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Economic and Social Policies, EU Financing / Budgetary Affairs, PUBLICATIONS

How the EU budget is financed – The “own resources” system and the debate on its reform

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© Markus Mainka / Fotolia

The system of “own resources” ensures the EU is able to finance its policies. In 2012, total EU revenue amounted to €139.5 billion. Successive reforms have determined the system’s current configuration, which relies on three key streams of revenue: traditional own resources (mainly customs duties); a resource based on value added tax (VAT); and a resource related to Member States’ gross national income (GNI).

At present, the system provides sufficient resources to cover planned expenditure, which is crucial, since the EU budget cannot run a deficit. However, it is often criticised for its complexity and opacity, to which a series of exceptions and so-called correction mechanisms (such as the UK rebate) add. Modification of the system requires unanimity in the Council and ratification by each Member State. For the Own Resources Decision, the European Parliament is only consulted.

The EP considers the system to have several shortcomings. For example, it says that the current arrangements do not follow the provisions of the Treaties. Whilst these provide the Union with financial autonomy, most EU revenue depends on resources that are perceived as national contributions, which Member States wish to see minimised. Accordingly, some observers note that the negotiations on the 2014-20 Multiannual Financial Framework (MFF) appeared to concentrate more on limiting the total amount of resources available than on aligning multi-year planning with the EU’s priorities. Indeed, the focus on so called “budgetary balances” can have a negative impact on the effectiveness of expenditure, since Member States may tend to favour instruments with geographically pre-allocated funds rather than those with higher EU added value. In addition, it can reduce the likeliness of changes in the structure of spending, hindering the EU’s ability to respond to variable circumstances and priorities.

The EP has long pushed for reforms of the own resources system, as two important resolutions adopted in 1999 and 2007 show. In 2011, the European Commission put forward proposals with a view to reshaping the system and improving its functioning. In February 2013, the European Council agreed on a limited number of modifications. However, in the context of the political deal for the 2014-20 MFF, the European Parliament obtained agreement from the Council that a high-level group be set up to prepare a possible overhaul of the system.

Analysts and stakeholders envisage two opposing models to streamline the system, and a wide range of intermediate options: 1) financing the entire budget with a GNI resource; and 2) creating one or more new genuine own resources and eliminating or reforming some of the existing resources. Whilst the former is meant to promote simplicity, the latter would aim to reducing the shortcomings noted above, by increasing financial autonomy.

The financing system and its components can be assessed against several criteria, which include budgetary, economic, political and administrative factors such as revenue sufficiency and stability, simplicity, transparency, fairness between Member States, equity between citizens, cost-effectiveness and EU financial autonomy. A good system would aim to strike the right balance among the various goals of all these factors; however these may partly conflict with each other. Over time, stakeholders and researchers have discussed various potential candidates for new own resources.

Read the whole in-depth analysis here.

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Discussion

One thought on “How the EU budget is financed – The “own resources” system and the debate on its reform

  1. Three ideas to be analysed in the frame of bigger EU financial autonomy:

    – The establishment of EU wholly and/or partially owned companies and joint-ventures to operate in the fields of EU competences.

    – The development and explotation of EU infraestructures (ports, airports, highways, etc.) not only funding but participating of benefits when concessions are granted, for instance.

    – Financial Investments: capital shared, funds, large companies in sectors as energy and raw materials, etc.

    Regards

    Like

    Posted by Miguel Atanet | June 2, 2014, 21:59

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