Memorandum by HM Treasury
INTRODUCTION
1. The existing Own Resources system can
be considered in two parts:
(i) the "own resources" that together
comprise gross contributions to the EU budget (currently Traditional
Own Resources (TOR), the VAT-based resource, and the GNI-based
resource[2]);
and
(ii) correction mechanisms. Correction mechanisms
(the UK abatement and the corrections agreed at the December 2005
European council for Netherlands, Sweden, Austria and Germany)
relate to member states' net contributions to the budget are therefore
driven by inequities in the expenditure side of the budget. Consideration
of correction mechanisms—and therefore of own resources—cannot
be made in isolation from consideration of EU expenditure.
2. The Own Resources Decision (2000/597/EC)
and the implementing regulation (2028/2004) together form the
legal basis for the financing of the EC budget. The Own Resource
Decision also sets limits, in terms of a percentage of EU GNI,
on the amount of payment appropriations and commitment appropriations
that can be entered into the budget in any year.
What principles should underpin the way in which
the money for Europe's budget is raised?
3. Equity is the key principal that should
guide the manner in which EU revenue is raised in terms of the
design of the own resources themselves. It also underpins the
basis for correction mechanisms that was first established at
the Fontainebleau European Council in 1984:
"Expenditure policy is ultimately the essential
means of resolving the question of budgetary imbalances.
[However it has been agreed] that any member
state sustaining a budgetary burden which is excessive in relation
to its relative prosperity may benefit from a correction at the
appropriate time"
(From Fontainebleau European Council Conclusions)
4. Secondary principals are those of efficiency
and simplicity (in particular that the administrative burden of
the Own Resources system is kept to a minimum).
Is the present system of Own Resources fair?
5. The trend over the last 20 years, driven
by concerns of fairness, has been towards aligning member states'
gross contributions pre-correction in terms of the share of national
wealth, for example through the capping of the VAT-based resource,
reduction of the VAT capping rate and the introduction of the
GNI-based resource. Gross contributions (pre-correction) expressed
as a percentage of GNI are now broadly similar in all member states—see
annex 1. The incidence of the VAT-based resource and TOR are still
somewhat uneven—see annex 2—but now represent a smaller
share of total revenue—see annex 3. For example, over the
last 10 years since 1996, the VAT-based resource has gone from
constituting over 50 per cent of EU revenue to just above 15 per
cent.
6. There are now five member states that
benefit from a correction: the UK, Netherlands, Sweden, Austria
and Germany. The corrections take a variety of forms—the
abatement for the UK, reductions in the rate of call of the VAT
resource for Netherlands, Sweden, Austria and Germany and a reduction
in GNI-based contributions for Netherlands and Sweden. Nevertheless,
all were introduced with the aim of reducing the disparities in
net contributions between the large net contributors reflecting
the enduring inequities in the distribution of EU expenditure.
Is the present system of Own Resources sustainable?
7. The Own Resources system has been in
operation since the 1970s and has provided a stable and uninterrupted
flow of funds to the EU budget ever since.
8. The system has, however, evolved over
this period[3],
the changes primarily designed to improve the fairness of the
own resources themselves and, in the case of the five corrections,
to address the budgetary imbalances affecting some of the large
net contributors. Financial Perspective negotiations, the most
recent of which set the framework for the EU budget over the period
2007-13, consider own resources, expenditure and corrections as
a package. As such the sustainability of the system depends on
the ability of member states to find similarly acceptable packages
in the future.
9. The conclusions of the December 2005
European Council called for a fundamental review of the EU Budget,
both expenditure and Own Resources. This review provides an opportunity
for thorough reform of EU expenditure policy as well as consideration
of possible changes to the Own Resources system.
10. It should be noted that the Own Resources
Decision (ORD), which forms the legal basis of the Own Resources
system, is not time-limited. It remains in force until it is replaced
by a new ORD. In contrast the Inter-Institutional Agreement between
the European Council, Parliament and Commission sets the budget
framework for only a fixed seven-year period.
