COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 07.10.1998 
COM(.1998) 560 final 
Financing the European Union 
Commission Report on the Operation of the Own Resources System 

Executive summary 
The object of the present report is to review the performance of the EU own resources 
system, including the search for new own resources as well as the possibility of 
applying a fixed rate of call for the VAT resource; and to examine the correction 
mechanism in favour of the United Kingdom and the issue of contributions to the EU 
budget raised by several Member States. 
The EU own resources system has evolved considerably over time and, following 
modifications introduced by the 1988 and 1994 Own Resources Decisions, the equity 
among Member States of gross contributions to the EU budget has improved 
substantially as they have become more aligned with their respective shares in EU GNP. 
This improvement has been primarily a result of the increasing importance of the GNP 
resource in total budget contributions. The current system has also provided the 
resources necessary to finance EU expenditure. However, the present system has shown 
shortcomings in at least two respects. By relying increasingly on transfers from 
Member States treasuries, the system has not secured genuine financial autonomy for 
the EU; and various interventions in the contributions system, including the correction 
mechanism in favour of the United Kingdom, have inhibited transparency in the 
financial relationships of the Member States and the EU budget. 
Reform of the present EU financing system could take either of two forms. It could be 
directed towards enlarging the fiscal base and developing new own resources for the 
Union or it could aim towards a simplification of present contributions arrangements. 
In the former case, the report notes that several candidates for new own resources exist 
but only one would be realistically available in the medium term. This is a modified 
VAT resource which, however, would not be entirely consistent with the equity 
criterion. Under the latter possibility, the present system of contributions could be 
replaced by a system where the VAT resource or even the so called Traditional Own 
Resources (TOR, i.e. essentially customs and agricultural duties) are replaced by 
contributions based on GNP. In this respect, Spain, supported by Greece and Portugal, 
has proposed the introduction of an element of progressivity into the system taking into 
greater account, albeit modified, each Member State's GNP. Although prima facie 
appealing, progressivity in contributions would not be consistent with the current acquis 
communautaire of practising solidarity through the expenditure side of the budget and 
promoting real convergence through investment. 
Despite conceptual and technical difficulties linked to the relevance and measurement 
of budgetary (or net) balances, the issue of budgetary imbalances has re-emerged in the 
budget debate. Germany, the Netherlands, Austria and Sweden, have argued that their 
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budgetary balances ought to be considered as excessive under the terms of the 
Fontainebleau agreement. 
The report, as mandated by the 1994 Own Resources Decision, reviews the functioning 
of the existing correction mechanism in favour of the United Kingdom and of the 
budgetary imbalance of this Member State. The report notes that circumstances at the 
background of the UK rebate have undergone significant changes since the early and 
mid-1980s. The UK imbalance is no longer unique since several other Member States 
record similar imbalances. The relative prosperity of the United Kingdom after 
enlargement will be well above the average of the Union. While the Fontainebleau 
mechanism was essentially intended to provide a correction for the low share of the 
United Kingdom in agricultural expenditure, it currently confers it an advantage for all 
expenditure. Furthermore, if the mechanism were to remain unchanged, the United 
Kingdom would pay only one third of what it would otherwise pay for the forthcoming 
enlargement. Nevertheless, even after the rebate, the United Kingdom remains a larger 
net contributor than some Member States with higher capacity to pay. 
The budgetary imbalances of Germany, the Netherlands, Austria and Sweden have 
become large in recent years reflecting, predictably, the impact of several factors. For 
the years to come, these imbalances, when measured in terms of GNP, are expected to 
change somewhat, under the influence of the forthcoming enlargement and the 
prospective reforms of expenditure policies and this would be more pronounced in the 
case of the Netherlands. Regarding enlargement, there will be an average deterioration 
in the budgetary balance of the present Member States of around 0.15 per cent of GNP, 
which should not give rise to demands for compensation. With regard to the reforms, it 
is not possible to estimate precisely their impact prior to the completion of the 
negotiations. However, it is likely that the reform of the Common Agricultural Policy 
will not affect significantly the budgetary balance of the Member States in question with 
the exception of the Netherlands where there is likely to be an accounting rather than a 
substantive effect. The impact of the reform of Structural policies on budgetary 
balances is even more difficult to estimate but, in any case, the reduction in Structural 
expenditure within the present 15 Member States will mean a reduction in contributions 
and a consequent relative improvement in the budgetary balances of these Member 
States even if Structural spending is concentrated in less prosperous regions. 
If a political consensus on the need to address the issue of these imbalances were to 
develop, three courses of action would be possible. An option on the financing side of 
the budget would be to move towards an own resources system characterised by greater 
transparency, that is absence of ad hoc features, and equity, that is the removal of the 
remaining elements of regressivity. This would encompass the reduction or even the 
phasing out of the present correction mechanism, whose rationale would be weakened if 
an option on the expenditure side were to be adopted, and/or the partial or complete 
substitution of the GNP resource for the other resources were to be implemented. 
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ill -
Another approach, consistent with the Fontainebleau conclusions, would be to introduce 
corrections on the expenditure side of the budget. The report discusses an option 
involving the partial (75 per cent) reimbursement of CAP expenditure on direct aids to 
farmers. Without affecting either the Community nature of the CAP or the overall 
assistance to farmers - since the conditions attached to direct aids payments will 
continue to be an integral part of the Common Agricultural Policy and would result 
from EU decisions - the possibility exists to share between the EU and the national 
treasuries the amount of assistance in direct aids. This option would benefit those 
Member States where the share in financing is greater than the share in direct aids, but it 
would affect adversely those Member States where the opposite holds. Such an option 
would permit a reduction of the Agricultural Guideline and possibly of the own 
resources ceiling. 
Finally, there is the option of a generalised correction mechanism. A straightforward 
generalisation of the present mechanism to all Member States recording a negative 
budgetary balance would involve a huge increase in the redistribution of resources 
between Member States. However, it would be possible to modify some parameters of 
the present mechanism, for instance the threshold for compensation or the value of the 
compensation coefficient. This would generate many outcomes, some involving less, 
and others involving more, resources than the current UK rebate. 
The report concludes by confirming the view put forward in Agenda 2000, that neither 
the need for an increase in the financial resources of the Union, nor the limited 
shortcomings of the financing system provide grounds to modify the Own Resources 
Decision at an early stage. The options presented in the report are interchangeable, can 
be completed and can be spread over time. However, none of these options provides an 
ideal solution. Technical and conceptual weaknesses can be found in all of them. The 
shifts in the burden of financing that results from some of these options present 
regressive elements that might need a redress in the context of an overall solution. 
If a consensus were to emerge on the need to address the issue of budgetary imbalances, 
it would be necessary to choose between the options presented in the report or to agree 
on a combination of them which would respect their logic. The timing of any change 
would depend on whether a modification of the Own Resources Decision would be 
required, and enlargement would appear to present a change of circumstances so 
significant as to justify such a major structural reform. 
