoked was to counter an alleged regressive effect of the VAT-based resource with relatively less well-off member states.

1995-1999. The global own resources ceiling for payments was increased (from 1.21% for 1995 to 1.27% for 1999). There was also a progressive broadening of the capping of the VAT base (50% in 1999 for all member states) and a lowering of the call-up rate for the VAT-based resource (from 1.32% in 1995 to 1.0% in 1999).

2000-2006. GNP was replaced by the concept of gross national income (GNI). The global own resources ceiling for payments was slightly decreased (from 1.07% of GNI for 2000 to 1.06% for 2006). The maximum call-up rate for the VAT-based resource was reduced from 1% to 0.75% in 2002 and 2003 and to 0.50% from 2004 onwards. Starting with the calculation of the UK rebate in 2001, Austria, Germany, the Netherlands and Sweden obtained to fund this rebate to a quarter of their normal share. As from 2001, the percentage of TOR that member states retain to cover collection costs was increased from 10% to 25%.

2007-2013. The global own resources ceiling for payments was set at 1.23% of GNI. The uniform rate of call of the VAT-based resource was reduced to 0.30%, although with some exceptions (for Austria it was fixed at 0.225%, for Germany at 0.15% and for the Netherlands and Sweden at 0.10%). A gross annual reduction in their GNI contribution was granted to the Netherlands (&8364;605 million) and Sweden (&8364;150 million).

2014-2020. While the global own resources ceiling for payments remains at 1.23% of GNI, the actual amount of payment appropriations has been lowered by almost 4% compared to the previous period. Reduced VAT-based resource rates (0.15% rather than 0.30% for the other member states) are applied to Germany, the Netherlands and Sweden. Moreover, Denmark, the Netherlands and Sweden will benefit from reductions of their national GNI payments of &8364;130 million, &8364;695 million and &8364;185 million, respectively. The Austrian annual GNI contribution will be reduced by &8364;30 million in 2014, &8364;20 million in 2015 and &8364;10 million in 2016. Finally, TOR collection costs retained by member states are reduced from 25% to 20%.

Figure 1 traces the evolution of the resources financing the EU budget since 1970.

The figure shows that the pattern of revenue has undergone a profound modification over the years. This is principally due to the emergence of the GNP/GNI-based resource (74% of the own resources for the period 2007-2013) at the expense of the VAT-based resource, but also to the reduction of customs duties following the trade liberalisation and the increase of collection costs paid to member states as from 2001. Initially intended to complement the existing own resources, the GNP/GNI-based resource has become the dominant source of revenue as a conventional indicator of the contributive capacity of individual member states.


What do 'own resources' actually mean?

Following Article 3(6) of the Treaty on European Union (TEU), "[t]he Union shall pursue its objectives by appropriate means commensurate with the competences which are conferred upon it in the Treaties". Article 311 of the Treaty on the functioning of the European Union (TFEU) further clarifies that "[t]he Union shall provide itself with the means necessary to attain its objectives and carry through its policies. Without prejudice to other revenue, the budget shall be financed wholly from own resources".

It should be noted that the EEC founding Treaty provided for the Community budget to be financed in a first phase through member states' contributions (Article 200 EEC), with possibly moving on to the Community's 'own resources' at a later stage (Article 201 EEC). Thus, the Treaty of Rome set a clear distinction between these two types of funding sources. This transition, ensured in principle by the decision of 21 April 1970 "on the replacement of financial contributions from Member States by the Communities' own resources", provided the political justification for giving the European Parliament budgetary powers.

As observed by Ehlermann (1982:572, 584-585), the exceptional procedure required for adopting such a decision (unanimity in Council plus ratification by national parliaments) was similar to that for introducing direct elections of the European Parliament (Article 138(3) EEC). This coincidence should be interpreted as the wish to make the EU financially independent from member states, just as direct elections of the European Parliament severed its 'umbilical cord' with national parliaments. Therefore, the purpose of these provisions would have been to disengage the Community progressively from the member states.

