European Union Finances

van der Hoek, M. Peter (2011): European Union Finances. Published in: Fiscal Sovereignty of the Member States in an Internal Market (2011): pp. 39-50.

Abstract

Traditionally, three branches of government are distinguished in public finance: the allocation branch, the distribution branch and the stabilization branch. Although the first two branches apply to the EU budget, the third does not for two reasons. First, the EU is legally obliged to balance its budget. Second, the EU budget accounts for only 1% of the EU GNI. The EU can only play a role in fulfilling the stabilization function by policy coordination as it does in the framework of the Stability and Growth Pact. The EU’s revenue system has developed from national contributions (until 1971) to a system of own resources. The traditional own resources (in the form of customs and agricultural duties) were introduced in the early 1970s. The VAT-based own resource was introduced in 1970, although it did not yield revenues until 1979. In 1988, a GNI-based own resource was introduced. The GNI-based own resource is now the EU’s primary source of revenue. Therefore, the current revenue structure resembles the EU’s financing method as it existed before the own resources were introduced as there is hardly any difference between the national contributions from before 1971 and the GNI-based own resource. The share of agricultural spending in the EU budget continued to grow until the late 1980s, when it amounted to approximately two-thirds. However, the share of the CAP has gradually declined due to the implementation of other policies and is expected to amount to approximately one-third by 2013. The EU has agreed on a ceiling of 1.24% of EU GNI for the expenditure. The problem of budgetary balances has led to the introduction of a number of corrections in the EU budget, which have considerably reduced the simplicity and transparency of the EU’s funding system. Moreover, it seems questionable whether these correction mechanisms are still justified. In addition, the problem of budgetary balances has proved to be a serious obstacle to substantive budget reform.

• Item Type: MPRA Paper
• Language: English
• Keywords: EU budget, own resource, VAT-based own resource, GNI-based own resource, budgetary balance
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents

References

De la Fuente, Angel, Rafael Doménech & Vasja Rant. Addressing the net balances problem as a prerequisite for EU budget reform: A proposal. (2008) <http://ec.europa.eu/dgs/policy_advisers/discussions_papers_en.htm>.

European Commission (2005). ‘Allocation of 2004 EU Operating Expenditure by Member State’. September 2005, European Commission, DG III, Brussels.

Feld, Lars P. ‘European public finances: much ado about nothing?’. in Handbook of Public Administration and Policy in the European Union. Edited by M. Peter van der Hoek. Boca Raton: Taylor & Francis/CRC Press, 2005.

Gros, Daniel. How to Achieve a Better Budget for the European Union. (2008) <http://ec.europa.eu/dgs/policy_advisers/discussions_papers_en.htm>.

Inghelram, J.F.H. ‘Welke toekomst voor de financiering van de EU?’. SEW 90, no. 5 (2007): 191–200.

Jonung, Lars, Martin Larch & Jonas Fischer. ‘101 Proposals to Reform the Stability and Growth Pact. Why So Many? A review’. Public Finance and Management 8, no. 3 (2008): 502–560.

Parliamentary Papers. Staat van de Europese Unie 2009-2010, Tweede Kamer, vergaderjaar 2009–2010, 32,125, Nos 1–2, The Hague: Sdu Uitgevers, 2009.

Schneider, Ondřej. The EU budget dispute – A blessing in disguise?. (2007) CESifo Working Paper No. 1986, <www.CESifo-group.de>.

Van der Hoek & M. Peter. ‘From Nation to State: A Difficult Process’. Public Administration and Management: An Interactive Journal 3, no. 4 (1998) <http://www.pamij.com/>.

Van der Hoek & M. Peter. ‘Tax Harmonization and Competition in the European Union’. eJournal of Tax Research 1, no. 1 (2003): 19–36.

Von Hagen, J. & G.W. Hammond. ‘Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community’. The Manchester School 66, no. 3, (1998): 331–353.