7-10-98 
EUROPEAN COMMISSION 
Financing the European Union 
Commission Report on the Operation of the Own Resources System 
Introduction 1 
1. The Performance of the Own Resources System < 1 
1.1. The resource composition of the present system 2 
1.2. An assessment of the present own resources system 5 
1.2.1. Adequacy and equity 5 
1.2.2. Financial autonomy, cost effectiveness, transparency and simplicity 8 
1.3. Options for a new system of contributions 10 
1.3.1. Simplification of the present system of contributions 11 
1.3.2. Criteria for new own resources 12 
1.3.3. Possible future own resources 13 
1.3.4. Progressivity in contributions 14 
2. The Issue of Budgetary Imbalances 17 
2.1. The UK budgetary imbalance 20 
2.2. The budgetary imbalance of Germany, the Netherlands, Austria and Sweden 23 
2.3. The impact of Agenda 2000 on the most important budgetary imbalances 26 
2.4. Options for reform 29 
2.4.1. Return to a more straightforward system 30 
2.4.2. Correction on the expenditure side 31 
2.4.3. A generalised correction mechanism 33 
3. Final Comments 36 
Annexes 
1. The evolution of the EU financing system 
2. Criteria and proposals for new own resources for the European Union 
3. The concept and measurement of the budgetary balance 
4. The budgetary compensation for the United Kingdom 
5. A partial reimbursement of CAP direct aids 
6. A generalised budgetary compensation mechanism 
7. Progressivity in budget contributions 
8. Statistical Annex 
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INTRODUCTION 
The current Own Resources Decision foresees that the Commission will submit by 
the end of 1999 â report on the operation of the own resources system as well as on 
the correction of the budgetary imbalance granted to the United Kingdom. The 
Decision also requires that the Commission report on the feasibility of creating a new 
own resource as well as on the arrangements for the possible introduction of a fixed 
uniform rate levied on the VAT base1. 
The report has been prepared at a time when the EU is expected to widen its 
membership with the forthcoming enlargement and is in the process of considering 
significant policy reforms. Although difficult to quantify, the likely effects of 
enlargement and of the proposed reforms are also an important part of the report. 
The first part of the report reviews and assesses the performance of the financing 
system of the European Union. A key argument developed in this part of the report is 
that the current system has performed adequately both in terms of sufficiency and in 
terms of equity in gross contributions. However, judged against the criteria of 
financial autonomy, ' cost effectiveness and transparency, the present system shows 
some shortcomings. The introduction of a new own resource is often seen as a way 
of improving the performance of the system. This part of the paper examines the 
case for and the difficulties in introducing a new own resource and of permanently 
fixing the rate of call of VAT. In addition, it reviews the recent proposal of Spain, 
Greece and Portugal to introduce a significant element of progressivity into the own 
resources system. 
The combination of the present financing arrangements and of the expenditure 
decisions has resulted in budgetary imbalances which some Member States consider 
as too large. The second part of the report examines issues related to the budgetary 
positions of the Member States. In the current system, the sole Member State 
benefiting from a correction of its budgetary imbalance is the United Kingdom (also, 
Germany's share in the financing of the UK rebate is reduced by one third). 
Recently, other Member States have argued that they also meet the conditions 
mentioned in the Fontainebleau agreement as justifying the granting of budgetary 
relief. This section of the report comments on the budgetary imbalances of this group 
of Member States and presents some options for addressing the perceived difficulties. 
1. THE PERFORMANCE OF THE OWN RESOURCES SYSTEM 
The present part of the report extends over three sections. The first provides a 
description of the resource composition of the current system of own resources while 
its historical development is briefly summarised in Annex 1. The second section 
Article 10 of the Council Decision of 31 October 1994 on the system of the European 
Communities' own resources (94/728/EC, Euratom), Official Journal of the European 
Communities No. L 293/9, November 12, 1994. 
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provides an assessment of the present system according to the criteria of adequacy, 
equity, financial autonomy, transparency/simplicity and cost effectiveness. The third 
section addresses the issue of possible new own resources for the EU. Several 
potential new resources are considered while a detailed review of new own resources 
options is presented in Annex 2. Given the unequal tax base each potential resource 
represents in each of the Member States, this section also alludes to the possible 
conflict between increasing the financial autonomy of the EU and improving the 
equity of the system 
1.1. The resource composition of the present system 
The most recent modification of the system of own resources was agreed in the 
Edinburgh meeting of the European Council in December 1992. This political 
agreement was then transformed into a formal decision in October 19942 while the 
ratification by all national parliaments was finally obtained in the spring of 1996. 
The present system of own resources came into force, retroactively, on January 1, 
1995. 
Table 1 
The composition of EU own resources 
(as percent of total, accrual basis; data for 1998 and 1999 are projections) 
Traditional 
own resources 
VAT(1) 
GNP 1988 
29.1 
60.0 
10.9 1989 
28.7 
60.7 
10.6 1990 
29.4 
69.9 
0.7 1991 
26.4 
59.5 
14.1 1992 
23.6 
61.9 
14.5 1993 
20.3 
54.0 
25.7 1994 
20.6 
51.9 
27.5 1995 
21.3 
57.8 
20.9 1996 
19.1 
51.3 
29.6 1997 
18.8-
45.5 
35.7 1998 
16.7 
39.7 
43.6 1999 
16.1 
35.4 
48.4 
(1) Including the UK correction. 
The changes introduced on this last occasion went in the same direction of those 
introduced in 1988 and have had significant implications for the composition of own 
resources. Table 1 presents the share of each category of resources in the budget, 
and graph 1 shows the absolute value of contributions by resource, over the period 
1988-1999. 
A notable feature of these data is, first, the trend decline in the relative contribution of 
the so called "traditional own resources" (TOR, customs and agricultural duties) 
whose share has fallen from 29.1 per cent of the total in 1988 to 19.1 per cent in 1996 
and about 16 per cent in 1998-99. The impact of trade liberalisation on tariff levels 
has meant that the total yield of this resource has failed to increase in line with the 
expansion of world trade. In absolute terms, traditional own resources have 
remained in the range of Ecu 12 to 14 billion thus giving the observed reduction in 
the share of total resources. 
Council Decision 94/728/EC, Euratom of October 31, 1994, footnote 1. 
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Graph 1 
Composition of EU own resources 1988-1999 
(Current prices, billions of Ecu) 
100 
80 
60 
40 
20 / 
m GNP 
m VAT 
m TOR 
ggg&J 
till 1 --11» ||-||i|-111 H - -
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 
A second important development is represented by the decline in the share of VAT 
contributions from almost 70 per cent of total resources in 1990 to 51.3 per cent in 
1996 and about 35 per cent in 1999. Correspondingly, the share of the GNP resource 
has risen to 35.7 peT cent in 1997 and is projected to be close to 50 per cent in 1999. 
The declining share of VAT revenues primarily reflects policy reforms introduced by 
the 1988 and 1994 Own Resources Decisions. In 1988 it had been agreed that the 
VAT base of the Member States should be limited to 55 per cent of their GNP. In 
1994 it was decided to lower this limit to 50 per cent from 1995 onwards for the 
Member States whose GNP per head was below 90 per cent of the EU average (i. e. 
Greece, Ireland, Portugal and Spain) and to reduce progressively the capping of the 
VAT bases of the other Member States from 54 per cent in 1995 to 50 per cent in 
1999. Table 2 records the capping threshold and the Member States whose VAT 
base has been capped over the period 1988-1999 as well as time series on the 
maximum and the uniform call rate for VAT. 
In addition, in 1994 it was decided to lower, from 1995 onwards, the maximum call 
rate for VAT from 1.4 per cent to 1 per cent in 1999. However, the rate determining 
actual VAT contributions is the so called uniform rate which is lower than the 
maximum rate because of the need to leave aside an amount for the notional financing 
of the UK correction3. This rate has fluctuated between 1.20 and 1.28 per cent until 
1994, but has since declined in line with the maximum rate and is projected to drop to 
0.84 per cent in 1999 (see table 2). 
