1 The EU budget: Some questions Jean Pisani-Ferry Contribution to the roundtable « Challenges for the EU in the 21 st century », Warsaw, 8 April 2008.

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The EU budget: Some questions

Jean Pisani-Ferry

Contribution to the roundtable « Challenges for the EU in the 21st century », Warsaw, 8 April 2008

An opportunity not to miss

2004 Sapir report: EU budget « an historical relic »

2005 negotiation on Financial Perspectives: an exercise in relic preservation

Opportunity offered by the budget review must be grasped

– Current disconnect between priorities and spending undermines EU legitimacy

– Changing international context (climate, CAP) call for new policies

– Evolving EU priorities need to be supported by the budget

However risks that traditional attitude will prevail

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Questions: A selective list

1. Where does the EU budget fit in?

2. What role for the EU budget?

3. What criteria for deciding on spending?

4. Standard economics vs. politics: What should prevail?

5. How flexible should the EU budget be?

6. Redistribution through revenues or through spending?

7. Redistribution to regions or countries?

8. Financing: Are there alternatives?

9. How should the discussion be structured?

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1. Where does the EU budget fit in?

EU budget vs. other instruments: two dimensions

– Vertical: other public spending (EU spending 1/40th of total)

– Horizontal: At EU level budget is only one of several instrument (alongside regulation, coordination), often not the main one

« Questions about the budget are in their essence questions about the European construction « (Pietras)

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2. What role for the EU budget?

The Musgravian trinity

Macroeconomic stabilisation – no role Dominated by monetary policy, coordination of national budgetary

policies

Allocation – specific policies Main instruments are regulation, trade policy, competition policy

Room for complementary instrument

Redistribution – inter-country and inter-region No interpersonal redistribution

Significant international and interregional dimensions

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3. What criteria for deciding on spending?

Subsidiarity criterion applies, but

Treaty clearly states it applies to competences, thus policies

Impact of EU policies on national spending more significant than on EU spending

– R&D, higher education

– Infrastructure

– Climate

– Development assistance

EU budget should thus not be looked at in isolation

– However large disconnect between EU budget and EU policies

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4. Standard economics vs. politics: What should prevail?

Two views

– Standard normative economics European public goods

Degree of redistribution

– Political approach (on both revenue and spending sides) Citizenship through taxation

Redress domestic political failures through EU policies

Don’t overplay political arguments

– EU legitimacy still primarily rests on economic criteria

– Political argument should have limited role only

– Fate of referendum is reason for caution

Case for incentive role in accordance with EU priorities

– Lisbon: EU as (weak) incentive framework7

5. How flexible should the EU budget be?

EU priorities variable over time 1980’s: Single market

1990’s: EMU

2000’s: Enlargement

2010’s: Climate, external action

Calls for dynamic subsidiarity principle

Yet most of EU budget is an entitlement budget

– PAC and structural funds

– Lisbonisation of spending items is window dressing

Support to EU priorities calls for much more flexibility in the budget

– Reason to separate out discussion on net balances (de la Fuente)

– Reason for sunset clauses (Gros)

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6. Redistribution to regions or to countries?

Regional policy a strange mix, disputable from allocative and distributional viewpoints

Enlargment implies lesser focus on regions

Case for explicit targeting of countries rather than regions

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7. Redistribution through revenues or through spending?

Mix variable at national level

EU:

– Redistribution cum allocation, through spending

– Corrections

Strong reasons to change?

– Degree of redistribution anyway subject to ex post check

– Desired degree of redistribution can be achieved through corrections / horizontal transfers whatever the distributional content of policies

Therefore case for progressive taxation is weak

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8. Financing: Are there alternatives?

Arguments for new revenue sources:

– Ressources whose apportionment is largely arbitrary (seignorage)

– Very mobile tax bases giving rise to tax arbitrage at EU level (corporate income tax, flight duties)

– Pigouvian taxes associated with EU policies (carbon tax)

– Or a combination of all three (proceeds of emission quota sales)

First best solution could be assignment to EU budget, but

– Risks in making EU budget dependent on volatile resources

– Base for total contribution will remain close to GNI

Is it worth the effort?

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9. How should the discussion be structured?

Several issues, not all have same priority

– Spending level

– Budget structure

– Budget procedures

– Financing

– Net balances

Three approaches

– The old way: CAP first, the rest after

– Commission: public goods first, draw conclusions for budget

– Alternative: enveloppe first (level and net balances), content thereafter

Second approach is best, third may be more realistic

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Thank You For Your Attention

Jean.pisani-ferry@bruegel.org

www.bruegel.org