EU budget and main financial instruments Flashcards
Revenue composition
1) ‘Traditional’ own resources
These consist of customs duties, agricultural duties and sugar levies collected since 1970. The percentage that may be retained by Member States to cover collection costs has been raised back up to 25% from 20%. ‘Traditional’ own resources now usually account for around 10% of own resource revenue[1].
2) The VAT-based own resource
This consists of the transfer of a percentage of the estimated value added tax (VAT) collected by the Member States to the Union. Although provided for in the 1970 decision, this resource was not applied until the VAT systems of the Member States were harmonised in 1979. The VAT resource now also accounts for around 10% of own resource revenue.
3) The GNI-based own resource
This own resource consists of a uniform percentage levy on Member States’ GNI set in each year’s budget procedure, and was created by Council Decision 88/376/EEC of 24 June 1988. Originally it was only to be collected if the other own resources did not fully cover expenditure, but it now finances the bulk of the EU budget. The GNI-based resource has tripled since the late 1990s, and now makes up around 70% of own resource revenue.
4) Plastic own resource
This is the first new category of own resources introduced from 1 January 2021 by the 2020 Own Resources Decision. It is a national contribution on the basis of the quantity of non-recycled plastic packaging waste, with a uniform call rate of EUR 0.80 per kilogram. The contributions of Member States with a GNI per capita below the EU average are reduced by an annual lump sum corresponding to 3.8 kilograms of plastic waste per capita. The revenue from this resource provides around 3-4% of the EU budget.
5) Other revenue and the balance carried over from the previous year
Other revenue includes taxes paid by EU staff on their salaries, contributions from non-EU countries to certain EU programmes, remaining UK contributions and fines paid by companies found in breach of competition laws or other laws. If there is a surplus, the balance from each financial year is entered in the budget for the following year as revenue. Other revenue, balances and technical adjustments usually make up around 2-8% of total revenue.
6) Correction mechanisms
The own resources system has also been used to correct budgetary imbalances between Member States’ net contributions. The ‘UK rebate’ agreed in 1984 reduced the United Kingdom’s contribution and was financed in equal shares by all the other Member States, except for Germany, the Netherlands, Austria and Sweden, which benefited from a reduction. Although the UK rebate no longer applies, lump sum corrections will continue to benefit Denmark, Germany, the Netherlands, Austria and Sweden over the 2021-2027 period.
7) Borrowing
The EU budget cannot run a deficit, and funding its expenditure through borrowing is not allowed. However, in order to finance the grants and loans provided by the NextGenerationEU (NGEU) recovery scheme, the Commission was authorised on an exceptional and temporary basis to borrow up to EUR 750 billion (in 2018 prices) on capital markets. New net borrowing should stop at the end of 2026, after which only refinancing operations will be allowed. The Commission is applying a diversified borrowing strategy, combining the use of long-term bonds, green bonds and short-term bills sold by syndication and auctions, coupled with open and transparent communication via annual borrowing decisions and semi-annual funding plans.
New own resources
New own resources are required because the EU’s annual expenditure may not exceed its revenue. Increase of expenditure due to inflation and high interest rates make the introduction of new own resources more pressing, while some Member States and political groups may call for expenditure cuts to address budgetary gaps.
Te Own Resources Decision (EU, Euratom) 2020/2053 introducing a new own resource based on non-recycled plastic waste in 2021.
As part of the funding proposal for NextGenerationEU, the Commission proposed the introduction of EU taxes to complement the existing own resources, including:
- New corporate tax based on operations and levied on companies that draw significant benefits from the EU single market and survived the COVID-19 crisis (Pillar One based own resource)
- Digital tax for large companies
- Carbon border adjustment mechanism
- Emissions Trading System-based resource including a possible extension to maritime and aviation sectors
**However, Council changed this by **
* The Commission had suggested introducing a new own resource that would be levied on large companies that draw vast benefits from the EU single market and survived the COVID-19 crisis; this resource was not included in the conclusions.
