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Lecture 8, Topic A
BUDGET AND REDISTRIBUTION IN THE EU
Dr. Wadim Strielkowski IES FSV CUNI
November 18, 2013
Synopsis
Budget of the EU. Why joint budget: transaction costs and redistribution of costs and benefits. Structure of revenues and expenditures. Who decides? Net contributors and net beneficiaries.
Common agricultural policy (CAP): objectives, forms, problems. Economic arguments for a special treatment of agricultural sector. Instruments of CAP, welfare analysis.
Criticisms and reforms.
Reading:
Svendsen G. T. (2003), The Political Economy of the European Union, Institutions, Policy and Economic Growth. Edward Edgar,
Cheltenhan. Chapter 3, pp. 58-68.
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Transaction costs
Gains and costs of integration
Compensation asymmetric shocks
Redistribution of costs and benefits - common agricultural policy - regional redistribution
common policies (R&D, environmental protection, fishing)
Optimal currency area: redistribution is one of conditions of smooth functioning
Redistributive functions of the budget of EU
WHY DOES REDISTRIBUTION HAPPEN IN EU?
AGGRESSIVE AND TOLERANT INTEGRATION MODELS
Different arrangements of international economic relations might have different effects on different national economies and their regions and different sectors of each national economy
For example in our simple model of a customs union the
customs union of countries 1 and 2 increases total welfare of
both countries, but while country 2 is gaining, country 1 is
losing (such situation is expressed in Fig. 8.1). A rationality of
establishing the customs union is based on the fact, that the gain
of country 2 exceeds decline of welfare in country 1.
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Fig. 8.1, Gains and losses in customs union
In aggressive models those who are benefiting from international economic cooperation are not sharing their gains with those who are loosing.
In tolerant models we can observe willingness to share benefits to motivate by economic instruments mutual cooperation.
European Union uses a tolerant method of economic
integration.
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BUDGET OF THE EU
The European Union (EU) has an independent
parliament (EP) and civil service which is distinct from those of the 27 member states.
It administers common laws between the Member States and expenditure on common policies
throughout the EU.
• Peculiarities of the EU budget:
– Democratic control – No taxes
– CAP
– UK rebate
EU budget in numbers
• EU has an agreed budget of €116 billion for the year 2007, and €862 billion for the period 2007-2013.
• For comparison, the UK expenditure for 2004 alone was estimated at about €759 billion (Czech budget about 35 billion).
• For comparison:
– just over 1 percent of EU GNI
– Small relative to national budgets (40-50 percent)
– 0.70 Euro per day per person
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History of EU budget
Budgetary crisis
• Until late 1970s: the ‘De Gaulle Budget’ reflecting strong French agricultural interests
1980 and 1984-88 budgets rejected:
• 1. Spending beyond limits of own resources (CAP 70% of budget)
• 2. EP dissatisfied with power to only control part of the budget
• 3. Size of UK Budgetary contribution
Solution:
• Inter-institutional agreements
• budget reforms
• financial frameworks
• UK rebate = equivalent to 66 % of its contributions
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• The rebate is calculated as approximately 2/3 of the amount by which UK payments into the EU exceed EU expenditure returning to the UK
• Budget dispute started with accession
negotiations: UK felt disadvantaged by CAP
• (Britain was the third poorest country in the EC)
• ‘Correcting mechanism’ demanded (1974) but not implemented
• Britain’s net-payment in the 1970s: £60m (until 1976), £369m (1977), £822m (1978), £947m (1979)
• 1984: British rebate settled at 66%
• 2005: Britain is the third wealthiest EU country (rebate at about £3b/year)
• 50% of the rebate is being paid by Italy and France
The British (UK) rebate
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1988 and 1993 budget reforms
• Delors packages I and II
• EU budget maximum linked to 1.2% of EU GNI (since 1993: 1.27%;
2005: 1.24%)
• National contribution linked to GNI
• Attempts to limit then reduce CAP spending
• Agreement to doubling of structural funds
GNI=GDP + net income from other countries
GDP = consumption + investment + government spending + (exports − imports)
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1999 budget reforms (Agenda 2000)
• Stabilisation of total expenditure
• CAP spending only marginally increased
• Decrease in structural fund spending
• UK rebate untouched
Agenda 2000 - Action programme of the European Union with objectives to
reform CAP and Regional policy, and establish a new financial framework for the years 2000-06 with a view to the then upcoming Enlargement.
