Future financing of the Union [Ten issues to watch in 2018]

Written by Etienne Bassot,

The EU has a modest fiscal capacity in the form of an annual budget, whose size and structure are largely predetermined by a Multiannual Financial Framework (MFF). The current MFF covers the 2014-2020 period and amounts to €1.09 trillion, or roughly 1 % of EU GDP. The EU Budget funds spending priorities collectively agreed by the Member States, the Parliament and Commission. It is currently financed by three categories of ‘own resources’: ‘traditional own resources’ consisting of customs duties and sugar levies (€20.1 billion in 2016, or 14 % of revenue); an own resource consisting of a percentage of the Member States’ estimated VAT income (€15.9 billion in 2016, or 11.1 %); and an own resource based on a fixed percentage of Member States’ gross national income (GNI) (€95.6 billion in 2016, or 66.6 %). Other revenue includes income taxes on EU staff, contributions by non-EU countries to EU Budget-funded programmes, fines paid by companies in breach of competition law, and revenue from EU borrowing and lending operations. Unlike national budgets, the EU’s cannot be in deficit and spending must be matched by revenue. Own resources mobilised to cover EU Budget spending are capped at 1.23 % of EU GNI per year.

Some Member States’ GNI-based contributions are partly reduced by ‘rebates’, or reductions designed to offset the gap between their contributions to the EU Budget and their public and private sector receipts at home. While the United Kingdom’s rebate is the most high-profile of these, it has led to a series of other rebates for other net contributors.^[1]

Significant spending on EU priorities is also done outside the EU Budget in a number of ways. One of them involves setting up a separate intergovernmental fund, one such example being the €30.5 billion 2014-2020 European Development Fund, to which Member States contribute individually. Others involve the use of various financial instruments and vehicles such as loans or guarantees managed by the European Investment Bank, or trust funds pooling EU Budget funds with contributions by other donors. The latter have grown in importance in recent years as the EU has sought to contribute to development both within and beyond its boundaries through leveraging private investment.

Potential for reform and expected developments in 2018

There is a broad consensus among the European Commission, the European Parliament and many academic observers that the current own resources system needs reform.^[2] It is seen as complex and opaque, and as encouraging Member States to focus on getting a ‘fair return’ on their national contributions through money spent locally, rather than on shared European priorities. But while there is no shortage of ideas for alternative own resources that would radically simplify the system and endow the EU Budget with greater financial autonomy, achieving significant reform has proven difficult. Changes to the own resources system require the Council of the EU to agree unanimously after consulting the Parliament, and then need to be ratified by all Member States.

An opportunity for reform will present itself in 2018, however. The Commission plans to publish a package in May comprising a comprehensive proposal for the future MFF beyond 2020 and proposed changes to the EU Budget’s own resources. This will be followed by proposals for the next generation of multiannual spending programmes.

In anticipation of the proposal for the post-2020 MFF, in June 2017, the Commission published a reflection paper on the future of EU finances, linked to the March 2017 white paper on the future of Europe, setting out five scenarios of varying scale and ambition, with corresponding implications for EU finances. In the reflection paper, the Commission suggests simplifying or even abolishing the VAT-based own resource, and notes that Brexit renders the UK rebate obsolete, and with it the various ‘rebates on the rebate’. In the white paper, echoing a recommendation in the December 2016 report by the interinstitutional High-level Group on Own Resources (HLG) that any new own resource should be clearly and transparently linked to the core policy objectives of the EU, the Commission cites the possibility of levying common energy or environmental taxes to help incentivise decarbonisation of the EU economy, or of allocating a percentage of the common corporate tax base or creating a financial transaction tax to help stabilise the single market and the euro area.

The Commission also sees scope for an expansion of financial instruments such as loans, guarantees and equity, both within the EU Budget and beyond, as part of the EU’s ‘extended financial architecture’, of which the European Investment Bank is part. During the current MFF, the most noteworthy example of such a financial instrument has been the European Fund for Strategic Investments (EFSI). The Commission is interested in further exploring the potential of these instruments at a time when the EU budget comes under the twin pressures of responding to new challenges and adjusting to reduced revenue with the departure of the United Kingdom, or of doing ‘more with less’.

Role of the European Parliament

The Parliament has long advocated reform of the EU Budget, including its own resources. To this effect, it adopted one resolution in 2007 and another in 2011, calling for the introduction of genuine EU own resources to reduce the role of those perceived by Member States as national contributions, and to shift the focus of budgetary negotiations to activities with the highest EU added value. Setting up an HLG to conduct a thorough review of the own resources system was among the Parliament’s conditions for agreeing to the 2014-2020 MFF.

In October 2017, the Parliament adopted a resolution on the Commission’s reflection paper on the future of EU finances. Parliament agreed that any new policy priorities for the Union should be coupled with additional financial means, and reiterated that the EU should be funded by ‘genuine’ own resources, as provided for in the EU Treaties. The resolution encouraged the Commission to develop further the idea of ‘European added value’, seeing this as crucial to deciding on the Union’s spending priorities, and thus on the correct mix of own resources. The Parliament also reiterated its commitment to budgetary unity, and questioned the wisdom of creating additional funding instruments outside the EU Budget.

The Parliament plans to debate own-initiative reports on the post-2020 MFF and on future own resources in spring 2018.

[1]     A. D’Alfonso, The UK ‘rebate’ on the EU budget: An explanation of the abatement and other correction mechanisms, EPRS, February 2016.

[2]     See, for example, A. D’Alfonso, How the EU budget is financed: The ‘own resources’ system and the debate on its reform, EPRS, June 2014; Opinion of the European Economic and Social Committee on the Reflection paper on the future of EU finances, October 2017; M. Schratzenstaller, ‘The next Multiannual Financial Frame­work (MFF), its Structure and the Own Resources‘, in Fair Tax Working Paper Series No 14, November 2017.

Read the complete in-depth analysis on ‘Ten issues to watch in 2018‘ on the Think Tank pages of the European Parliament.