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What austerity? EU Commission and Barroso tables €1trillion budget for EU until 2020

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The European Commission yesterday (29 June) presented long-awaited proposals for the EU's next seven-year budget (2014-2020). In a bid to reduce national contributions, the Commission suggested levying new taxes directly, a proposal that was strongly rejected by the UK, which labelled it "unrealistic".

José Manuel Barroso, president of the European Commission, proposed to increase the EU budget from the current €976 billion to €1.025 billion for the next seven-year period, which starts in 2014.

This represents a 4.8% increase, which is beyond the average 2% inflation recorded in the last decade.

In a bid to woo member states that are opposed to further rises in the EU budget, the Commission proposed to reduce national contributions, in line with austerity measures adopted across Europe.

In the previous period (2007-2013), each country committed 1.12% of their Gross National Income (GNI) to the EU budget, a contribution that the Commission is proposing to bring down to 1.05%.

"We are proposing an ambitious and at the same time responsible budget," Barroso underlined.

Shifting priorities

The Commission's proposals are conservative in that the share of funding allocated to the EU's two main areas of expenditure – agriculture and regional policy – remain largely unchanged.

Two new areas will benefit from significant new sources of funding – the EU's External Action Service (EEAS), which was introduced after the Lisbon Treaty, and home affairs, which includes border control, security and immigration.

These are partly offset by a planned reduction in administrative spending, a move that is expected to trigger protests from EU civil servants in the coming days.

Separately, an extra €58 billion is earmarked for programmes that are currently covered by the EU budget, such as the European Globalisation Fund or the international nuclear fusion reactor ITER.

If merged with the budget, the overall amount of national contributions would increase to €1,083 billion on average.

EU VAT and financial transactions tax

But probably the most controversial move is a proposal to raise taxes at EU level, something presented as a way to reduce contributions from national coffers.

Currently, the EU budget is mostly funded through financial transfers from member states.

The first option would be to tap into a European Financial Transactions Tax (FTT), a suggestion Barroso made ahead of a June summit of European leaders. "Ten member states already have mechanisms to tax financial transactions," Barroso argued, adding that without a common EU framework on financial taxation, "we risk breaking the internal market for financial services".

Barroso dismissed criticism that an FTT applied only to the European financial sector would favour the EU's international competitors. "Instead of waiting for everybody to have a financial transactions tax, we thought that is better to have our own and then see if we can create the conditions for a global financial tax," he said.

Moreover, the EU executive suggested introducing a direct Value Added Tax (VAT) at EU level. Currently the Commission receives a levy on national VATs, a system which brings in around €14 billion per year to the EU budget, but reduces member states' incomes. The proposal foresees replacing the current levy with a direct EU VAT, shifting the burden from member states to taxpayers.

In a working document published in October, the Commission said that if the EU VAT was applied at a 1% rate across the EU, "combined with elimination of the existing VAT-based resource," it would bring around €41 billion a year to the EU's coffers.

The UK government immediately criticised the Commission's proposals, with Downing Street labelling Barroso's call for new taxes as "unrealistic".

Czech MEP Jan Zahradil, president of the European Conservative and Reformists group (ECR) in the European Parliament, said: "We will fight EU taxes all the way, both on grounds of principle and because we cannot afford them."

"The fact that the EU must come back to national governments every seven years to ask for a new budget acts as the ultimate anchor of accountability. If we grant the EU tax-raising powers then it becomes tantamount to a state. The EU is supposed to be the servant of the member states, not their master," he added.

Jerzy Buzek, president of the European Parliament, which has a key role in passing the EU's long-term budget, welcomed the Commission's proposals.

"The Commission's proposal on the long-term budget for the EU is an intelligent starting point for negotiations. The next Multiannual Financial Framework will be one of the most important in the EU's history. It will set the direction for the Union at an exceptional time when the European project is under pressure from the sovereign debt crisis and from external instability," Buzek commented.

"A system of real own resources would be fairer, more transparent, simpler and equitable. We should also see an end to rebates, exceptions and correction mechanisms that have accumulated within the current system," he added.

  • 2011-2012: Member states and European Parliament to discuss and amend Commission's proposals.
  • By end 2012: Deadline for approving EU's long-term budget for 2014-2020.
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