The EU’s long-term budget—formally known as the Multiannual Financial Framework (MFF)—take years of negotiation.
The MFF requires unanimous agreement in the Council and an absolute majority in the European Parliament.
Although the European Council of EU leaders has little formal role according to the treaties, trade-offs finalised at the head of state level are inevitably required to reach agreement among member states.
Long-term budgets cover seven-year periods, with the next one running from 2021 to 2027.
EU leaders first discussed the next budget as early as February 2018, and in May that year the European Commission produced its initial proposal.
The Council has been working on the budget proposal continuously since mid-2018.
What has the Commission proposed?
This is equivalent to 1.11% of the 27 EU member states’ gross national income (the size of the total EU economy).
However, because of the UK’s anticipated exit from the EU, in practical terms it would mean the other member states increasing their collective contribution by €52 billion over the seven years to cover the gap left by the UK’s departure.
Despite a stable budget, the Commission is proposing changes to what it is spent on.
This includes a reduction in direct payments to farmers, which are administered through the European Agricultural Guarantee Fund (EAGF). These are currently slated to fall by 11% in real terms.
The other major cut is to the Cohesion Fund, which supports transport and energy infrastructure projects in poorer member states, down by 45%.
The programmes that would benefit are Border Management (+243%), and especially Frontex—the EU’s border agency—which would see its funding almost tripled in real terms.
The Erasmus+ education and training exchange programme (+92%) and the Horizon Europe research programme (+29%) would also see substantial increases in funding.
The budget also includes new programmes such as the Reform Support Programme (€25 billion), which would support member states’ domestic reform efforts on things like the business environment and labour market, and the European Defence Fund (€13 billion), which would promote the EU’s defence industry.
How will the budget be funded?
The Commission has also proposed changes to the way that the EU budget is funded.
Currently, almost three-quarters comes directly from member-state contributions, with the remainder coming from customs duties and the EU’s share of value-added tax (VAT) income.
The changes would reduce reliance on direct member-state contributions and diversify income sources by reforming customs and VAT rules, and creating several new income streams.
It is estimated that these changes would reduce member-state contributions to 57% of the budget by 2027, from 72% currently.
In future, member states would keep only 10% of customs duties to cover the costs of collection, down from 20% currently.
The VAT system would be simplified and a standard 1% rate—up from 0.3% currently—would be applied to the VAT base of each member state.
The lower rate that Germany, the Netherlands and Sweden are currently allowed to apply would also be abolished.
What are the new sources of funding?
Finally, the budget foresees adding three new sources of funding: a common corporation tax levy, a tax on non-recycled plastic packaging and a share of revenue from the emissions trading scheme.
The corporation tax levy would rely on the completion of legislation establishing a Common Consolidation Corporate Tax Base (CCCTB), designed to set up a common tax calculation system for multinational companies operating in the EU.
The new system would establish an EU-wide total for each company’s taxable income, with member states then applying their national corporate tax rate to their share of the total, depending on where the company’s activities take place.
The budget proposes applying a 3% tax rate to this overall EU taxable income.
This Commission estimates this could bring in €25bn per year, and that by 2027 it would contribute 9% of the budget.
The charge on the amount of non-recycled plastic produced in each member state would equal €0.80/kg, contributing €7bn to the budget each year.
Finally, the EU would appropriate a fifth of the income from the emissions trading system—member states auction greenhouse gas allowances to companies for the emissions they produce—raising roughly €3bn per year.
What are the controversial proposals?
One of the more controversial proposals is to introduce financial sanctions for violations to the rule of law which broadly relate the budget.
It would allow the Commission to suspend, reduce or restrict member state governments’ access to EU funds if found in breach.
It could affect all government entities, but not non-government recipients that receive funding directly from EU projects and programmes.
A decision to impose sanctions would be done via reverse qualified majority in the Council, i.e. unless 15 member states disapproved of the decision, it would be implemented.
This means that, in theory, a majority of member states (14) could disapprove of a decision and it would still apply.
Another controversial proposal is to phase out all rebates as a result of the UK leaving the EU.
The UK’s rebate—i.e. two-thirds of the difference between its payments and receipts—is financed by all other member states. However, Austria, Germany, the Netherlands and Sweden receive a rebate of 75% on their contribution to the UK rebate, which in turn is financed by all other member states.
This phasing-out would take place over the first five years of the next budget period (2021-25).
Denmark and Ireland would retain their financial adjustment for not participating in justice and home affairs policies.
What has the European Parliament said?
Generally speaking, the European Parliament has called for the Commission to go further than its plans.
The parliament has called for the budget to increase, in contrast to the Commission’s proposals, which represent a slight real-terms cut of €1.1bn (0.01% of the total budget).
Instead, the parliament wants a budget of €1.32trn, some €189bn above the Commission’s proposal.
This would ensure that all existing programmes continue to be funded, alongside new initiatives, and make up for the loss of funding from the UK’s exit.
Most of the discrepancy between the parliament’s demands and the Commission’s proposals comes down to four items: direct payments to farmers, the Cohesion Fund, Erasmus+ and Horizon Europe.
In essence, the parliament wants programmes set for cuts to be at least maintained at the current level, and for the main expanded programmes to be increased further.
Maintaining current funding for direct payments and the Cohesion Fund would amount to an extra €66bn in real terms.
Tripling the Erasmus+ programme from €26bn and increasing Horizon Europe funding to €120 (40% more than the Commission proposal) would add a further €86bn.
The parliament is generally supportive of the Commission’s proposals on rebalancing the sources of funding, as well as the three new funding streams.
On top of these, it has said that a financial transactions tax and a carbon border adjustment mechanism—taxing imports according to their environmental impact—should be added to the EU’s income streams.
Furthermore, it supports the rule of law sanctions that the Commission has proposed, subject to further protections to ensure individual beneficiaries are not punished for their governments’ actions.
The parliament also supports the Commission initiative to phase out ‘all rebates and other correction mechanisms’, suggesting it would in fact like the proposals to go further than planned.
How have member states reacted?
The UK’s anticipated exit has exacerbated what are always divisive negotiations.
While this will raise the contributions of all member states, it will affect the existing net contributors most.
As far as attitudes to the next budget among member states go, there appear broadly to be two groups: those that would like to see a smaller budget, and those (to varying degrees) who would like to see it expand.
The former group includes Austria, Denmark, the Netherlands and Sweden—all net contributors whose contributions would increase most to make up for the loss of the UK contribution.
Dutch prime minister Mark Rutte responded to the Commission’s proposal by saying that ‘a smaller EU means a smaller budget.’
The then Danish prime minister made the same point. Germany has also reportedly submitted a document to other member states saying that ‘losing the UK as one of the largest next contributors to the MFF means that even with this limit, contributions of the remaining member states will increase significantly.’
This hints at a similarly reluctant attitude.
However, member states have not yet reacted in depth to the precise detail of the budget.
The Council continues discussions internally to resolve conflicting positions.
The aim is to reach agreement before the end of 2019, a date that has already been pushed back from this autumn.
There is every chance it will run over into the new year and beyond.
If no agreement is reached in time for the new budget period in 2021, the existing funding arrangements in the current budget will continue until such an agreement is reached.
By Matt Bevington, researcher at the UK in a Changing Europe.
The views expressed in this analysis post are those of the authors and not necessarily those of the UK in a Changing Europe initiative.