Finding a Slovak politician willing to comment on the new EU budget proposal is like looking for a needle in a haystack. Unfortunately, the topic dominating the news these days is more whether the Commission might halt the money pipeline over resolutions from the European Parliament. Yet, a meeting in Brussels has since taken place that could well decide the budget’s fate.
The new multiannual EU budget is meant to look different. First, it will be substantially larger – inflated by 15% relative to the size of the EU economy (an extra EUR 500 billion). And that is without even counting the cost of servicing the Recovery Plan (EUR 149 billion a year), or support for defense and Ukraine.
The budget is growing chiefly out of sheer ambition. The “Digital Leadership” program alone is set to receive EUR 49 billion – a 333% increase over the previous budget. It stands as something of a symbol for the whole budget, in which the Commission wants to place greater emphasis on competitiveness. Second, the budget cuts spending on both farmers and regional development (– EUR 79 billion) – areas that, until recently, dominated the EU budget.
The cuts are modest, though, and the freed-up funds will go, for instance, toward growing aid to countries in the Middle East and Africa (+EUR 33 billion), and of course toward a one-third increase in spending on Erasmus+ – a textbook example of a spending program whose added value is notoriously hard to measure. Third, half the budget now comes with prescribed uses: 35% of spending must go toward decarbonization, and 14% toward social policy.
A substantially larger budget, however, has to be paid for by someone. Today, member states contribute to the EU budget mainly out of their own tax revenues. A very small share of EU income comes from shared customs duties; the rest is paid by member states based on their gross national income (not GDP) and on VAT collection. A transparent way to raise the budget would be through higher GNI-based contributions. These are indeed set to rise – for Slovakia, by more than EUR 200 million – but the Union wants a far larger share of the increase to come from new revenue sources. And those have been chosen, to put it mildly, “unfortunately.”
The worst proposal on the table is the so-called CORE tax – taxing companies based on turnover, essentially a European equivalent of Slovakia’s tax license. Regardless of whether a company is profitable, it would have to pay between EUR 100,000 and EUR 750,000 a year, on the sole argument that it generates revenue thanks to its participation in the EU single market.
Setting aside the fact that this proposal crosses a Rubicon by having the European Union move into corporate taxation – a policy area that is supposed to remain the exclusive preserve of member states – the new tax also runs directly against the goal of boosting competitiveness. It will hold back company growth, which is precisely the opposite of what Draghi called for in his report.
Slovakia is a textbook case of just how damaging this tax would be. We already have the highest corporate tax rate in post-communist Europe, a transaction tax, and a special levy on regulated industries. The result has been sluggish economic growth. And now the Union wants to take, by our calculations, another EUR 74 million from companies that are already under serious strain?
Under the new proposal, a third of the revenue from emissions allowance sales would go to the EU budget. Every country faces the economic costs of decarbonization, and the proceeds from allowance sales exist precisely to help offset those costs. Most countries use this money to subsidize thermal insulation and lower energy costs; the smarter ones use it to cut direct taxes. Where, exactly, is the added value of routing this through the EU budget? Such a proposal runs contrary to the principle of subsidiarity.
Even stranger is the proposed EUR 2-per-kilogram fee on uncollected electronic waste. Not only does this, too, run into the fact that member states can solve their own problems more efficiently on their own – the tax also contains a basic internal contradiction. On one hand, the Union sets targets for how much e-waste must be collected and pushes countries toward more efficient recycling. On the other, it’s budgeting for revenue that assumes the amount of waste will not actually decline. That is not how fiscal policy should be made.
Smilarly, transferring 15% of tobacco and nicotine tax revenue to the EU budget makes no sense whatsoever. The negative externalities involved arise within member states, and it is precisely those states that are best placed to address them.
The only proposal that does make sense is keeping 75% of the revenue from the Carbon Border Adjustment Mechanism (CBAM) at EU level, much like the revenue from shared customs duties. Except this particular tax is symbolic – it accounts for just 3% of the EU’s new revenue.
With the exception of CBAM, none of the EU’s proposed new revenue sources should be introduced. They lack any coherent “fiscal logic” and create the risk that member states will simply compensate for the shortfall by raising other taxes. Why build a whole new tax bureaucracy, why introduce selective taxation, when it would be enough to simply adjust the existing GNI-based contribution?
The Commission knows perfectly well that the EU as a whole is managing its finances poorly: member states run an average deficit of 3.1% and debt exceeding 80% of GDP. National governments are reluctant to “give up” their own resources in the form of direct contributions to the Brussels budget, which would add further pressure on their deficits. These new taxes have not been designed to make fiscal sense – they have been designed to be politically achievable.
There is, however, another way to look at the problem of new revenue sources. Is it actually necessary to increase the Union’s budget spending at all? Is it really necessary for these new taxes to cost the average family of four an extra EUR 280 a year in contributions to the EU budget (roughly EUR 365 million a year for Slovakia as a whole)? It is not. More money in the budget will not fix the problem of a badly designed budget.
In our analysis of An Alternative EU Budget, we show that if the Union were financed solely by customs duties and a 1% GNI contribution, it would have more than enough resources to fund the core functions the EU is actually supposed to perform: cross-border transport links, cross-border energy grids, support for the single market, and security along shared borders. Nowhere in that list are subsidies for companies, farmers, startup funding, new kindergartens, caregiver wages, or covering the costs of decarbonization. All of those are challenges that, in keeping with the principle of subsidiarity, member states are perfectly capable of solving on their own.