The European Union should continue to be financed by member states' contributions in future. A separate EU tax should be rejected. However, the present UK-centred rebate should be replaced by a "general, but limited correction mechanism". These are the main findings of a ZEW study on the future of the Brussels financing system.

The study commissioned by the German Federal Ministry of Finance develops reform proposals for future financing of the EU budget. The study starts by assessing the status quo. The Brussels budget is currently financed by so-called own resources, which are de facto member states' contributions and need to be financed from national tax revenues. The fact that the current contribution system establishes a close link between national budgets and the EU budget is identified as a key advantage, as this provides a strong incentive for the Council to control spending at EU level. One weakness of the status quo is, however, associated with the large number of exceptions and special conditions.

A rational budgetary policy is overshadowed again and again by debates about the national distribution of the financial burden. The status quo analysis performs simulations which make clear that the distribution problem has its roots on the expenditure side, while the revenue side acts as a buffer to partially compensate for the distribution effects caused on the expenditure side.

The findings do nothing to indicate that the introduction of an EU tax would solve the current problems. The calculations show, in particular, that any EU tax would entail new strong distribution effects, which would be bound to create new compensation payments.

Based on the status quo analysis and the reform options discussed in the literature, the authors develop their own reform proposal. This includes the complete phasing out of the VAT resource, financing the EU budget fully on the basis of the GNI resource and the introduction of a general, but limited correction mechanism (GLCM). Retaining a correction mechanism is essential as long as substantial restructuring of the expenditure side is not successful. A GLCM would have many advantages over the current UK-centred rebate system or a generalised, but unlimited mechanism (GCM). In particular, the GLCM allows correction to be limited to those policy areas that appear to be especially problematic from the point of view of distribution. By contrast, payments which are, for example, explicitly aimed at favouring poor countries or regions would not be undermined, as happens in the current UK-centred rebate system.

Apart from these core reform elements, the ZEW study recommends that the EU regions should be more closely involved in financing the EU budget. The current system, according to which, in Germany, EU own resource payments are to be made from the Federal Government's tax revenues, but the return flows benefit the federal states, in particular, creates incorrect incentives as long as the latter do not participate on the cost side. Furthermore, it would be desirable to use nominal metrics in EU budgetary policy, instead of the current practice, which expresses the budget figures as a percentage of GNI and in real Euro.

for further information please contact:

Dr. Friedrich Heinemann

Phone: +49/621/1235-149, Fax: -223

E-Mail: heinemann@zew.de

Date

21.01.2008

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