Reform Options for the EU Own Resources

System

Philipp MohlCentre for European Economic Research

(ZEW)

Conference: „The Future of the EU Budget“Budapest, 30 May 2008

Assessing the Status quo

0

20,000

40,000

60,000

80,000

100,000

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

GNP/GNI own resource

VAT own resource

traditional own resources

other payments

in m

illio

n E

UR

Development of EU Own Resources

Incentives of Budgetary Players & the Common Pool Problem

• Provision of European goods suffers from asymmetric cost-benefit analysis

• Council members represent national electorates• Enlargement and unanimity rule force the common

pool problem• Small countries in particular face almost zero

marginal costs in financing pork barrels

Incentives of Budgetary Players & the Common Pool Problem (contd.)

Country Share in % Country Share in %Germany 20.1 Irland 1.5France 17.9 Poland 2.4Italy 14.1 Czech Republic 1.0UK 11.1 Hungary 0.8Spain 9.7 Slovak Republic 0.4The Netherlands 5.1 Slovenia 0.3Belgium 3.1 Latvia 0.2Sweden 2.7 Lithuania 0.2Austria 2.3 Luxembourg 0.2Denmark 1.9 Cyprus 0.1Greece 1.8 Estonia 0.1Finland 1.6 Malta 0.0Portugal 1.6

The Driving Forces of Redistribution

• Expenditure side:– Large redistributional effect– Structural funds: progressive redistribution pattern– Agricultural policy: arbitrary redistribution pattern

• Revenue side: – Relative small redistributional effect– Largest redistributional effects: UK‘s rebate– The revenue side counteracts the expenditure side

redistribution to a small extent

Conclusion:Strengths and Weaknesses of

the Status quo

+ Link between national budgets and the EU budget

+ Ceiling of the EU budget

+ Member States can decide on their own how to finance the EU budget

+ Increasing relevance of GNI resources

– Common Pool Problem

– Long list of special provisions

ZEW Reform Proposal

ZEW Reform Proposal

• Complete phasing-out of the VAT resource• Focus on the GNI resource • Establishing a generalised but limited correction

mechanism (GLCM)– Generalised, i.e. no single country would be priveleged– Limited, i.e. not all allocatable expenditures are taking into

account in the correction

ZEW Reform Proposal (contd.)

Idea: Split the EU budget in two baskets:

• Basket 1:– Includes policies whose distributive effects are either not

measurable or are politically accepted– Financed by GNI resources– Eurostat might calculate the level of contributions

ZEW Reform Proposal (contd.)

• Basket 2: – Includes policies whose distributive effects are not regarded

as acceptable– Financed by a generalised correction mechanism– Option to phase out Basket 2 of the EU budget

Distribution pattern of various EU taxes

VAT tax

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

DE FR UK IT ES NL EL PT BE SE AT DK FI IE LU PL CZ HU SK LT LV SL EE CY MT

Dev

iatio

n fr

om G

NI p

ropo

rtio

nalit

y

CO2 tax

-100%

0%

100%

200%

300%

400%

500%

DE FR UK IT ES NL EL PT BE SE AT DK FI IE LU PL CZ HU SK LT LV SL EE CY MT RO BU

Dev

iatio

n fr

om G

NI p

ropo

rtio

nalit

y