* The Council agreed on the introduction of a Financial Transaction Tax as a new own resource, which the Commission had not proposed in May 2020.
No conrete outcome in interinstitutional agreement,
In light of this, the Commission presented a package of the new own resources in December 2021,4 proposing three sources of revenue that would be introduced by 1 January 2023:
- 25% of the revenue generated by EU emissions trading
- 75% of the revenue generated by Carbon Border Adjustment Mechanism (CBAM)
- 15% of the “share” of the residual profits of the largest and most profitable multinational enterprises that are reallocated to EU Member States under the global agreement
Since December 2021, little progress has been achieved on the negotiations of a new own resource package. In an attempt to speed up the negotiations, the Commission adjusted and complemented its 2021 proposal by publishing an adjusted package on 20 June 2023.
* With the adjusted package, the Commission proposed to introduce a new statistical-based own resource, which is expected to provide revenues of approximately €16 billion per year
* The new statistical-based own resource will be temporary, to be replaced by a possible contribution from BEFIT , to be proposed in September
* This new own resource is not a tax on companies, but a national contribution of Member States calculated on the basis of statistics from national accounts under the European system of accounts (ESA). It will be calculated as 0.5% of the notional EU company profit base
* THis would inply significicantly higher national contributions, which could trigger tax increases
* Adjustment of ETS own resource: Given the price increase and based on the assumption that the prices would remain high in the next years, the Commission proposes to increase the call rate for the ETS-based own resource to 30 percent – up from the original 25 percent contribution proposed in 2021.
* The Commission estimates that the new contribution would generate EU budget revenue of approximately EUR 7 billion (in 2018 prices) annually from 2024 onwards. The amounts would be further increased starting 2028, when the new ETS rules enter into force.
Next steps: By July 2025 Council deliberation on 2023 proposal, should enter into force by January 2026
Overall Budget expenditure
Nine general rules
* Unity,
* budgetary accuracy
* annuality,
* equilibrium
* unit of account (euro)
* universality
* specification
* sound financial management and transparency
Structure of budget
* The general budget is divided into 10 sections, one for each institution (outside COM, mostly admiinstrative expenses)
* In 2022, the overall administrative expenditure corresponds to 6.26% of the total budget of EUR 169.52 billion.
EU long-term budget
Soze, spending stats, ceilings (what they are)
Background
SIze
* The EU’s 2021-2027 long-term budget, together with the NextGenerationEU recovery instrument, amounts to €2.018 trillion in current prices (€1.8 trillion in 2018 prices).
* The package consists of the long-term budget, the 2021-2027 multiannual financial framework, made up of €1.211 trillion in current prices (€1.074 trillion in 2018 prices), combined with the temporary recovery instrument, NextGenerationEU, of €806.9 billion (€750 billion in 2018 prices).
Spending stats
* More than 50% of the total amount of the next long-term budget and NextGenerationEU will support the modernisation of the European Union through research and innovation; fair climate and digital transitions; preparedness, recovery and resilience
* 30% of the EU budget will be spent to fight climate change, highest share ever. The package also pays specific attention to biodiversity protection and gender-related issues
* 20% of NextGenerationEU will be invested in the digital transformation
* In 2026 and 2027, 10% of the annual spending under the long-term budget will contribute to halting and reversing the decline of biodiversity
* For the first time ever, new and reinforced priorities have the highest share within the long-term budget, 31.9%.
spending ceilings
In the EU budget, maximum annual amounts (“ceilings”) exist both for:
- Expenditures – the long-term budget ceilings establish the maximum amounts that the EU can either commit or spend during the 7-year Multiannual Financial Framework (currently from 2021 to 2027); This ceiling is fixed at 2018 prises, and only increases at 2% per annum to account for inflation
- Revenues – the own resources ceilings establish the maximum amount of own resources the EU can request from Member States to finance its expenditures in the same period. Due to inflation, GNI has risen a lot, and EU could count on higehr callable MS contributions.
