Lecture 3_4. The budget of the European Union

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Lecture 3_4. The budget of the European Union

• Lecture objectives
• to discuss the principles of fiscal federalism
• to describe the structure and characteristics of
  the EU budget
• to review the policy debates surrounding the EU
  budget regarding expenditure, revenue and the
  contributions of member states
• to evaluate future options for the EU budget in
  the context of further EU integration

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The subsidiarity principle

• Article 5 (ex 3b) of the Maastricht TEU
• In areas which do not fall within its exclusive
  competence, the Community shall take action, in
  accordance with the principle of subsidiarity,
  only if and in so far as the objectives of the
  proposed action cannot be sufficiently achieved
  by the Member States and can therefore, by reason
  of the scale or effects of the proposed action,
  be better achieved by the Community.
• Any action by the Community shall not go beyond
  what is necessary to achieve the objectives of
  this Treaty.

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An economic perspective on subsidiarity

• Subsidiarity is about discovering the appropriate
  level of government for the administration of
  economic functions
• A clear preference for decentralised
  decision-making
• On political grounds, a preference for a more
  devolved process of decision-making as being more
  democratic
• On economic grounds, that decisions are more
  likely to be effective and to accord with
  citizens preferences

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The economics of fiscal federalism(multi-tier
government)

• Arguments for centralisation
• (positive or negative) spillovers
• economies of scale, influence and increased
  effectiveness of action at a higher national
  level
• Any benefits from centralisation must be set
  against any additional costs (e.g.weaker controls
  on higher level agencies)
• Apply these arguments to the main public economic
  functions
• the allocative, redistributive and stabilisation
  functions
• subject to the constraint of free internal trade
  and factor movements

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Applying the economics of fiscal federalism to
the EU

• Allocative functions
• These arise in the context of market failures,
  e.g. public goods, imperfect markets,
  externalities
• May be shared between EU and member states
  depending on the existence of spillovers and
  economies of scale in implementation
• Redistribution functions
• Scope for redistribution by Member States
  severely circumscribed by existence of a single
  market, arguing for assignment to the Union level
• Stabilisation function (monetary and fiscal
  policy)
• Internal market requires exchange rate stability
  as difficult to achieve through co-operation,
  there is an argument to shift (some) macro policy
  to Union level

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Some characteristics of the EU budget

• EU budget is very small - around 1.2 of EU GDP
  compared to total general government expenditure
  amounting to around 50 of EU GDP
• Legal requirement that EU budget must balance in
  each year. This rules out use of the budget for
  demand management purposes, even disregarding its
  small size.
• Budgetary power jointly shared by the Council and
  Parliament
• Annual budget cycle now conducted within the
  framework of multi-annual financial perspectives

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EU sources of budget revenue
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Structure of EU budget spending
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The relative burden on member states

• Arguments about the principle and feasibility of
  juste retour - should member states get back
  what they put in?
• Imbalances arise because member states have
  different propensities to contribute revenue
  (esp. the VAT contribution) and different
  abilities to draw down expenditure.
• Highlighted by UK accession - budget debates in
  the 1980s dominated by the UK rebate.
• Now a more general issue, with Germany and the
  Netherlands arguing that their net burdens are
  unreasonable

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Future EU budget issues

• Is the size of the EU budget adequate?
• in the light of fiscal federalist principles
• in the light of next EU enlargement to the East
• Should the EU have additional own resources?
• How to introduce greater budget equity between
  member states?
• 1998 Commission report Financing the European
  Union explored options regarding the introduction
  of new own resources and introducing greater
  budget equity
• proposals include introducing national
  co-financing of CAP aids and extension of the UK
  correction mechanism to other net contributors

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Debate over the 2007-2013 Financial Perspective

• The Commissions Medium Term Proposal 2003
• Commission Report on Own Resources System 2004
• See website for references

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Conclusions

• The EU does not have the institutions of a
  federal state there is a blend of
  supranationalism and intergovernmentalism in the
  Community method
• There is considerable evidence of both widening
  and deepening of the Unions economic competences
  in successive Treaty revisions
• Conclusions of the theory of fiscal federalism
  would suggest a somewhat different assignment of
  powers between the Union and member states than
  what actually exists, as well as a larger budget,
  the topic of the next lecture.