Margarida Vasconcelos: Europe must be joking over budget

It has already been reported that David Cameron and other EU leaders’ call for the EU 2012 budget to be cut or at least to be frozen fell on deaf ears. The calls in the letter to the President of the European Commission, for “payment appropriations should increase, at most, by no more than inflation over the next financial perspectives” are set to have the same fate.

Last November, the European Commission adopted a Communication on the EU budget review, starting up the discussion on the financial framework post 2013. The Commission presented its ideas on how to reform the EU budget and is now seeking the Council and the European Parliament’s views on it. On 8 June, the European Parliament voted on its position for the next multiannual financial framework negotiations.

The European Parliament is calling for a five percent increase in the next multiannual financial perspectives, for a system of own resources, meaning a system of EU direct taxes, and the abolition of national rebates.

The European Parliament’s position reflects the Commission Communication on the budget review, as it is also the Commission’s plan to introduce EU direct taxes and scrap the UK rebate. Unsurprisingly, the European Commission has welcomed the vote, hence, one can conclude that it will take on board the European Parliament’s position when presenting, on 29 June, a proposal for a regulation on the next multiannual financial framework (2014-2020) and a draft decision on EU own resources. According to the Daily Mail, a Government source said: “Calls for a five per cent increase in the budget are completely unacceptable. Tax is a matter of national sovereignty and the rebate is not up for negotiation.”

The European Parliament is asking for a 5% increase in the EU next multiannual financial framework (MFF) for 2014-2020, whereas several Member States, including the UK, are calling for any increase to be limited to the rate of inflation. The MEPs believe “that freezing the next MFF at the 2013 level, as demanded by some Member States, is not a viable option.” The ECR group voted against such proposals and its chairman, Jan Zahradil MEP, said: “The ECR is the only mainstream group that is listening to taxpayers who reject EU taxes and who want Brussels to spend money with greater efficiency.” In fact, it is important to mention that several Liberal Democrats MEPs voted in favour of scrapping the UK rebate and introducing EU direct taxes. They voted, therefore, against their government’s policy.

At a time of severe strain on the majority of Member States’ public finances, where governments are reducing public spending and implementing austerity measures, and when Member States are demanding the EU’s next multiannual financial framework to be frozen, for the European Parliament to come up with such proposals is a complete joke. The European Parliament’s position does not reflect economic and budgetary constraints at the national level. As Richard Ashworth MEP, noted “One day national governments are being told by Brussels to cut their deficits and the next they’re being asked to pay tens of billions more to the EU.” However, according to the European Parliament “the solution to the crisis is more and not less Europe.”

Unsurprisingly, the main focus of the Commission EU budget review has been the reform of EU financial resources. 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. However, the Commission wants to replace some or all of the existing resources by direct EU taxes and that idea has now been re-endorsed by the MEPs.

The European Parliament has criticised the existing funding system (national contributions), which, according to the MEPs “places disproportionate emphasis on net-balances between Member States thus contradicting the principle of EU solidarity, diluting the European common interest and largely ignoring European added value”. The European Parliament recalled that Article 311 TFEU provides that “The Union shall provide itself with the means necessary to attain its objectives and carry through its policies.” It wants, therefore, to replace “the current national contributions with genuinely European resources.” The European Parliament stressed “that the Union should be able to collect directly its own resources independently from the national budgets.” The Commission has presented a “non-exclusive list” of possible new EU own resources: EU taxation of the financial sector, EU revenues from auctioning under the greenhouse gas Emissions Trading System, EU charge related to air transport, EU VAT, EU energy tax, EU corporate income tax, and the MEPs took note of it.

A share of a financial transaction or financial activities tax is, therefore, one of the options for the EU’s new own resources. The European Parliament considered “that an FTT could constitute a substantial contribution, by the financial sector, to the economic and social cost of the crisis, and to public finance sustainability” and it believes “that an FTT could also contribute partially to the financing of the EU budget...” The Commission has noted “There could also be a perceived national imbalance as, due to network externalities, financial asset transactions are highly concentrated in certain markets.” In fact, if such proposals go ahead the UK could become the main net contributor to the EU budget.

According to the Commission “The introduction of new own resources would mirror the progressive shift of the budget structure towards policies closer to EU citizens and aiming at delivering European public goods and a higher EU added value.” Citizens are already facing austerity measures therefore the last thing they need is an 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. Brussels should reduce Member States contributions by cutting the budget, not by introducing EU direct taxes to raise money. If Brussels is allowed to levy direct taxes, Member States would lose control over how much they send to Brussels. It is for national governments to levy taxes and not for Brussels. As Bill Cash said “The people who decide the taxation of this country exclusively are those in the Westminster Parliament on behalf of the voters of the UK.” Such proposals would entail a major transfer of powers to Brussels, which would be able to raise its own funds. This would encroach on national tax sovereignty. The UK must, therefore, veto such proposals.

It is important to recall, under the provisions concerning the system of own resources, 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 European Parliament must be consulted, but the Council is not bound by the Parliament’s opinion. 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.”

According to the European Commission the reform of the EU financing could include “the progressive phasing-out of all correction mechanisms”, meaning the UK rebate. Unsurprisingly, the Commission wants to scrap the UK rebate in the next Financial Perspectives. The EU budget commissioner, Janusz Lewandowski, has already said, “The rebate for Britain has lost its original justification.” The European Parliament has endorsed the Commission position and 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].”