Expenditure ceilings: The long-term budget lays down the ceilings for EU expenditure as a whole and for the main categories of expenditure (headings) over the 7-year period. There are two types of expenditure ceilings:
* anunal ceiling for each heading, legally bindnig promised o spend money
* overall annual ceiling
* expenditure ceiling is lower than own resources ceiling
The only exception that allows surpassing the long-term budget ceilings occurs when it is necessary to use special instruments, mobilised to respond to unforeseen circumstances. However, even in this case, the commitment appropriations for special instruments cannot exceed the own resources ceiling.
Budget management
management types, spending categoreis, common provision regulation
3 management types
* direct management: EU funding is managed directly by the European Commission (DGs, delegations, executive agencies). Programmes implemented in direct management account for around 20% of the EU budget 2021-2027.
* A big part of the funds from NextGenerationEU, the temporary recovery instrument, will also be implemented in direct management mode, notably the Recovery and Resilience Facility (RRF)
* shared management: the European Commission and national authorities jointly manage the funding. Around 70% of EU programmes are run this way.
* indirect management: funding is managed by partner organisations or other authorities inside or outside the EU (humanitarian aid providers, IOs, EIB, EIF, deentralised agencies, PPPs). The majority of the EU budget allocated to humanitarian aid and international development, for instance, is implemented under indirect management. Around 10% of total budget
Spending categories
* commitments: money that will be spent in future
* payment appropriations: money to be spent in this year
Common provisions regulation
* A common provisions regulation is established to govern 8 EU funds whose delivery is shared with Member States and regions. Together, they represent a third of the EU budget.
* The 8 funds are: ERDF, ESF+, Cohesion Fund, JTF, EMFAF , AMIF, ISF, BMVI
MFF mid-term review
- Proposed in June 2023, on backdrop ofseries of unprecedented and unexpected challenges since the adoption of the Multiannual Financial Framework (MFF) in 2020
- additional costs due to new migration rules, higher interest rates (which has generated a shortfall of between €17 and €27 billion through 2027), new investmetns in OSA and competitieveness, reached limits of budget flexibility
- Overall top-up is unclear yet, but will be lower than EUR 100 billion, according to Hahn
Commission presented three legislative proposals to reinforce the EU budget in a limited number of priority areas:
* the creation of a Ukraine Facility to cover the country’s immediate needs and support its recovery and modernisation.Will be based on grants, loans and guarantees, with an overall capacity of €50 billion in the period 2024-2027
* a reinforcement of the EU budget to support member states in addressing urgent challenges related to migration, the needs arising from the global consequences of Russia’s war on Ukraine, and for stronger partnerships with key third countries with EUR 15 billion
* the setting-up of a platform for strategic technologies for Europe (STEP, this is the rebranded souvereignity fund) to make the EU more competitive on critical technologies, (such as digital, clean tech and biotech) with the capacity to generate €160 billion of investments. Involves topping up existing programmes with EUR 10 billion (investEU, EIC, EDF, Innovation Fund)
* Finally, the Commission proposes the creation of a new ‘One-Stop-Shop’ and a dedicated new online Sovereignty Portal to support projects’ promoters and EU countries in their STEP investments supported by the different EU funds.
* a new special mechanism (EURI instrument) to cover additional costs for the funding of the Next Generation EU recovery instrument, due to higher interest rates. Amount not yet specified.
* raise budegt for administrative expenditure
MFF 2021 - 2027
Background
* The Treaty of Lisbon transformed the MFF from an interinstitutional agreement into a Council regulation to be adopted unanimously, subject to the consent of the European Parliament, under a special legislative procedure.
* Proposed in 2018, adopted in July 2020, together with NGEU
Size and categories
* Total size is EUR 1.2 trillion (1.074 in 2018 prices)
Allocations per heding:
1) Single Market, Innovation, and Digital: EUR 149.5 billion. NextGenerationEU will contribute to this heading with €5.41 billion for Horizon Europe and €6.07 billion for InvestEU, in current prices.
