The Treaty of Rome, and indeed all of the European Treaties since then, stipulated that the EEC would have its own budget and that it would be financed by own resources. Initially financed by the revenues from customs duties and levies on agricultural imports – in line with the two main areas of European integration, the single market and the CAP – the EU budget progressively drifted away from ‘genuine’ own resources towards a mode of financing essentially based on national contributions. This occurred first with the own resources derived from VAT, and then with the currently dominant resources based on GNI. The immediate cause of this progressive change in the nature of the financing was the insufficiency of revenue from the initial instruments, due to both the increasing size of the budget during the 1970s and 1980s, and the decline in the yields of customs tariffs and agricultural levies. This annex recalls the major steps and decisions leading to the current financing structure.
The pros and cons of genuine own resources vs GNI-based national contributions are discussed at length in the literature,73 and in various reports by the European Commission and the European Parliament. This annex analyses the strengths and weaknesses of existing budget resources, such aspects of the current EU budgetary procedure as the periodicity of the MFF, the resource ceiling and the budget balancing mechanisms are taken into account.
HISTORICAL ANALYSIS OF OWN RESOURCES
At origin of the EEC, the principle of financing the budget of the Community was stated in Art.
201 of the Treaty of Rome: “without prejudice to other revenue, the budget shall be financed wholly from own resources”. From 1958 to 1970, the European budgets were exclusively financed by Member States’ contributions, but this mechanism was considered temporary. Yet new proposals by the Commission to develop own resources and to improve Community governance (with additional budgetary powers given to the European Parliament and an increased role for the Commission) were the starting point of the first institutional gridlock. In 1965, France, boycotting European institutions (in the Empty Chair crisis), manifested its opposition to majority voting being enforced in the Council. Such a development was considered an unacceptable loss of sovereignty. Some months later, a compromise was presented by Luxembourg Prime Minister and President of the Council, Pierre Werner. This Luxembourg compromise recognised the unanimity rule pertaining to ‘vital’ interests of Member States.
Consequently, the right to veto initiatives has limited the actions of the European Commission and has led to inertia in the process of integration. In 1970, the Council adopted a decision to assign finance to a single budget (following the Merger Treaty of 1965) through ‘traditional’ own resources (agricultural levies and customs duties) and a resource based on VAT. The need to harmonise the VAT base resulted in a delay in the collection of VAT until 1979.
Interestingly, the European Commission proposed two methods to put this policy into force, the returns method (also called ‘base-on-base’ or the ‘declaration method’) and the revenue method (also called the ‘statistical method’). The former method implied that the EU percentage of the VAT would be written on any invoice. The advantage of this approach was transparency, establishing a direct link between the Union and taxpayers. The statistical method, consisting of applying the EU percentage on the total value of goods, was eventually adopted because of the
73 They are summarised in, e.g. Cattoir (2006), Le Cacheux (2007), Begg et al. (2008), Haug et al. (2011), Núñez Ferrer et al. (2007) and Núñez Ferrer (2008) and Cipriani (2007, 2010 and 2014).
high administrative costs of the declaration method and also certainly because of Member States’ opposition. The Cornelissen Report of 1985 pointed out the position of the Parliament in this discussion:
Can parliament tolerate the fact that revenue from VAT is being increasingly watered down to a national financial contribution following the necessary abandonment of the principle of the uniform VAT rate and can it accept that the establishment of the uniform VAT base is ultimately reduced to a statistical calculation? Or must every effort be made in connection with the calculation of the VAT base to revive the communities’ own resources system and the financial autonomy of the Community which is dependent thereupon?
Despite its apparent success during the 1980s (Figure A-1), this resource became unpopular among some Member States. To illustrate the opposition, we successively analyse changes that have been implemented to the tax base and to the tax rate.
Figure A-1. Shares of resources over time
Initially, the tax base was capped at 55% of GDP. But this scheme was considered unfair for poor countries and in 1995 the limit was set at 50% of GNP for states with a per capita GNP below 90% of the Community average. Between 1995 and 1999, this exception became the rule: the rate of 50% was extended to all countries.
Concerning the tax rate, the Own Resources Decision of 1970 limited the maximum call-in rate to 1% of the base. The Own Resources Decision (of 1985) raised the ceiling to 1.4%, to coincide with the accession of Spain and Portugal. This increase was designed to meet the costs of enlargement. The Own Resources Decision of 2000 finally cut the maximum call-in rate to 0.5%
of the harmonised and capped VAT base. Lastly, in 2007 the call rate was reduced to the current level of 0.3%, with an additional rebate for Germany (0.15%), Sweden (0.1%), the Netherlands (0.1%) and Austria (0.225%).
Almost immediately after its implementation, it became clear that the VAT system was inadequate to finance the Union. Since the 1980s, increasing expenditures have triggered discussions on new sources of revenue. In 1988, as part of preparations for the first financial perspective, the European Council agreed to establish a new resource, consisting of direct
0 20 40 60 80
1980
1987
1989
1993 2000
2012
VAT-based own resources Traditional own resources GNI-based own resources
transfers. To reduce the growth of expenditures, the own resources were also subjected to an annual ceiling of 1.2% of GDP in 1993, later changed to 1.27% of GNI in 1999.
