Baldwin

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The Economics of European Integration
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Chapter 2EU budgetVasja Rant
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Presentation objectives

• Basic facts history of the EU budget
• Economic rationale for the EU budget
• Budgetary procedure
• Annual procedure
• Multiannual procedure
• Budgetary principles
• Financial perspectives of the EU
• Expenditures of the EU budget
• Revenues of the EU budget
• EU budget in 2008

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EU budget facts history
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EU budget facts history

• Relativna velikost

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EU budget facts history

• Why is the EU budget so small?
• It does not include expenditure items for
  implementing sovereign state functions (military,
  police)
• It does not include expenditure items that ensure
  individual social security (except for EU public
  officials)
• It does not include debt servicing costs
• It includes limited expenditures for provision of
  public goods
• It includes limited expenditures for
  redistribution between member states/regions.

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EU budget facts history

• 1965 the Merger Treaty ECSC and Euratom
  administrative budgets incorporated into the EEC
  general budget
• 1970 the Luxembourg Treaty incorporation of
  the Euratom research and investment budget into
  the EEC general budget
• 2002 expiry of the ECSC Treaty all assets and
  liabilities of the ECSC budget transferred to the
  EU budget (Treaty of Nice)
• 1970-2002 the period of two budgets EC general
  budget (EU budget since 1992) ECSC operating
  budget.
• 2002-today the period of a single budget EU
  general budget.

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EU budget facts history

• EU budget expenditures developed alongside the
  common (EU) policies
• Common agricultural policy key milestones
• 1962 foundation of CAP by establishment of the
  European Agricultural Guidance and Guarantee Fund
  (EAGGF)
• Structural/cohesion policy key milestones
• 1971 and 1975 foundation of EU structural
  policies by reform of the European Social Fund
  (ESF, established 1957) and establishment of the
  European Fund for Regional Developement (EFRD)
• 1988 and 1993 reforms of the Structural Funds,
  more focus (priority objectives) and more
  resources creation of the Cohesion Fund and
  Financial Instrument for Fisheries Guidance
  (FIFG)
• Research policy
• 1984 expansion by adoption of the first
  Framework programme
• Other policies
• Since 1993 new policies in the areas of freedom,
  security, justice and home affairs to support the
  3-pillar structure of the EU

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EU budget facts history

• EU budget revenues developed alongside reforms of
  the EU financing system
• ECSC budget
• 1951-2002 ECSC levy (since 1965 the levy was
  raised only to finance the ECSC operating budget)
• The general (EEC) Euratom budgets
• 1958-1970 the budgets were financed by a system
  of Member States contributions
• 1970 Introduction of the Own Resources System
  with three resources (Customs Duties,
  Agricultural Duties and the VAT resource)
• 1988 Reform of the Own Resources System
  introduction of the fourth resource (the GNI
  resource)
• Since 1993 gradual decline in the VAT resource
  rise of the GNI resource (successive reductions
  of uniform VAT call rates).

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Economic rationale

• Why should EU be involved in public finance?
• Answer double market failure in acheiving
  socially optimal results
• 1. failure private market failure
• Market inefficiency allocation function
  (provision of public goods).
• Socially undesired outcomes redistribution and
  stabilization functions.
• 2. failure failure of national authorities and
  national public finance
• Insufficient scale of public goods production on
  national level due to externalities and
  spill-over effects.
• Lower average costs or greater effects of
  production of public goods on supra-national
  (federal) level due to economies of scale and
  scope.

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Economic rationale

• What should be the basic functions of the EU
  budget?
• Allocation function economically justified in
  case of European public goods, politically
  relatively unproblematic.
• Redistribution function
• Between individuals problematic due to
  non-homogeneus preferences of EU member states
  regarding the scope of the welfare state.
• Between countries economically justified
  redistribution centre ? periphery (smaller fiscal
  benefits of periphery from the common market)
  socially justified redistribution more developed
  ? less developed member states and regions
  (European model of economic and social cohesion)
• Stabilization function economically justified
  due to existence of the European monetary union,
  but politically unfeasible due to the loss of
  fiscal sovereignty needed to implement
  stabilization function.
• Conclusion EU budget should be involved in
  provision of European public goods and
  redistribution between countries.

