Margarida Vasconcelos: EU proposes a trillion euro spending budget

On 29 June, the European Commission presented its proposals for the EU’s next multiannual financial framework (2014-2020). The European Commission called it “a budget for EU citizens”, but it has proposed to spend more taxpayers’ money. It proposed over one trillion euros for EU spending between 2014 and 2020, which is a considerable amount of money to be earmarked for the purpose of running a failing project.

The Commission proposed for the next seven years €1,025 billion in commitment appropriations, which will increase from €975.8bn (an increase of 5%), and payment appropriations would increase to €972.2bn from €925.6bn in 2007-13. At a time of severe strain on the majority of Member States’ public finances, where governments are reducing public spending and implementing austerity measures, when Member States are demanding the EU’s next multiannual financial framework to be frozen, the Commission comes up with this proposal.

David Cameron, and other EU leaders including, Angela Merkel, Nicolas Sarkozy, Mari Kiviniemi and Mark Rutte, called for “payment appropriations (to) increase, at most, by no more than inflation over the next financial perspectives.” The UK, Germany, France, Finland and the Netherlands have asked the Commission for the EU’s multiannual financial framework to be frozen. However, these calls fell on deaf ears. The Commission completely ignored the UK and other Member State demands for an increase in spending to be limited to the rate of inflation. The Commission has taken on board the European Parliament suggestions when deciding on the overall amount to propose for the next MFF. The Commission has agreed with the European Parliament that “freezing the next MFF at the 2013 level…is not a viable option … [and that] … at least a 5% increase of resources is needed for the next MFF.” According to a Treasury spokesman “The commission’s proposal is completely unrealistic. It is too large, not the restrained budget they claim and incompatible with the tough decisions being taken in countries across Europe.”

It is important to mention that the Commission has earmarked an extra €58 billion for programmes outside the MFF. According to the Commission this entails amounts, which cannot be foreseen, and expenditures to which member states contribute on ad hoc basis. In this way, by moving spending items from the MFF the Commission has attempted to hide the overall increase in the EU spending. The Commission is misleading taxpayers as it is not asking for a 5% but a 11% increase on the 2007-2013 spending. The total MFF and programmes outside MFF amount to €1.083.3bn.

The Commission agreed with the European Parliament that more flexibility in the budget is necessary to enable the EU to face new challenges. Consequently, the Commission proposed five instruments outside the financial framework. According to the Commission “Special instruments, the Emergency Aid Reserve, the European Union Solidarity Fund, the Flexibility Instrument, the European Globalisation Adjustment Fund, the Reserve for crises in the agriculture sector and the Contingency Margin, are necessary to allow the Union to react to specified unforeseen circumstances, or to allow the financing of clearly identified expenditure which could not be financed within the limits of the ceilings available for one or more headings as laid down in the financial framework.” The MFF draft Regulation proposed by the Commission provides the possibility to mobilise them, if necessary, over and above the ceilings established by the financial framework. The Commission also proposed a contingency margin of up to 0.03% of the Gross National Income of the Union to be created outside the ceilings of the financial framework “as a last resort instrument to react to unforeseen circumstances.” According to the Commission the costs of ITER and GMES “are too large to be borne only by the EU budget” hence it also proposed “their funding outside the MFF after 2013.

It is well known that Brussels has not kept the EU administrative expenditure as low as possible and has been wasting taxpayers’ money. There are around 50,000 EU civil servants who enjoy high salaries, for instance a senior director general may receive over €17,000 per month, plus all the benefits such as family allowances, expatriation allowance, installation allowance, travel expenses, removal expenses, daily subsistence allowance as well as low taxes. Brussels has demanded more posts for the European External Action Service. It is important to note that the salaries of the EU diplomats and administrative staff vary between €52,000 and €216,000 per year. The UK, Austria, Denmark, France, Germany, the Netherlands and Sweden have written to the Commission saying that “European administration spending cannot be exempt from the considerable efforts made by the Member States to reduce their administrative expenditures.” Those countries demanded therefore “very substantial reductions” in spending on salaries, pensions and benefits as part of the next MFF.

The Commission is aware of the unpopularity of the package of benefits that EU civil servants are entitled to. In order to give the impression that it is responding to Member States demands, Maroš Šefčovič, the European commissioner for inter-institutional relations and administration, said: “The current economic climate calls for ambitious measures not only from public administration in Member States but also from European institutions and agencies.” The Commission has decided to propose a 5% cut in the staff of each EU institution and agency in the next MFF. The Commission will propose changes to the staff regulations applicable to EU civil servants in the EU institutions, such as a new method for calculating the adaptation of salaries, an increase in working hours from 37.5 to 40 hours a week, without compensation through higher wages, an increase of the pension age from 63 to 65, and the maximum number of leave days granted to staff for annual trip to their country will be reduced from 6 to 2. Nevertheless, the Commission has earmarked €62.6bn to Administration, allocating €12.1bn for pension and expenditures and European schools and €49bn for administrative expenditure of the institutions.