Main goals:
• To update the European Model of Agriculture
• To narrow the gaps in wealth and economic prospects between regions
• To honour priorities while enjoying only very modest increases in budget income until 2006
The reforms were first outlined in the documents with the title "Agenda 2000"
published by the Commission in July 1997. Reforms were finally agreed by the 15 EU countries at the European Council meeting in Berlin in March 1999.
Detailed legislation was later drafted and agreed to by all of the EU institutions.
BUDGET REVENUES
Where does the money come from?
The European Union has its own resources to finance its expenditure. Legally, these resources belong to the
Union. Member States collect them on behalf of the EU and transfer them to the EU budget (EU budgetary
agreement 1971)
Own resources are of three kinds:
- traditional own resources (TOR) - part of value added tax (VAT)
- resources based on grass national income of
member states (GNI)
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1. Traditional own resources (TOR)
consist mainly of duties that are charged on imports of products coming from a non-EU state
they bring in approximately EUR 17,3 billion or 15 % of the total revenue
(the figures here and below refer to the forecasts for
2007, source European Commission web page).
2. The resource based on value added tax (VAT) a uniform percentage rate that is applied to each Member State’s harmonized VAT revenue
The VAT-based resource accounts for 15 % of total revenue, or some EUR 17.8 billion.
3. The resource based on gross national income (GNI) a uniform percentage rate (0.73 %) applied to the GNI of each Member State
the largest source of revenue, accounts for 69 % of total
revenue or EUR 80 billion
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4. Other revenue
such as
- taxes paid by EU staff on their salaries
- contributions from non-EU countries to certain EU programmes
- fines on companies that are breaking competition or other laws
These miscellaneous resources add up to around EUR
1.3 billion, i.e. about 1 % of the budget.
Budget revenues at a glance
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BUDGET EXPENDITURES 2007
1. Natural resources 43%
Common agricultural policy Rural development
Environmental protection
2. Cohesion policy 36%
Regional redistribution Cohesion funds
3. Competitiveness and growth 8%
Employment and social services Support of research
Information society
4. Foreign aid and other extension 6%
Cooperation with new candidate states
Long term assistance to underdeveloped countries Emergency aid in natural disasters
5. Security and justice 1%
Fight against terrorism
Cooperation in criminal and judicial matters
6. European citizenship 1%
Cultural heritage Public health
Consumers protection
7. Administrative costs 5%
EU institutions
EU foreign service
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EU expenditures
Compulsory (46%) CAP
Non-compulsory (54%)
- Structural funds - Internal policies - External policies - Administration - Pre-accession aid
35 267 2624 4937 12190 25817
41804
59369
96238 111424 129100
0 50000 100000 150000
1958 1963 1968 1973 1978 1983 1988 1991 2001 2006 2008
Growth of EU budget over years
Example of the budget year 2005
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Budget for the 2007
EU net budget 2007-2013 per capita
10000 EUR plus PP
-5000 – 1000 EUR PP
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BUDGETARY RULES
- The treaties: the Union budget is not allowed to be in deficit, which means that revenue has to cover the entire expenditure.
- A maximum spending limit is currently set at 1.24 % of the Union's gross national income (GNI) for
payments made from the EU budget. This corresponds to approximately EUR 293 per EU citizen on average.
- A financial framework agreed by the European
Parliament, the Council of Ministers and the European Commission, which controls the evolution of the EU
budget by expenditure category over a set period of
time.
HOW THE BUDGET IS DECIDED
There are two types of budget expenditure: compulsory and non-compulsory expenditure. Compulsory
expenditure covers all expenditure resulting from
international agreements and the EU treaties. All other expenditure is classified as non-compulsory.
The Council of Ministers has the final word on
compulsory expenditure and the European Parliament
on non-compulsory expenditure.
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THE BUDGET PROCEDURE
Preliminary draft of the budget by Commission Council – first reading, amendments
Parliament – first reading, with amendments
Council – second reading, tries reach agreement with Parliament
Parliament – second reading, finally approves or rejects non compulsory expenditure
The most recent financial frameworks cover the seven-
year period from 2007 to 2013
EP COM CoM ECJ ECA
proposal
preliminary draft
draft Commission
Council
EP
Council EP
compulsory expenditure
non- compulsory expenditure first reading
Council has last word
EP has last word
amended draft
constant dialogue between the Council
and the EP
no:
emergency budget adopted after
second reading? yes
final publication in
Official Journal
The budget procedure
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Redistribution
Net contributors, paying more than getting
Germany, France, Italy, United Kingdom, Netherlands, Austria, Denmark, Sweden, Finland, Luxembourg
All other countries – net receivers, getting more than paying
Expenditure in Luxembourg, Belgium and France
include items for the EU administrative centers in each
of those countries.
