Academic journal article National Institute Economic Review

The EU Budget and UK Contribution

Academic journal article National Institute Economic Review

The EU Budget and UK Contribution

Article excerpt

The European Union budget is small and fulfils only a limited range of functions, yet it provokes regular disputes among the Member States and institutions of the Union. This paper describes the structure of the budget and shows that standard theories, such as fiscal federalism, are not well-suited to analysing how the EU budget operates or the political economy behind it. The paper then looks at how much the UK contributes towards the EU budget and explains why some of the claims made about it in the public discourse are inaccurate.

Keywords: European Union budget; fiscal federalism; UK referendum on EU; EU cohesion policy; common agricultural policy; own resources

JEL Classifications: F55, H11, H61

One of the most consistently contentious aspects of the European Union is its budget. (1) This is a puzzle, not least because the budget accounts for barely 2 percentage points of aggregate public expenditure by all levels of government. The issues that cause friction turn on fractions of a percentage point of the GDP of Member States and would probably generate far less acrimony if they arose inside a country. Disputes centre on the size of the budget, the net contributions or receipts of different Member States, the composition of spending and the manner in which the budget is funded.

During the 1980s, there was intense conflict between the EU institutions over who should have the final say on the budget (Laffan, 1997). Although the significant reforms in 1988 saw a diminution in these conflicts, they have not gone away. Although the EU has to agree its budget annually, the principal political bargaining is around the Medium-term Financial Framework (MFF) which establishes ceilings for expenditure on the main headings of the budget. The first MFF ran for five years from 1988 to 1992, and subsequent ones for seven years.

Since 1988, limited changes in the presentation and composition of the budget have been undertaken. The total budget expenditure has been around 1 per cent of EU GDP on average, reflecting the fact that that for the principal net contributors (notably Germany and the UK) keeping the budget low has been a priority. Since it has to be agreed by unanimity among the Member States, they have been able to achieve this aim. Within this total, around three-quarters of the spending has been devoted to two principal policy areas: Cohesion Policy, targeted at economic, social and (more recently) territorial development; and support for agriculture and rural development. All other headings of the budget have had to compete for the remaining quarter. Over these three decades, the main change in the budget has been for the share of Cohesion Policy to rise, while that of agriculture has fallen (figure 1).

The EU budget also elicits regular hostile comment. It fails, year after year, to obtain a statement of assurance from the European Court of Auditors that the money had been properly spent, an outcome that is mainly the result of errors in conforming to the complex rules governing spending, rather than overt fraud. Brussels 'fat cats' are frequently castigated for their extravagance, high pay and perks, even though the administrative share of the budget was around 6 per cent in 2015, and much of that is to pay for the costs of translation and interpretation.

Since the budget was recast in 1988, there have been substantial changes in the EU itself. The euro has been introduced and there have been four enlargements of the EU's membership (in 1995,2004,2007 and 2014), taking the number of Member States from twelve to twenty-eight, greatly increasing the disparities in GDP per head within the EU. As Buti and Nava (2009, p. 478) note, "the weight of the past both in terms of expenditure, revenues and budgetary procedure has tended to prevail, leading over time to an increasingly suboptimal distribution of tasks between the EU and the national level". Time after time, political constraints have inhibited reform (Heinemann et al. …

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