1. 1 The EU budget: Some questions Jean Pisani-Ferry Contribution to the roundtable « Challenges for the EU in the 21 st century », Warsaw, 8 April 2008

2. An opportunity not to miss 2004 Sapir report: EU budget « an historical relic » 2005 negotiation on Financial Perspectives: an exercise in relic preservation Opportunity offered by the budget review must be grasped –Current disconnect between priorities and spending undermines EU legitimacy –Changing international context (climate, CAP) call for new policies –Evolving EU priorities need to be supported by the budget However risks that traditional attitude will prevail 2

3. Questions: A selective list 1.Where does the EU budget fit in? 2.What role for the EU budget? 3.What criteria for deciding on spending? 4.Standard economics vs. politics: What should prevail? 5.How flexible should the EU budget be? 6.Redistribution through revenues or through spending? 7.Redistribution to regions or countries? 8.Financing: Are there alternatives? 9.How should the discussion be structured? 3

4. 1. Where does the EU budget fit in? EU budget vs. other instruments: two dimensions –Vertical: other public spending (EU spending 1/40th of total) –Horizontal: At EU level budget is only one of several instrument (alongside regulation, coordination), often not the main one « Questions about the budget are in their essence questions about the European construction « (Pietras) 4

5. 2. What role for the EU budget? The Musgravian trinity Macroeconomic stabilisation – no role Dominated by monetary policy, coordination of national budgetary policies Allocation – specific policies Main instruments are regulation, trade policy, competition policy Room for complementary instrument Redistribution – inter-country and inter-region No interpersonal redistribution Significant international and interregional dimensions 5

6. 3. What criteria for deciding on spending? Subsidiarity criterion applies, but Treaty clearly states it applies to competences, thus policies Impact of EU policies on national spending more significant than on EU spending –R&D, higher education –Infrastructure –Climate –Development assistance EU budget should thus not be looked at in isolation –However large disconnect between EU budget and EU policies 6

7. 4. Standard economics vs. politics: What should prevail? Two views –Standard normative economics European public goods Degree of redistribution –Political approach (on both revenue and spending sides) Citizenship through taxation Redress domestic political failures through EU policies Dont overplay political arguments –EU legitimacy still primarily rests on economic criteria –Political argument should have limited role only –Fate of referendum is reason for caution Case for incentive role in accordance with EU priorities –Lisbon: EU as (weak) incentive framework 7

8. 5. How flexible should the EU budget be? EU priorities variable over time 1980s: Single market 1990s: EMU 2000s: Enlargement 2010s: Climate, external action Calls for dynamic subsidiarity principle Yet most of EU budget is an entitlement budget –PAC and structural funds –Lisbonisation of spending items is window dressing Support to EU priorities calls for much more flexibility in the budget –Reason to separate out discussion on net balances (de la Fuente) –Reason for sunset clauses (Gros) 8

9. 6. Redistribution to regions or to countries? Regional policy a strange mix, disputable from allocative and distributional viewpoints Enlargment implies lesser focus on regions Case for explicit targeting of countries rather than regions 9

10. 7. Redistribution through revenues or through spending? Mix variable at national level EU: –Redistribution cum allocation, through spending –Corrections Strong reasons to change? –Degree of redistribution anyway subject to ex post check –Desired degree of redistribution can be achieved through corrections / horizontal transfers whatever the distributional content of policies Therefore case for progressive taxation is weak 10

11. 8. Financing: Are there alternatives? Arguments for new revenue sources: –Ressources whose apportionment is largely arbitrary (seignorage) –Very mobile tax bases giving rise to tax arbitrage at EU level (corporate income tax, flight duties) –Pigouvian taxes associated with EU policies (carbon tax) –Or a combination of all three (proceeds of emission quota sales) First best solution could be assignment to EU budget, but –Risks in making EU budget dependent on volatile resources –Base for total contribution will remain close to GNI Is it worth the effort? 11

12. 9. How should the discussion be structured? Several issues, not all have same priority –Spending level –Budget structure –Budget procedures –Financing –Net balances Three approaches –The old way: CAP first, the rest after –Commission: public goods first, draw conclusions for budget –Alternative: enveloppe first (level and net balances), content thereafter Second approach is best, third may be more realistic 12

13. 13 Thank You For Your Attention Jean.pisani-ferry@bruegel.org www.bruegel.org