The European Commission yesterday (29 June) presented long-awaited proposals for the EU's next seven-year budget (2014-2020). In a bid to reduce national contributions, the Commission suggested levying new taxes directly, a proposal that was strongly rejected by the UK, which labelled it "unrealistic".
Background
The EU's current long-term budget for the period 2007-2013 envisages commitments from member states of up to €976 billion. Actual payments into the EU coffers amount to €925 billion.
The EU budget is mainly funded through direct financial transfers from member states calculated on the basis of their Gross National Income (GNI) instead of the more common Gross Domestic Product (GDP).
Commitments and payments respectively represent 1.12% and 1.06% of the EU's overall GNI.
The share of GNI devolved to the EU budget is tiny compared with national budgets, which on average amount to 40% of the EU's GDP. However, the EU budget does not include expenditure on social benefits, pensions, health care or security, which are among the highest costs of national administrations.
On 19 October 2010, the European Commission listed a number of options to fuel the EU's future budget, proposing that Europe decreases the share of funding that comes directly from member states.
To compensate for the shortfall, it proposed EU taxes which could take several forms: a tax on air transport or a share of new financial, corporate or energy taxes, as well as an EU VAT.
José Manuel Barroso, president of the European Commission, proposed to increase the EU budget from the current €976 billion to €1.025 billion for the next seven-year period, which starts in 2014.
This represents a 4.8% increase, which is beyond the average 2% inflation recorded in the last decade.
In a bid to woo member states that are opposed to further rises in the EU budget, the Commission proposed to reduce national contributions, in line with austerity measures adopted across Europe.
In the previous period (2007-2013), each country committed 1.12% of their Gross National Income (GNI) to the EU budget, a contribution that the Commission is proposing to bring down to 1.05%.
"We are proposing an ambitious and at the same time responsible budget," Barroso underlined.
Shifting priorities
The Commission's proposals are conservative in that the share of funding allocated to the EU's two main areas of expenditure – agriculture and regional policy – remain largely unchanged.
Two new areas will benefit from significant new sources of funding – the EU's External Action Service (EEAS), which was introduced after the Lisbon Treaty, and home affairs, which includes border control, security and immigration.
These are partly offset by a planned reduction in administrative spending, a move that is expected to trigger protests from EU civil servants in the coming days.
Separately, an extra €58 billion is earmarked for programmes that are currently covered by the EU budget, such as the European Globalisation Fund or the international nuclear fusion reactor ITER.
If added to the budget, the overall amount of national contributions would increase to €1.083 billion per year on average.
EU VAT and financial transactions tax
But probably the most controversial move is a proposal to raise taxes at EU level, something presented as a way to reduce contributions from national coffers.
Currently, the EU budget is mostly funded through financial transfers from member states.
The first option would be to tap into a European Financial Transactions Tax (FTT), a suggestion Barroso made ahead of a June summit of European leaders. "Ten member states already have mechanisms to tax financial transactions," Barroso argued, adding that without a common EU framework on financial taxation, "we risk breaking the internal market for financial services".
Barroso dismissed criticism that an FTT applied only to the European financial sector would favour the EU's international competitors. "Instead of waiting for everybody to have a financial transactions tax, we thought that is better to have our own and then see if we can create the conditions for a global financial tax," he said.
Moreover, the EU executive suggested introducing a direct Value Added Tax (VAT) at EU level. Currently the Commission receives a levy on national VATs, a system which brings in around €14 billion per year to the EU budget, but reduces member states' incomes. The proposal foresees replacing the current levy with a direct EU VAT, shifting the burden from member states to taxpayers.
In a working document published in October, the Commission said that if the EU VAT was applied at a 1% rate across the EU, "combined with elimination of the existing VAT-based resource," it would bring around €41 billion a year to the EU's coffers.
Positions
The UK government immediately criticised the Commission's proposals, with Downing Street labelling Barroso's call for new taxes as "unrealistic".
In Germany, Liberal Foreign Minister Guido Westerwelle said Berlin was opposed to Commission proposals for an EU tax. "There is no need for such a tax since the EU does not face any financing problems," Westerwelle said, claiming that a majority of EU member states were of the same opinion.
