EU BUDGET: EU BUDGET: CONCEPT AND REVIEW CONCEPT AND REVIEW

Mojmir MrakMojmir Mrak

LjubljanaLjubljana4 July 20074 July 2007

AgendaAgendaGeneral concept of General concept of EU public financesEU public finances

– Introduction into EU public financesIntroduction into EU public finances– Medium-term financial perspectiveMedium-term financial perspective (MTFP) (MTFP) – Expenditures of the annual budgetExpenditures of the annual budget– Revenues of the annual budgetRevenues of the annual budget

2007 – 2013 MTFP2007 – 2013 MTFP– Key event before / during the negotiatiationsKey event before / during the negotiatiations– Final agreement and its assessment Final agreement and its assessment

EU budgetary reviewEU budgetary review– EU budgetary review clause EU budgetary review clause – Key dilemmas of the EU budgetary reviewKey dilemmas of the EU budgetary review

A. A. Introduction into Introduction into EU public EU public financesfinances

The first financial armThe first financial arm – budgetary resources – budgetary resources– Strategic course – medium-term financial Strategic course – medium-term financial

perspective perspective – Implementation and operational details – annual Implementation and operational details – annual

budgets budgets The second financial armThe second financial arm – borrowing and – borrowing and

lendinglending

– European Investment Bank (EIB)European Investment Bank (EIB)– European Bank for Reconstruction and European Bank for Reconstruction and

Development (EBRD)Development (EBRD)

B. Medium-term financial perspectiveB. Medium-term financial perspective

Why MTFP have been introducedWhy MTFP have been introduced– Before 1988 there was no MTFP Before 1988 there was no MTFP

– Conflicts between 3 branches of budget authorityConflicts between 3 branches of budget authority

– A new system was necessaryA new system was necessary What is MTFP? What is MTFP?

– An agreement on budget priorities / facilitates the An agreement on budget priorities / facilitates the budgetary procedure budgetary procedure

– A planning instrument for medium-term periodA planning instrument for medium-term period

– Allows predictability of EU expendituresAllows predictability of EU expenditures

– An agreed »cap« on spending below the OR ceilingAn agreed »cap« on spending below the OR ceiling

B. Medium-term financial perspective B. Medium-term financial perspective (II) (II)

What MTFP is not?What MTFP is not?– It is not a multi-annual budget It is not a multi-annual budget – Annual budgetary procedures are still neededAnnual budgetary procedures are still needed– It is not indicative – it sets maximum annual ceiling for It is not indicative – it sets maximum annual ceiling for

each category of spending (»expenditure headings«)each category of spending (»expenditure headings«) Expenditure headings under Expenditure headings under the 2007 – 2013 the 2007 – 2013

MTFP MTFP – H 1: H 1: Stable growthStable growth

CompetitivenessCompetitiveness CohesionCohesion

– H 2: H 2: Natural resourcesNatural resources – H 3: H 3: Freedom, security, justice and citizenshipFreedom, security, justice and citizenship– H 4: H 4: EU as global partnerEU as global partner– H 5: Administration H 5: Administration

CC. Expenditures of the annual . Expenditures of the annual budgetbudget

Expenditures are relatively small compared to Expenditures are relatively small compared to national budget – around 100 bn EUR what is national budget – around 100 bn EUR what is equivalent to around 1% of GNP of the EUequivalent to around 1% of GNP of the EU

Three “types” of expendituresThree “types” of expenditures– Commitment appropriationsCommitment appropriations

– Payment appropriationsPayment appropriations

– PaymentsPayments Why the EU annual budget is so modest? Why the EU annual budget is so modest?

– No »public services« and »sovereignty« spending No »public services« and »sovereignty« spending

– No social security spendingNo social security spending

– No debt burdenNo debt burden

C. Expenditures of the annual C. Expenditures of the annual budget (II)budget (II)

Basic structure of the budgetBasic structure of the budget– Stable growthStable growth – – 4444%; of this%; of this

– Competitiveness (Lisbon strategy) - 9Competitiveness (Lisbon strategy) - 9%% (maily R&D, (maily R&D, education) education)

– Cohesion – 35% Cohesion – 35% Convergence (78% of Convergence (78% of CohesionCohesion)) Regional competitiveness (20% of Regional competitiveness (20% of CohesionCohesion)) Teritorial cooperation (3% of Teritorial cooperation (3% of CohesionCohesion))

