By Herman Matthijs (Professor in public finance at the Universities of Ghent and Brussels and a member of Belgium’s High Council of Finance)
Since the “Luxembourg agreement” of 1970, the European Union’s budget is financed through the so-called system of “own resources”. Every 6 to 7 years, the European Council has to decide how to update this system in relation with the EU’s new “Multiannual Financial Framework’ (MFF), which will run from 2021 until 2027 this time around. So also now, EU leaders took political decisions concerning the financing system and the MFF.
Article 311 of the Treaty on the Functioning of the European Union (TFEU) provides that the Own Resources Decision still needs to be unanimously ratified by all EU member states, meaning each of them can still veto.
The new system of own resources is still based on custom duties which member states need to transfer to the EU budget, something which will face a few changes, because the percentage of what member states can keep to cover the cost of collecting the income for the EU will increase from 20% to 25%. This increase is a good thing for countries with a high level of custom duties collections, like Belgium and the Netherlands.
Secondly, EU member states will need to transfer a fixed rate of 0,300% of their VAT income to the EU budget.
However, the most important own resource is the “Gross National Income” or “GNI”-based resource. Every year, the EU calculates the amount for every member state. This is determined by the additional revenue needed to finance the budgeted expenditure not covered by the other resources.
It’s likely that, as a result of the pandemic, the level of custom duties and VAT will be lower than otherwise. Due to the fact that the EU treaty requires the EU’s budget to be balanced, the GNI rate will increase in the next few years.
In the new own resource system, there’ll be “a new national contribution based on non-recycled plastic packaging waste”. The EU Commission has stated it will “propose an own resource based on the Emissions Trading System by June 2021”.
This is part of its pledge to “propose additional new own resources, which could include a Financial Transaction Tax and a financial contribution linked to the corporate sector or a new common corporate tax base” by June 2024.
The EU budget of 2021, which amounts to around 165 billion euros, is the first one without the United Kingdom, which no longer contributes to the EU budget from January 1st, 2021 on. For many years ,the UK was a net net contributor to the EU budget.
Looking at the EU’s 2019 accounts, and calculating the difference between the sum of the own resources paid and what a member state receives from the EU budget, it’s possible to make a ranking of net payers and receivers:
The net payers: Austria, Denmark, Finland, France (7,6 billion euro ),Germany (17,6 billion ), Italy (5,4 billion ), The Netherlands (5,5 billion), Sweden and the United Kingdom (7,7 billion).
The status of Spain and Ireland is a matter of doubt.
Belgium and Luxembourg are seen as net receivers, because these two countries are benefiting from the fact that the EU’s institutions are based in Brussels and Luxembourg city.
All the other member states are net receivers.
In other words: all the countries that joined the EU in the 21th century are net receivers, whereby with Brexit, the EU budget witness the loss of a mass net contributor.
On top of this, a 750 billion euro “Recovery Fund” was agreed, involving grants and loans for EU member states, amounting to 750 billion euro, to help them deal with the economic fall-out of COVID-19.
This enormous sum, which is being borrowed by the EU Commission on capital markets, with EU member states jointly guaranteeing this debt, is going to weigh heavily on the future EU budgets.
Some net contributors will receive large sums of such Covid grants, as Italy would receive 65,4 billion euro, Spain 59,1 billion and France 37,3 billion (based on EU Commission documents). This does compensate for quite a bit of their “net contributor status”.
Based on the accounts of 2019, the distribution to which EU member states contributed to the total collection of the EU’s own resources is as follows:
Germany (20,68%), France (16,76%), United Kingdom (11,86%), Italy (11,62%), Spain (8,17%), the Netherlands (5,57%), Belgium (4,22%), Poland (3,49%), Sweden (2,46%) and Austria (2,33%).
The 18 member states that aren’t listed contributed less than 2%. 11 member states contributed less than 1% to the financing of the own resources.
This shows that, based on 2019 figures, the six founding members of the EU still contribute 59% and the 15 member states that formed the EU in 1995 still paid 91,3% of the EU’s own resources in 2019.
This proves the fact that the entrance of new member states during this century can certainly not be called a success in budgetary terms. Even the three Benelux countries together still have a share of 10,04%, which is very close to the Spanish share.
In the 2021 budget, without the UK, the share of the six original EU member state is increasing to 66%. The loss of Britain has to be paid by the countries that were a part of the EU last century.
EU Enlargement arguably went too fast, and as a result, there are now more net receivers than net payers in the EU, whereby enormous sums of money are being transferred to net receivers. Following Brexit, all of the attention went to safeguarding EU transfers, while not much effort was put into achieving a more economically efficient EU budget, even if this is precisely what the EU and many of its members need.