1. EU BUDGET: CONCEPT AND REVIEW Mojmir Mrak Ljubljana 4 July 2007

2. Agenda  General concept of EU public finances –Introduction into EU public finances –Medium-term financial perspective (MTFP) –Expenditures of the annual budget –Revenues of the annual budget  2007 – 2013 MTFP –Key event before / during the negotiatiations –Final agreement and its assessment  EU budgetary review –EU budgetary review clause –Key dilemmas of the EU budgetary review

3. A. Introduction into EU public finances  The first financial arm – budgetary resources –Strategic course – medium-term financial perspective –Implementation and operational details – annual budgets  The second financial arm – borrowing and lending –European Investment Bank (EIB) –European Bank for Reconstruction and Development (EBRD)

4. B. Medium-term financial perspective  Why MTFP have been introduced –Before 1988 there was no MTFP –Conflicts between 3 branches of budget authority –A new system was necessary  What is MTFP? –An agreement on budget priorities / facilitates the budgetary procedure –A planning instrument for medium-term period –Allows predictability of EU expenditures –An agreed »cap« on spending below the OR ceiling

5. B. Medium-term financial perspective (II)  What MTFP is not? –It is not a multi-annual budget –Annual budgetary procedures are still needed –It is not indicative – it sets maximum annual ceiling for each category of spending (»expenditure headings«)  Expenditure headings under the 2007 – 2013 MTFP –H 1: Stable growth  Competitiveness  Cohesion –H 2: Natural resources –H 3: Freedom, security, justice and citizenship –H 4: EU as global partner –H 5: Administration

6. C. Expenditures of the annual budget  Expenditures are relatively small compared to national budget – around 100 bn EUR what is equivalent to around 1% of GNP of the EU  Three “types” of expenditures –Commitment appropriations –Payment appropriations –Payments  Why the EU annual budget is so modest? –No »public services« and »sovereignty« spending –No social security spending –No debt burden

7. C. Expenditures of the annual budget (II)  Basic structure of the budget –Stable growth – 44%; of this –Competitiveness (Lisbon strategy) - 9% (maily R&D, education) –Cohesion – 35%  Convergence (78% of Cohesion)  Regional competitiveness (20% of Cohesion)  Teritorial cooperation (3% of Cohesion) –Natural resources – 46%; of this –I. pillar – Direct payments and market related expenditures (76% of Natural resources) –II. pillar – Rural development (22% of Natural resources)

8. C. Expenditures of the annual budget (III)  Basic structure of the budget (cont.) –Freedom, security, justice and citizenship – 1%; of this –Fredom, security and justice (50%) –Citizenship (50%) –EU as a global partner – 6%; of this –Development assistance to developing countries (34% of EU as a global partner) –Neighbourhood assistance (22% of EU as a global partner) –Instrument for re-accession Assistance (19% EU as a global partner) –Administration – 3%

9. D. Revenues of the annual budget  Revenue No. 1: Traditional own resources (+/- 12%) –Agriculture and sugar levies (+/- 1%) –Customs duties (+/- 11%); collection costs – 25% retained by member states  Revenue No. 2: Contributions based on the value added tax (+/- 14%)  Revenue No. 3: Contributions based on the size of member states' GNP (+/- 74%)  Revenue No. 4: UK Correction (zero-sum game)

10. D. Revenues of the annual budget (II)  Calculation of annual budget revenues: Total expenditures minus TOR + contributions based on VAT = Total contributions based on GNP  EU budget must be in equilibrium

11. E. Key events before / during the 2007 – 2013 MTFP negotiations  October 2002 – Council agreement about agriculture till 2013  June 2003 – Sapir report  December 2003 – Letter of the six net payers to the EU budget  February 2004 – Proposal of the Commission  December 2005 – Council agreement reached  April 2006 – Inter-institutional Agreement reached

12. E. Key events before / during the 2007 – 2013 MTFP negotiations (II)  Group of the six net payers (France, UK, Netherlands, Germany, Sweden and Austria)  Group of “old” member states with positions closer to the Commission’s proposal  Group of “old” cohesion states facing pressure on cohesion funds  Group of “new” member states putting cohesion as its top priority

13. F. Final agreement and its assessment Commission proposal (bn EUR) Final agreement (bn EUR) Cut from the Commission’s proposal (%) 1. Sustainable growth 462 382 -17 Competitiveness Competitiveness122 74747474 -39 Cohesion Cohesion340 308 -9-9-9-9 2. Natural resources 400 371 -7-7-7-7 3. Citizenship 21 11111111 -48 4. EU as a global partner (without EDF) 6350 -21 5. Administration 5850-14 Total commitments 1.004 864 -14