– Natural resourcesNatural resources – 4– 466%%; ; of this of this – I. pillarI. pillar – D – Direct payments irect payments and market related expenditures and market related expenditures

(76% of (76% of Natural resourcesNatural resources))

– II. pillarII. pillar – – Rural developmentRural development (22% of (22% of Natural resourcesNatural resources))

C. Expenditures of the annual C. Expenditures of the annual budget (III)budget (III)

Basic structure of the budget (cont.)Basic structure of the budget (cont.)– Freedom, security, justice and citizenshipFreedom, security, justice and citizenship – –

1%; 1%; of thisof this– Fredom, security and justice (50%)Fredom, security and justice (50%)

– Citizenship (50%)Citizenship (50%)

– EU as a global partnerEU as a global partner – – 66%%; ; of thisof this– Development assistance to developing countries (34% of Development assistance to developing countries (34% of

EU as a global partnerEU as a global partner))

– Neighbourhood assistance (22% of Neighbourhood assistance (22% of EU as a global EU as a global partnerpartner))

– Instrument for re-accession Assistance (19% Instrument for re-accession Assistance (19% EU as a EU as a global partnerglobal partner) )

– AdministrationAdministration – – 3%3%

D. Revenues of the annual budgetD. Revenues of the annual budget

Revenue No. 1Revenue No. 1: Traditional own resources (+/- : Traditional own resources (+/- 12%)12%)– Agriculture and sugar levies (+/- 1%)Agriculture and sugar levies (+/- 1%)

– Customs duties (+/- 11%); collection costs – 25% Customs duties (+/- 11%); collection costs – 25% retained by member statesretained by member states

Revenue No. 2Revenue No. 2: Contributions based on the : Contributions based on the value added tax (+/- 14%)value added tax (+/- 14%)

Revenue No. 3Revenue No. 3: Contributions based on the size : Contributions based on the size of member states' GNP (+/- 74%)of member states' GNP (+/- 74%)

Revenue No. 4Revenue No. 4: UK Correction (zero-sum game): UK Correction (zero-sum game)

DD. Revenues of the annual budget (II). Revenues of the annual budget (II)

Calculation of annual budget revenues:Calculation of annual budget revenues:

Total expenditures Total expenditures

minusminus

TOR + contributions based on VAT TOR + contributions based on VAT

==

Total contributions based on GNPTotal contributions based on GNP EU budget must be in equilibrium EU budget must be in equilibrium

EE. Key events . Key events before / during the before / during the 2007 – 2013 MTFP 2007 – 2013 MTFP negotiationsnegotiations

October 2002 – October 2002 – Council agreement about Council agreement about agriculture till 2013 agriculture till 2013

June 2003June 2003 – Sapir report – Sapir report December 2003December 2003 – Letter of the six net payers to – Letter of the six net payers to

the EU budgetthe EU budget February 2004February 2004 – Proposal of the Commission – Proposal of the Commission December 2005December 2005 – Council agreement reached – Council agreement reached April 2006April 2006 – Inter-institutional Agreement – Inter-institutional Agreement

reachedreached

EE. Key events . Key events before / during the before / during the 2007 – 2013 MTFP 2007 – 2013 MTFP negotiationsnegotiations (II) (II)

Group of the six Group of the six net payers net payers (France, UK, (France, UK, Netherlands, Germany, Sweden and Austria)Netherlands, Germany, Sweden and Austria)

Group of “old” member states with positions Group of “old” member states with positions closer to the Commission’s proposal closer to the Commission’s proposal

Group of “old” cohesion states facing Group of “old” cohesion states facing pressure on cohesion funds pressure on cohesion funds

Group of “new” member states putting Group of “new” member states putting cohesion as its top priority cohesion as its top priority

F.F. Final agreement and its assessment Final agreement and its assessment

Commission Commission proposalproposal

(bn EUR)(bn EUR)

Final Final agreementagreement

(bn EUR)(bn EUR)

Cut from the Cut from the Commission’sCommission’s

pproposal (%)roposal (%)