See Annex 4 for a discussion of these issues. 
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The role of the GNP resource, introduced by the 1988 Decision, is one of a buffer 
serving a residual function to equate revenue and aggregate budget expenditure. As a 
consequence, the uniform call rate for GNP varies according to annual budgetary 
requirements; in 1995, for example, it was 0.339 per cent ; in 1997, it was 0.403 per 
cent; in the 1999 budget, it is estimated to be 0.534 per cent4. 
The budgetary balance from the previous year can affect resource availability in the 
current year and, correspondingly, the need to draw on the GNP resource. For 
example, the budget surplus of 1989 reduced GNP financing in 1990 to a minimum; 
in contrast, the slow growth in VAT revenues during the recession years of 1992-
1994 made it necessary to increase residual GNP financing. In general, however, 
with the progressive decline in the share of revenues from traditional own resources 
as well as from VAT, the GNP resource is taking on an increasingly significant role 
in the financing of the EU budget. 
Table 2 
Capping threshold, Member States whose VAT base is capped, 
the maximum VAT call rate and the uniform VAT call rate 
i i i i i i i i II II 
1988 | 1989 j 1990 j 1991 j 1992 j 1993 j 1994 j 1995 j 1996 j 1997 J1998(1) |1999(1> 
Capping threshold 55% I 55% i 55% j 55% j 55% I 55% j 55% j j j I j 
Greece, Ireland, j j | j j j j 50% j 50% j 50% | 50% | 50% 
Portugal, Spain j I I ill I ! ! j i 
Other Member j j j j | j | 54% I 53% j 52% j 51% j 50% 
States | ! I | : ; j | I ; I 
Member States j E j j j i j j j j j j GR 
whose VAT base |RL L j IRL. L, : p ^ j p \ IRL, P j L ; IRL, P : p : p | p i p {JK j IRL'Li 
is capped j P. UK ! ' ; : j i j ; ; ; ' ! P, UK 
Maximum VAT call UQ | 1 4Q : UQ | 1 4Q j 1 4Q : 1 4Q j 1 4Q j ]32 \ ^ \ 1/|g j 1 og j 1 QQ 
rate i : : : i : : i I i i 
Unif°rrate(2)T Ca" 1'27 : 1'28 ' 1>21 i 1l2° Î 1,2S ! 1'25 I 128 Î 125 ^ 112 i 1-05 ! °-99 i °'84 
(1) Projections; (2) the difference between the "maximum VAT call rate" and the "uniform rate" depends on the 
size of the UK correction. 
In addition to the resources mentioned in the previous paragraphs, the EU budget 
receives other revenues, which are not considered own resources, resulting from 
specific Community provisions. These revenues consist of fines, revenues accruing 
from the administrative operations of the Community institutions, contributions 
related to activities in the European Economic Area, interest on late payments, taxes 
on the salaries of employees of the European Institutions, income from borrowing and 
lending operations and other miscellaneous revenues. In 1997, such revenues 
amounted to Ecu 612 million or 0.74 per cent of all resources available to the budget. 
The 1995 and 1997 data refer to the Supplementary Amending Budget 1/95 and 1/97, 
respectively; the 1999 estimate is from the Preliminary Draft Budget 1999; the figures are 
rounded to three decimals while the actual budgetary calculations are performed using 15 
decimals. 
7-10-98 
-5-
Graph 2 
Own resources ceiling, financial perspective and budgets 
1.35 
1.25 
1.15 
1.05 
0.95 
1988 1990 (as a percentage of EU GNP) 
Own resources ceiling 
Budgets 
1992 1994 1996 1998 
1.2. An assessment of the present own resources system 
The key criteria according to which the performance of the system can be evaluated 
are: 
• Resource adequacy, i.e. the resource must have a significant yield relative to the 
size of the EU budget; 
equity in gross contributions, i.e. the burden should be fairly shared among 
Member States; 
financial autonomy i.e. the resource should increase the independence of the EU 
budget from national treasuries; 
transparency and simplicity, i.e. the determination of the tax should be easily 
understood by citizen; and 
cost effectiveness, i.e. the collection and administration costs of the resource 
should be low relative to its yield. 
To anticipate the conclusions of this section, the present own resources system has 
performed satisfactorily when judged against the first two criteria, but some 
shortcomings are encountered with regard to the last three. 
1.2.1. Adequacy and equity 
The present own resources system has performed well against the criteria of adequacy 
of resources and equity in gross contributions. 
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Adequacy 
The present own resources arrangements have' generated sufficient revenue to finance 
expenditure plans. The decline of the traditional and VAT resources has been made 
up by the GNP resource. The previous own resources ceiling of 1.20 per cent of GNP 
proved barely adequate and difficulties were experienced, particularly during the 
recession of 1993. The recovery of 1994 and the accession of three new Member 
States in 1995 eased somewhat the constraints. More recently, however, the 
progressive increase in the own resources ceiling agreed in Edinburgh has gone hand 
in hand with greater restraint in spending decisions. As a result, a margin has 
appeared under both the Financial Perspective and the own resources ceiling which is 
expected to increase further in 1999 (see graph 2). 
Equity 
The equity of gross contributions of the Member States has improved, largely because 
of the progressive replacement of the VAT resource with the GNP resource. In this 
context, equity is interpreted to mean proportionality of gross contributions to income 
across the Member States5. 
Graph 3 
Share in VAT and GNP contributions and share in EU GNP 
(Data for 1997, in percent, after UK correction) 
30 
20 
10 
Share in VAT and GNP 
contributions 
D F UK E NL B S A DK GR SF P IRL L 
As a result of the 1988 Own Resources Decision, which opted for introducing the 
GNP resource rather than meeting financial needs through increasing the VAT call 
rate, and of the confirmation of this choice in 1994, Member States' contributions are 
now becoming more closely correlated with national GNPs6. As the ability to 
contribute to the EU budget can best be measured by a nation's national income 
The issue of progressivity in the EU financing system is discussed in section 1.3.2 and in 1.3.4. 
It is generally considered that the contributions on the VAT resource are regressive since they 
represent a higher proportion of GNP in poor rather than in rich Member States. 
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converted at current exchange rates into a common currency, the increasing 
importance of the GNP resource translates into improved equity in gross budget 
contributions. 
Graph 3 presents data for shares in VAT and GNP financing, which is the part of the 
contributions that can be seen as coming directly from the Member States' treasuries, 
and shares in EU-15 GNP in 1997 for all Member States ranked in descending order, 
starting with Germany. The data confirm that contributions mirror closely GNP 
shares with the particular exception of Italy, and of the UK where the rebate has led 
to contributions that are considerably lower than the GNP share. Each year, however, 
the relationship between VAT and GNP contributions and GNP shares is influenced 
by several factors. 