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Budgetary procedure

• It is an inter-institutional procedure which
  determines each year the actual expenditure
  appropriations of the EU budget for the following
  year for individual policy items.
• It takes into account the maximum amounts of
  expenditures and revenues set by the medium-term
  (currently 7-year) financial framework
• For expenditures financial perspective
• For revenues own resources decision

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Annual budgetary procedure national parallels

• Member state
• Budget proposal national government
• Budget adoption national parliament
• Implementation national government
• Technical supervision national court of auditors
• Political clearance national parliament

• European Union
• Budget proposal European Commission
• Budget adoption European parliament and EU
  Council
• Implementation European Commission
• Technical supervision European court of auditors
• Political clearance European parliament

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Annual budgetary procedure timeline

• Established timeline since 1988 ensures
  uninterrupted financing and implementation of EU
  policies

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Annual budgetary procedure decision making
rules
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Annual budgetary procedure compulsory and
non-compulsory expenditures

• Compulsory expenditures expenditures that
  originate from the Treaty establishing the
  European Community, i.e. expenditures of the
  common agricultural policy (first pillar only),
  expenditures based on international agreements,
  expenditures for salaries and pensions of EU
  public officials, membership fees in
  international organizations and reservations for
  guarantees
• Non-compulsory expenditures all other
  expenditures, i.e. expenditures for cohesion
  policy, rural developement policy,
  competitiveness policy, internal policies.
• Decision making rules
• Compulsory expenditures EU Council has the last
  word.
• Non-compulsory expenditures European Parliament
  has the last word
• Lisbon Treaty cancels this division of
  expenditures!

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Annual budgetary procedure consequences of
rejection of the budget

• Provisional twelfths rule If the European
  Parliament and the EU Council cannot reach an
  agreement about the EU budget by the end of year
  N-1, the budget cannot exceed 1/12 of the planned
  expenditures of the year N-1 in any single month
  of year N.
• Enforced several times before 1988 problems in
  adoption of the budgets of 1980, 1985, 1986 and
  1988
• Solution introduction of multi-annual financial
  perspectives

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Multi-annual procedure medium term financial
framework

• Financial perspective (FP)
• Determines maximum amounts of EU budget
  expenditures by individual years and budget
  headings (policies) for a 7-year period.
• Own resources decision (ORD)
• Determines the sources and rules of financing of
  the EU budget.
• FP and ORD decision making unanimity in the EU
  Council based on Commission proposal and
  unanimous political agreement in the European
  Council in case of ORD, ratification by
  national parliaments is required (de facto
  decision making on Treaty level)! Multi-annual
  negotiations!
• Advantages limitation and predictability of EU
  budget expenditures and revenues
• Disadvantages non-flexibility of EU budget
  (inertia of existing expenditure structure) and
  concentration of power in EU Council.

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Budgetary principles (1)

• The principle of unity all expenditures and
  revenues of the EU must be included in the EU
  budget exceptions
• European development fund (international
  development aid)
• Financial activities of the European investment
  bank
• Lending/borrowing activities
• The principle of universality expenditure and
  revenue sides of the budget are separate
  individual budget revenues cannot be appropriated
  for specific spending purposes exception
• Fines in case of non-compliance with the
  Stability and Growth Pact are a revenue of the
  budget, however they, are appropriated only to
  member states that are not in the Excessive
  Deficit Procedure.

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Budgetary principles (2)

• The principle of annuality budgetary
  appropriations must refer to a specific year due
  to multi-annual nature of some programs, two
  categories of appropriations are entered into the
  EU budget
• Appropriations for commitments the expenditure
  committed by the EU in a given year in respect to
  operations that can be carried out over a longer
  period of time
• Appropriations for payments the expenditure
  effectively incurred by the EU in a given year in
  meeting the commitments of that and/or of
  previous years.
• The principle of equilibrium according to
  article 268 of the EC Treaty, the EU budget
  cannot be in deficit or surplus.
• Practical enforcement of the equilibrium
  principle automatic adjustment of revenues to
  expenditures through the GNI source.
• Problematic from the point of stabilization
  function and the EMU.

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Budgetary principles (3)

• The principle of specification states that no
  commitment can be entered in the EU budget
  without a definite scope and purpose. Exception
• Budgetary reserve
• The principle of the unit of account the EU
  budget is expressed in euros (before ECUs from
  1977 to 1999, golden parity from 1958 to 1977
  and even U.S. dollars until 1958)

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EU financial perspectiveReasons for existence

• Inadequacy of the existing annual budget system
• Conflicts between institutions
• Especially acute was the conflict
  Council-Parliament due to shared powers in
  budgetary decision making since 1975 (delays in
  adoption of budgets 1980, 1985, 1986 in 1988).
• Lack of financial resources
• Reduction of traditional resources, i.e. customs
  and agricultural duties (trade liberalization in
  the context of GATT negotiations)
• Stagnation of the VAT resource (lower shares of
  final consumption expenditures in more developed
  member states)
• Increases in expenditure levels (new policies,
  uncontrolled rise of agricultural spending)
• Budgetary imbalances in member states the
  problem of the United Kingdom.
• Relatively high share of contributions to the EU
  budget and low share of receipts from the budget
  compared to comparable countries.

