New Wine in Old Bottles or New Old EU Budget

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In 2018 the European Commission presented its proposal for the EU’s multi-annual financial perspective 2021-2027 as a “new”, “modern” and “focused” budget. Yet, in terms of its expenditure and revenue, the draft EU budget continues to diverge significantly from what would appropriately address current challenges facing the EU27 and contribute to its economic dynamism, welfare and security.

An updated version of late May 2020 proposed only minor changes to the earlier budget draft, despite extraordinary circumstances related to the COVID-19 and the strengthened need to use scarce taxpayers’ money in the most effective way.

Moreover, by proposing an additional 750 billion euro in loans without an appropriate reform of the traditional spending areas, the recent proposal is yet another illustration of how entrenched the deficiencies in the current EU budget are.

The idea of massive borrowing at the expense of future financial obligations of EU taxpayers without budget reform also shows inability of the EU to rise to the current challenges.

The Lithuanian Free Market Institute together with the Network presents a position paper on the European Commission’s proposal for the EU multiannual financial perspective 2021-2027.

The Paper assesses to what extent the newly proposed EU budget reflects the principles of maximizing added-value of the taxpayers’ money, contributing to the goals of the EU and its member states in a rapidly changing global environment and increasing transparency and democratic accountability.

The Paper discusses the size of the proposed EU budget, its revenue and expenditure items, assessing the proposals which form the ongoing negotiations in the EU27 and then suggesting the directions for the future reform of the EU budget.

The Paper draws on the EC’s initial proposal of May 2018 and its recently updated version in the context of the COVID-19 health care and economic crisis. The negotiations, which started after the European Commission presented its proposed EU budget in May 2018, are underway.

The paper is aimed at both policy makers and citizens of the EU27 who are interested in having the EU budget which contributes to the wellbeing and security of citizens in practice rather than in rhetoric.

A Misguided Debate on the Size of the EU Budget

After Brexit the proposal to increase the contributions of the EU27 in order to maintain the same budget size as in 2014-2020 is ill-founded, especially taking into account that its significant share would continue to be redistributed to farmers, causing inefficiencies and raising questions of fairness.

The financial effects of the UK’s exit and the needs related to the joint response to the COVID-19 crisis should be managed by reducing funding for agriculture – a legacy of the post-war situation that is far detached from the contemporary challenges facing the EU.

The size of the EU budget should be an outcome of the total sum of decisions to fund those projects and policy areas which comply with the principles of subsidiarity, European added value and contribute to the common goals of the EU27 set in the EU Treaty.

The post-Brexit and post-COVID-19 EU budget should be qualitatively different in terms of its structure and underlying reasoning. Failure to reform it could further strengthen redistributive conflicts inside the EU and increase the risk of disintegration of the Single market.

The EU Budget Expenditures – A New Wine in Old Bottles

A number of changes to the EU budget structure proposed by the European Commission are in the right direction, proposing to increase funding for those areas where it may add value.

However, the sums allocated for the common agricultural policy and cohesion policy are still far too large, making around two thirds of the proposed EU budget while the sums proposed for those areas which could bring value-added and contribute to the goals of the EU27 are modest.

This expenditure should be redirected to the areas which contribute to the consolidation of the common market, and more generally create positive spill-overs from EU funding to its member states, maximizing benefits from interdependencies and minimizing risks from it.

The examples of such targeted spending include cross-border infrastructure, external border protection, facilitation of structural reforms, education and science, and health care programs.

EU Budget Revenue – One Step Forward, Three Steps Back

The revenue side of the EU budget should be made more transparent and connected to the contributions of its member states based on agreed proportion of their GNI, while other sources should be phased out either as a result of external trade policy decisions (removal of import duties) or by the agreement of member states (in the case of VAT based revenues).

Unfortunately, recent proposals of the European Commission outlining additional new own resources, such as a tax on the access to the common market, go in the opposite direction.

New measures which could eventually lead to EU wide taxes are not justified and would increase the overall tax burden. Some of the proposed taxes would be counter-productive to the efforts of the EU to re-shore production and increase investments in the EU common market.

Besides, since taxation competences are core state powers, they should remain a matter of the EU member states on the grounds of democratic legitimacy. Corrections of payments (rebates) should be phased out, because their presence significantly reduces the transparency of the EU budget.

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