Table 3a 
Member States' shares in EU financing and in EU-15 GNP 
(in percent of total, data for 1997, including the UK correction) 
B DK D GR E F IRL I L NL A P FIN S UK 
Share in EU GNP 
3.1 1.9 26.0 1.5 6.6 17.2 0.8 14.2 0.2 4.5 2.6 1.2 1.4 2.7 16.1 
Share in the financing of the EU budget 
3.9 | 2.0 | 28.2 | 1.6 | 7.1 | 17.5 | 0.9 | 11.5 | 0.2 | 6.4 | 2.8 | 1.4 | 1.4 | 3.1 | 11.9 
of which : Traditional Own Resources 
7.4 2.0 24.2 1.2 4.5 10.9\ 1.6 ' 7.9 0.2 72.2 1.8 
of which : VA T and GNP contributions 
3.1 2.0 29.1 1.7 7.8 19.0 0.8 12.4 0.2 5.1 3.0 1.1 ] 1.0 | 2.6 
1.5 « 3, 21.5 
9.6 
First, because all Member States pay an identical percentage of their VAT base and/or 
GNP, differences in the rates of growth of the VAT harmonised base (influenced 
largely by the growth of private consumption) and in that of GNP imply changes in 
relative shares and corresponding changes in relative contributions. Secondly, the 
corrections of the VAT and GNP contributions made once the outturn is known (i.e. 
in the year following that in which the contributions are paid) usually tend to amplify 
movements in contributions resulting from growth in the economy (when good 
economic growth is sustained for a number of years, the initial forecasts tend to be 
underestimated and therefore result in large supplementary payments when the 
correction is made and vice versa in the case of a downturn). As a result, trends in 
national contributions tend to show a cyclical pattern that is more pronounced than 
the economic cycle which influences its bases. 
The inclusion of traditional own resources modifies somewhat the pattern of total 
contributions (see table 3a for the percentage shares and table 3b for absolute values). 
The share of Belgium, Ireland, the Netherlands and the UK in TOR is markedly 
higher than their shares in GNP, a reflection of substantial port facilities that serve as 
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gateways of entry of foreign goods into the EU; studies suggest that this effect may 
be substantial. Its existence underscores one of the many difficulties involved in 
interpreting a simple difference between budget contributions and budget expenditure 
as a measure of the benefits a Member State enjoys from membership in the EU. 
Table 3b 
Difference between actual VAT contributions, TOR collection and 
theoretical GNP contributions 
(Ecu million, data for 1997, excluding the UK correction) 
B DK D GR E F IRL I L NL A P FIN S UK 
Difference between VAT contributions and theoretical GNP ones 
(a minus sign means that the VAT contributions are lower than those to be paid urder a system based only on GNP) 
-266 -71 708 20 
Difference between 
(a minus sign means that TC 
565 5 -405 -56 98 j 159 | 8 
TORc 
)R collec 
-391 -1236 7 42 93 79 - 45 72 332 
ollected in each country and theoretical GNP contributions 
ted are lower than a contribution to be paid under a system based only on GNP) 
-975 124 -812 -9 1052 -135 -31 -68 -55 1190 
Sum of the previous two lines 
299 -66 303 -36 -292 -816 132 -2 048 -2 1094 -42 48 -113 17 1521 
Additional advances towards improving equity in contributions will take place over 
the next years as the share of TOR and VAT in own resources will decline further. 
However, perfect equity cannot be expected since the VAT resource will continue to 
yield revenues which will not be correlated with national income and will continue to 
introduce an element, albeit small, of regressivity into the system. In addition, equity 
in gross contributions is hindered by the presence of the UK rebate mechanism, which 
reduces their correlation with the ability to pay. 
1.2.2. Financial autonomy, cost effectiveness, transparency and simplicity 
In certain respects, the present system shows shortcomings in terms of financial 
autonomy, cost effectiveness and transparency. To a large extent, this is due to the 
fact that there are inevitable trade-offs between financial autonomy, equity and cost 
effectiveness. The dominant part of EU resources derives from national contributions 
from the treasuries of the Member States; this reduces the financial autonomy of the 
EU, but offers a good degree of equity and of cost effectiveness. Traditional own 
resources contribute to financial autonomy, but their equity is contested and their 
collection and control are very cumbersome. 
Financial autonomy 
Traditional own resources represent currently the only true own resource of the EU. 
However, the importance of TORs in financing EU expenditure is diminishing 
markedly. Moreover, although customs duties and related revenues resulting from 
the EU's commercial policy formally belong to the EU, Member States that collect 
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9-
these duties tend to regard them as national contributions. This is not appropriate 
and it reduces further the significance of budgetary balances7. 
The lack of financial autonomy resulting from the low share of real own resources in 
the financing of the budget is considered responsible for various shortcomings of the 
present system. 
• First, it has made the EU increasingly dependent on intergovernmental transfers; 
such dependence has already contributed to conflicts and has encouraged 
Member States to seek to maximise ill-defined concepts of the national benefit 
from the EU budget; 
• second, the system whereby all financing needs not covered by TOR or the VAT 
resource are covered by the GNP resource is very cost effective, but it results in 
changes in EU expenditure at the margin being reflected in changes in national 
spending. This entangles EU financing issues with domestic financial and 
budgetary policies at the expense of revealing to the citizens the EU-wide 
priorities at stake; and 
• third, democratic accountability is obscured because of lack of a direct 
relationship between citizens and taxes paid to the EU budget. 
Cost effectiveness 
The collection of traditional own resources is very cumbersome and the attitude of 
Member States towards these resources is ambiguous. Customs legislation is very 
elaborate with over eleven thousand tariff positions and a Community customs code 
of about 400 articles8. However, international trade is a much more complex reality 
with new products and new trade flows appearing every day. Under these conditions, 
there is scope for fraud, irregularities and litigation. 
In the present institutional system, Member States are responsible for collecting 
traditional own resources and putting them at the disposal of the Commission. The 
latter has the responsibility to control the way Member States perform this task. To 
this end a complicated machinery has been set up which amounts to a form of 
multilateral surveillance of the way in which Member States carry out their duties. 
Any loss in the collection of TOR in a Member State must be made up by a 
corresponding increase in the GNP resource called. As a result, the negligence of a 
Member State has financial consequences for all the others. For this reason, the 
results of the control activities of the Commission are made available to all Member 
States9 and all important decisions on the non recovery or remission of customs duties 
as well as on the write-off of amounts impossible to collect are taken with some 
involvement of all Member States. 
7 For a discussion of the concept and measurement of budgetary balances see Annex 3. 
8 There are, in addition, over 900 articles of the Regulation laying down the provisions for its 
implementation. 
9 This provision also applies to the controls on the VAT and GNP resources. 
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10-
These provisions result in a substantial amount of administrative work which, as the 
reports of the Court of Auditors show year after year, always falls short of what 
would be desirable for a better protection of the financial interests of the EU. In 
addition, the complexity of the procedures for the recovery of amounts put at risk by 
fraud or irregularities appears to discourage most national administrations, which 
often appear unable or unwilling to recover what is due. 
Under these conditions, Member States appear to prefer to finance the EU budget 
through GNP instead of through a more effective collection of TOR even if this must 
have implications for the distribution of the financial burden. In effect, they are 
neither inclined, for understandable reasons, to tighten the regulatory framework of 
the customs system nor do they appear willing to commit the necessary resources to 
the collection of customs duties. 
Transparency and simplicity 
With four Member States having their VAT base capped in 1998 (as, probably, will 
be the case for all the future new Member States), the VAT resource is becoming in 
effect a GNP resource. In its 1998 report on the functioning of the VAT and GNP 
resources, the Court of Auditors points out that the VAT resource, despite being 
formally a tax on consumption, has taken the character of a financial contribution 
from Member States to the EU budget with its determination depending to a certain 
extent on statistical calculations (especially for the estimation of the weighted average 
rate). 