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EU financial perspectivedefinition

• Financial perspective IS
• An agreement about the ceiling of EU budget
  expenditures (aggregate and for individual budget
  headings/subheadings)
• An agreement about the policy priorities of the
  EU budget.
• An agreement about the distribution of the
  financing burden of the EU budget between the
  member states.
• A medium-term (currently 7-year) planning
  document, which
• Ensures predictability of EU budget expenditures,
  
• Eases implementation of programmes and management
  of budget funds,
• Enables smooth annual budget procedure and
• Ensures budgetary discipline.
• Financial perspective is NOT a multi-annual EU
  budget.

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EU financial perspectivefacts

• The EU has so far implemented 4 financial
  perspectives
• 1st financial perspective Delors I (1988-1992)
• 2nd financial perspective Delors II (1993-1999)
• 3rd financial perspective Agenda 2000
  (2000-2006)
• 4th financial perspective multi-annual
  financial framework (2007-2013)
• Financial perspective is included in the
  Interinstitutional Agreement on budgetary
  discipline and sound financial management ,
  between the European Parliament, the EU Council
  and the European Commission
• It is not explicitly stated in the EC Treaty.
• It does not have legislation status and is thus
  not legally binding.
• Decision making procedure for the FP is de facto
  subject to strict voting rules (unanimity in the
  European Council), there have been no violations
  so far.
• The Lisbon Treaty includes a formal provision for
  FP (regulation).

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EU financial perspectiveDelors I (1988-1992)

• The first inter-institutional agreement
• Reform of the common agricultural policy
• Control of expenditure growth (agricultural
  guideline)
• Early warning system (in case of excessive
  expenditure growth)
• Reform of cohesion policy
• Doubled amount for the Structural funds
• Introduction of priority objectives (5 or 6) and
  better coordination between the funds
• Reform of the own resources system
• Introduction of the fourth resource (GNP, today
  GNI)
• Own resources ceiling raised from 1,15 to 1,20
  of GNP (payments) and to 1,30 GNP (commitments).

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EU financial perspectiveDelors II (1993-1999)

• Renewal of the inter-institutional agreement
• Reform of the common agricultural policy
• Control of expenditure growth (agricultural
  guideline)
• Introduction of direct payments
• Reform of the cohesion policy
• Substantial increase in resources (from 17 to 30
  bn ECU) by 1999
• Increase of priority objectives from 6 to 7
  emphasis given to least developed regions
• Establishment of the Cohesion fund (for less
  developed member states)
• Reform of the own resources system
• Rise of importance of the GNI resource (VAT
  uniform call rate reduced from 1,4 to 1)
• Increase of the own resources ceiling to 1,27
  GNP (payments and 1,335 GNP (commitments).

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EU financial perspectiveAgenda 2000 (2000-2006)

• Renewal of the inter-institutional agreement
• Reform of the common agricultural policy
• Reduced market interventions and increased direct
  payments
• Rural development policy
• Cohesion policy
• Stable relative amount of resources 0,46 GNI
• Focusing of goals 3 priority objectives instead
  of 7
• Concentration of funds 70 for least developed
  regions MS
• Enlargement
• Pre-accession aid (PHARE, ISPA, SAPARD)
• Enlargement reserve
• Own resources system
• Stabilization of own resources ceiling at 1,27
  GNP (payments)
• Further rise in the GNI resource due to
  reductions in VAT uniform call rate to 0,75
  (2002) and 0,50 (2004).

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EU financial perspectiveMulti-annual fin.
framework (2007-2013)

• Renewal of the interinstitutional agreement
• Competitiveness (Lisbon objectives)
• Real increase by 70 (from 7,5 bn EUR in 2006 to
  12,9 bn in l. 2013)
• Substantially less than Commission proposal (21
  bn EUR in 2013)
• Cohesion policy
• 3 objectives convergence, competititveness,
  teritorial cooperation
• Concentration in new member states
  Lisbonisation of expenditure
• Common agricultural policy
• 1st pillar based on 2002 CAP agreement (nominal
  1 growth by 2013),
• Gradual phasing in of direct payments in new
  member states (2013-16)
• Own resources system
• Freezing of the VAT uniform call rate at 0,30
• Additional rebates for Germany, the Netherlands,
  Austria and Sweden
• UK rebate kept, but with full UK participation in
  financing enlargement
• Review clause
• Substantive review of the EU budget due in
  2008/09