What is clear about the trend over the last two decades is that the proportion of funding raised from resources explicitly ‘owned’ at the EU level has diminished markedly, while the share of intergovernmental transfers has grown. This evolution raises two main issues. First, the progressive erosion of the VAT resource has cast doubt on its continued use, especially as the harmonisation process has broken the direct link to what VAT actually raises in each Member State. Second, the increasing reliance on intergovernmental transfers, rather than on genuine EU revenue instruments, is seen by many as problematic. The GNI resource in particular has been subject to considerable criticism, yet it manifestly remains the preferred option for many Member States.
BUDGETARY BALANCES
Figures A2 through A10 present different aspects of the budgetary balances (in € million and as shares of GNI), as well the financial transfers generated by the UK correction and the additional corrections linked to it (the impact of reduced VAT rates or lump-sum concessions through expenditure policies, e.g. additional funding for Poland, are not included).
Figure A-2. Member States’ shares of EU budget expenditure, 2000–06 and 2007–13
BE 6%
BG 0%
CZ 1% DK
2%
DE
13% EE
0%
IE EL 3%
6%
ES FR 16%
HR 15%
0%
IT CY 12%
0%
LV 0%
LT 0%
LU 1%
HU 1%
MT
0% NL
2%
AT 2%
PL 2%
PT 4%
RO 0%
SI 0%
SK 0%
FI 1%
SE 2%
UK 8%
2000-2006
Source: Financial Reports, European Commission.
Figures under 1% are displayed as 0%
Figure A-3. Member States’ shares of contributions to the EU budget (excluding TOR), 2000–
13
BE 6%
BG 1%
CZ 3% DK
1%
DE 11%
EE 1%
IE EL 2%
6%
ES 11%
FR 12%
HR 0%
IT 9%
CY 0%
LV 1%
LT 1%
LU 1%
HU 3%
MT 0%
NL 2%
AT 2%
PL 10%
PT 4%
RO 3%
SI 1%
SK 1%
FI 1% SE
1%
UK 6%
2007-2013
BE 3% CZ
1% DK 2%
DE 22%
EE 0% IE EL 1%
ES 2%
9%
FR 18%
IT CY 14%
0%
LV 0%
LT 0%
LU 0%
HU 1%
MT
0% NL
5%
AT 2%
PL 2%
PT 2%
SI 0%
SK 0%
FI 2% SE
3%
UK 11%
2000-2007
Source: Financial Reports, European Commission.
Figures under 1% are displayed as 0%
Figure A-4. Average, annual, operational budgetary balances (€ million), 2000–06
Source: Financial Reports, European Commission.
BE 3% BG
0%
CZ 1%
DK 2%
DE
20% EE
0%
IE EL 1%
ES 2%
9%
FR 18%
HR 0%
IT 14%
CY 0%
LV 0%
LT 0%
LU 0%
HU 1%
MT 0%
NL 4%
AT 2%
PL 3%
PT 1%
RO 1%
SI
0% SK 1%
FI 2%
SE 3%
UK 11%
2007-2013
Figure A-5. Average, annual, operational budgetary balances (€ million), 2007–13
Source: Financial Reports, European Commission.
Figure A-6. Average, annual, operational budgetary balances (% of GNI), 2000–06
Source: Financial Reports, European Commission.
Figure A-7. Average, annual, operational budgetary balances (% of GNI), 2007–13
Source: Financial Reports, European Commission.
Figure A-8. Average, annual, operational budgetary balances (€ million), 2000–13
Source: Financial Reports, European Commission.
Figure A-9. Average, annual, operational budgetary balances (% of GNI), 2000–13
Source: Financial Reports, European Commission.
Figure A-10. Shares of the correction in total own resources, 2013
Source: EU Budget 2013, Financial Report, European Commission (2014c).