2) Cohesion, resilience, and values: EUR 426.7 billion. This heading will be reinforced with €776.50 billion (in current prices) from NextGenerationEU, which will be divided between the Recovery and Resilience Facility (€723.82 billion), REACT-EU (€50.62 billion), and RescEU (€2.0 billion), all in current prices.
3) Natural resources and environment: EUR 401 billion. Rural development and the Just Transition Fund will receive additional funding from NextGenerationEU, respectively €8.07 billion and €10.87 billion, in current prices.
4) MIgration and border management: EUR 25.7 billion
5) Security and defence: EUR 14.9 billion
6) Negihbourhood and the World: EUR 110.6 billion
7) European Public Administration:EUR 82.5 billion. This heading covers mainly the administrative expenditure of all EU institutions, as well as the pensions of the retired EU officials.
Main EU Programmes based on headings
Heading 1: Single Market, Innovation, and Digital: EUR 149.5 billion.
- InvestEU
- HorizonEurope
- Single Market Programme
- EU space programme
- Euratom
- International Thermonuclear Experimental Reactor (ITER)
- Digital Europe
- Connecting Europe Facility (CEF)
- EU Anti-Fraud Programme
Heading 2: Cohesion, resilience, and values: EUR 426.7 billion.
* REACT-EU
* Creative Europe
* Cohesion’s Action for Refugees in Europe (CARE)
* European Regional Development Fund
* EU4health
* European solidarity corps
* RRF
* ESF+
* Erasmus+
* RescEU (UCPM)
* Cohesion Fund:
* Technical Support Instrument
* Citizens, Equality, Rights and Values programme
Heading 3: Natural resources and environment: EUR 401 billion.
* European agricultural guarantee fund (EAGF)
* European agricultural fund for rural development (EAFRD)
* LIFE programme
* Just Transition Fund
* European Maritime and Fisheries Fund (EMFF)
Heading 4: MIgration and border management: EUR 25.7 billion
* Asylum and Migration Fund (AMIF)
* Integrated Border Management Fund (IBMF)
* Decentralised Agencies - Borders (Frontex)
* Decentralised Agencies - Migration
Heading 5: Security and defence: EUR 14.9 billion
* Internal Security Fund (ISF)
* European Defence Fund (EDF)
* Decentralised agencies
* military mobility
* Nuclear safety and decommissioning
Heading 6:Neighbourhood and the World: EUR 110.6 billion
* Neighbourhood, Development and International Cooperation Instrument (NDICI)
* instrument for pre-accession
* Humanitarian aid
* diplomatic servce
* Common Foreign and Security Policy
Heading 7: European public administration
* Administrative expenditure of the institutions (76.4%)
* European Schools and pensions (23.4%)
Protect EU budget
With errors, directive, OLAF/EPPO, conditionality regulation, EDES
with errors
- The Commission relies on a robust internal control framework, including dedicated control strategies, to ensure that the EU funds are well managed and protected.
- ex ante: Before any payment is made, the Commission can interrupt, suspend or reduce payment if it discovers deficiencies in the way the EU budget is spent, or errors in the cost claims received from beneficiaries.
- ex post The Commission can also take action after the payments have been made, by introducing financial corrections and recovery orders for any funds already paid.
Regulations and Fianance
* PIF Directive from 2019 on the fight against fraud to the Union’s financial interests by means of criminal law
* EU Anti-Fraud Programme, ich whiprovides funding, in particular for technical and operational investigation equipment, specialised training and research activities, to support the protection of EU financial interests. Total budget in MFF: EUR 181 million
with fraud
Euroepan Anti-Fraud Office (OLAF)
* The Commission can also take action after the payments have been made, by introducing financial corrections and recovery orders for any funds already paid.
* OLAF is part of the European Commission, but has operational independence
* It is also lead services that develops the European Commission’s anti-fraud policy.