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EU financial perspectiveMulti-annual fin.
framework (2007-2013)
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EU budget expenditures

• EU budget expenditures reflect the development of
  the common EU policies
• Expenditure growth in the last 20 years roughly
  equal to GNI growth (slowdown since 1999).
• Roughly 80 of EU budget expenditures in the last
  20 years have been determined exclusively by two
  large policies
• Common agricultural policy absolutely dominated
  the budget until 1988 (more than 60 of total
  expenditures)
• Cohesion policy substantial rise in importance
  between 1988 and 1999 (increase of share in total
  expenditures from 17 to 36), particularly on
  behalf of reduction in CAP share.
• The share of internal policies is slowly, but
  persistently increasing (from 3 to 10 of total
  expenditures since 1988 until 2013).
• The share of external policies has been more or
  less stable (between 4 and 6)

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EU budget expenditures evolution of the scale
of expenditures
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EU budget expenditures evolution of the
expenditure structure
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EU budget expenditures evolution of the
expenditure structure
Cohesion
Agriculture
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EU budget revenues own resources system

• Traditional own resources (TOR)
• Customs duties, agricultural duties, sugar and
  glucose levies
• Of total collected traditional own resources, 25
  is kept by the member state to cover the
  collection costs (10 until 2000)
• Resource basted on value added tax (VAT resource)
  
• Uniform VAT call rate (ceiling) 1 (until
  2000) 0,75 (2002) 0,50 (2004) 0,30
  (2007, actual rate)
• Tax basis VAT return or maximum 50 of member
  state GNI
• It is not a genuine tax resource, merely an
  accounting exercise.
• Resource based on gross national income (GNI
  resource)
• The balancing resource (ensures the equilibrium
  principle)
• GNI resource EU budget expenditures (TOR
  VAT resource)

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EU budget revenues own resources system

• Correction in favor of the United Kingdom (UK
  rebate)
• Zero sum game UK, other EU member states
• Basic idea return the UK 66 of its net
  contribution to the EU budget.
• Scale of rebate around 5-6 bn EUR annually in
  recent peirod
• Backround history of the rebate
• The UK had a relatively small agricultural sector
  with a high share of imports upon acceding to the
  EEC relatively small benefits from the common
  agricultural policy
• The UK was one of the least developed member
  states upon acceeding to the EEC and had a
  relatively high share of VAT in GNI relatively
  large contributions to the EU budget
• The rebate was installed at the1984
  Fountainebleau European Council and is often
  credited to persistence of then prime minister
  Margaret Thatcher.

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EU budget revenues own resources system

• Calculation of the rebate
• UK rebate (UK share in OR except TOR UK share
  in allocated expenditures) x total allocated
  expenditures x 0,66
• The rebate is officially accounted for as a
  reduction of the uniform VAT call rate for the
  UK.
• Financing of the rebate
• All other member states, except UK (in year t1)
• 75 rebate on financing of UK rebate for Austria
  Germany, the Netherlands and Sweden since 2001.
• Other corrections in the own resources system
• Reduction of the VAT uniform call rate for
  Austria (to 0,225), Germany (to 0,15), the
  Netherlands and Sweden (to 0,10) for the
  2007-2013 period.
• Rebates on GNI contributions 605 mil. EUR for
  the Netherlands and 150 mil. EUR for Sweden in
  the period 2007-2013.

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EU budget revenues evolution of the own
resources structure
Other
GNI
VAT
TOR-customs
TOR-agri. duties
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EU budget expenditure structure 2008 (bn EUR and
)
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2008 budget expenditures subheading 1a
(Competitiveness)
55,0
17,1
9,0
40
2008 budget expenditures subheading 1a
(Cohesion)
78,9
18,3
2,6
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2008 budget expenditures heading 2 (Natural
resources)
74,4
24,0
1,6
42
2008 budget expenditures subheadings 3a and 3b
(FSJ and C)
53,9
15,3
11,7
16,9
32,5
9,4
10,8
43
2008 budget expenditures heading 4 (EU as
global partner)
4,1
11,0
21,9
31,5
19,2
2,0
44
2008 budget expenditures heading 5
(Administration)
7,3 billions EUR
45
2008 budget expenditures heading 5
(Compensations)
207 millions EUR
46
2008 budget revenues own resources
1,4 bn EUR
18,7 bn EUR
19,1 bn EUR
81,1 bn EUR
Total 120,3 billions EUR
47
EU budget and juste retour net balances in
2007 (mil. EUR)
48
EU budget and juste retour net balances in
2007 ( of GNI)
Slovenia 0,27