Reform Options for the EU Own Resources System Philipp Mohl Centre for European Economic Research (ZEW) Conference: „The Future of the EU Budget“ Budapest, 30 May 2008

Assessing the Status quo

Development of EU Own Resources

Incentives of Budgetary Players & the Common Pool Problem Provision of European goods suffers from asymmetric cost-benefit analysis Council members represent national electorates Enlargement and unanimity rule force the common pool problem Small countries in particular face almost zero marginal costs in financing pork barrels

Incentives of Budgetary Players & the Common Pool Problem (contd.)

The Driving Forces of Redistribution Expenditure side: –Large redistributional effect –Structural funds: progressive redistribution pattern –Agricultural policy: arbitrary redistribution pattern Revenue side: –Relative small redistributional effect –Largest redistributional effects: UK‘s rebate –The revenue side counteracts the expenditure side redistribution to a small extent

Conclusion: Strengths and Weaknesses of the Status quo + Link between national budgets and the EU budget + Ceiling of the EU budget + Member States can decide on their own how to finance the EU budget + Increasing relevance of GNI resources – Common Pool Problem – Long list of special provisions

ZEW Reform Proposal

Complete phasing-out of the VAT resource Focus on the GNI resource Establishing a generalised but limited correction mechanism (GLCM) –Generalised, i.e. no single country would be priveleged –Limited, i.e. not all allocatable expenditures are taking into account in the correction

ZEW Reform Proposal (contd.) Idea: Split the EU budget in two baskets: Basket 1: –Includes policies whose distributive effects are either not measurable or are politically accepted –Financed by GNI resources –Eurostat might calculate the level of contributions

ZEW Reform Proposal (contd.) Basket 2: –Includes policies whose distributive effects are not regarded as acceptable –Financed by a generalised correction mechanism –Option to phase out Basket 2 of the EU budget

Distribution pattern of various EU taxes

VAT tax

CO2 tax