Budget revolution put off until next century

Date: 08/10/1998

The system currently used to raise the money needed to finance the EU's policies satisfies no one. But radical changes in the way individual member states' contributions are calculated are unlikely before the new millenium. Tim Jones explains why AN APOCRYPHAL story is told about a driver who gets lost in deepest countryside while searching for a tiny and illusive village.

Seeing a passer-by, he stops the car and asks the way to the village. The local pauses, scratches his chin and says: “Well, I wouldn't have started from here.”

The same could be said of the EU's Byzantine system for raising the money needed to finance its 85-billion-ecu annual budget. European governments are tying themselves in knots over how, when or even whether to overhaul the Union's revenue-raising arrangements precisely because they have inherited a patchwork scheme which satisfies nobody.

The Germans and the Dutch, who respectively pay 10 billion ecu and 2 billion ecu more into Union coffers than they get back, feel hard done by. Germany's net contributions alone account for 58&percent; of the annual total.

The Spanish, on the other hand, feel that poorer members of the Union pay too much in proportion to their wealth measured as per capita gross domestic product.

If they could tear it up and design a totally new revenue raiser for the world's biggest trading power and second largest single currency zone, Europe's politicians would probably make a better fist of it. Unfortunately, since budgetary decisions have to be agreed unanimously and there is always a government in one member state or another facing re-election, this will not happen.

Instead, in drawing up his long-promised review of the EU's 'own resources' used to finance its policies, European Commission President Jacques Santer has had to tiptoe through a political minefield.

While he acknowledges that the system has to be “seen to be fair and balanced by all member states or we could jeopardise acceptance of the European unification process”, he is not signalling radical change so much as rather better marketing of the current regime.

For Santer, the whole issue has become an irritant standing in the way of agreement on the Agenda 2000 package of reforms to the EU's spending programmes, which is designed to ready the Union for enlargement into central and eastern Europe.

From day one, he has had no intention of seeking to raise the ceiling on the overall amount of money which governments have to find to finance EU policies, set six years ago by Union leaders at 1.27&percent; of GDP.

Santer's predecessor Jacques Delors managed to double the regional spending budget ten years ago by tying the increase to the arrival of the single European market.

However, Santer realised from the start that trying to do this again with regard to enlargement, but this time dealing with a post-reunification Germany, would be impossible. Once that was established, he knew that rejigging the revenue side of the budgetary equation could only end in tears.

Santer hopes that once EU governments have stared into the abyss threatened by radical change, which he clearly spells out in his report, governments will choose to back off and leave the issue alone until the next round of reform in 2004-05.

For only then will the brass tacks of budget reform be addressed; a fact which French European Affairs Minister Pierre Moscovici let slip in a recent interview with the French daily newspaper Le Monde. “We should surely one day consider whether a Europe hoping to restructure its economy, to become involved in the world of culture and education, will need a bigger budget,” he said. “Why not eventually give it additional resources such as a European tax?”

The French government moved quickly to distance itself from Moscovici's remarks. But they merely echo the private wishes of many European politicians to make the mechanisms used to raise revenue for EU policies truly automatic and progressive.

At the moment, most politicians believe these schemes are not, and that they are becoming increasingly inappropriate for a growing regional power.

Giving the EU its 'own resources' in the Sixties, then developing them in two rounds of reform in 1984 and 1988, was designed to free the Union from the yearly whims of national governments.

The four resources are customs duties and levies on imported goods; levies on imported farm produce; a small percentage share of value added tax revenues; and a lump sum related to a member state's gross national product which bridges the gap between the Union's total spending needs and the yield from the other three resources.

The development of the world economy since these resources were agreed has led to distortions.

What were meant to be the main sources of revenue - the windfalls from the common external tariff and levies on imported food - has been eroded by rounds of global negotiations under the General Agreement on Tariffs and Trade.

The stagnation of these resources led to a big increase in the third VAT resource; a trend which has hit the Netherlands hard because of its role as an EU import and transit corridor via the port of Rotterdam.

It has also antagonised the Spanish since VAT is a tax on consumption rather than income and is, therefore, regressive. In fact, as wealth increases, people tend to save more and nowhere is this more true than in northern European countries such as the Netherlands, Belgium and Germany.

With the erosion of the first two resources, the fourth lump sum revenue tap has grown exponentially, rising from 13&percent; of total resources in 1991 to 40&percent; last year. This has been the main reason for the growth in Germany's net contributions.

Even though the EU has seen an overall growth in its 'own resources', governments have continued to try to exert their power to decide where the funds should go - a phenomenon highlighted recently by the British legal challenge to Commission spending plans for poverty reduction.

For this reason, the Spanish government and the European Parliament called on the Commission to look into the feasibility of creating a fifth resource which would take countries' wealth into account.

Under Madrid's plan, lump sum payments would be made on a rising scale by countries with per-capita incomes of less than 90&percent; of the Union average, followed by bands of 90&percent;-100&percent;, 100&percent;-110&percent;, 110&percent;-120&percent; and above 120&percent;.

The Commission promised to analyse the feasibility of this proposal, and it did. But it had no intention of recommending its adoption at this stage. With the Germans and the Dutch demanding a cut in their contributions, Santer knew such a formula was politically hopeless.

Similarly, given the enormous problems faced by Internal Market Commissioner Mario Monti in persuading member states to introduce minimal common taxation regimes for savings income and energy use, the Commission could not push the case for a new tax.

Instead, its report suggests tinkering at the margins, at most, by renationalising part of the agricultural budget. Handing back responsibility for paying direct subsidies to farmers based on their land area under cultivation and livestock head-counts could cut Germany's contributions by 700 million ecu and Italy's by 100 million, but would raise France's and Spain's by 500 million ecu: another non-runner.

Santer is sitting out this round. He knows it is not serious. After the first round of enlargement in 2004-05, times will be very different. Eleven and maybe even 15 countries will be trading in the same currency and the pressure for a large and predictable source of revenue for the Union itself will be strong.

Then, fundamental change could well be on the cards. In the absence of a federal income tax, the simplest proposal, suggested by University of North London economist John Grahl, would be a lump sum based on per-capita income. It would then be up to national parliaments to decide exactly how to raise this cash at home.

That would be a radical change.