The concept of 'own resources' was therefore meant to imply a shift of sovereignty on the part of member states, allowing the Community to exert a direct power of taxation over EU citizens. In this respect, Strasser (1991:91) defined 'own resources' as a tax borne directly by EU taxpayers which is included under revenue in the EU general budget and does not appear in the budgets of the member states.

Yet, the idea that the EU is financed by resources that belong to it by right as a cornerstone of its financial autonomy, and that therefore revenue accrues automatically without the need for any subsequent decision by national authorities, needs to be put into context and its evolution considered over time. In particular, a key overarching element of the EU financing system is that EU expenditure is subject to strict predictability ('budgetary discipline'), ensured through three main features:

i. The overall volume of EU revenue is limited (since 1988) by an 'own resources' ceiling (for the MFF 2014-2020, payments shall not exceed 1.23% of the EU GNI). This ceiling is updated every year on the basis of the latest forecasts in order to guarantee that the EU's total estimated level of payments does not exceed the maximum amount of own resources that the EU may raise during a given year.

ii. The EU budget is subject to the principle of equilibrium. This means in practice that to balance the budget each year, the revenue is determined in relation to the expenditure (and not the other way round). Unlike its member states, the EU is not allowed to borrow to finance its activities or to cover any budget deficit.

iii. To ensure at the same time that EU spending is predictable, the MFF plays the role of a budgetary planning tool, laying down the maximum annual amounts ('ceilings') for broad categories of expenditure over a period of at least 5 years.


Therefore, as is often explained by the Commission, the EU budget cannot grow out of control. It never runs a deficit, never builds up debt and only spends what it receives. It is always balanced.

Moreover, the EU does not have the power to raise taxes on its own. The type, the nature and the overall amount of the own resources as well as accessory specific arrangements are dealt with by a decision (the own resources decision) adopted unanimously by the Council, after consultation with the European Parliament. To enter into force, that decision requires further approval by each member state in accordance with its constitutional requirements, thus respecting national sovereignty. This implies in most cases a ratification by national parliaments; hence, the own resources decision constitutes a 'Treaty' within the Treaties. In practice, however, national parliaments are under considerable pressure to give a green light to an agreement negotiated and approved by their own governments. A denial would re-open a negotiation with no guarantee of a more favourable outcome for the member states concerned.

While the legal texts define all EU financing sources as 'own resources', only TOR revenue (13% of 'own resources' in the period 2007-2013) can be considered to be a 'true' EU financing source, since the EU is the legitimate institutional recipient of duties levied on a specific and identifiable taxable operation. Also, as there is often no coincidence between the place of collection and the final consumption of the goods, this revenue could not be attributed to a specific member state.

By contrast, the assessment basis of the VAT and GNI-based resources (87% of 'own resources' in the period 2007-2013) derive from a member states' calculation, mostly based on statistical data. These resources are therefore not 'collected' but put at the disposal of the EU budget as financial transfers from the cashbox of overall national taxation. In particular, the VAT-based resource is not levied directly on national taxable persons (and therefore on consumers), but on member states' 'notional' harmonised VAT bases. In addition, due to the 'capping mechanism', the VAT-based resource has since 1988 become de facto a GNP/GNI-based resource for the countries concerned. In 2014, five member states (Croatia, Cyprus, Luxembourg, Malta and Slovenia) will have their VAT bases capped at 50% of their GNI.

Finally, member states' contributions to the EU budget are recorded in national budgets in a diverse way. Only very few countries attribute contributions to the EU budget directly as appropriations to the EU and thus as a reduction in income of the central government (notably France, Germany, Austria and Romania). The majority considers the contributions to the EU budget as government expenditures. The exception is for TOR, and at times the VAT-based resource, but even there practices vary.