The presence of the UK rebate contributes to obscuring the exact nature of the system 
and its consequences. Not only, as already indicated previously, does it reduce the 
correlation between gross contributions and ability to pay, but its calculation and 
financing arrangements are so complex as to impair the transparency of this 
mechanism. 
1.3. Options for a new system of contributions 
Modifications of the present system of contributions could either make it simpler 
through a reduction in the number of sources of financing or could introduce new 
own resources in addition to the existing ones or as a replacement of some of them. 
The arguments in favour of a simplification of the present system of contributions are 
essentially based on the shortcomings of the present own resources system in terms of 
financial autonomy, cost effectiveness and transparency discussed earlier. The 
introduction of new own resources is sought as a way of improving financial 
autonomy. 
New fiscal own resources would clearly reduce the share of the EU budget financed 
through national contributions and would ease the tensions arising from attempts to 
measure net contributions. Should the budget be fully financed through own 
resources, the link between changes in EU expenditure and corresponding changes in 
national expenditure would also be broken. As well, if the EU budget were to 
become entirely financed through "real" own resources whose rates of call were to be 
7-10-98 
-11 
decided every year, the budgetary authority would have full control of the 
expenditure and of the revenue side of the budget. Finally, proponents of new own 
resources expect them to enhance political accountability, transparency and visibility 
to citizens. However, because the distribution of the tax bases for fiscal resources 
are not equal across the Member States, introducing a new own resource and, thus, 
enhancing financial autonomy, could be in conflict with enhancing equity in 
contributions. 
1.3.1. Simplification of the present system of contributions 
The yield from TOR is low and will decline further while their administration is very 
cumbersome. The frustration felt with TOR is such that proposals have been made to 
return them to the Member States. While admitting that TOR should theoretically be 
attributed to the central level, it is sometimes considered that their relative share in 
the total financing of the EU is so low that returning them to the Member States 
would yield practical advantages compensating for the implicit sub-optimality of such 
attribution. The distributional problems that are likely to appear could be partly 
reduced through measures aimed at encouraging the use of the transit facility that 
allows the payment of customs duties where the goods are finally consumed. It is 
clear that even if customs duties ceased to be own resources of the EU budget, they 
would continue to represent an important instrument of the Union's trade policy and 
their effective collection would require some form of control by the Commission on 
behalf of the Member States. 
The present VAT-based own resource has drawbacks with respect to equity in 
contributions, financial autonomy and transparency. As the Court of Auditors has 
recently underlined again, it is hardly an own resource given the way in which its 
base is calculated and the existence of rules which, for some Member States, make it 
effectively a GNP based resource. In addition, its uniform rate of call varies every 
year according to the size of the UK rebate. This is due to a provision that calls for 
the UK rebate to be notionally financed through VAT and therefore reduces further, 
by a variable amount, the maximum rate of call. 
If on the occasion of a future modification of the Own Resources Decision the VAT-
based resource were maintained, it would at least appear necessary to call it at a fixed 
rate. This could be achieved through putting an end to the presumption of financing 
the UK rebate on the VAT resources accompanied by a corresponding permanent 
lowering of the maximum rate of call10. 
Own resources almost always entail significant collection and control costs and are 
therefore less cost effective than straightforward national contributions. In addition, 
no own resource can be more equitable - in the sense of being linked to the ability to 
pay - than a contribution based on GNP which constitutes the best available proxy of 
such ability to pay. Indeed, some proposals for new own resources include parallel 
10 On average, over recent years this provision has lowered the rate of call of VAT by 0.12 
percentage points - see Annex 4. 
7-10-98 
12-
corrections in the form of an equalisation mechanism intended to align gross 
contributions to GNP shares. 
A further consideration in this context is that taxes influence the allocation of 
resources and there is some merit in having a system of national contributions and 
leaving it to the Member States to decide on the best way to raise the corresponding 
financial resources. These considerations have prompted proposals for the 
replacement of the present system of own resources with a system based solely on 
GNP contributions, which would provide no financial autonomy whatsoever, but that 
would be equitable, transparent and cost effective. 
Whatever the future of such a proposal, it must be underlined that the present GNP-
based contributions suffer from the unwillingness of Member States to use the best 
available data for the reference aggregate. Estimating the total value of the national 
income of a country is a difficult task. In particular, the methods used must evolve in 
line with the transformations of the economies to take into account the changes in the 
goods and services produced and delivered. To this end, the national statistical 
offices of the European Union have recently developed a new common methodology 
to estimate GNP11 and new decisions are taken periodically to update and refine it (a 
recent important one was taken at the end of 1997 and concerned the imputation of 
financial services indirectly measured). However, Member States have sought to 
delay the use of these new measures in the EU budget12 thus leading to the co­
existence of two statistical series for GNP: one, of better quality, for general use and 
another, less reliable, used for the assessment of the GNP contributions. If GNP will 
continue to play a role in the system of own resources, this situation must be 
corrected with any GNP contributions based on the most recent and most reliable 
definitions. 
1.3.2. Criteria for new own resources 
A set of criteria, some of which derive from economic rules regarding the assignment 
of policy instruments to different levels of jurisdiction (Member State or EU) while 
others are more specific to the EU, can be used to select candidates for new own 
resources13. Economic theory predicts that tax instruments belong optimally to a 
11 European System of Accounts (ESA) 1995, Council Regulation 2223/96 of June 25, 1996, Official 
Journal of the European Communities L310, November 30,1996. 
12 The use of the figures resulting from the new system of national accounts will have to wait until 
the adoption of a new Own Resources Decision while those taking into account the indirectly 
measured financial services will need an ad hoc decision by the Council. 
For a review of these issues see Commission of the European Communities (1993): "Stable 
Money - Sound Finances Community Public Finance in the Perspective of EMU", European 
Economy no. 53, especially ch. 7; see also Annex 2. These criteria obviously do not apply in the 
case of a tax introduced throughout the EU as instrument for the implementation of a Community 
policy. In this case, the rationale for the introduction of the tax would derive from the specific 
policy in question and the attribution of its yield to the EU budget would only have to respect the 
criterion of cost effectiveness. 13 
7-10-98 
13 
higher level of authority when there are cross-border externalities and/or when it is 
difficult to attribute specific revenues to specific Member States. 
In the case of the EU, additional specific criteria are appropriate. A very important 
one is that contributions ought to respect horizontal equity so that among Member 
States of equal ability to contribute all do indeed contribute an identical amount. 
However, given that the level of real income is not equal among the Member States, it 
is sometimes felt desirable that vertical equity be satisfied as well, so that 
contributions to the EU budget are a function of the Member States* differential 
ability to pay. Recently Spain, supported by Greece and Portugal, has proposed the 
introduction of a significant element of progressivity into the contributions to the EU 
budget. 
It is also necessary that new own resources be consistent with other EU policies so as 
not to offset their effects. Their visibility for the EU citizens is also desirable while, 
on a more technical level, their base must present a sufficient degree of harmonisation 
and their collection should be possible without too high administrative costs. Finally, 
their yield must be high enough to finance a substantial amount of EU spending. 
1.3.3. Possible future own resources 
The search for new own resources has so far proved elusive. This has been partly due 
to the generally good performance of the present system, which has blunted 
incentives for finding new resources, but principally to the difficulties involved in 
establishing new own resources and also to differing political priorities. Since 1992, 
however, interest in establishing new own resources has incr~<ised, in part reflecting 
institutional initiatives and in part related to emerging new possibilities14. The 
publication of a report by the European Parliament on new own resources, advocating 
a modulated VAT-based system15, is important in this context. 
