With the EU Commission planning to issue its proposals for the next EU funding cycle on the 2nd May discussions on the 2021 - 2027 EU funding programme have built momentum over the last couple of months. The EU Commission is pushing for Member States to agree on a final budget package by May 2019. This would enable the new European Commission and Parliament, to be appointed in 2019, to roll out the implementing regulations in 2020 and ensure that the EU funds are available on ground on the 1st January 2021.
Considering that it took the previous €1 trillion budget 29 months to get approved, compounded with the complexities of a Brexit funding shortfall, there is recognition that the proposed time frames are overly ambitious. Brexit will result in a budget short-fall of approximately €12 billion annually. To address this shortfall, the EU Commission is identifying where savings can be made and priorities delivered more efficiently, such as in the areas of cohesion and agricultural policy. Such saving will however not plug the Brexit hole and Member States would need to increase their average contributions.
In May 2018, the EU Commission is expected to present a 1.15% of GNI target in comparison to the current average of 1% of GNP. Some Member States such as the Netherlands, Austria, Denmark and Sweden argue that the 1% target should be retained claiming that the EU without the UK should require less funding. That however would result in a smaller EU budget post-Brexit which would not allow the EU to address the challenges post 2020 such as migration, security, strengthening the Euro, research and innovation, climate change and digitisation.
Considering the envisioned political stalemate, the EU Commission is seeking new ways of enhancing its “own resources” funding which complements Member States’ contributions. As at end 2017 just over 25% of the EU budget revenue is composed of own resources coming from Customs Duty and a portion of the Value Added Tax collected by Member States.
Three new proposals to increase the EU Commission’s own resources are on the table for discussion:
1. Common Consolidated Corporate Tax Base (CCTB) – A CCTB provides for a single set of rules for calculation of the corporate tax base. Corporates operating in the EU single market would no longer have to deal with 28 different sets of national rules when calculating their taxable profits. The CCTB is envisioned as a way towards re-establishing the link between taxation and the place where profits are made. The EU Commission is considering using funds from a CCTB, which could also include a digital tax which was recently unveiled, to contribute towards funding the EU budget. Such an initiative is envisaged to bring in between €21 to €140 billion over seven years.
2. Emission Trading Systems – The permits issued by the EU Emissions Trading Scheme are auctioned by Member States and purchased by companies to ensure their compliance with greenhouse gas targets. The EU Commission proposal is looking into seeking a portion of these revenues collected by Member States to fund the EU Budget. This could generate estimated revenues between €7 billion and €105 billion over seven years.
3. Seignorage – This is the difference between the value of money and the cost of producing it. It is essentially the profit earned by the government when printing currency. The EU Commission is arguing that since the income from seignorage from the ECB is linked to the Economic and Monetary Union, a portion of this revenue could be considered as an own resource for the EU Budget. Depending on the percentage applied, estimated revenues from seignorage could range between €10 billion and €56 billion over seven years.
Options 1 and 2 are a discreet way of tapping into national budgets to fund the EU’s common pot which will not appeal to Member States. Option 3 may require internal EU political jostling which, if overcome, will have a minor budgetary contribution.
It is clear that revenue streams funding the European Union post 2020 will be different in nature and volume, and Europe will need to do more with less. A possibly less politicised solution to address the gap in funding is an increased use of EU financial instruments which use EU funds to leverage private funds. The involvement of private sector funding will not only increase the spending fire power of the EU, but it will also ensure that EU funds become more market-driven.
Whilst acknowledging that EU financial instruments will not fully address the EU’s funding needs, the crowding in of private capital using EU funds will help in making ends meet when negotiations heat up in the coming months.
Mark Scicluna Bartoli is Executive - EU & Institutional Affairs at Bank of Valletta and is also responsible for Bank of Valletta’s EU Representative Office in Brussels.