The Commission has proposed a Council Regulation laying down the multiannual financial framework for the years 2014-2020. In fact, any political agreement reached by the member states will be then translated into a Council Regulation. Under the Lisbon Treaty, the Council, acting unanimously, shall adopt the multiannual financial framework, after obtaining the consent of the European Parliament (special legislative procedure). The European Parliament may accept or reject the proposal but cannot amend it. The MEPs are likely to reject the multiannual financial framework if their demands for higher spending are not met. It is important to stress that Member States have the right to veto the definition and establishment of their contribution to the Union budget and the adoption of the financial framework. Very long and fierce negotiations over the MFF are, therefore, expected.

The European Union has its own resources to finance its expenditure, which are collected by the member states and then transferred to the EU budget. There are three types of EU’s own resources: traditional own resources (TOR) which consist of customs duties and sugar levies and account for around 12 % of total EU revenue, the own resource based on value added tax (VAT) which is levied on Member States' VAT bases, and represents 11% of the EU revenue and the annual direct contribution by each member state based on their gross national income (GNI), which accounts for around 76 % of total EU revenue. The Commission has been saying that “except for the traditional own resources (mainly customs duties originating from the customs union), the EU resources currently display almost no link to - nor do they support - EU policy objectives.” The Commission wants, therefore, to create a link between EU policy objectives and the EU financing. The Commission wants to give “the EU budget a share of genuinely "own resources.” Hence, it proposed to introduce two new own resources: a financial transactions tax and a “new modernized VAT.

The European Commission proposals reflect, therefore, the European Parliament’s demands for new own resources. In fact, Guy Verhofstadt MEP said, "This is exactly what we had called for. We need to move from a budget which is based on contributions from member states where national governments fight over the net payments they make to the EU, to one based on own resources."

Obviously, member states want to reduce their national contributions to the EU budget but not in exchange of having Brussels raising taxes directly from citizens and companies to fund the EU budget. Citizens are already facing austerity measures therefore the last thing they need is a EU tax, which will be an additional burden. If such proposals go ahead, they would end up paying more for the EU budget than presently. The member states are responsible to taxation policy and Brussels should be kept out of it. If Brussels is allowed to levy direct taxes, member states would lose control over how much they send to Brussels. Taxation is a key part of Member States sovereignty and such proposals would encroach on national tax sovereignty.

A Downing Street spokesman said "Britain will also oppose new EU taxes which will introduce additional burdens for business and damage EU competitiveness.” The Council is divided on this issue, but David Cameron is expected to lead opposition to the Commission’s proposals. Moreover, Czech MEP Jan Zahradil, president of the European Parliament Conservative and Reformists group, said: "We will fight EU taxes all the way, both on grounds of principle and because we cannot afford them."

The Commission has made full use of the Lisbon Treaty new legal framework and presented a proposal for a Council decision on the system of own resources of the EU. Such proposal provides for the introduction of new own resources and the reform of correction mechanisms. The Commission is expecting that it would apply from January 2014.

The Lisbon Treaty has specified that the Council “may establish new categories of own resources or abolish an existing category.” Moreover, under Article 311 TFEU, the Council acting unanimously on a proposal from the Commission through the special legislative procedure (consultation) shall adopt a decision setting up provisions concerning the system of own resources of the Union. The Lisbon Treaty has provided that such “decision shall not enter into force until it is approved by the Member States in accordance with their respective constitutional requirements." The UK must, therefore, veto such proposals.

The Commission proposal for the own resources decision has kept the structure of the current Decision, but it has also introduced substantial changes such as the ending of the VAT–based own resources in December 2013, a list of new own resources and the timing of their introduction. Hence, under the Commission proposal, the EU would have as own resources: a financial transaction tax and a new VAT resource, the application of a uniform rate to the sum of Gross National Income (GNI) of all the Member States and traditional own resources consisting of levies, Common Customs Tariff duties and other duties. The draft decision specifies that Member States shall retain, by way of collection costs, 10% of these amounts, whereas presently is 25%.

It is important to mention that last March, Algirdas Semeta, Commissioner responsible for taxation, said “With regard to a financial transactions tax at EU-level only, I firmly believe that it is premature to commit to such an option.” In fact, he stressed “taking into account the potential impact that this could have on European competitiveness, it would be irresponsible to proceed with such a tax without first analysing and fully understanding all the implications.” According to the Financial Times, the current president of the European Central Bank, Jean-Claude Trichet, has called for plans for a financial transaction tax to be ditched, he said “I call for great, great prudence in introducing something which is not done at a global level…” Mr Trichet stressed “Let’s be sure we don’t do something we might regret one day … If certain transactions are considerably more costly in Europe than in other parts of the world, they will be done overseas.” Ten member states have already introduced some forms of financial transaction taxation, therefore, the Commission, and in particular Barroso, believes “that action at EU level could prove both more effective and efficient than uncoordinated action by Member States given the level of cross-border activity and high mobility of the tax Bases” and it will reduce “the existing fragmentation of the Internal market.” A financial transaction tax would be collected at EU level. In its Report on the operation of the own resources system, the Commission pointed out “The collection of the tax should, to the extent possible, be based directly on the trading books, accounting and internal control systems of financial sector institutions and/or be operated automatically through information systems or trading platforms.” Hence, the target taxpayer would be “the financial institutions operating financial transactions.” The Commission has estimated that such tax could generate up €37bn in 2020 and it will account 22.7% of the EU own resources. The Commission will present a proposal for a EU financial transaction tax this autumn, it would define a harmonised base and fix low rates differentiating by products groups based on trading by financial institutions. If such proposals go ahead the UK could become the main net contributor to the EU budget. In fact, a FTT “would be a tax on the City of London”, as Vicky Ford MEP, Conservative economics spokesman, said. Moreover she noted, "Imposing a tax of this nature without a global agreement would cause some of our financial services sector to relocate, losing the UK billions in tax revenues and costing untold jobs."

