EU budgetary issues

1. EU budgetary issues Łukasz Konopielko, PhD

2. Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”. Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego.

3. Reasons for integration • Transaction costs: Diversity of rules adds cost related to search of best solution. Uniformity allows transparency and cost reduction. • Economies of scale: production and provision of public goods and policies is more efficient in larger scale • Spill-over effects: These may lead to inefficiencies as outsiders may benefit or bear the cost of actions of the insiders. Therefore higher authority should solve the problem. • Credibility: As incentive to „free-ride” still exists and cooperative policy can be thus undermined, it is better to hand over the competence to the union level. • Insurance: More scope for the pooling the risk – especially in case of macro shocks as there is no market for this type of insurance.

4. Three stages of markets integration • Free trade area All trade impediments are eliminated among members. Flow of goods internally is free, however each country maintains its previous trade regulations to third countries • Custom union Free trade area plus common external trade policy established • Common market Custom union plus fully free internal market for production factors. Common external policy with respect to production factors.

5. Economic policy integration • Economic union Common market plus high degree of coordination of economic policy. Firstly regulations associated with establishing common market such as market regulations, competition. Establishing rules proceeding to next stage ie. Monetary union. Also redistribution and environment policies. • Monetary union – common currency • Economic and monetary union Involves what described above plus coordination of macroeconomic and budget policies. • Possible further stages: • political union (can be formed with respect to some aspects of political issues like anti-crime etc.) • Full union (confederation or federation)

6. The Subsidarity Principle • Assumption: Power is best executed by the nation and only in specific circumstances handed over to higher (union) level. • This is due to lower implementation cost and higher accountability of the institutions. • Competition between various „local” systems bring the most efficient solution. • Hierarchy of policy cooperation: information, consultation, coordination and unification.

7. Principle of proportionality • Higher degree of integration = more power transferred to union institution • But in order to maintain subsidiarity principle the least constraining instrument should be used. • For example: if the matter can be dealt with coordination, than this instrument should be used instead of harmonization.

8. Effects of Custom Union • Trade creation – shift of demand from domestic products to the imported from custom union. • Trade diversion - imports from outside replaced by imports from union. • Trade expansion - general increase of trade (both trade creation and additional import form outside world).

9. The budget of the EU • The budget is a focus for repeated negotiation among the major EU institutions, now following firmly established rules. • On revenue side decreasing significance of agricultural levies and custom duties, increasing significance of GNP resource (introduced in 1988). • On expenditure side increasing share of sustainable growth aim (competitiveness + cohesion).

10. Budgetary principles related to EU budget • Unity All expenditure and revenues must be found in the budget • Universality No contraction between expenditures and revenues is possible (lack of direct link) • Annuality Requires 2 types of appropriations: commitment appropriations and payment one.

11. Budget appropriations • Commitment appropriations – the expenditure committed by EU in a given year in respect to operations that can be carried over a longer period of time • Payment appropriations – the expenediture effectively incurred by the EU in a given year in meeting the commitments of that and/or previous years.

12. Budgetary principles cont. • Specification No commitment can be entered in the EU budget without a definitive scope and purpose • Equilibrium The revenue and expenditure shown in the budget must be in balance. This amounts to a total lack of intertemporal flexibility.

13. The politics of making and managing budgets have had considerable salience in the evolution of the EU, for number of reasons: • The search for an autonomous source of public finance for the original European Community was critical in building a Community that went beyond a traditional international organization. • Budgetary issues have inevitably become entangled with debates about the role and competence of individual EU institutions and the balance between the European and the national levels of governance. • Budgetary flows to the member states are highly visible • Questions about the purpose of the budget and the principles that govern the use of public finance in the Union are linked to the wider questions about the nature of the EU and its evolution as a polity

14. EU budget at first glance: • Relatively very small ( circa1% of GNP), maximum cap 1,27% of EU GNP. • One should remember that public spending is about 40-45% of EU GNP, so EU budget translated into about 2,5% of public expenditures in national budgets. • Council an EU Parliament together are so called „budgetary authority” and budget is subject to annual adoption procedure, which should respect maximum thresholds established within multi-annual budgetary framework.

15. Financial perspective • The multi-annual framework is a document, enriched in legal text and including over a seven-year horizon the EU budgetary guidelines for both revenues and expenditures. • These legal texts are known as „Financial Perspectives” (FP) for the expenditure and „Own Resources Decisions” (ORD) for the revenues. • Negotiations of aboverepresents always a critical point of political life within the EU.

16. Budget procedure • TheCommission’sproposalsaredebated by theEuropeanParliament and theCouncil of Ministers of theEuropean Union, theParliamenthasthelastword on justoverhalftheindividualitems of expenditure. • Majority of members of theEuropeanParliamentneed to agree to thefullbudget, and threefifths of thevotesactuallycastareinfavour.

17. Speaking about budget as for a broad institutional process, we should note three features of recent developments: • The Commission is under intense pressure to improve the quality of its financial management. • In spite of the rising influence of finance ministers from member governments in the Council, within the budgetary arena both foreign ministers and heads of state or government remain at the centre of the bargaining process on the budget. • The EP has exploited its role in the budget to level more influence for itself within the EU more generally

18. Projekt : „Odpowiedź na wyzwania gospodarki opartej na wiedzy: nowy program nauczania na WSHiP”. Projekt współfinansowany ze środków Unii Europejskiej w ramach Europejskiego Funduszu Społecznego.