On Wednesday (June 29th) the Commission is scheduled to reveal its proposals for the next Multi-annual Financial Framework (MFF) which will set out the scale and composition as well as the proposed financing of the EU budget over the period to 2020. However, some reports suggest that Commission President Barroso is putting aside two days for the Commission College to agree the proposal so it may be later in the week before it sees the light of day. This is an important issue for Ireland, and this post discusses the issues to watch for in the Commission’s proposal.
Traditionally, Ireland has been a net recipient of funds from the EU budget, to the tune of almost €5 billion over the past seven years (see table). This is not a trivial amount in the context of current economic difficulties; for example, it is roughly what privatising all remaining state-owned companies might be expected to fetch.
The first issue will be the overall size of the budget, and here the rumours from Brussels suggest a budget similar in absolute size but slightly smaller relative to EU GNI (Gross National Income). The Commission must balance the recognition that Member State budgets across Europe are under strain while at the same time trying to find funding for some of the new responsibilities given to the EU in the Lisbon Treaty.
A number of net contributor countries (Germany, UK, France, Finland and Netherlands) in a letter last December called for a freeze on the EU budget. If the Commission’s draft 2012 budget were taken as a model, this would imply commitment appropriations equal to 1.12% of GNI and payment appropriations equal to 1.01% of GNI. This compares to the amounts of 1.12% and 1.06% for commitments and payments, respectively, in the current 2007-2013 MFF (the own resources ceiling in the current MFF is 1.23% of GNI – the difference with actual payment appropriations has been used as the basis for the EU’s guarantees on lending under the European Union’s Financial Stabilisation Mechanism). The European Parliament has called for an increase of 5% in the resources available in the next MFF (curiously, it interprets this as an increase from 1.06% to 1.11% of EU GNI in terms of commitment appropriations).
The second issue will be the composition of the budget. Agricultural and cohesion policy are the two big spending items. The agricultural budget will be defended by France which has lined up a significant number of other Member States behind its stance, including Ireland. Cohesion spending will be defended by the new Member States, and particularly Poland. Holding spending in these areas constant in nominal terms would allow some increase in the share of other spending, particularly on research and innovation, home affairs and immigration, and foreign policy. It seems doubtful that the Commission will suggest a more radical restructuring.
The third issue concerns financing of the budget. Currently, three quarters of the EU budget is financed by the GNI resource with most of the remainder consisting of the VAT resource. The rules for calculating the VAT resource have been so modified over the years that, in practice, it functions like the GNI resource and a welcome simplification would be to abolish it completely and absorb it into the GNI resource.
However, according to the Commission this would emphasise even more the reliance on direct transfers from Member States to finance the EU budget which, in turn, is supposed to encourage Member States to think in terms of ‘juste retour’ and formulating their negotiating position to either maximise their net receipts/minimise their net contribution to the budget. The Commission is therefore likely to propose some new revenue sources that would accrue directly to the Union. Traditional candidates include a revamped VAT resource, an energy levy or corporation profits tax. More recent suggestions include a financial transactions tax, an aviation levy or the proceeds from auctioning emission permits in the EU Emissions Trading Scheme (which under current legislation will accrue to the Member States).
At the same time, expect proposals to eliminate/reduce some of the existing rebate schemes intended to introduce greater ‘fairness’ into financing the EU budget, most notably the UK rebate, although in practice a much larger number of countries now benefit from adjustments either on the revenue or expenditure sides of the budget. In my view, it would be more sensible to adopt an explicit rule for the redistributional outcome of the EU budget rather than to ignore the ‘juste retour’ motive. The latter leads inevitably to a more dysfunctional budget as Member States defend budget lines not on their inherent merits but because they are an important mechanism for net transfers to national budgets.
Proposals on some more procedural aspects of the budget will also be important. For example, the MFF is divided into Headings which limit the extent to which surpluses under one Heading can be transferred to another Heading during the duration of the MFF. The Commission is likely to propose new arrangements for flexibility (essential in a medium-term framework to allow the EU to react to new and unforeseen events) to allow for contingencies. There may also be proposals for more innovative financing arrangements whereby the EU budget could be used to leverage additional private spending, for example, for infrastructure projects.
It was earlier thought that the Commission might favour a revised duration for the MFF to link it more closely to the term of office of the European Parliament (for example, a 10-year framework with provision for substantial revision after 5 years rather than the traditional 7-year term). Even the Parliament has now moved away from this notion for the immediate future, although there may be proposals for change in future MFFs.
The negotiations will only start with the Commission’s proposals. This is the first time that 27 Member States will attempt to reach agreement on the next MFF. The negotiations are even more complicated because for the first time the European Parliament has an explicit role (the size and composition of MFF expenditure is decided under the consent procedure whereby the EP must give its agreement on an up-or-down vote, without the power to propose amendments, whereas the structure of the EU’s finances including any new own resources are decided under the consultation procedure where the Council decides unanimously after taking into account the opinion of the Parliament).
Before the collapse of the Irish economy it was expected that Ireland would become a net contributor to the EU budget during the next MFF. Whether this will still happen will depend in part on the outcome of the negotiations on the Commission’s proposals this week, including the overall size of the budget, the share allocated to agriculture and whether new revenue sources are agreed (which is unlikely). In turn, the distribution of the agricultural budget is under negotiation in separate but parallel negotiations on CAP reform which will determine how much of that budget, whatever its size, will be retained by Ireland.
In the absence of a pre-agreed net transfer/contribution based on relative GNI per capita the Irish negotiating position (like that of every other Member State) will be heavily influenced by its desire to minimise its net contribution in the coming period. This means an overall budget at the lower end of the range discussed above, maintaining the CAP budget and the Irish share of that budget, more spending on research and innovation and less spending on cohesion (particularly by cutting back on spending in the old Member States). We will know later in the week how the Commission’s proposals measure up on these counts.