Commission proposals for the next EU budget Multi-annual Financial Framework to be published this week

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.

8 thoughts on “Commission proposals for the next EU budget Multi-annual Financial Framework to be published this week”

  1. This is an important topic which, unfortunately, will probably not get the attention that it deserves.

    A few general points.

    At about 1% of GNI and 2% of total government spending in the EU, the Multi-annual Financial Framework (MFF) can have no real impact at a macro-economic level across Europe although it can impact at a national level in smaller economies (Ireland being the living proof). Nevertheless, it represents an important instrument for a number of reasons mainly because of (i) the Common Agricultural Policy (ii) the funding of economic and social cohesion policies and (iii) the funding of whatever measures the EU can manage to agree on in relation to third countries.

    The Lisbon Treaty changed the basis on which the next MFF will be adopted to that of a Regulation (which will become part of the law of the EU once adopted,) from that of a Decision requiring ratification by the parliaments of all 27 member states.

    The UK rebate mechanism, agreed in 1984, and which is an integral part of the basic legislation, requires the use of the VAT base for its calculation. In the negotiation, the political issue will be more how the cost is funded by the other member states, rather than the justification for the rebate itself – which is likely to continue to exist viz. the lack of benefit, indeed a calculable cost, to the UK of the CAP – with a majority of member states likely to question why four – Germany, the Netherlands, Austria and Sweden – enjoy a major reduction which has to be made up by the others, the UK, of course, excepted.

    Against the background of the gap opening up between European economies in the context of the euro crisis, the negotiations promise to be of exceptional interest. The most notable feature from an Irish point of view is likely to be the fact that the UK, already with a semi-detached status to the EU, risks drifting into one of total detachment, the question being how Ireland may be impacted by this development.

  2. @DOCM

    Thanks for these useful comments. Your point that the UK rebate requires the VAT base for its calculation is something I had not spotted when speculating that the VAT contribution might be eliminated in the interest of simplification.

    I wonder whether your comment on the impact of the Lisbon Treaty is fully accurate. The Commission later this week will actually make two legislative proposals. One will be a draft Regulation (Article 312 TFEU) setting out the MFF size and spending limits. But the other will be a draft Decision (Article 311 TFEU) laying down the provisions relating to the own resources of the Union. Article 311 goes on to say “That decision shall not enter into force until it is approved by the Member States in accordance with their respective constitutional requirements” so I take it that the MFF as a whole (including both the financing as well as the spending sides) de facto will require ratification by the parliaments of all 27 member states. But perhaps someone with more constitutional knowledge can put us right on this.

  3. @Alan,

    I’m echoing DOCM’s gratitude to you for this post. It’s a useful heads-up. We’ll probably have to wait and see what emerges, but I expect a long drawn-out affair before some measure of agreement is reached. My sense is that the 12 who joined post 2004 got a much rawer deal than the below Community average joiners in the 70s and 80s. I wouldn’t be surprised if this didn’t figure. Poland is beginning to get a sense of its heft.

    And I wouldn’t be too worried about parliamentary ratification. Given the extent of executive dominance most governments enjoy, it shouldn’t be too hard. All the fun and games will be at the European Council.

  4. @ Alan Matthews

    Apologies. My comment on the issue of the legal basis for Own Resources is not accurate. I should have checked before making it. What becomes a Regulation is the Inter-Institutional Agreement governing the Financial Perspectives which become the MFF.

    There are, however, substantial changes also in relation to the OR Decision as it will be based on one of the three legal instruments mentioned in Article 288 and be adopted in accordance with a Special Legislative Procedure. What the implications of this are, I do not know but I do not think that it changes the existing situation to any significant extent having regard to the maintenance from previous treaties of both unanimity and the reference to “respective constitutional requirements”.

    In other words, there will be two legislative instruments, the MFF and the new OR Decision (assuming that there is one).