* In 2022, OLAF found EUR 1.77 billin of irregularities, in 12,455 cases (fraud only 1,100 cases)
Can investigate fraud, corruption, etc. concerning:
* all EU expenditure
* some areas of EU revenue, mainly customs duties
* suspiciouns of serious mosconduct by EU staff and members of EU instituions
European public prosecutor’s office (EPPO)
* creatd under Treaty of Lisbon, formed 2017 under enhanced cooperation
* It is responsible for investigating, prosecuting and bringing to judgment crimes against the financial interests of the EU. These include several types of fraud, VAT fraud with damages above 10 million euro, money laundering, corruption, etc.
* Looks into cases that involve more than one EU country.
* In 2022, launched 865 investigations relating to estimated damages of €9.9 billion.
* Operation Sentinel under EPPO will specifically protect NGEU against fraud, in cooperation with OLAD; Eurojust, Europol, OLAF, and 19 MS
Distinction OLAF/EPPO
* OLAF conducts administrative investigations, EPPO criminal investigations and prosecutes in case of falling under its competence in front of national courts
Rule of law conditionality mechanism
* Entered into force in 2021.
* The rule of law is one of the founding values of the European Union.
* This new conditionality regime allows the EU to take measures – for example suspension of payments or financial corrections – to protect the budget in case of breaches of rule of law principles that threaten UNion’s financial interests
* It is distinc from the European Rule of Law Mechanism, whose goal is to promote the rule of law
* Under the conditionality regulation, the Commission will propose appropriate and proportionate measures to the Council in case rule of law breaches in a given Member State threaten the EU financial interests. The Council will then take a final decision on the proposal of measures.
The Early Detection and Exclusion System (EDES)
* The Early Detection and Exclusion System is the system established by the Commission in 2016 to reinforce the protection of the Union’s financial interests and to ensure sound financial management.
* The EDES rules are applicable to all contracts, grants, agreements, prizes, financial instruments and remunerated experts, as well as to the implementation of the budget under indirect management.
* Its purpose is to protect the Union’s financial interests against unreliable economic operators by detecting and excluding them from receiving funds, and by imposing financial penalties on them.
* Reasons could be for example: insolvency proceedings, serious breach of contract, non-payment of taxes or social securitty, fraud, corrupotion, etc.
EU budget - special instruments
What they are and current MFF
- Special instruments ensure the flexibility of the EU budget, and are used in cases of specific unforeseen events, such as natural disasters and emergencies.
- special instruments are over and above the expenditure ceilings of the long-term budget, both for commitment and payment appropriations. However, the amounts reserved for flexibility instruments can never go above the own resources ceiling.
The maximum total amount that can be used for special instruments in 2021–2027 will be around €21 billion (in 2018 prices). There are two types of special instruments:
- “Thematic special instruments” (Solidarity and Emergency Aid Reserve, European Globalisation Adjustment Fund, Brexit Adjustment Reserve) which provide for flexibility and additional means for specific events or budget lines;
- “Non-thematic special instrument” (Flexibility Instrument, Single Margin Instrument), which provide the possibility to address more generally unforeseen circumstances or new/emerging priorities throughout the duration of the Multiannual Financial Framework.
Why EU bugdet
- The EU needs its own budget so it can deliver on its policy priorities and invest in big projects that most individual EU countries could not finance on their own.
- The EU budget is the tool to ensure that Europe remains a democratic, peaceful, prosperous and competitive force.
Achievments from budget
- The EU budget enabled the EU to secure a portfolio of up to 4.2 billion doses of COVID-19 vaccines. On this basis, 81% of the adult population in Europe had been fully vaccinated,
- Thanks to cohesion policy investments in the period 2014–2020, GDP per head will be 2.6% higher in less developed regions in 2023.
- EU funding stands behind the European GPS Galileo, whose signals are used by more than 2.3 billion devices worldwide
- Since 1987, 12.5 million young people and educational professionals have participated in the Erasmus+ educational exchange programme.
- In 2021, 3 of the Nobel Prize winners had received EU funding, joining a list of at least 20 EU-funded researchers who won a Nobel Prize.