A modified VAT resource offers the potential of becoming an important own 
resource in the future. Such a tax would be highly visible to taxpayers and would be 
consistent with the establishment of EU-wide minimum tax rules and would also 
generate sufficient revenues for the budget. However, 'VAT is levied on a national 
tax base and it is difficult to see its revenues as belonging to the EU, and also it may 
entail considerable administration costs. 
A European Parliament (1994) report16 advocated a new own resource based on a 
common VAT call rate across the Member States, differentiated across commodities 
according to two rates, a lower one and a higher one, of say 1.5 per cent and 3 per 
cent. The tax would be levied on a harmonised base through declarations explicitly 
recording that it is an EU tax. Total VAT revenues would be divided between the 
14 Annex 2 reviews in detail eight specific proposals for new own resources. 
15 See European Parliament (1994): "Draft Report on a New System of Own Resources for the 
European Union", Rapporteur Horst Langes, Committee of Budgets, A3-0000/94. 
16 See European Parliament (1994): op. cit., footnote 15. 
7-10-98 
14 
national budget and the EU, and national parliaments would determine the part for 
domestic budgetary purposes while the EU budgetary authority would determine the 
part to be attributed to the Community budget. 
The proposal could be implemented. It would clearly involve a number of technical 
problems, but these could be overcome if there was the political will to proceed in 
this direction. It is questionable, however, if such a system should be accompanied, 
as in the European Parliament proposal, by an equalisation mechanism ensuring that 
national contributions would be proportional to each Member State's share in the 
GNP of the Union17. If the idea is to tax the consumption of individuals, then the 
concept of national contributions should not enter into the equation. 
Other possible own resources - a form of withholding tax, a C02/energy tax, excise 
taxes, seigniorage, corporate and personal income taxes, new communication taxes -
are discussed in the Annex "Review of possible new own resources for the European 
Union" (Annex 2). At this stage, it is important to note that, despite proposals made 
for new own resources, there is little consensus about which one(s) would be the most 
appropriate. This is a reflection of differences of views regarding the future 
orientation of European integration. 
1.3.4. Progressivity in contributions 
A proposal to introduce progressivity in the system of own resources has been made 
by Spain. The proposal, which is supported by Greece and Portugal, is founded on 
the P; otocol on Economic and Social Cohesion, in particular, on the declaration of 
intent of the high contracting parties to take "greater account of the contributive 
capacity of individual Member States in the system of own resources, and of 
examining means of correcting, for the less prosperous Member States, regressive 
elements existing in the present own resources system ". It should be stressed at this 
stage that, during the 1992 discussions of the 1993-1999 Financial Perspective, equity 
was understood to mean proportionality with GNP and, as noted in section 1.2, 
measures have already been taken to address the regressive elements of the own 
resources system. The proposal recognises that improvements, related to the 
increasing importance of the GNP resource, have been made but it also underlines 
that progressivity in contributions continues to be absent from the own resources 
system. 
Greater progressivity in contributions could be achieved, according to the proposal, 
by adjusting the base of the GNP resource through the use of coefficients reflecting 
each Member State's relative prosperity. The adjustment can be complete (applying 
to the GNP resource) or partial (applying to only part of the GNP resource), and in 
the latter case progressivity would also be partial. Member States could also be 
grouped into classes of relative prosperity (for example, Member States with income 
per capita less than 90 per cent of the EU average, those between 90 per cent and 100 
17 See Annex 2 for a more detailed discussion of this proposal. 
7-10-98 
-15 
per cent, etc) with specific adjustment coefficients assigned to each class. 
Contributions to the EU budget would then be determined according to the new 
bases. The new resource could ultimately, it is argued, replace the VAT resource. 
Table 4 
Modifications of total national contributions relative to the present system 
Progressivity proposal applied to the GNP resource 
(adaptation of the GNP base using the ECU index of GNP per head; 
the percentages indicate changes relative to present total contributions) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN (1) 
S 
UK(1) 
Total 1996 
Ecu million 
75.9 
134.9 
1105.6 
-155.4 
-551.1 
311.0 
-45.4 
-404.0 
38.2 
55.3 
102,3 
-152.2 
-6.7 
67.9 
-576.2 
0.0 % 
2.7 
9.6 
5.2 
-13.8 
-11.9 
2.5 
-6.5 
-4.4 
23.5 
1.2 
5.4 
-17.6 
-0.7 
3.4 
-6.8 1997 
Ecu million 
70.0 
178.6 
1043.4 
-204.1 
-803.9 
259.1 
-45.4 
-466.4 
47.9 
44.5 
102.0 
-199.3 
1.3 
71.1 
-98.9 
0.0 % 
2.3 
11.6 
4.8 
-17.1 
-14.8 
1.9 
-6.4 
-5.3 
27.7 
0.9 
4.8 
-18.2 
0.1 
3.0 
-1.1 
1) The technicalities of the proposal result in these countries marginally benefiting from the operation of the 
progressivity mechanism even if their index of GNP per head is slightly above 100 (see Annex 7) 
It should be noted at the outset that the proposal does not entail the introduction of a 
new own resource as such but it provides for a significant modification of an existing 
resource (GNP). A simulation of the impact of the proposal on the budget 
contributions in 1996 and 1997 is presented in table 4. 
The proposal is prima facie appealing since progressivity is found in virtually all the 
Member States' national tax systems. However, the proposal has an important 
drawback in that it does not acknowledge the nature of solidarity and its practice in 
the Community. There are two main reasons for the current EU choice of 
implementing solidarity through the expenditure side of the budget18. 
18 The arguments are developed in greater detail in Annex 7. 
7-10-98 
16 
First, solidarity in the EU is mainly expressed in the form of improving real 
convergence by directing funds mainly to eligible regions in any Member State 
rather than to a Member State as a whole. 
Second, achieving real convergence has a higher probability under expenditure-
based progressivity than under progressivity in contributions. The reason for 
this is that progressivity in contributions, by lowering the financing shares of 
the less prosperous Member States, would leave it up to them to use the funds 
as they see appropriate. It is plausible to expect that, in this case, investment 
activity would not be strengthened as much as under expenditure-based 
progressivity. 
7-10-98 
- 17 
2. THE ISSUE OF BUDGETARY IMBALANCES 
Budgetary balances (also called net balances), measured by the simple difference 
between contributions to and receipts from the EU budget, represent only a narrow 
view of, and fail' to fully account for, the benefits accruing to Member States from 
participating in the EU19. 
Recorded budgetary flows fail to account for positive externalities arising from EU 
policies. For example, CAP, structural operations and external expenditure benefit 
not only the immediate recipients but also give rise to spill-over effects transcending 
national borders20. It is clear that their consideration would modify the assessment of 
the accounting imbalances even if it is not possible to quantify the importance of 
these spill-overs. 
Graph 4a 
Total allocated expenditure, VAT and GNP contributions (before 
UK correction) and total payments to the EU budget 
(percent of GNP; average 1995-1997; the data for "allocated expenditure" 
include administrative expenditure) 
L IRL GR P E B DK FIN F I NL A UK S D 
There are also difficulties associated with the identification of the ultimate 
beneficiaries of EU expenditure policies; for instance, CAP export restitutions do not 
necessarily benefit the residents of the country where they are paid. In addition, EU 
budget expenditure is heterogeneous and comparisons of total amounts received have 
often limited meaning in appreciating the "benefit" resulting from such payments: a 
given amount spent in purchasing goods and services does not bring the same 
advantages of the transfer of a grant of an equivalent amount. Similar problems 
19 See Annex 3 for a discussion. 
20 These spill-over effects include the spending of income generated in the receiving Member State 
on goods produced in another Member State, the purchase of financial asset denominated in 
various Member States currencies etc. 
