The current system of EU budgeting is doomed to fail

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Ivailo Kalfin [Georgi Gotev]

If a household spends its budget in the same way as the EU spends its money, family members would first cheat, and then revolt, writes Ivailo Kalfin.

Ivailo Kalfin is a member of the High Level Group on Own Resources.

Imagine that you have an agreement in your family about each members’ personal budget, and the corresponding obligations of the family to ensure this is the case.

First, all major decisions are taken by unanimity. Second – the family decides that whatever happens, members cannot spend more than 1.23% of what the family earns, no member is allowed to take credits, and the whole cash flow has to go to one family account, managed commonly, without allowing any flexibility to the individual members. Third, the family decides your budget 7 years in advance and it is usually below the self-imposed ceiling. The idea is to guarantee long-term sustainability of the family’s priorities. Fourth, every year the family decides how much you can spend for the next 12 months to meet your obligations to the family.

Fifth, the budget is set for 7 years and goes to expenditures for the family needs. If you are short of funds, that happens all the time because of this mechanism, your only option is to delay some of the payments. In such a case you go to the fifth decision for the same money – to eventually increase your annual budget but only in the frames of the 7 years limit.

You would ask what if unexpected expenditures are needed – for example to increase the security of the family house, or to help a member who is temporarily out of work? Easy – the family council promises, because this is expected but then the promise is not properly financed and usually fails because of financial constraints. Oh, yes – and do not forget that you can spend no more than 6% of your individual budget for personal needs – the rest has to go for predetermined family policies.

Difficult to observe all that? Indeed – therefore the family members start cheating – no bad feelings – just in the family. Some members believe that they give too much to the family, compared to others and they ask for a rebate – leaving them some money at their disposal.  There is also another trick – since the family is enlarging and consensus decisions are more and more difficult, the family budget is not negotiated in common but in bilateral talks with the senior member. In order to achieve consensus, the senior member makes promises to the individual members that some of their needs will be financed from the common budget. The result is a total lack of transparency, which makes all members revolt.

This is where we are with the EU budget. National authorities decide four times on spending the same public funds. Each decision doesn’t bring anything but tension. The current multiannual budget was adopted in 2013 and has to last until 2020 but already fails responding to the unforeseen challenges – security and anti-terror, migration pressure, the recovery of the EU economy. The heads of state of the EU members keep making political promises, but fail to provide the instruments needed to make these promises reality. This disappoints many European citizens, who tend to blame remote EU institutions, but not their own governments. This current system of public finances is doomed to fail.

It is urgently needed to reopen the debate about the EU budget and the fiscal instruments as a whole. There are intrinsic reasons – the budget is not flexible enough and therefore not in a position to finance the priorities and the new challenges. An increase of the genuine own resources – not passing through the intermediary of the national budgets is an important part of the change. Now member states decide once in seven years about their national envelopes – or what they get from the EU budget and keep making annual, sometimes more often decisions about the funding. You cannot expect the EU budget to provide to your country what is promised, to meet the newly emerging challenges and not to ask you for additional contribution.

I am not advocating for a larger EU budget or for increasing the burden on tax payers. The opposite – channeling some revenues directly to the EU budget would diminish the national contributions, respectively the expenditures from the national budgets. This is bringing the principles of financing the EU policies to the original ideas of the Union – to be financed from its own revenues. The GNI based national contributions appeared at a much later stage, when the trade liberalization decreased the revenues from custom duties and the EU started a large scale cohesion policy. Increasing the share of the own resources to a level higher than the current 20% would not mean less control from the member states – just one or two decisions on the same money will do, instead of 4 or 5.

Scrapping the perverse system of rebates and exceptions will make the EU budget much more transparent and understandable to the taxpayers. Considering new sources of revenue would also make sense. After the court decision on Apple, the borderline between state aid and autonomous tax policy is very thin. The issues of a common tax base and a minimum corporate tax rate in the single market become pertinent. In terms of carbon emissions, in case a third country wants to increase its price competitiveness by not engaging with the environment goals and sell on the single market at the same time, there might be a tax on their products that would prevent competition negative to the environment.

But parallel to the internal reasons, there are also external ones that make the deep reconsideration of the budget principles an emergent need. The creation of new fiscal instruments, like an eventual eurozone budget or guarantee instrument, the ESM, large financial instruments like EFSI suggest a different structure of the EU public finances. At the end of the day, the same taxpayers are paying it all.

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