The discussion above shows that the 'relay' envisaged by the EEC Treaty between national contributions and 'own resources', with the latter meant to be a direct levy on citizens in view of making the EU financially independent, has not taken place. Member states have remained in the end the (pay)masters. Under the current circumstances, EU 'financial autonomy' means no more than member states' complying with the obligation they have set on themselves to finance each year the EU budget within the limits of the MFF-agreed ceiling.


To each its own

In a speech to the European Parliament, 11 January 1977, Roy Jenkins, then President of the European Commission, observed:

To wish to benefit from the success of the Community is a very good thing. But what is quite different, and indeed highly undesirable, is constantly to try to strike a narrow arithmetical balance as to exactly how much day-to-day profit or loss each country is getting out of the Community. (...) The Community can and must be more than the sum of its parts. It can create and give more than it receives, but only if the Member States, people and governments alike, have the vision to ask what they can contribute, and not just what they can get.

This statement provides good evidence of member states' longstanding practice to calculate the benefits accrued from EU expenditure as the difference between their contributions to and the receipts from the EU budget ('budgetary balances').

Figure 2 shows, for the period 2007-2013, the allocation of EU expenditure (total and by main spending areas) to the five main 'net-payer' member states (Germany, France, Italy, the United Kingdom and the Netherlands) as well as their 'operating budgetary balances'. These member states fund together around two-thirds of national contributions to the EU budget.


Figure 2 shows that:

* Over the 2007-13 period, France has been the major beneficiary of EU expenditure. This is due to the fact that this country accounts for a high share of EU total 'agriculture markets' expenditure (21%) and that this spending area represents a significant proportion of total expenditure (some 37% for the MFF 2007-2013).

* As compared to other major member states like Germany, France and Italy, the United Kingdom has benefited from a lower amount of EU payments, overall and in general for the spending areas considered. Only for 'Research' spending does the United Kingdom record a relatively high position (in second place, behind Germany).

* The share of the United Kingdom in 'agriculture markets' expenditure is well below that of Italy, France and Germany. This situation, one of the grounds at the basis of the UK rebate, suggests that as long as expenditure related to agriculture market and direct payments to farmers will represent some 30% of the EU budget operational expenditure (2014-2020 MFF), the UK will most likely feel legitimated to keep claiming an imbalance in its disfavour.


It should be stressed that, as indicated by the Commission, the calculation of 'budgetary balances' is merely an accounting exercise of certain financial costs and benefits. It gives no indication of many of the other benefits gained from EU policies contributing to the far-reaching Union's objectives. The conventions that determine these calculations are 'arbitrary' and 'highly questionable'. Yet, despite its conceptual weaknesses, 'budgetary balances' calculations have emerged as the key benchmark for the MFF negotiation. In this context, 'budgetary balances' provide to each member state a measure for negotiating the MFF in view of reaching an outcome that is politically defensible at home and to monitor its implementation during the programming period. In fact, EU expenditure represents the financial 'return' of national contributions paid to the EU. This explains that a large part of this expenditure (agricultural market-related expenditure and direct payments to farmers, rural development, fisheries and cohesion, representing some 70% of the 2014-2020 MFF) is directly or de facto pre-allocated on a country basis as part of the MFF deal.


(Continues...)

Excerpted from Financing The EU Budget by Gabriele Cipriani. Copyright © 2014 Centre for European Policy Studies. Excerpted by permission of Rowman & Littlefield International, Ltd..
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Table of Contents

Preface
1. The EU budget revenue system
EU revenue: A short history
What do ‘own resources’ actually mean?
To each its own
The price of unanimity
Who pays how much?
Concluding remarks
2. Simplicity, transparency, equity and democratic accountability
Four good reasons for change
The drawbacks of the 2011 Commission’s proposals
New VAT-based resource
Financial transaction tax
Correction mechanism
Reducing the burden on national budgets?
Two categories of revenue sources for the EU budget
Back to the past
Making an EU resource visible to citizens
Concluding remarks
3. EU expenditure: The other side of the same coin
The legitimacy of EU revenue
How much money for the EU budget?
Concluding remarks
References


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