7-10-98 
18 
appear on the revenue side: the country where customs duties are collected is not 
necessarily the one of residence of the economic agents ultimately bearing their 
burden. 
The definition of budgetary balances is also fraught with significant conceptual and 
accounting problems. To compute budgetary balances it is necessary to make 
numerous choices on the items to be included in the receipts and expenditure flows as 
well as on the reference periods (e.g. cash vs. accrual figures, surpluses from previous 
years, etc.). Depending on the choices made, it is possible to obtain numerous, 
equally valid, definitions of budgetary balances which sometimes produce 
significantly different results21. 
Graph 4b 
EU expenditure (excluding administration), VAT and GNP contribution 
(before UK correction) and total payments to the EU budget 
(percent of GNP; average 1995-1997) 
'total expenditure excluding administration", 
{payments Jfcoro the-EU budget} — 1. 
total payments to the EU budget 
IRL GR P E DK FIN F B I NL A UK S D 
Nevertheless, the size of some of these imbalances has been at the centfe of 
discussions for many years22. In response, a compromise was struck in 1984 at the 
21 
22 See Annex 3 and Commission of the European Communities (1997): "Budget Contributions, EU 
Expenditure, Budgetary Balances and Relative Prosperity of the Member States", paper presented 
by President Santer to the Ecofin Council, October 13. The two definitions used in this report are 
the UK rebate definition (concept used in the calculation of the UK rebate) and the operational 
definition (difference between all moneys paid to and all moneys received from the budget 
excluding administrative expenditure and expenditure related to other EU institutions). 
The largest imbalances, although substantial in absolute terms, measured as a percentage of the 
GNP, are much smaller than the regional budgetary positions existing within Member States. A 
recent study conducted under contract for DG XIX indicates that, using a definition of regional 
budgetary positions comparable to that commonly used in the relationships between Member 
States and the EU budget, the average negative budgetary position of a region of northern Italy is 
equal to almost 4 per cent of its GDP, while the average positive balance of a southern Italian 
7-10-98 
19 
Fontainebleau meeting of the European Council. According to the conclusions of 
that meeting, 
"Expenditure policy is ultimately the essential means of resolving the question of 
budgetary imbalances. 
However, it has been decided that any Member State sustaining a budgetary 
burden which is excessive in relation to its relative prosperity may benefit from a 
correction at the appropriate time."23 
The reference to expenditure policy as the means of correcting budgetary imbalances 
reflects the prominent role that expenditure decisions have in their determination (see 
graphs 4a and 4b). Correcting budgetary imbalances through ad hoc mechanisms 
essentially amounts to a refusal to act directly on the sources of the imbalances. 
Graph 5 
Negative balances of some Member States 
("UK rebate" definition; percentages of GNP; United Kingdom before correction) 
0.7 
Germany Netherlands Austria Sweden United Kingdom 
^1995 E31997 ffl1999 
In the present part of the report, the first section reviews the performance of the 
correction mechanism in favour of the United Kingdom set up following these 
decisions. In March 1998, four Member States, namely Germany, the Netherlands, 
Austria and Sweden have stated their belief that their negative balances are to be seen 
as excessive in relation to their prosperity under the terms of the Fontainebleau 
agreement. The second section of the report examines the development of the 
balances of these Member States. 
region is equal to around 7 per cent; see G. Pola (1998): "The Regional Incidence of a Central 
Budget - The Italian Case". 
23 See Fontainebleau European Council, Conclusions of the Presidency, Bulletin of the European 
Communities 6-1984. 
7-10-98 
-20-
The third section provides some indications of the possible effects of the Agenda 
2000 reforms on the budgetary imbalances of the five countries examined in the 
previous two sections. Finally, the fourth section reviews some of the main options 
available in relation to the issue of budgetary imbalances: phasing out of the 
correction mechanism for the United Kingdom, corrections on the expenditure side of 
the budget and application of a correction mechanism to all Member States 
experiencing large imbalances. 
2.1. The UK budgetary imbalance24 
The budgetary imbalance of the United Kingdom was at the centre of the political 
debate for about a decade (1974-1984) provoking frequently stalemates in the EU 
decision-making process. The question was finally settled at the Fontainebleau 
European Council of 1984 and the resulting rebate mechanism constitutes an integral 
part of the Own Resources Decisions taken subsequently. The rebate was reviewed in 
1988 and 1992 and on both occasions the European Council decided that it should be 
continued. 
Graph 6 
25 Share of the United Kingdom in (VAT and GNP) 
payments and in EU (allocated) expenditure 
(percentage of totals; accruals figures; 
1995-97: provisional figures; 1998: forecasts) 
87 68 89 90 91 92 93 94 95 96 97 98 
The size of the budgetary imbalance of the United Kingdom - and therefore that of its 
compensation - has fluctuated substantially since 1985 around half a point of GNP for 
the imbalance and 0.3 per cent of GNP for the rebate25. Graph 6 shows 
developments in the shares of the United Kingdom in payments to the EU budget and 
in EU expenditure over the period 1987-1998. 
For more details on the functioning of the UK rebate, see Annex 4. 24 
25 See Annex 4 for a more detailed analysis of the evolution of the UK rebate and an explanation of 
its variability. 
7-10-98 
21 
Graph 7 shows that the mechanism has been effective in reducing substantially the 
negative balance of the United Kingdom. However, even after the rebate the United 
Kingdom remains a larger net contributor to the EU budget than Member States with 
a higher capacity to pay. 
Graph 7 
Budgetary balance of the United Kingdom 
(UK rebate definition percentages of GNP; actual data, see table 7, Annex 8 and Annex 4;1998: forecast ) 
-0.7 • before compensations ; : v 
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 
Some of the conditions that prevailed at the time the mechanism was decided do not 
apply any more: 
i) Changes in the composition of EU spending have modified the rationale of the 
compensation. Whereas in 1984, it had essentially the nature of a correction for 
the specific agricultural problem (CAP represented about 70 per cent of total 
allocated expenditure), it has now lost to a great extent this characteristic since it 
corrects equally the agricultural problem as well as the United Kingdom's 
contribution to the solidarity effort of the EU and to its other policies. If a 
correction on the expenditure side of the type presented in section 2.4.2 (partial 
reimbursement of CAP direct aids) were to be introduced, this consideration 
would become even more relevant. 
ii) The budgetary imbalance of the United Kingdom is no longer unique. In 1984, 
the imbalance of the United Kingdom, before correction, was the largest of the 
Community. In recent years, four more countries have budgetary imbalances as 
large as the United Kingdom's (see graph 8). 
iii) The gap in relative prosperity between the United Kingdom and some other large 
contributors to the EU budget has narrowed. The United Kingdom has a relative 
7-10-98 
22-
prosperity (and a corresponding relative capacity to pay) around the EU average 
and will certainly be above this mark after the forthcoming enlargement of the 
EU26. 
The mechanism also has some technical drawbacks and a more fundamental, 
systemic, characteristic which, although not new or unexpected, ought to be 
underlined. 