What changes, if any, should be made to the system?
11. As has been noted above, the direction
of travel in the Own Resources system is towards greater fairness
in the incidence of the own resources themselves and for the addition
of new correction mechanisms for net contributors.
12. There remains scope for further increases
in the share of financing that comes from resources linked closely
to national wealth—either GNI or GDP for example.
13. In terms of correction mechanisms, it
is notable that the resolution of budgetary imbalances for large
net contributors has been achieved by the addition of new correction
mechanisms rather than the reform of expenditure policy. The Fontainebleau
principles note that expenditure policy is the right way to address
budgetary imbalances but that member states should receive a correction
rather than be required to sustain such an imbalance. The budget
review is, however, an opportunity to address the problems with
EU expenditure.
14. The system of own resources is often
criticised as being complex and lacking in transparency. This
is partly due to the complex original design of the resources
themselves (and the corrections) but also a reflection of the
incremental way in which the system has evolved. The aim of greater
simplicity, transparency and a reduced administrative burden should
nevertheless be supported where possible. One simplification,
(the elimination of the frozen rate and uniform rate steps in
the calculation of the VAT-based resource) was agreed as part
of the December 2005 Financial Perspectives deal that was concluded
under the UK presidency of the EU.
15. It should be noted that as the financing
of the budget is a zero-sum game, even the most modest simplification
will inevitably create winners and losers with the result that
minor modifications can become significant issues in Financial
Perspective negotiations.
Should the European Union be given a tax of its
own?
16. The UK Government believes that taxation
is a matter for national governments and therefore does not support
the introduction of an "EU tax".
17. In addition, the EU is not permitted
to run budget surpluses or deficits from one year to the next.
The revenue from an EU tax on its own would not be sufficiently
flexible to guarantee the precise level of funds required for
the budget to support spending requirements. This would mean that
other "own resources" would have to be retained to finance
the difference between the tax revenue and the budget total.
Is a system of Own Resources the best way of the
EU raising its money?
18. A system of "Own Resources"
was introduced in the place of national contributions in order
to give the financing of the EU budget a degree of autonomy: the
Own Resources Decision and the accompanying implementing Regulation
provide a legal basis for the European Commission to call up funds
from member states and impose fines if these are not forthcoming.
At the same time, the system in its current form reflects member
states' desires to determine how funds are raised and closely
align shares of the financing burden with national wealth. A return
to a simple system of national contributions (as existed prior
to the introduction of the Own Resources system) could be administratively
simpler but would remove the degree of financial autonomy that
the current system allows. As such the current arrangement can
be regarded as seeking to strike a balance between autonomy and
member states' concerns.
What effect has enlargement had on the Own Resources
System?
19. The main impact of enlargement has been
felt on the expenditure side of the budget rather than on the
Own Resources System. It was not necessary, for example, to amend
the Own Resources Decision in 2004 to allow the accession of 10
new member states.
20. In terms of expenditure, the 10 new
member states received 9.5 per cent of total allocated expenditure
in 2005 (when allocated expenditure—ie excluding external
actions—equalled 0.89 per cent of EU GNI) but should receive
approximately 27 per cent of allocated expenditure over the period
2007-13 (with allocated expenditure over the period equal to approximately
0.92 per cent of EU GNI).
21. As part of the agreement on the 2007-13
Financial Perspective reached at the December 2005 European Council,
the UK agreed, in recognition of the financial cost of enlargement,
to "disapply" the abatement to expenditure in new member
states apart from Common Agricultural Policy Direct payments and
market-related expenditure as well as that part of rural development
expenditure originating from the EAGGF guarantee section. This
begins with 20 per cent disapplication of the relevant expenditure
in 2009, 70 per cent in 2010 and 100 per cent thereafter.
2 A short description of the individual resources
can be found in the annual European Community Finances White Paper
Cm 6770. Back
3
See annex 4 for chronology of changes to the Own Resources system. Back
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