According to the Commission a new VAT resource “would create a genuine link between national and EU VAT and foster additional harmonization of national VAT systems.” In order to “simplify” Member States' contributions, the Commission proposed to abolish the existing VAT-based resource in December 2013. The Commission believes that the best solution is to national tax administrations to regularly transfer a share, corresponding to the EU rate, of the VAT receipts “collected and stemming from transactions subject to the standard rate.” The new VAT would be levied at a fixed percentage by all member states and then transferred directly to the EU budget. The Commission said “Unlike the existing VAT-based own resource, the revenue stream (…) would result from the actual new VAT resource paid by all the European final consumers and then collected by the national tax authorities.” According to the Commission “The application of a 1.0% rate on supplies of goods and services, intra-Community acquisitions of goods and importation of goods subject to a standard rate of VAT in every Member State pursuant to the VAT Directive would lead to revenue estimates of EUR 20.9 billion to 50.4 billion (2009 data).” The Commission has noted “The revenue estimates are dependent on the degree of harmonization of VAT rules in the EU towards a broader based tax with a single rate”, hence if there is “full harmonization with all the transactions being subject to the standard rate” the revenue will be bigger. Such proposal is very likely to increase tax burden for citizens. Presently, 0.3% of the UK’s VAT receipts goes to the EU budget. However, if the Commission proposals go ahead that could entail an increase of 1% on VAT in the UK. The draft decision provides that from 1 January 2018 the Member States shall collect a share of the Value Added Tax and a financial transaction tax shall be collected “in accordance with the relevant Union legislation.”

It is important to mention that the European Parliament has called for “unused margins, de-committed and unused appropriations (…) in one year's budget should be carried over to the next year and constitute a global MFF margin to be attributed to the different headings.” In fact, under the draft decision on the system of own resources proposed by the Commission "Any surplus of the Union's revenue over total actual expenditure during a financial year shall be carried over to the following financial year.” This is unacceptable, unspent EU money must be returned to national governments.

The European Commission has been saying that the reform of the EU financing could include “the progressive phasing-out of all correction mechanisms”, meaning the UK rebate. The European Parliament has also called “for an ending of existing rebates, exceptions and correction mechanisms;” David Cameron and George Osborne have already made clear that the UK is “not going to give way on the abatement [rebate].” The government has been under increasing pressure from various Member States and from the European Commission for the rebate to be abolished. In fact, the Commission has noted "The clear majority view is that abolishing existing exceptions and correction mechanisms is an indispensable step in making the EU budget more equitable and transparent." According to the Commission “The UK is now one of the most affluent EU Member States, able to fully contribute to solidarity with the poorer Members of the Union.” Moreover, the Commission noted, “with the elimination of the current VAT-based own resource, essential data for calculating the UK correction will no longer be available.” Then, the Commission concluded “that there was no longer any objective reason to treat the UK differently from the other major net contributors.” However, a Downing Street spokesman said "we will continue to protect the rebate – without it, the UK’s net contribution as a percentage of national income would be the largest across the EU, twice as large as France’s and Italy’s, and almost 1½ times bigger than Germany’s." However, the Commission proposed to replace all existing corrections with a lump sum gross reduction on the GNI-based own resources payments. According to the Commission “A system of lump sums it would be fair, by treating large contributors to the EU budget in line with their economic prosperity, and ensuring a balanced financing of the corrections;”

The draft proposal for a Council decision on the system of own resources defines the lump sum reduction on GNI payments attributed to each of the Member States concerned for every year. Article 4 of the draft Decision provides the financing of these corrections, which are based on the relative prosperity of all Member States. It reads “For the period of 2014–2020, a gross reduction in annual GNI contributions shall be granted to the following Member States: EUR 2500 million for Germany, EUR 1050 million for the Netherlands, EUR 350 million for Sweden, EUR 3600 million for the United-Kingdom.” Barroso said that ''The new system (…), based on a lump-sum reimbursement, would mean that Britain would be entitled to receive a gross amount of 25.2 billion euros from 2014-20.''  According to the Daily Telegraph, the Treasury said ''Britain's rebate is fully justified and we are not going to give way on it.'' The Government must, therefore, put its foot down and stick to its policy that the rebate is not negotiable. The UK has the right to veto the adoption of the financial framework, consequently it has a strong negotiating position.

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