The Union’s revenue
The EU budget is financed in large part (over 90 %) from own resources. Annual revenue must completely cover annual expenditure. The system of own resources is decided by the Council on the basis of unanimity, having regard to the opinion of the European Parliament, and needs to be ratified by the Member States. A reform of the own resources system composed of two packages of new own resources was proposed by the Commission in 2022 and 2023.
Legal basis
- Articles 311 and 322(2) of the Treaty on the Functioning of the European Union and Articles 106a and 171 of the Treaty establishing the European Atomic Energy Community;
- Council Decision (EU, Euratom) 2020/2053 of 14 December 2020on the system of own resources of the European Union;
- Council Regulation (EU, Euratom) 2021/768 of 30 April 2021 laying down implementing measures for the system of own resources of the European Union, Council Regulation (EU, Euratom) No 609/2014 of 26 May 2014 on the methods and procedure for making available the traditional, VAT and GNI-based own resources and on the measures to meet cash requirements, Council Regulation (EU, Euratom) 2021/769 of 30 April 2021 on the definitive uniform arrangements for the collection of own resources accruing from value added tax, and Council Regulation (EU, Euratom) 2021/770 of 30 April 2021 on the calculation of the own resource based on plastic packaging waste that is not recycled, on the methods and procedure for making available that own resource, on the measures to meet cash requirements, and on certain aspects of the own resource based on gross national income.
Objective
To provide the European Union with financial autonomy within the bounds of budgetary discipline.
How it works
The Own Resources Decision of 21 April 1970 provided the European Economic Community (EEC) with its own resources. Per Council Decision (EU, Euratom) 2020/2053 of 14 December 2020, the level of own resources that can be called on per year is currently limited to a maximum of 1.4% of EU gross national income (GNI). As overall spending cannot exceed total revenues, expenditure is also restricted by this ceiling (1.4.3). In practice, the current multiannual financial framework (MFF) 2021-2027 (1.4.3) sets the expenditure ceiling at a level equivalent to around 1.4% of EU GNI.
Revenue composition
1. ‘Traditional’ own resources
These consist of customs duties, agricultural duties and sugar levies collected since 1970. The percentage that may be retained by Member States to cover collection costs has been raised back up to 25% from 20%. ‘Traditional’ own resources now usually account for around 10-15% of own resource revenue[1].
2. The VAT-based own resource
This consists of the transfer of a percentage of the estimated value added tax (VAT) collected by the Member States to the Union. Although provided for in the 1970 decision, this resource was not applied until the VAT systems of the Member States were harmonised in 1979. The VAT resource now also accounts for around 10% of own resource revenue.
3. The GNI-based own resource
This own resource consists of a uniform percentage levy on Member States’ GNI set in each year’s budget procedure, and was created by Council Decision 88/376/EEC of 24 June 1988. Originally it was only to be collected if the other own resources did not fully cover expenditure, but it now finances the bulk of the EU budget. The GNI-based resource has tripled since the late 1990s, and now makes up around 60-70% of own resource revenue.
4. Plastic own resource
This is a new category of own resources introduced from 1 January 2021 by the 2020 Own Resources Decision. It is a national contribution on the basis of the quantity of non-recycled plastic packaging waste, with a uniform call rate of EUR 0.80 per kilogram. The contributions of Member States with a GNI per capita below the EU average are reduced by an annual lump sum corresponding to 3.8 kilograms of plastic waste per capita. The revenue from this resource provides around 3-4% of the EU budget.
5. Other revenue and the balance carried over from the previous year
Other revenue includes taxes paid by EU staff on their salaries, contributions from non-EU countries to EU programmes, interest payments, and fines paid by companies found in breach of EU laws. If there is a surplus, the balance from each financial year is entered in the budget for the following year as revenue. Other revenue, balances and technical adjustments usually make up around 2-8% of total revenue.
6. Correction mechanisms
The own resources system has also been used to correct budgetary imbalances between Member States’ net contributions. Although the ‘UK rebate’ introduced in 1984 no longer applies, lump sum corrections will continue to benefit Denmark, Germany, the Netherlands, Austria and Sweden over the 2021-2027 period.
7. Borrowing
The EU budget cannot run a deficit, and funding its expenditure through borrowing is not allowed. However, in order to finance the grants and loans provided by the NextGenerationEU (NGEU) recovery scheme, the Commission was authorised on an exceptional and temporary basis to borrow up to EUR 750 billion (in 2018 prices) on capital markets. New net borrowing should stop at the end of 2026, after which only refinancing operations will be allowed. The Commission is applying a diversified borrowing strategy, combining the use of long-term bonds, green bonds and short-term bills sold by syndication and auctions, coupled with open and transparent communication via annual borrowing decisions and semi-annual funding plans.
Towards the reform of EU own resources
The Treaty of Lisbon reiterated that the budget should be financed wholly from own resources, and maintained the power of the Council, after consulting Parliament, to unanimously adopt a decision on the system of own resources of the Union[2], to establish new categories of own resources and abolish existing ones. It also established that the Council can only adopt the implementing measures for these decisions with the consent of Parliament.
