Members' Research Service By / January 11, 2023

Budgeting in times of crises and war [Ten issues to watch in 2023]

Just as Next Generation EU (NGEU, see issue 3) launched, the EU budget has had to respond to the multiple new crises created by Russia’s invasion of Ukraine: security, humanitarian and energy crises, and high inflation.

Written by Alina Dobreva.

This is the seventh edition of an annual EPRS publication aimed at identifying and framing some of the key issues and policy areas that have the potential to feature prominently in public debate and on the political agenda of the European Union over the coming year.
The topics analysed encompass the 2024 European elections, budgeting in times of crises and war, lessons for public investment in the EU from the EU recovery instrument, the fiscal and monetary policy mix, climate
and socio-economic tipping points, the impact of increasing fuel prices on transport, cyber-resilience in the EU, protecting media freedom and journalists, the future of Russia, and geoeconomics in an age of empires

Just as Next Generation EU (NGEU, see issue 3) launched, the EU budget has had to respond to the multiple new crises created by Russia’s invasion of Ukraine: security, humanitarian and energy crises, and high inflation. In 2023, attention will focus on how the EU employs various budgetary and off-budget financial instruments to address these crises while dealing with two major challenges: available revenue and flexibility in spending.

Budgeting designed for times of peace and stability

An investment budget, the EU budget is designed to implement long-term policies, to provide continuity and stability rather than flexibility. The long-term policy priorities and their scope of implementation (i.e. financial allocation ceilings on expenditure) are determined by the multiannual financial framework (MFF). This leaves limited possibility for flexibility, responsiveness and dynamism in the face of unforeseen circumstances, despite Parliament’s long-standing position in favour of strengthening flexibility. With the MFF’s seven-year duration, plus the time from the Commission’s initial draft to its final adoption, the expenditure framework at the disposal of policymakers might have been conceived as long as ten years before a crisis hits the Union.

According to Article 311 of the Treaty on the Functioning of the EU (TFEU), the EU shall provide itself with the means necessary to attain its objectives, i.e. to deliver on its policy commitments as well as to address emerging challenges. The reform of own resources in 1988 was the first, and only, major reform to date. However, the competences and therefore policies covered by the EU budget have grown significantly over that period. Even without crises, the sufficiency of EU budget revenue can become an issue of concern. In its 2017 resolution on the reflection paper on the future of EU finances, the European Parliament stressed that additional political priorities should be supported with additional financial means and not be financed to the detriment of existing EU policies.

Budgeting when crises comes

Although the EU budget is not designed to respond to crises and has only limited possibilities to respond to unforeseen events, it does do so, and citizens’ expectations are growing. On the one hand, regardless of the latter, EU policymakers and leaders can act only within the limitations of the EU Treaties and the competences they provide to EU institutions, which can be far below the challenges the crises create. On the other hand, when crises have global impact, responses are more efficient when executed at EU rather than national or regional level. Under the subsidiarity and proportionality principles, the EU budget provides European added value by supporting actions that can be more efficient, effective or synergetic than actions taken at national or lower level.

For slightly more than a decade, the EU budget had to provide financial means for policy responses to several major crises – the European debt crisis, the migration crisis, the COVID-19 pandemic and its economic consequences, as well as to act in the conditions of a worsening humanitarian situation across the world and changes related to Brexit.

Flexibility in spending

The agreed MFF provides tight expenditure ceilings under which annual budgets and their amendments are adopted. A more significant amendment to the MFF could be done in a mid-term review, but the mid-term review/revision of the 2014-2020 MFF did not provide adequate response to the crises back then. The President of the European Commission confirmed in her September 2022 letter of Intent that an MFF review will be done in 2023, as called for by some Members of Parliament. It remains to be seen how and to what extent it will provide a response to current crises.

Over the years, the flexibility instruments of the EU budget have developed after the insistence of the European Parliament, and have been used frequently due to the multiple crises facing the Union. They constitute a minimal share of the EU budget, which Commissioner Johannes Hahn, responsible for the budget, estimates to be around 1 % of the overall EU budget (not linked to pre-allocations), and experience has shown their insufficiency. Flexibility has been much debated but the views of the Commission, the Parliament and the Council vary significantly, with the Parliament repeatedly calling for more flexibility of the EU budget. Future needs might see incorporation of more flexibility instruments in the EU budget rather than, as currently, using a galaxy of off-budget instruments, which are not subject to democratic parliamentary scrutiny. 

Sufficient revenues

In its resolution on the 2021-2027 MFF and own resources, the European Parliament states that the 2014-2020 MFF had proven inadequate to finance the EU’s pressing needs and political priorities. Experts also doubt if the EU budget has been sufficiently expanded and reformed to reflect the deepening Union and its expanding competences. The currently pressing needs related to the Russian invasion of Ukraine and its consequences are expected to be even more significant than those resulting from previous crises. Unlike national budgets, the EU budget cannot run a deficit or fund expenditure through borrowing. It can increase expenditure only through an increase of its revenue, knowns as own resources. Borrowing, however, is a funding mechanism for off-budget instruments such as NGEU (although repayment of the debt it generates will come from the EU budget). The future €18 billion fund to support the reconstruction of Ukraine is again funded by borrowing – loans that will be guaranteed (but not repaid) by the EU budget.

An own-resource reform found interinstitutional agreement (IIA) as part of the package on the 2021‑2027 MFF and NGEU. One aim was securing resources to cover new budgetary expenditure such as on NGEU debt repayment. The first step was the Own Resources Decision (ORD), which entered into force in June 2021, introducing a new own resource based on non-recycled plastics. In December 2021, six months later than initially scheduled in the IIA roadmap, the Commission proposed a new own resources package, comprising part of the revenues deriving from an extended emissions trading scheme (ETS), a carbon border adjustment mechanism (CBAM), and a share of the reallocated profits of very large multinational companies (based on Pillar 1 of the OECD/G20 agreement). The proposal is to introduce the new own resources gradually as of 1 January 2023, but at the time of publishing, the proposal had still not been adopted by the Council. Over the 2026-2030 period, revenue for the EU budget then have the potential to reach up to €17 billion a year (in constant 2018 prices). The Commission committed to making a proposal with a further package of new own resources in 2023 (earlier than the deadline of June 2024 set in the IIA).

The progress of own resources reform will be a key issue to watch during 2023, because any delay to the already lengthy adoption and implementation might put in jeopardy the future stability, reliability and continuity of the EU budget. Even if the IIA is fulfilled as planned, there are still concerns whether the amounts generated will be sufficient due to the increased interest rates on NGEU repayments (the principal is due only at the end of the current MFF) and the additional funds needed to address the consequences of the Russian invasion of Ukraine. Insufficiency of resources might lead to a need to increase the own resource based on gross national income (GNI) and/or limiting the funding of existing programmes and MFF commitments.

Read the complete in-depth analysis on ‘Ten issues to watch in 2023‘ in the Think Tank pages of the European Parliament.

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