The EU budget: Some questions

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

2. 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

3. Questions: A selective list • Where does the EU budget fit in? • What role for the EU budget? • What criteria for deciding on spending? • Standard economics vs. politics: What should prevail? • How flexible should the EU budget be? • Redistribution through revenues or through spending? • Redistribution to regions or countries? • Financing: Are there alternatives? • How should the discussion be structured?

4. 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)

5. 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

6. 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

7. 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 framework

8. 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)

9. 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

10. 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

11. 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?

12. 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

13. Thank You For Your Attention Jean.pisani-ferry@bruegel.org www.bruegel.org