Budget 2006, member states contribution and expenditure
Member State
Total Contribution
in Euro
Total Contribution
as % of total EU budget
Total Expenditure
year 2006 in Euro
Total Expenditure
as % of total EU budget
European
Union 105 259 468 772 100.00% 106 575 500 000 100.00%
Germany 22 218 438 941 21.11% 12 242 400 000 11.49%
France 17 303 107 859 16.44% 13 496 200 000 12.66%
Italy 14 359 479 157 13.64% 10 922 300 000 10.25%
United
Kingdom 13 739 900 046 13.05% 8 294 200 000 7.78%
Spain 8 957 286 488 8.51% 12 883 000 000 12.09%
Netherlands 5 552 933 781 5.28% 2 190 400 000 2.06%
Belgium 4 035 286 807 3.83% 5 625 100 000 5.28%
Sweden 2 832 862 800 2.69% 1 573 400 000 1.48%
Austria 2 308 432 030 2.19% 1 830 100 000 1.72%
Denmark 2 130 860 212 2.02% 1 501 900 000 1.41%
Poland 2 099 087 114 1.99% 5 305 600 000 4.98%
31 Member State
Total Contribution
in Euro
Total Contribution
as % of total EU budget
Total Expenditure
year 2006 in Euro
Total Expenditure
as % of total EU budget
Greece 1 882 611 879 1.79% 6 833 700 000 6.41%
Finland 1 544 832 284 1.47% 1 280 400 000 1.20%
Portugal 1 443 049 602 1.37% 3 634 800 000 3.41%
Ireland 1 341 281 313 1.27% 2 461 800 000 2.31%
Hungary 1 003 119 411 0.95% 1 842 200 000 1.73%
Czech
Republic 932 392 859 0.89% 1 330 000 000 1.25%
Slovakia 393 148 777 0.37% 696 200 000 0.65%
Slovenia 299 993 572 0.29% 406 000 000 0.38%
Luxembourg 241 439 011 0.23% 1 194 800 000 1.12%
Lithuania 221 997 405 0.21% 799 800 000 0.75%
Cyprus 144 556 416 0.14% 239 600 000 0.22%
Latvia 115 205 431 0.11% 402 600 000 0.24%
Estonia 100 756 308 0.10% 300 000 000 0.28%
Malta 57 409 269 0.05% 157 000 000 0.14%
Bulgaria 360 600 000 0.34%
Romania 693 100 000 0.65%
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Member State Money to EU
(billions)
Money from EU (billions)
Net benefit (billions)
Ratio of money (Out/In)
Population
(2007) Net benefit per capita
Austria 19 10 -8.5 0.526 8,298,923 -1024
Belgium 33 39 +6.4 1.182 10,584,534 605
Bulgaria 2.3 12 +9.7 5.218 7,679,290 1263
Cyprus 1.1 1 -0.1 0.909 778,684 -128
Czech Republic 9.2 31 +22 3.370 10,287,189 2139
Denmark 17 10 -7.2 0.588 5,444,242 -1322
Estonia 0.8 4 +3.2 5.0 1,342,409 2384
Finland 13 9 -3.7 0.692 5,276,955 -701
France 140 89 -51 0.636 63,392,140 -805
Germany 164 78 -86 0.476 82,314,906 -1045
Greece 15 40 +25 2.667 11,171,740 2238
Hungary 8.4 32 +24 3.810 10,066,158 2384
Republic of Ireland 11 12 +0.6 1.091 4,312,526 139
Italy 116 70 -46 0.603 59,131,287 -778
Latvia 1.4 6 +4.6 4.286 2,281,305 2016
Lithuania 1.7 9 +7.3 5.294 3,384,879 2157
Luxembourg 2.3 10 +7.7 4.348 476,187 16170
Malta 0.5 1 +0.5 2.0 407,810 1226
Netherlands 37 13 -24 0.351 16,357,992 -1467
Poland 22 87 +65 3.955 38,125,479 1705
Portugal 12 29 +17 2.417 10,599,095 1604
Romania 7.2 32 +25 4.444 21,565,119 1159
Slovakia 3.5 14 +11 4.00 5,393,637 2039
Slovenia 3.1 6 +2.9 1.9354 2,010,377 1443
Spain 76 78 +22 1.026 44,474,631 49
Sweden 20 9 -11 0.450 9,113,257 -1207
Estimates for EU-27 budget for 2007-2013 in euros (€)
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