In a statement, the French government vowed to fight to maintain the EU's farm policy funding at current levels and said it was "open to discussion" on finding new resources for the overall EU budget.
"France will not accept any financial framework that would not guarantee a stabilisation of the CAP. The determination of the President [Nicolas Sarkozy] and of the government in this respect is total," said the statement, released by the foreign affairs ministry – which includes European affairs – in conjunction with the budget and agriculture ministries.
On new budget sources, France said it was "ready to work" on the basis of the Commission's proposals, reiterating its support for a financial transaction tax. However, it stressed that the new sources of funding derived from an EU tax should "substitute itself entirely from existing income".
The statement also lashes out at the British and Danish rebates, saying France "has always been against it rebates" and could not envisage their continuation. "Any extension would be unimaginable," the statement said, arguing for "more simplicity, transparency and fairness".
Czech MEP Jan Zahradil, president of the European Conservative and Reformists group (ECR) in the European Parliament, said: "We will fight EU taxes all the way, both on grounds of principle and because we cannot afford them."
"The fact that the EU must come back to national governments every seven years to ask for a new budget acts as the ultimate anchor of accountability. If we grant the EU tax-raising powers then it becomes tantamount to a state. The EU is supposed to be the servant of the member states, not their master," he added.
Jerzy Buzek, president of the European Parliament, which has a key role in passing the EU's long-term budget, welcomed the Commission's proposals.
"The Commission's proposal on the long-term budget for the EU is an intelligent starting point for negotiations. The next Multiannual Financial Framework will be one of the most important in the EU's history. It will set the direction for the Union at an exceptional time when the European project is under pressure from the sovereign debt crisis and from external instability," Buzek commented.
"A system of real own resources would be fairer, more transparent, simpler and equitable. We should also see an end to rebates, exceptions and correction mechanisms that have accumulated within the current system," he added.
Poland, which will hold the rotating presidency of the EU from tomorrow (July 1), published a statement saying "the Commission's communication initiates the negotiations process which will be a challenge for the member states and EU's institutions. Ahead of the EU are many months of hard work but Poland trusts that in the end of this path we will find the European consensus, which in turn will allow the Union to successfully carry out its policies in the years to come".
"Late in the autumn Poland will organise a conference with the participation of the Council, the European Commission, the European Parliament and national parliaments with a view to reflecting on the future of the EU budget and to give a possible new stimulus to the political debate," it added.
Alain Lamassoure MEP (European People's Party; France) supported the Commission's proposal for an EU tax, arguing that the "policies of the future" would need "a European dimension" if the EU was "to compete on an equal footing with the great conquering powers of other continents".
"Tonight marks the opening of what will be the great building site of the next two years," said France's former Europe and budget minister, who argued in favour of opening the debate to the widest audience possible via "a European financial conference that associates fully the national parliament".
Such important decisions, he said, should not be negotiated "in the secrecy of ministerial meetings behind closed doors," Lamassoure insisted.
Oxfam, an international development NGO, welcomed the Commission's support for an FTT, but stressed that the revenues should be used to tackle poverty and climate change.
"It's great news that the Commission has joined the millions of ordinary Europeans who want the financial sector contribute more to society," said Natalia Alonso, head of Oxfam International's EU office. "But this tax will only win popular support if the revenue is used to tackle poverty and climate change – not if it disappears into the general EU budget."
WWF, the global conservation NGO, said the proposed EU budget fell short on the 2020 commitments made by European leaders on climate change, biodiversity and the environment.
"The Commission's proposal on the future EU budget falls short of moving boldly towards a green economy," said Tony Long, director of the WWF's European Policy Office. "The Commission must come out with a more visionary approach in the regulations of each EU fund – to be presented in autumn. Mandatory requirements need to be included to guarantee that EU-funded activities contribute to achieving EU climate and biodiversity targets by 2020 and not undermining them," he said.
Next Steps
- 2011-2012: Member states and European Parliament to discuss and amend Commission's proposals.
- By end 2012: Deadline for approving EU's long-term budget for 2014-2020.