How to dissociate resources from expenditures?

The problem with net balances is they clearly link EU resources to expenditures. An efficient resources system should, with rare exceptions, be completely dissociated from the allocation of expenditure. In efficient national revenue systems, the public does not have an a priori claim for a return of the tax contribution. In most international organisations there is no connection between the funding for the organisation and the operations of the organisation. The EU is, from the point of view of an international organisation, rather unique. Some EU Member States contribute similar sums to international aid as to the EU budget, and they do not request that aid assistance be given to them in exchange. In 2014, the UK government spent close to 0.7% of its GNI on development aid, meeting the 0.7% goal. No net return was required. Therefore, in terms of net contributions, the UK has offered more in foreign aid than it has contributed to the EU budget, and so have other Member States, such as Denmark and the Netherlands. Why are contributions to the EU budget so controversial then? It would seem that Member States consider that some of the EU budget is not spent efficiently on worthwhile objectives.

Undoubtedly, some EU policies are very controversial, and the demands for rebates based on those policies are understandable, at least from a political point of view. Yet the present system of corrections is not conducive to any rational solution, but rather a worsening of the rationale for the budget. The formulas for the UK rebate and other corrections are not based on any specific expenditure item. The UK rebate is calculated on the aggregate contribution and returns on all internal policies of the EU, including administrative expenditure. This formula makes it close to impossible to discuss the substance of the matter, e.g. finding new policy solutions to the CAP design or agreeing on aspects of the EU regional policy.

Consequently, there is a need to link corrections directly, and with a justification, to the policy area that is under question. That brings us to the notion of selective correction instruments that target and review the financing of specific policies.

9.2.1 Removing headings from rebates and net balance calculations

Presently, the UK rebate, and by proxy all other rebates, reduce the contributions of Member States to policies of an intrinsic European character and high EU added value, such as for

heading 3a “Freedom, security and justice”, research and development, support for competitiveness, the trans-European networks and support for the environment. Member States are not questioning the value of these policies.

It is thus rational to exclude such headings from the calculation of any rebate. If that were done, the net balance issue would be fought on specific policy matters, creating a more rational link between policies and the problem of financing them. Any corrections – be it rebates, lump-sum transfers or any other measure agreed for the benefit of any particular country – would be undertaken for the specific policies. The rebate or transfer would be decided by the Council based on a methodology related to the costs of the policies in the budget. This would be in line with the Commission’s own declaration in a staff document accompanying the proposals for new resources in 2011. More specifically, it stated that the “correction mechanism will need to be carefully justified, not only by way of debatable accounting measurements, but in view of the overall balance of benefits brought by the EU budget and policies”,⁵⁸ a condition the European Commission did not follow in the actual proposal, as the Court of Auditors correctly points out.⁵⁹ The selection of the headings to keep in or out of any correction mechanism would first be determined by the nature and EU added value of the policies. That is easier said than done.

Tarschys (2005 and 2011), Núñez Ferrer and Tarschys (2012) and Heinemann (2015) address the difficulty of conceptualising what EU added value means in practice. Without clear criteria most expenditures can be specified as generating ‘EU added value’. Maybe the present combined pressures in the areas of energy, climate, security, competitiveness and economic growth are already hinting that a limited budget needs a flexible approach to how added value changes with circumstances.

An agreement on those parts of the budget that address EU added value would need to be guided by a number of criteria:

 Is the value generated higher than would be the case from separate national actions?

 Who are the beneficiaries of these actions and is the distribution of funding and risk between the public and private sector appropriate?⁶⁰

 Related to the above, what is the public good nature of the investment?

 What is the cross-border element of the investment?

 Are the costs in line with the proportionality principle?

In the case of support for cohesion, the funding is provided to support the financial burden of poorer countries to develop their economies and to achieve EU standards and objectives. In this case, for more local added value, it is important to ask the following questions:

58 See European Commission (2011a), which accompanies the amended proposal for a Council Decision, p.

44.

59 See the Court of Auditors, Opinion No. 2/2012 of 20 March 2012, point 43.

60 The word ‘appropriate’ is used, because in practice it is very difficult to find the ‘correct’ distribution.

Financial instruments are one of the modes today in the search for balanced risk approaches.

