Brussels wants EU taxes to fuel budget

Barroso Budget picnik.jpg

The European Commission listed yesterday (19 October) a number of options to fuel the EU's future budget, which is currently funded overwhelmingly by member states. An EU VAT, a tax on air transport or a share of new financial, corporate or energy taxes are among the possible options.

The options listed are not definitive and are intended to serve as a basis for discussion when the EU launches negotiations next year over its next long-term budget for 2014-2020.

"The Commission does not believe that the current mix [of resources] is appropriate," reads a note issued by the EU executive which underlines that almost 90% of the budget is directly funded by member states.

"Not only does this go against the spirit of the Treaties but this gave birth to the bitter debates about 'net contributors' and the complex concepts of rebates" which have been awarded to the UK, but also to Sweden, the Netherlands, Austria and Germany, argues the Commission.

This situation tends to favour "instruments with geographically pre-allocated financial envelopes rather than those with the greatest EU added value," the Commission concludes.

In view of this, Brussels is proposing to increase its own resources for the next long-term budgetary period in 2014-2020. In other words, the Commission wants funds which it can obtain directly instead of depending on member states for financial support.

Indeed, the global economic downturn has put member states' budgets under pressure, leading to austerity measures in almost every EU country, and Brussels is likewise urged to reduce its expenses.

UK Business Secretary Vince Cable recently warned of a "backlash" across Europe if citizens are hit with cutbacks while Brussels' budget is untouched. "At a time when national governments have to make very deep cuts, people can't understand why the Commission and Parliament would want to protect the EU budget," he said.

Moreover, the European Union's only 'own resource', which comes from import duties, is gradually decreasing as a consequence of the lower tariffs applied by the EU on imported products.

As a follow-up to a number of ideas circulated in recent months, Brussels launched a budgetary review that proposes new own resources while at the same time eliminates one of the current levies imposed on member states' incomes.

Towards an EU VAT?

One of the Commission's most surprising proposals concerns the introduction of an EU Value Added Tax (VAT). Currently Brussels applies a levy on national VATs, which brings in something like €14 billion per year, but it reduces member states' incomes. 

The proposal foresees replacing the current levy with a direct EU VAT. This would lower the burden on member states, although it is likely to increase the burden on citizens. 

In an annex to the proposal, the Commission says that if the VAT were applied at a 1% rate across the EU, "combined with elimination of the existing VAT-based resource," it would bring to the EU coffers something like €41 billion a year. These figures result from a study carried out in 2004.

Other options

"The Commission puts forward the option of reducing member states' contributions by abolishing the VAT-based own resource and progressively introducing one or several new own resources as a replacement," reads a note from the EU executive.

The list of alternative 'own resources' suggested by the Commission is long, but "non-exhaustive," says the Commission.

A possible candidate for new own resources could be a share of a financial transaction or financial activities tax. Of the two, the first appears unlikely to be applied, as the Commission itself made clear at the beginning of October, while the second option also seems controversial.

Another option involves collecting the financial benefits of "auctioning greenhouse gas emission allowances". "An EU charge related to air transport" is also under consideration, following similar moves adopted in some member states.

"A share of an EU energy tax or of an EU corporate income tax" was proposed as well but opposition will likely be strong.

UK rebate back on the table

The Commission proposal also puts the UK's controversial EU rebate back on the table, saying it needs to be scrapped.

An annex to the Commission proposal reveals that respondents to a public consultation indicated "very heavy opposition" to "correction mechanisms" such as the UK's current rebate, which is worth €3.5 billion each year.

The issue risks splitting the UK government coalition between Prime Minister David Cameron's Conservative party and the normally pro-European Liberal Democrats.

Bill Cash, the Conservative party chairman of the House of Commons' European scrutiny committee, signalled on his website that MPs would pressure Cameron to draw a red line on the rebate ahead of an EU summit next week.

"This must not only be refused on the basis of not giving new powers to the EU but we have to have a referendum," Cash said. "With the rebate and tax proposals, the EU is making demands that are completely unacceptable to the British people."

"Europe and the world are changing," said EU Budget Commissioner Janusz Lewandowski. "We must make sure that the EU budget is shaped to serve 500 million European citizens," he added.

Joseph Daul, chairman of the centre-right European People's Party (EPP), the largest group in the European Parliament, supported the Commission proposal. "Our states can even make savings and lower their contributions to the Community budget, if they accept that Europe changes the financial system, which is today obsolete, and benefits from its own resources."

Arnaldo Abruzzini, secretary-general of Eurochambres, the European association of chambers of commerce, said in a statement that businesses trusted that their recommendation would "give teeth" to the growth principles included in the EU Budget Review, and "resonate strongly" in future EU budget negotiations, following the results of the associations' survey of business opinion.

A survey of hundreds of businesses showed that their 'dream budget' would see a quarter of the next EU budget being allocated to competitiveness action in the fields of education, training, innovation and research- more than doubling its current level.

Common Agricultural Policy spending would be halved, resources devoted to the 'citizenship, freedom, security and justice' heading would increase eight-fold and the 'EU as a global player' budget would see a 50% increase, its statement read.

Speaking to EURACTIV in an interview, Tony Long, director of the WWF's European Policy Office, said cuts to the EU budget "would not be welcome" as they would likely hit environmental expenditures, which are already "not very high".

"The EU budget currently accounts for 2% of public expenditure in Europe. It is difficult to see how cutting into this relatively small amount is going to make much difference in the overall scheme of things."

"The public goods of climate and biodiversity require a truly European approach to be managed efficiently and sustainably […] If this means returning more control of EU expenditure to Brussels, so be it."

The European Union budget is currently funded mainly with resources that come from member states, with only a limited percentage coming from the EU's own resources.

The three pillars of the EU budget are:

  • A resource based on gross national income (GNI) which is a uniform percentage rate applied to the GNI of each member state. This is the largest source of revenue and accounts for around 76% of total revenue;
  • Traditional own resources, consisting of duties that are charged on imports of products coming from a non-EU state. They bring in approximately 12% of total revenue;
  • A resource based on value added tax (VAT), which is a uniform percentage rate that is applied to each member state's harmonised VAT revenue. The VAT-based resource accounts for 11% of total revenue.
  • Mid-2011: Commission to propose Multiannual Financial Framework outlining details of EU budget allocations.
  • 2012-2013: EU to finalise budget for 2014-2020.

Subscribe to our newsletters


Want to know what's going on in the EU Capitals daily? Subscribe now to our new 9am newsletter.