    My aim was to underline some facts that are often overlooked. The UK rebate is (i) included in the OR Decision (ii) it is an essential element of its functioning (iii) it is based on a formula which requires the existing VAT base for its calculation (iv) any new Decision will require unanimity and (v) until that is forthcoming, the existing Decision will continue.

    Margaret Thatcher did a good job (as did evidently the UK negotiators of the Lisbon Treaty).

  5. @ Alan Matthews

    The question that has just occurred to me is: what is the Commission going to propose in the new OR Decision to which you refer?

  6. @DOCM

    My guess would fall under two headings. First, the OR decision defines the Union’s own resources, so if the Commission wants to see a new own resource introduced or to propose deleting an existing one (e.g. the VAT resource), this is where it would do it.

    But even if the Commission opted not to propose a new OR and to maintain the existing structure of financing the budget, it still has to propose a call up rate for the VAT resource plus make proposals on the various rebates to which you refer. The structure of the budget’s own resources is bound to be different in the future compared to the past, not least because we now have 27 member states negotiating and not just 15 when the current OR decision was decided. Hence the need for a new OR decision.

    But all will be revealed later in the week.

  7. @ Alan Matthews

    All will, indeed, be revealed as instead of agreeing the deal and then writing the text of the OR Decision to reflect it the text on this occasion will come first.

    The question is whether the Commission will succeed in locating its proposal in the real world or simply continue with the incrustations attached to the existing budget. I fear the latter because almost thirty years of the UK rebate has embedded the principle of juste retour in EU budgetary thinking.

    cf.

    http://blogs.ft.com/the-a-list/2011/06/28/a-summer-to-do-list-for-european-leaders/#axzz1QYPfElkp

  8. @ Alam Matthews

    It seems that discretion is proving to be the better part of valour in the matter of the Commission’s new OR proposal which seems not to be included in the package of proposals, at least as far as I can see. Wise move! In the meantime, the major net contributor countries can pretend to have a common front by concentrating on the only thing that unites them viz. keeping the overall budget as small as possible.

    The really interesting document consists of Barrroso’s (unscripted at certain points?) comments.

    He switched to French to say the following with regard to the issue of “rebates” (which, no doubt, explains why the Daily Telegraph missed it).

    “Et pour ces mêmes raisons, le temps est venu de reformer le système des rabais et les mécanismes de correction et les corrections des mécanismes de correction où personne ne comprend ce qui se passe. Je crois qu’au monde il y aura peut-être quatre ou cinq personnes qui comprennent notre système de rabais, contre-rabais et correction de rabais. C’est vraiment d’une complexité infinie. Nous allons proposer un système beaucoup plus claire, plus juste, plus transparent. Dans le nouveau système, il n’y a pas de place pour la notion de “juste retour”. Solidarité implique que ceux qui sont relativement plus riches et prospères contribuent relativement plus. Mais solidarité implique aussi que des contributions nationales ne peuvent devenir disproportionnées au regard de la richesse relative du pays. Donc on aura un système de correction pour les pays qui seraient forcés à un niveau d’effort disproportionné par rapport à leur prospérité relative”.

    One looks forward to the “système de correction” when it is proposed.

    When he says that there are only four or five people in the world who understand the system of rebates unleashed by the introduction of the UK rebate, he should have increased the figure to nine or ten to include one in each of the six major capitals (responsible for 75% of the EU’s economic activity and expenditure) – with two in London, including the Prime Minister – and the others in the three smaller countries who think their net contribution is too high viz. The Netherlands, Sweden and Austria (the last tagging along with Germany).

    However, more seriously, the overall Commission effort in relation to the MFF is very impressive (and the reaction of the gaggle of puny politicians guiding the destinies of Europe at the moment equally unimpressive).

    N.B. In particular, the following.

    “For example, we propose to allow for a temporary increase in the co-financing rate by 5-10% when a Member State is under a financial assistance programme to help with the fiscal consolidation efforts in these countries either in euro area or outside euro area”.

    http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/11/487&format=HTML&aged=0&language=EN&guiLanguage=en

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