In January 2017, the high-level group created in 2014 to undertake a general review of the own resources system (‘Monti group’) presented its final report on more transparent, simple, fair and democratically accountable ways to finance the EU budget. The main conclusion was that the EU budget needed reform, on both the revenue and the expenditure sides, so as to be able to address current challenges and achieve tangible results for EU citizens.
Based on this report and the subsequent Reflection paper on the future of EU finances, the Commission made proposals[3] on 2 May 2018 to simplify the current VAT-based own resource and to introduce a basket of new own resources. The Commission also proposed abolishing all rebates and reducing from 20% to 10% the share of customs revenues that Member States keep as collection costs, as well as an increase in the ceiling on annual calls for own resources to take account of a smaller total GNI of the EU-27 and of the proposed integration of the European Development Fund into the EU budget.
The European Parliament’s views
Building on the new provisions of the Treaty of Lisbon, Parliament has repeatedly called for an in-depth reform of the system of own resources in a number of positions and resolutions over the past years[4]. Parliament has highlighted problems with the own resources system, particularly its excessive complexity and its financial dependence on national contributions.
With a view to achieving a more stable EU budget designed to support EU policy objectives, it repeatedly called for an ambitious and balanced basket of new EU own resources that is fair, simple, transparent and fiscally neutral for citizens. Parliament also pushed for reforms to make revenue collection simpler, more transparent and more democratic, to reduce the share of GNI contributions, to reform or scrap the VAT resource and to phase out all forms of rebate.
Reform proposals
At the European Council meeting of 17-21 July 2020, the Heads of State or Government agreed on a new MFF, the NGEU, raising the ceiling for payments, and a new own resource based on non-recycled plastic waste to be applied from January 2021. This was based on the Commission proposal of 28 May 2020, to borrow up to EUR 750 billion by issuing bonds on the international markets on behalf of the EU with maturities of 3 to 30 years, in order to counter the effects of the COVID-19 pandemic. To underpin the liabilities incurred by the EU to eventually reimburse the market finance raised, the Commission proposed to raise the own resources ceiling exceptionally and temporarily by 0.6% of the EU’s GNI on top of the proposed permanent increase from 1.2% to 1.4% of GNI in order to take account of the new economic context. .
In its resolution of 23 July 2020, Parliament stressed that only the creation of additional new own resources can help to repay the EU’s debt while salvaging the EU budget and alleviating the fiscal pressure on national treasuries and EU citizens. On 16 September 2020, Parliament’s opinion under the consultation procedure reiterated calls for the introduction of new own resources following a roadmap, and for the abolition of all rebates.
On 10 November 2020, Parliament, Council and Commission negotiators reached a political agreement on the MFF, own resources and certain aspects concerning the governance of the recovery instrument. A new annex to the Interinstitutional Agreement between the European Parliament, the Council and the Commission on budgetary discipline, cooperation in budgetary matters and sound financial management established a roadmap for the introduction of new own resources over the 2021-2027 period. Income from new own resources should be sufficient to cover the repayment of NGEU, while any remaining revenue should fund the EU budget, in line with the principle of universality. The binding calendar required the Commission to make proposals by June 2021 for new own resources based on a carbon border adjustment mechanism, on a digital levy and on a revised ETS (to be introduced by 1 January 2023), and to make proposals by June 2024 on additional new own resources, which could include a Financial Transaction Tax and a financial contribution linked to the corporate sector (possibly a new common corporate tax base). Under the new Own Resources Decision adopted on 14 December 2020, rebates for certain Member States were maintained and the collection costs on customs duties were increased from 20% to 25%.
Following its ratification by all Member States by 31 May 2021, the Own Resources Decision has applied retroactively since 1 January 2021.
After the proposals of 14 July 2021 for the revision of the EU ETS and the introduction of a carbon border adjustment mechanism, a proposal for a next generation of EU own resources was published on 22 December 2021. It specifies that 25% of revenues from ETS allowances auctioned, 75% of the income generated by the carbon border adjustment mechanism and 15% of the share of the residual profits reallocated to EU Member States under the OECD/G20 agreement on international corporate taxation (‘pillar one’) would be paid into the EU budget. On 23 November 2022, Parliament adopted amendments to the proposal, which is awaiting Council decision. Parliament also adopted a resolution on 10 May 2023 suggesting additional new own resources.
On 20 June 2023, the Commission published its proposals for a second package of own resources. This included a temporary statistical own resource, paid as a national contribution on company profits at 0.5% of the notional EU company profit base (based on the gross operating surplus for the sectors of financial and non-financial corporations, calculated by Eurostat). Eventually, this will be replaced by a genuine own resource based on corporate taxation, a contribution from a future Business in Europe: Framework for Income Taxation (BEFIT). The proposal also envisages an increase of the call rate of the ETS own resource from 25% to 30%, justified by the increasing carbon prices. The proposed package could bring in additional annual revenues of about EUR 23 billion from 2024 and EUR 36 billion from 2028, which corresponds to around 18-20% of the total revenues.
Andras Schwarcz