1. Sustainable growth 1. Sustainable growth 462462 338282 -1-177

CompetitivenessCompetitiveness 122122 7744 -3-399

Cohesion Cohesion 340340 303088 --99

2. Natural resources2. Natural resources 400400 337171 --77

3. Citizenship3. Citizenship 2121 1111 --4848

4. EU as a global 4. EU as a global partner (without EDF)partner (without EDF)

6363 5050 --2121

5. Administration5. Administration 5858 5050 -14-14

Total commitmentsTotal commitments 1.0041.004 868644 -14-14

F.F. Final agreement and its Final agreement and its assessment (II) assessment (II)

Expenditure side; Expenditure side; tthe he agreement is very agreement is very close to close to the request of the 6 net payersthe request of the 6 net payers– In the process of negotiations, In the process of negotiations, all expenditure itemsall expenditure items

were reduced, were reduced, but to but to a very a very different extentdifferent extent– The structure of budget expenditures has not The structure of budget expenditures has not

changed substantially from the Agenda 2000 changed substantially from the Agenda 2000 – The main victim of the negotiations is the Lisbon The main victim of the negotiations is the Lisbon

strategy (strategy (de-factode-facto considered as a budgetary reserve) considered as a budgetary reserve)– Cuts in cohesion less drastic ( in the final round of Cuts in cohesion less drastic ( in the final round of

negotiations cuts concentrated on least developed negotiations cuts concentrated on least developed new member states)new member states)

– Minor cuts in a agriculture Minor cuts in a agriculture

F.F. Final agreement and its Final agreement and its assessment (III)assessment (III)

Revenue side; Revenue side; the agreement has not the agreement has not introduced substantive changes from the introduced substantive changes from the Agenda 2000Agenda 2000– Dominance of the GNI funding source continuesDominance of the GNI funding source continues– No “general correction” mechanism introduced No “general correction” mechanism introduced – UK rebate UK rebate reduced reduced but but only only temporarilytemporarily

Revew clause; Revew clause; the agreement asks for major the agreement asks for major revision of all segments of the budgetrevision of all segments of the budget– It was instrumental for making the dealIt was instrumental for making the deal– It acknowledges that something has to be done It acknowledges that something has to be done

with the EU budget with the EU budget

FF. . Final agreement and its Final agreement and its assessment (IV)assessment (IV)

Overall assessment Overall assessment of the agreementof the agreement– It was anIt was an achievement achievement per seper se– Highly Highly pragmatic pragmatic deal tdeal that dhat does oes not address not address

substantive challengessubstantive challenges faced by the EU (lack of faced by the EU (lack of ppolitical willolitical will))

– It is far It is far away from the Commission’s proposalaway from the Commission’s proposal– It is very untransparent (due to numerous It is very untransparent (due to numerous

interventions aimed at fixing net positions)interventions aimed at fixing net positions)– The process was strongly dominated by national The process was strongly dominated by national

priorities and therefore by net positions of priorities and therefore by net positions of individual member states individual member states

– There is a cThere is a clear need for lear need for a a substantive reform substantive reform / / revision revision of theof the EU EU budget budget

GG. . EU budgetary review clauseEU budgetary review clause

The Council asked to Commission to undertake The Council asked to Commission to undertake until 2008 / 2009 a full, wide-ranging review until 2008 / 2009 a full, wide-ranging review covering all aspects of EU spendings, including covering all aspects of EU spendings, including the CAP, and resources, including the EU rebate.the CAP, and resources, including the EU rebate.

The fourth cohesion report from May 2007 and The fourth cohesion report from May 2007 and the agriculture “health check” to be prepared in the agriculture “health check” to be prepared in spring 2008 should not pre-empt decisions of the spring 2008 should not pre-empt decisions of the budgetary reviews budgetary reviews

The review should give an answer how to close The review should give an answer how to close the gap between common objectives of the EU the gap between common objectives of the EU member states and allocation of the EU funds member states and allocation of the EU funds among individual membersamong individual members

GG. . EU budgetary review clause (II)EU budgetary review clause (II) Budgetary review is aimed primarily at post Budgetary review is aimed primarily at post

2013 period, but it does not exclude a possibily 2013 period, but it does not exclude a possibily for certain adjustments already before that for certain adjustments already before that

Though deadline for the review has been set, its Though deadline for the review has been set, its timing depends strongly on several issues timing depends strongly on several issues – EU constitution debate EU constitution debate – Possible reelection of the Commission’s president Possible reelection of the Commission’s president

