The EU budget must undergo serious changes

According to the economists at the Bruegel Institute, the future EU budget, including new tasks in the area of security, migration and protection of external borders, requires greater funding and changes in the structure of assistance programs.

The new priorities of the European Commission in the scope of common expenditures from the EU budget may lead to a reduction of expenditures on the current priority objectives, i.e. the Common Agricultural Policy and the cohesion policy. For Poland, this means serious changes in the financing of investment projects and in the support for agriculture. “The structural funds contribute to the implementation of approximately 60 per cent of all public investments in Poland. The low level of investment remains a major problem of the Polish economy,” emphasizes Pierre Guérin, PhD, an economist at the OECD. Because of that, the negotiations of the new EU budget are extremely important from the Polish point of view.

Assuming that the United Kingdom will stop paying its contribution to the common EU budget in connection with the procedure of leaving the EU, and that the membership fees will not be increased in the years 2021-2027, a gap of EUR94bn will arise in the common EU budget. Meanwhile, the new priorities entail additional expenditures of at least EUR100bn.

“The shortfall in the EU budget can be covered, among others, by freezing the spending on the Common Agricultural Policy and the cohesion policy, which would in reality mean a reduction of these expenditures in real terms. Alternatively, the membership fees of EU member states could be increased or a new mechanism for the financing of the EU budget could be introduced, e.g. a carbon tax,” explains Zsolt Darvas, PhD, an analyst at the Brussels-based Bruegel Institute and the co-author of the study “Rethinking the European Union’s post-Brexit budget priorities”.

“Many European enterprises, including companies in France, where the environmental taxes are higher than in Eastern Europe and in Poland, already have to account for environmental costs in their operational activities. The introduction of a carbon tax is very likely, despite the opposition of some member states,” believes Darvas.

The final shape of the carbon tax proposal, which is crucial for Poland because of the country’s dependence on coal, is not yet known, although the very idea of its introduction has been discussed on the EU forum since 2011.

The Bruegel Institute suggests the creation of an additional direct tax and/or a C02 emissions tax as a potential source of additional funding for the EU budget. One of the considered options is to redirect the proceeds from emission trading to the common EU budget. According to Darvas, an increase in the membership fees, which was supported by Poland, is unlikely.

France and Germany are trying to put pressure on other countries in order to ensure that the budget responds to the new challenges facing the EU:

  • the need to ensure financial security;
  • the migratory pressures;
  • and the United States’ ambiguous – according to the leading politicians in both countries – guarantees concerning security matters.

The budget as an additional guarantee

“The member states themselves decide about their defense policy, their health care system, and their social policy. Therefore, any further discussion on an increase of the EU budget should only take place when the members of the Community are ready to delegate more decisions in these areas to the EU level,” said Guntram Wolff, PhD, the head of the Bruegel Institute.

The key question is which services within the EU can be provided at EU level and which can only be provided at national level. At this stage of the European Union’s development and integration, its common budget could serve as something like an insurance, an additional protection that complements the national budgets and national policies of the individual countries.

The current budget structure

The EU budget is financed from membership fees mainly determined on the basis of the gross national income and VAT receipts. The common budget also receives 80 per cent of the customs duties on goods imported from outside the Community and on sugar imports.

The budget of the European Union corresponds to about 1 per cent of the gross national product of the member states. The EU spends 38 per cent of its budget on the Common Agricultural Policy (CAP), while 34 per cent is spent on the cohesion policy. This gave a total amount of EUR775bn in the years 2014-2020. Both of these expenditures – which have thus far been considered a priority – are criticized by economists from the Bruegel Institute. In their opinion, the EU budget is constructed on the basis of a complicated and outdated method and needs to be reformed.

According to Zsolt Darvas, the Common Agricultural Policy provides important financial support, especially for wealthy and large farms, but the assessment of its effectiveness is not clear. “Although it promotes the convergence of the economies, it is not known how strong this effect is and how long-lasting it will be. Meanwhile, this policy does not contribute to the strengthening of the biological diversity (biodiversity),” he believes.

In the present financial framework EUR408bn was allocated for the purposes of the Common Agricultural Policy, of which EUR313bn were direct subsidies for farmers. The amount of EUR96bn was allocated to support for the development of rural regions, and EUR18bn was allocated for interventions in the event of disasters.

According to the European Commission data, 80 per cent of the subsidies go to 20 per cent of European farmers, which is criticized on the grounds of a balanced distribution of EU funds. EU officials have suggested reforms of the subsidy distribution system and the introduction of national co-financing of the support for farmers so that the subsidies from the common EU funds could stimulate the creation of organic farms.

The expenditures on the cohesion policy amount to EUR367bn, and are distributed between the European Regional Development Fund (ERDF, 55 per cent of the funds), the European Social Fund (ESF, 23 per cent of the funds) and the Cohesion Fund (20 per cent).

Additionally, the ERDF and the ESF have separate sub-funds distributed on the basis of GDP per capita in a given region (EUR185bn is targeted at the less developed regions, where GDP per capita is less than 75 per cent of the EU average). The regions undergoing transition (i.e. with a GDP per capita between 75 and 90 per cent of the EU average) could count on support reaching EUR36bn, and the remaining regions – so-called developed regions – received funds in the amount of EUR56bn.

The economists at the Bruegel Institute believe that support for investments in infrastructure, as well as education, and research and development (R&D) is the most effective in terms of long-term effects.

Other important and less criticized items in the common budget include:

  • supporting competitiveness on the labor market, including, among others, the Horizon2020 research program and the Erasmus educational program (a total of EUR146bn);
  • the Global Europe program (EUR66bn), which covers EU foreign policy instruments such as humanitarian aid;
  • the “Sustainable development” program (EUR11bn);
  • the “Security and civil society” program (EUR18bn).

The Bruegel Institute analysts emphasize that the discussion on the new budget cannot be limited to the balancing of expenditures and revenues. It should also relate to the long-term effects for the market.

“It is true that the net beneficiaries of the current budget are the countries of Central and Southeast Europe (CSE), but the countries of Western Europe should not see this in terms of a loss for their taxpayers, but as a contribution to the unification of the European market, whose development is in the interest of all Europeans,” says Darvas. “Companies that are active on the common market and come from countries that pay more to the EU budget in reality become the beneficiaries of the common market thanks to the cohesion funds,” he adds.

Therefore, any reform of the funds allocated to the Common Agricultural Policy and the economic convergence of the regions should not aim at a reduction of these resources, but should strive to increase their effectiveness. One of the proposals of the European Commission is to reduce the subsidies for large-area farms in favor of smaller, more environmentally sustainable ones.

Depending on the scenario of the new EU budget, the expenditures on additional priorities in subsequent years will increase by EUR117bn (scenario 2) to as much as EUR390bn (scenario 3).

It is already clear from the declarations of the European Commissioners that there will be no separate budget for the Eurozone, which the CSE countries feared the most.

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