14. F. Final agreement and its assessment (II)  Expenditure side; the agreement is very close to the request of the 6 net payers –In the process of negotiations, all expenditure items were reduced, but to a very different extent –The structure of budget expenditures has not changed substantially from the Agenda 2000 –The main victim of the negotiations is the Lisbon strategy (de-facto considered as a budgetary reserve) –Cuts in cohesion less drastic ( in the final round of negotiations cuts concentrated on least developed new member states) –Minor cuts in a agriculture

15. F. Final agreement and its assessment (III)  Revenue side; the agreement has not introduced substantive changes from the Agenda 2000 –Dominance of the GNI funding source continues –No “general correction” mechanism introduced –UK rebate reduced but only temporarily  Revew clause; the agreement asks for major revision of all segments of the budget –It was instrumental for making the deal –It acknowledges that something has to be done with the EU budget

16. F. Final agreement and its assessment (IV)  Overall assessment of the agreement –It was an achievement per se –Highly pragmatic deal that does not address substantive challenges faced by the EU (lack of political will) –It is far away from the Commission’s proposal –It is very untransparent (due to numerous interventions aimed at fixing net positions) –The process was strongly dominated by national priorities and therefore by net positions of individual member states –There is a clear need for a substantive reform / revision of the EU budget

17. G. EU budgetary review clause  The Council asked to Commission to undertake until 2008 / 2009 a full, wide-ranging review covering all aspects of EU spendings, including the CAP, and resources, including the EU rebate.  The fourth cohesion report from May 2007 and the agriculture “health check” to be prepared in spring 2008 should not pre-empt decisions of the budgetary reviews  The review should give an answer how to close the gap between common objectives of the EU member states and allocation of the EU funds among individual members

18. G. EU budgetary review clause (II)  Budgetary review is aimed primarily at post 2013 period, but it does not exclude a possibily for certain adjustments already before that  Though deadline for the review has been set, its timing depends strongly on several issues –EU constitution debate –Possible reelection of the Commission’s president  Expected schedule of events –Autumn 2007 – Launch of the the public debate –Spring 2008 – Wrap-up of the public debate –Spring 2009 – Policy paper prepared by the Commission

19. H. Key dilemmas of the EU budgetary review  The EU budgetary reform will consist of two closely interlinked sets of reforms –Substance; reforms that will addreess conceptual problems of the EU budget  Objectives of the EU budget expenditures  Volume of the EU budget  Funding of the EU budget, including the rebates –Procedure; reforms that will address the issue of how to process the EU public finances

20. H. Key dilemmas of the EU budgetary review (II)  Objectives of the EU budget expenditures –Key dilemma – what is the main objective of the EU budget?  Is this primarily to achieve commonly agreed EU policies?  Is this primarily to redistribute resources among individual member states? –Now, key EU policies, i.e. CAP and cohesion, serve to a large extent for redistribution purposes (they are implemented through “national envelopes”) and therefore for achieving acceptable net budgetary positions –If in future, the EU policies are to be the main objective, then according to the economic theory there should be significant changes in the structure of the expenditures –If, however, redistribution is to be the main objective in future, then a transparent mechanism of cash transfers among the member states seems to be a logical solution.

21. G. Key dilemmas of the EU budgetary review (III)  Volume of the EU budget expenditures –Key dilemma – what should be the volume of EU budget expenditures? –A response to this dilemma is closely related to the dilemma about the EU budget expenditures objectives –If EU policies are taken as the main objective, then the total volume should be a result of jointly identified priorities taken into account the principle of subsidiarity –If, however, redistribution is taken as the main priority, then decision about the volume is closely interrelated with the net balance acceptancy issue

22. G. Key dilemmas of the EU budgetary review (IV)  Funding of the EU budget, including the rebates –Key dilemma – How to finance the EU budget? Should an EU tax be introduced? If yes, of what kind? –Now, EU budget is financed primarily through GNI source; consequently, net budgetary positions dominate negotiations  EU budgetary procedures –Key dilemma – How to achieve a better balance between two opposing principles, i.e. efficiency and legitimacy? –Reform of the budget procedure has to be looked at from the point of view of the existing level of the EU political integration. Major changes in this procedure are therefore closely related to the institutional changes / adjustments within the EU.