 Are the investments undertaken having a real impact on the economy or assisting the achievement of EU standards and objectives?

 Is the project in line with the additionality principle?

 Is the project in line with the proportionality principle?

 Is the financing in line with a ‘financial’ subsidiarity/solidarity principle, i.e. the local financial means do not allow the investment to perform?

These are just some of the questions that need consideration when reviewing the EU budget.

Measures will need to be taken to ensure disagreements on the expenditure side are dissociated from the resources, putting an end to the net balance approach to the EU budget.

Another aspect that can be taken into account is the potential of common policies to generate savings for Member States. With the crisis, the Member States called for the EU to reflect efforts to cut national budgets by cutting the EU budget expenditures. This seemingly reasonable request is contrary to the nature of the EU budget. The rigid and mostly pre-allocated funding structure impedes such ‘cuts’. In addition, most of the expenditure is based on multiannual programmes with signed commitments. In the end, the only areas where restrictive measures could be undertaken are budget lines that are not pre-allocated, generally those with higher EU added value that reduce the cost of action compared with separate national actions. In the same manner that the benefits of EU membership have largely been ignored in negotiations on the EU budget resources, economies of scale and savings have not been properly assessed.

While a lot of work and analysis is needed, there are headings that are easy to exclude from net balance calculations. Of course, those headings already outside the UK correction mechanism should be excluded, such as all expenditures for external action.

Heading 1a – Competitiveness for growth and jobs

This heading is by and large pursuing policies with EU added value and should not be part of a rebate system. In addition, many of these policies are for the benefit of net contributors and it is strange that it is included in the present UK rebate, as the country is a considerable beneficiary.

Heading 1b – Economic, social and territorial cohesion

This policy is part of the principle of solidarity of the EU and while the policy may need further refinement, many of its objectives are structured today to achieve EU objectives and standards often defined by more advanced, wealthier EU countries. It is therefore justifiable that less developed regions are supported to pursue those objectives. Developing regions that lag behind can also improve social cohesion, which has an added value for the EU.

Undoubtedly, improvements can always be made, but already the policy’s focus, strategic quality and its controls have improved markedly in the last two decades.

Heading 2 – Sustainable growth and natural resources

This heading and particularly its sub-heading “Market-related expenditure and direct payments”

of the CAP, is certainly by far the most controversial in the budget. The UK has pointed out numerous times that the CAP is at the core of the justification for the rebate. There is a rationale for this claim, as the policy was designed as a support system benefiting certain farm structures and products more than others at its inception, and the present support system is still linked to

the original distribution. CAP reforms and the decoupling of support did not remove the original distribution bias. The funding distribution is still tied to historical levels and to the provision of support either by farm or region.

The UK, because of its farm structures and products, benefited and still benefits less than other Member States, which has led to the net contribution dispute that triggered the rebate. Studies have shown that the CAP is a regressive distributional policy (see Núñez Ferrer and Kaditi, 2007) at the farm level as well as in terms of the GDP per capita of countries. Despite the fact that the CAP is presented as support for a struggling sector, the relationship between the added value of farms and the support level does not show solidarity with farmers in need. This anomaly ensures that some wealthy Member States are low net contributors.

Other sub-headings, such as the LIFE Programme and partially the rural development funds, when clearly focused on attaining the objectives and standards of the EU, can be regarded as having EU added value.

Heading 3 – Security and citizenship

This heading is plainly of high EU added value and is surprisingly underfunded, as the migration crisis has exposed. It is a policy that many academics view as suffering from the incoherent logic of the net balance approach to the EU budget. Including this heading in the rebate calculations makes little sense. It is possible that those Member States that have opted out of Schengen or specific provisions would consider a rebate justifiable. Yet, having some Member States not participate also generates costs for the overall system.

Heading 5 – Administration

It is reasonable to exclude the administrative expenditure from any correction mechanism, as the EU’s administration has the competences that Member States have bestowed on it. It does not seem rational to have any correction for such expenditure. It may be that for the future, a slight differentiation in contributions could be agreed for areas where a Member State does not participate in a policy (actions under enhanced cooperation), but the impacts are bound to be minimal.