In 2005, Tony Blair gave up £7bn of the UK rebate in return for CAP reform and there is no serious reform on the way, and such move has already cost the UK economy billions of pounds. The government is under increasing pressure from various Member States and from the European Commission for the rebate to be abolished. 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, so it has a strong negotiating position.

The Commission has made clear that it is planning to introduce new financial instruments. According to the European Commission, the EU budget should be used “to leverage both funding and financing to support strategic investments with the highest European added value.” The Commission wants to put in place a “more general use of the EU budget as an instrument to guarantee loans and bonds.” The Commission confirmed, in the abovementioned Communication, its willingness to use financing instruments such as EU project bonds. The European Parliament also calls on the Commission “to present a fully fledged proposal on EU project bonds.” One could wonder which legal basis the Commission is planning to use. Such plans will have fiscal implications for all EU Member States, as they will guarantee them.

According to the European Commission “the current budget has proved too inflexible to meet the pressure of events”, so the Commission wants to change the extent of the possible changes in the direction of spending as well as the procedures by which the European Parliament and the Council exercise scrutiny over such changes. The Commission is suggesting setting up an obligatory figure (5%) to increase margins so that “new priorities” can be taken into account. The Commission has also suggested other ways to increase budgetary flexibility such as “A reallocation flexibility to transfer between headings in a given year, within a specific limit” a “possibility to transfer unused margins from one year to another…” as well as “Freedom to front or backload spending within a heading’s multiannual envelope, to allow for countercyclical action and a meaningful response to major crises.” So much for budgetary discipline. The European Parliament noted “the Commission’s proposal to establish a fixed percentage for margins” but believes “that this option could provide better flexibility only if the future ceilings were set at a sufficiently high level, allowing for such additional room for manoeuvre.” According to the European Parliament “flexibility below the ceilings should be enhanced in all possible ways” hence, it welcomes the Commission’s proposals put forward in the budget review.

Moreover, the European Parliament calls for a ‘global MFF margin’ to be created, which will consist of “unspent margins as well as the decommitted and unspent appropriations (commitments and payments) of the previous budgetary year.” According to the European Parliament “unused margins, de-committed and unused appropriations (both commitments and payments) 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” consequently the MEPs believe “that the money allocated to the EU budget should only be spent in this context and not returned to the Member States, as is currently the case.”   This is unacceptable, unspent EU money must be returned to national governments.

The European Parliament is also calling for “an additional ‘reserve margin’ below the own resources ceiling and above the MFF ceiling” to address “the risks of defaults linked to the loan guarantees of the European Financial Stabilisation Mechanism and the Facility providing medium-term financial assistance to non-Euro area Member States’ balances of payments, as well as a possible intervention of the EU budget in the European Stability Mechanism after 2013.” Such suggestion is unacceptable, if there is an intervention of the EU budget in the European Stability Mechanism after 2013, this would mean that the UK would continue liable for eurozone Member States’ bailouts. It is important to recall, at the UK’s request, the EU leaders agreed that Article 122 (2), once the new mechanism enters into force, would no longer be needed to safeguard the financial stability of the euro area.

Under Article 312 TFEU, the Council, acting unanimously, shall adopt the multiannual financial framework, after obtaining the consent of the European Parliament. The consent of the Parliament is, therefore, compulsory for the adoption of the MFF by the Council. The European Parliament may accept or reject the proposal but cannot amend it. It is important to recall that the main controversial issue during the negotiations of the EU 2011 Budget was the MEPs demands for a greater say in future negotiations on the EU’s multi-annual financial framework. In fact, the European Parliament has only accepted the EU 2011 budget in exchange of having a greater role in the future negotiations. The MEPs recalled that the Lisbon Treaty provides in Article 312 “Throughout the procedure leading to the adoption of the financial framework, the European Parliament, the Council and the Commission shall take any measure necessary to facilitate its adoption.” Hence, according to the European Parliament “the three institutions must agree on a working method, making clear how to put this into effect.” The European Parliament has suggested having three MEPs participating in all negotiations, as observers. But, Member States, including the UK, Netherlands and Sweden, have been against such demands and pointed out that they go beyond what is foreseen in the Lisbon Treaty. The then Belgium EU presidency and the next four EU Member States to hold the rotating presidency agreed on a political declaration, committing to ensure the European Parliament participation in the EU’s multi-annual financial framework negotiations. This will grant MEPs a greater say in the upcoming negotiations. Unsurprisingly, the European Parliament welcomed the commitment of the Council Presidencies and urged “ the Council and the Commission to comply with the Treaty and to make every effort necessary to swiftly reach an agreement with the Parliament on a practical working method for the MFF negotiating process.” The European Parliament also reiterated “the link between a reform of revenue and a reform of expenditure and demands, accordingly, a firm commitment by the Council to discuss in the context of the MFF negotiation the proposals on new own resources.” The MEPs may reject the multiannual financial framework if their demands are not met. However, it is important to mention that under Article 312 (4) TFEU if the financial framework has not been adopted “by the end of the previous financial framework, the ceilings and other provisions corresponding to the last year of that framework shall be extended until such time as that act is adopted.” Such an outcome would be welcomed.

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