Expected schedule of eventsExpected schedule of events– Autumn 2007Autumn 2007 – Launch of the the public debate – Launch of the the public debate– Spring 2008Spring 2008 – Wrap-up of the public debate – Wrap-up of the public debate– Spring 2009Spring 2009 – Policy paper prepared by the – Policy paper prepared by the

Commission Commission

HH. . Key dilemmas of the EU Key dilemmas of the EU budgetary reviewbudgetary review

The EU budgetary reform will consist of two The EU budgetary reform will consist of two closely interlinked sets of reformsclosely interlinked sets of reforms– Substance;Substance; reforms that will addreess c reforms that will addreess conceptual onceptual

problems problems of the of the EU budgetEU budgetObjectives of the EU Objectives of the EU budget expendituresbudget expendituresVolume of the Volume of the EU EU budgetbudgetFunding of the Funding of the EU EU budget, including the rebatesbudget, including the rebates

– Procedure;Procedure; reforms that will address the issue of reforms that will address the issue of how to process the EU public financeshow to process the EU public finances

HH. . Key dilemmas of the EU Key dilemmas of the EU budgetary review (II)budgetary review (II)

Objectives Objectives of the EU budget expendituresof the EU budget expenditures– Key dilemmaKey dilemma – what is – what is the main objective of the the main objective of the EU EU budgetbudget??

Is this primarily to achieve commonly agreed EU policies? Is this primarily to achieve commonly agreed EU policies? Is this primarily to redistribute resources among individual member Is this primarily to redistribute resources among individual member

states? states?

– Now, key EU policies, i.e. CAP and cohesion, serve to a large Now, key EU policies, i.e. CAP and cohesion, serve to a large extent for redistribution purposes (they are implemented extent for redistribution purposes (they are implemented through “national envelopes”) and therefore for achieving through “national envelopes”) and therefore for achieving acceptable net budgetary positions acceptable net budgetary positions

– If in future, the EU policies are to be the main objective, If in future, the EU policies are to be the main objective, then according to the economic theory there should be then according to the economic theory there should be significant changes in the structure of the expendituressignificant changes in the structure of the expenditures

– If, however, redistribution is to be the main objective in If, however, redistribution is to be the main objective in future, then a transparent mechanism of cash transfers future, then a transparent mechanism of cash transfers among the member states seems to be a logical solution. among the member states seems to be a logical solution.

GG. . Key dilemmas of the EU Key dilemmas of the EU budgetary review (III)budgetary review (III)

VolumeVolume of the of the EU budget expendituresEU budget expenditures– Key dilemmaKey dilemma – what should be the volume of EU budget – what should be the volume of EU budget

expenditures?expenditures?

– A response to this dilemma is closely related to the dilemma A response to this dilemma is closely related to the dilemma about the EU budget expenditures objectives about the EU budget expenditures objectives

– If EU policies are taken as the main objective, then the total If EU policies are taken as the main objective, then the total volume should be a result of jointly identified priorities volume should be a result of jointly identified priorities taken into account the principle of subsidiaritytaken into account the principle of subsidiarity

– If, however, redistribution is taken as the main priority, If, however, redistribution is taken as the main priority, then decision about the volume is closely interrelated with then decision about the volume is closely interrelated with the net balance acceptancy issuethe net balance acceptancy issue

GG. . Key dilemmas of the EU Key dilemmas of the EU budgetary review (IV)budgetary review (IV)

Funding Funding of the EU budget, including the rebates of the EU budget, including the rebates – Key dilemmaKey dilemma – How to finance the EU budget? Should an – How to finance the EU budget? Should an

EU tax be introduced? If yes, of what kind? EU tax be introduced? If yes, of what kind?

– Now, EU budget is financed primarily through GNI source; Now, EU budget is financed primarily through GNI source; consequently, net budgetary positions dominate negotiationsconsequently, net budgetary positions dominate negotiations

EU budgetary EU budgetary proceduresprocedures– Key dilemmaKey dilemma – How to achieve a better balance between two – How to achieve a better balance between two

opposing principles, i.e. efficiency and legitimacy?opposing principles, i.e. efficiency and legitimacy?

– Reform of the budget procedure has to be looked at from Reform of the budget procedure has to be looked at from the point of view of the existing level of the EU political the point of view of the existing level of the EU political integration. Major changes in this procedure are therefore integration. Major changes in this procedure are therefore closely related to the institutional changes / adjustments closely related to the institutional changes / adjustments within the EU.within the EU.