- The EU budget made direct payments to 5.6 million farmers in 2021, helping them ensure that Europeans enjoy healthy food at their tables.
EU borrowing money
Overview
* EU issued bonds for over 40 years
* Rating of AAA by all agencies, and AA+ (outlook stable) by S&P. This is ensured as EU is legally bound by Art 323 TFEU to service its debt, headroom of EU budget (difference between own resources ceiling and expenditure ceiling)
* Borrowing raises funds for different programmes: NGEU, MFA, SURE, European Financial Stabilisation Mechansim for euro area countries, Balance of PAyments assistane for non-euro EU countries, Euratom
* Bonds re-distribuited on a ‘back-to-back’ basis, on same conditions and terms as EU issued them
* 30% of all NGEU funds issues as green bonds
EU unified funding approach
* Since January 2023, the Commission has been placing its borrowing on capital markets using a unified funding approach. Under this approach, all Commission issuances come with an EU-Bonds label rather than a label specific to the individual programmes the bond will fund (SURE, MFA etc).
* EU budgets guarantees all EU issuances
* Multiple funding instruments (EU-Bonds and EU-Bills) to maintain flexibility in terms of market access and to manage liquidity needs and the maturity profile;
* A combination of auctions and syndications (very rarely private placements), to ensure cost efficient access to the necessary funding on advantageous terms;
* Structured and transparent relationships with the banks supporting the issuance programme (via a Primary Dealer Network);
* Clear communication with the markets: An annual borrowing decision; bi-annual funding plan, to offer transparency and predictability to investors and other stakeholders; Quarterly investor newsletter.
Macrofinancial assistance
* Macro-Financial Assistance (MFA) is a form of financial aid extended by the EU to partner countries (usually, ENP, candidate countries, and occasionally third countries) experiencing a balance of payments crisis. It takes the form of medium/long-term loans or grants, or a combination of these.
* MFA programmes are decided upon under the EU’s Ordinary Legislative Procedure,
* MFA beneficiaries include Albania, Bosnia-Herzegovina, Georgia, Jordan, Kosovo, Moldova, Montenegro, North Macedonia, Tunisia, Ukraine.
* Under MFA+ programme, in 2023, the EU will provide up to €18 billion in MFA support to Ukraine, to come in the form of highly concessional loans, disbursed in regular instalments.
* This stable, regular and predictable financial assistance will help cover a significant part of Ukraine’s short-term funding needs for 2023, which the Ukrainian authorities and the International Monetary Fund estimate at €3 to €4 billion per month.
* The EU will also cover Ukraine’s interest rate costs through additional targeted payments by Member States to the EU budget.
* Between 2014 and 2021, the EU has provided over €5 billion to Ukraine through five MFA programmes.
* In 2022, following Russia’s war of aggression against the country, Ukraine has benefitted from a total of €7.2 billion of MFA support. The funds were provided in several tranches in the course of the year.
State of EU debt and issues
* Of the approximately €400 billion in outstanding EU debt as of May 2023, 85 percent has arisen from borrowing since 2020
* Borrowing will continue until 2026
* However, interest rates have risen sharply in 2022: interest rate cost could be twice as high as what was initially estimated at the start of the EU’s 2021-27 budget cycle.(ERU 10 illion per year, vs 5 billion estimated)
* Spread with German and French yields has risen sharply: liquidity of EU bonds much lower, EU bonds as collateral with same haircut only recently introduced by ECB, and in most central counterparty clearing parties, have a higher haircut than sourverign bonds, EU bonds have highe risk weight
* Repayment not prob, as own resources ceiling could increase a lot due to inreased GNI because of inflation
* However, expenditure is fixed, and hecne rising interest payments could mean less money for other EU prioriteis
* Recommandations from Bruegel: improve borrowing strategy by using more auctions to get better prices; EC to create better market for EU bonds to improve demand and investor base, create better institutional frameowrk to be treated as souvereign and not SSA, e..g by finalising own resources decision, wich coudl be viewes as “taxation power”