-30%
-20%
-10%
0%
10%
20%
BE BG CZ DK DE EE IE EL ES FR HR IT CY LV LT LU HU MT NL AT PL PT RO SI SK FI SE
Table A-1. Operating budgetary balances (€ million), 2007–13
2007 2008 2009 2010 2011 2012 2013
BE -868,2 -720,6 -1.663,9 -1.466,4 -1.369,6 -1.493,7 -1.541,1
BG +335,1 +669,6 +624,2 +895,5 +725,4 +1.329,7 +1.529,0
CZ +656,7 +1.178,0 +1.702,5 +2.079,3 +1.455,2 +3.045,2 +3.401,1
DK -604,4 -543,2 -969,5 -615,3 -836,6 -1.126,0 -1.277,1
DE -7.415,2 -8.774,3 -6.357,5 -9.223,6 -9.002,5 -11.953,8 -13.824,8
EE +226,2 +227,4 +573,0 +672,7 +350,4 +785,3 +771,4
IE +662,1 +566,1 -47,5 +803,9 +383,8 +670,6 +279,1
EL +5.437,2 +6.279,7 +3.121,0 +3.597,4 +4.622,6 +4.544,9 +5.340,7 ES +3.651,8 +2.813,2 +1.181,7 +4.100,9 +2.995,0 +3.999,0 +3.058,3 FR -2.997,3 -3.842,7 -5.872,7 -5.534,8 -6.405,8 -8.297,5 -8.445,7
HR +49,6
IT -2.013,5 -4.101,4 -5.058,5 -4.534,0 -5.933,0 -5.058,1 -3.789,9
CY -10,5 -17,7 -2,3 +10,6 +6,9 -25,2 +40,4
LV +488,8 +407,0 +501,5 +674,2 +731,3 +955,9 +801,2
LT +793,2 +842,6 +1.493,3 +1.358,4 +1.368,0 +1.514,0 +1.514,5
LU -139,8 -22,1 -100,2 -41,9 -75,0 -79,5 -69,4
HU +1.605,9 +1.111,7 +2.719,4 +2.748,4 +4.418,3 +3.280,4 +4.954,5
MT +28,1 +30,0 +8,6 +52,9 +67,0 +71,4 +88,0
NL -2.864,3 -2.678,2 +117,7 -1.833,1 -2.214,0 -2.364,5 -2.675,1
AT -563,2 -356,4 -402,1 -677,0 -805,1 -1.073,3 -1.251,7
PL +5.136,4 +4.441,7 +6.337,1 +8.427,5 +10.975,1 +11.997,2 +12.237,1 PT +2.474,4 +2.695,1 +2.150,7 +2.622,6 +2.983,7 +5.027,2 +4.416,7 RO +595,8 +1.581,0 +1.692,5 +1.245,2 +1.451,5 +2.031,6 +4.142,8
SI +88,6 +113,8 +241,9 +424,1 +490,1 +572,2 +429,2
SK +617,8 +725,6 +542,1 +1.349,6 +1.160,6 +1.597,0 +1.287,4
FI -171,6 -318,5 -544,2 -300,2 -652,1 -658,8 -604,0
SE -994,8 -1.463,1 -85,6 -1.211,4 -1.325,4 -1.925,1 -2.220,7
UK -4.155,3 -844,3 -1.903,3 -5.625,9 -5.565,6 -7.366,1 -8.641,7 Source: DG Budget
Table A-2. Operating budgetary balances (% of GNI), 2007–13
2007 2008 2009 2010 2011 2012 2013
BE -0,25% -0,20% -0,48% -0,39% -0,36% -0,38% -0,39%
BG +1,13% +1,92% +1,77% +2,50% +1,88% +3,32% +3,80%
CZ +0,51% +0,78% +1,23% +1,44% +0,96% +2,02% +2,33%
DK -0,26% -0,22% -0,42% -0,25% -0,33% -0,44% -0,49%
DE -0,29% -0,34% -0,25% -0,35% -0,33% -0,42% -0,48%
EE +1,50% +1,46% +4,18% +4,82% +2,25% +4,64% +4,22%
IE +0,39% +0,35% -0,03% +0,58% +0,27% +0,47% +0,19%
EL +2,40% +2,68% +1,35% +1,62% +2,29% +2,33% +2,93%
ES +0,35% +0,26% +0,11% +0,38% +0,28% +0,38% +0,29%
FR -0,15% -0,19% -0,30% -0,27% -0,30% -0,39% -0,39%
HR +0,12%
IT -0,12% -0,25% -0,32% -0,28% -0,36% -0,31% -0,24%
CY -0,06% -0,10% -0,01% +0,06% +0,03% -0,13% +0,23%
LV +2,23% +1,69% +2,49% +3,70% +3,62% +4,33% +3,46%
LT +2,84% +2,67% +5,44% +4,94% +4,55% +4,69% +4,45%
LU -0,48% -0,07% -0,42% -0,16% -0,27% -0,28% -0,24%
HU +1,70% +1,11% +3,05% +2,95% +4,62% +3,47% +5,08%
MT +0,50% +0,50% +0,15% +0,84% +1,00% +1,03% +1,21%
NL -0,47% -0,43% +0,02% -0,29% -0,34% -0,36% -0,42%
AT -0,20% -0,12% -0,14% -0,23% -0,26% -0,34% -0,39%
PL +1,70% +1,25% +2,09% +2,43% +3,03% +3,24% +3,22%
PT +1,46% +1,57% +1,27% +1,51% +1,73% +3,06% +2,63%
RO +0,49% +1,14% +1,42% +0,99% +1,10% +1,55% +2,94%
SI +0,26% +0,31% +0,68% +1,18% +1,34% +1,60% +1,20%
SK +1,13% +1,13% +0,85% +2,06% +1,69% +2,26% +1,78%
FI -0,09% -0,16% -0,30% -0,16% -0,33% -0,33% -0,30%
SE -0,27% -0,40% -0,03% -0,32% -0,32% -0,44% -0,49%
UK -0,19% -0,04% -0,11% -0,31% -0,30% -0,36% -0,43%
Source:Dg Budget