week six - budget of the EU Flashcards
what is the purpose of the public budget
- to fix market failure: public goods, protecting competition
- redistribution of resources
- stabilise the business cycle
general characteristics of the budget
- main instruments of economic policy
- EU budget is small in relative terms
- the budgets evolution is an essential tool to study integration
- budget authority is shared by the council of the EU and the european parliament, not forgetting the commission and the european council
what are the eight basic budgetary principles
- unity: all revenue and spending items should be shown in the budget
- annual: all budgets refer to an annual year
- equilibrium: revenue = spending, i.e. deficit = 0
(the budget cannot act counter-cyclically) - unit of account: euro
- universality: revenuews are not assigned to specific expenditures
- specification: each expenditure must have a purpose
- good financial management: efficiency and efficacy
- transparency: providing accountability
four phases of the budgetary process
- elaboration: commission drafts a budget
- approval: council revises, parliament suggests changes, council takes those into account, parliament rejects or approves
- implementation: commission and national/regional governments
- control: external (parliament and european court of auditors) and internal
what are the four historical phases of the EU revenue
1) 1958-1970: quotas (contributions by member states
2) 1970-1988: creation of a system of own resources and revenue problems
3) 1988-2020: own resources reform (GNI)
4) 2020-: COVID, eurobonds and NextGen funds
details of phase one regarding the EU revenue
- since the treaty of rome
- system of quotas: contributions by member states depending on each country’s level of development
- budgets decision process: dominance of council of the eu and parliament has consulting role
details of phase two regarding the EU revenue
- since 1975, parliament and council share decision making authority
- system of own resources (ORs) are introduced, union becomes financially autonomous to member states, funding is separated from member states
- ORs have a maximum
- harmonisation of taxes is limited (no common taxes, but some tax base and VAT harmonisation)
define traditional own resources
the ones created with the customs union
what are customs duties
tariffs levied from outside the EU under common external tariff
what are agricultural duties
import duties charged on agricultural products imported from non-members
how were traditional own resources collected from 1970-1988
- customs duties
- agricultural duties
- levies on sugar products
- own resource VAT (from 1979)
what type of tax is a VAT
regressive - average tax burden decreases with income
what were the other resources between 1970-1988 that were not own resources (ORs)
- budget surplus from previous year
- correction mechanisms: to fix budget unbalances between state members
what is the british exception and when was it
- 1984, known as the UK rebate
- correction mechanism that reduces UK’s contributions to the budget (reimbursement of 66% difference between what the UK pays and what it receives back from the EU)
- cost of rebate is shared between member states
- however since 2002, some countries have only been paying 1/4 of what they should according to their GNI
what happened in the 1980s
- financial crisis caused by the oil crisis
- traditional own resources lost relevance, reduction of tariff collection because of increase in free trade
- third enlargement: Spain and Portugal became net receivers
- political discrepancies between council and european parliament
details of phase three regarding the EU revenue
- single european act (reform of financial system)
- relevance of TORs continues decreasing
- since 1988, new OR: % of GDP, subsitutes VAT as the new balancing resource
- new correction mechanisms
- reform of 1988: multiannual financial frameworks (MFFs), lasted five years
- Maastricht treaty in 1992
- lisbon treaty in 2007
what did the multiannual financial framework entail
- EU priorities and budgetary classification
- budgetary discipline
- less political conflicts
- five years
what did the Maastricht treaty entail
- decrease in VAT relevance
- creation of Cohesion funds
- redefinition of budgetary ceiling
what is CE vs NCE
- compulsory expenditure: necessary expenditure so that the EU fulfills its commitments (EU council)
- non-compulsory expenditure: remaining expenditure (parliament)
what did the lisbon treaty entail
- MFF adopts a legislative form
- procedure is simplified and there is no distinction between CE and NCE
by 2007 why had the EU not taken sufficient steps towards fiscal federalism
the budget resources are transfers from member states rather than a European tax
characteristics of the GNI resource
- most important of the EU
- distributions of benefits and costs of the budget are not evenly distributed
what was the conclusion of the the Monti group report and when was it published
2017, the budget must be financed through a more transparent, simpler, democratic way
what were the proposals to modify spending and resources in the Monti group report
- simplify own resources based on VAT
- new own resources (around 12% of all income)
- to reduce the corrections gradually
what changed from 2007 onwards regarding EU revenue
- the new MFF adapted to 27 countries
- austerity continued but some changes in spending structure:
1) sustainable growth and employment (44%)
2) preservation and management of natural resources (43%)
3) citizenship, freedom, security and justice (1%)
4) EU as a global partner (6%)
5) administration (6%)
6) compensations (<1%)
what did the european strategy entail
- globalisation
- scientific and technological progress
- demographic changes (labour market)
- migratory pressure
- social and economic cohesion
- climate change
- protection and citizen security
- COVID
what did the MFF split into from 2014
- smart and inclusive growth (47%)
- sustainable growth (38.9%)
- citizenship and security (1.6%)
- EU as a global partner (6.1%)
- administration (6.4%)
- compensations (<1%)
what is the operating budgetary balance
analysis of the distribution between member states of EU’s revenue and spending
- contributions by member states
- spending allocated to each country
what do the contributions of each country depend on in absolute terms
- GNI
- consumption basis (VAT)
how can we analyse the distribution of revenue by member states
- own resources , VAT and GNI
why are there large differences in spending between countries (in absolute terms)
- size of country
- if they have an important agricultural sector
- if they less developed than other regions
is the spending in the EU redistributive
yes, money goes from richer to poorer countries
how to calculate net contributions
difference between allocated expenditures and allocated revenues
in absolute terms who are the biggest contributors and beneficiaries
- contributor: Germany
- beneficiaries: Eastern european countries, Greece, Spain, Portugal
who are the biggest beneficiaries in relative terms
Eastern European countries, Greece and Portugal
why is the debate about net contribution misleading
it does not reflect all the costs and benefit that each country obtains from being a EU member
why did the pandemic trigger important changes in the EU’s budget
- drop in GDP
- increase in unemployment
- bad performance of austerity policies applied during the previous recession
what are the EU next generation funds
- issuance of bonds centralised at the european level
- funds projects and loans for national projects
- 750 billion euros
from 2021 onwards what did the MFF and NextGen fund
both:
- most of nextgen money went towards recovery and reslience as well as some MFF
- MFF and NextGen funded single market, innovation and digitalisation
- MFF and NextGen funded projects for natural resources and the environment
just MFF:
- immigration/border control
- security and defence
- neighbours and the world
how did they decide how to distribute the nextgen funds
70% is decided by:
- population
- inverse of GDP per capita
- average unemployment rate over the past five years