With respect to the technical drawbacks, 
• the existence of the rebate leads to budget contribution by the United Kingdom 
representing a lower proportion of its income than those paid by the other 
Member States and therefore creates a distortion in the system of contributions; 
• the definition of the EU expenditure to be used in the calculation of the 
compensation ("allocated expenditure") includes also administrative expenditure 
whose nature is substantially different from the rest of EU spending and whose 
inclusion in any calculation of the budgetary imbalances has often been 
questioned27; and 
• allocated expenditure is defined in a way which may provoke a small, but quite 
unjustified, increase in the rebate at the time of enlargement. With enlargement, 
some expenditure flows directed to the new Member States (e.g. PHARE), which 
are currently considered "external expenditure" and therefore do not enter into 
the calculation of the rebate, will be replaced by payments under internal policies 
which enter into the calculation. 
The systemic characteristic of the rebate mechanism, on the other hand, is its 
function as a shock absorber for all changes in the imbalance of the United Kingdom; 
this would place this country in a unique position in respect to common budgetary 
decisions. This not only risks insulating the United Kingdom from the implications 
of budgetary decision-making but would have significant adverse effects at the time 
of enlargement. The accession of a large number of new Member States with very 
low standards of living is expected to have a negative effect on the budgetary 
positions of the current Member States. But the United Kingdom will see its 
budgetary position deteriorate by only one third of what would have happened in the 
26 International comparisons of income are made by comparing the levels of GNP per head of 
different countries. These comparisons need a common numeraire which is usually arrived at 
through the use of current exchange rates or especially computed conversions rates - the so 
called "purchasing power parities" (PPP) - which take into account the differences in the price 
levels. Data based on current exchange rates provide a measure of actual income and are 
therefore the best proxy for the ability to pay. Data based on. PPP estimates measure the real 
income of the average citizen of a country when he/she spends it in his country. The 
Fontainebleau agreement does not specify the measure to be used. The EU uses both 
measures. PPP data are used in identifying "objective 1" regions and the beneficiaries of the 
Cohesion Fund; current exchange rates are used in the calculations of budgetary contributions 
and in the identification of the countries benefiting from the lower level of capping of their VAT 
bases. 
27 For this and other difficulties in defining budgetary imbalances see Annex 3. 
7-10-98 
23 
absence of the correction mechanism, which would put into question an equitable 
sharing out of the burden resulting from enlargement. 
The provisions for the calculation and for the financing of the rebate are extremely 
complicated and inhibit budgetary transparency and accountability. In any case, it 
would be necessary to at least simplify the financing provisions and ensure that the 
VAT rate of call will not depend any more on the size of the rebate (see paragraph 
1.3.1). 
2.2. The budgetary imbalances of Germany, the Netherlands, Austria and 
Sweden 
Germany, the Netherlands, Austria, and Sweden have recently indicated that they 
consider their negative budgetary positions as excessive "relative to their prosperity" 
and, therefore, as candidates for a correction under the Fontainebleau agreement. In 
addition, these countries underlined their dissatisfaction with the present situation 
where other Member States of similar capacity to contribute to the EU budget show 
much smaller negative balances or even positive ones. Graph 8 confirms that these 
four countries do indeed record significant budgetary imbalances. 
Graph 8 
Budgetary balances of the UK, Germany, 
the Netherlands, Austria and Sweden 
(UK rebate definition ; before UK rebate ; percentages of GNP) 
United Kingdom 
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 
The Fontainebleau agreement established that to benefit from a correction mechanism 
a Member State's budgetary burden must be excessive in relation to its relative 
prosperity28. Relative prosperity is used to determine how well off are the citizens of 
a country or of a region compared to the EU average and is expressed in Purchasing 
Power Standards (PPS) data. Subsequently, the Protocol on Economic and Social 
28 See footnote 26 and Annex 4. 
7-10-98 
24 
Cohesion established that the proper way to take greater account of the Member 
States' relative prosperity in the system of own resources is by considering their 
contributive capacity. A Member State's contributive capacity can be used to 
determine its (citizens') capacity to contribute to a given international expenditure 
and is measured by converting nominal incomes into a common numeraire using 
current exchange rates, since the latter constitute the terms in which a country's 
income purchases international goods and services, including EU budget 
contributions29. 
Over the last decade, substantial changes in the relative position of the four Member 
States, measured by either concept, have taken place and these have been particularly 
pronounced in the cases of Germany and Sweden (see table 5, and tables 8 and 9 of 
the Statistical Annex 8). 
Table 5 
Capacity to pay and relative prosperity 
Gross national product at current market prices per head of population in Ecu and in PPS 
(until 1990: D and EUR-15 exclude East Germany; from 1991: D and EUR-15 include the new Lander ) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR-15 ECU 
1984 
101.0 
131.1 
129.9 
53.5 
52.3 
115.7 
61.9 
92.7 
171.4 
112.0 
109.3 
26.2 
130.1 
144.5 
98.6 
100.0 1990 
104.0 
127.8 
127.3 
44.0 
66.7 
111.4 
61.3 
101.1 
184.0 
100.7 
109.2 
35.8 
139.5 
137.8 
89.1 
100.0 1991 
106.0 
124.3 
114.6 
46.6 
71.4 
110.3 
62.4 
105.3 
192.3 
101.2 
111.8 
41.5 
123.3 
142.4 
91.2 
100.0 1995 
121.5 
140.2 
130.9 
49.2 
63.4 
116.4 
69.1 
83.2 
201.8 
113.7 
127.6 
46.8 
105.9 
111.7 
83.8 
100.0 1997 
112.8 
137.4 
118.6 
53.3 
62.6 
109.9 
79.9 
92.2 
186.4 
108.1 
118.8 
46.7 
104.9 
114.2 
101.8 
100.0 PPS1) 
1984 
106.-6 
106.7 
119.0 
62.8 
69.0 
111.7 
59.6 
101.9 
173.5 
102.7 
106.1 
49.4 
99.1 
111.8 
99.6 
100.0 1990 
105.3 
100.6 
117.8 
59.3 
74.2 
109.7 
64.3 
101.9 
185.2 
101.3 
105.8 
58.9 
99.9 
104.5 
99.5 
100.0 1991 
109.2 
102.4 
107.3 
62.3 
79.4 
113.0 
68.7 
105.5 
196.6 
102.3 
108.8 
64.5 
91.1 
102.4 
96.3 
100.0 1995 
115.7 
110.8 
110.4 
66.5 
76.8 
106.7 
80.5 
103.7 
181.6 
106.8 
111.1 
70.0 
93.6 
97.3 
96.4 
100.0 1997 
115.3 
112.5 
109.4 
69.0 
77.7 
104.3 
82.4 
102.6 
176.2 
106.0 
112.6 
69.6 
96.4 
93.7 
100.3 
100.0 
1) PPS = Purchasing Power Standards 
29 See footnote 26. 
7-10-98 
25 
The origins of the imbalances of these four countries, however, are different. 
Germany has had a large negative budgetary position for many years. As a wealthy 
country with a relatively small agricultural sector it attracts low shares of Structural 
Funds and CAP spending. The German negative balance deteriorated further between 
1990 and 1995 for various reasons. In 1990 and 1991, the country experienced a rate 
of economic growth much higher than those of the other Member States which led to 
an increase in its relative share in GNP and in the financing of the Community. After 
unification the country started receiving significant payments in favour of the new 
Lander under the Structural Funds, but this was more than compensated by the 
progressive increase in Structural Funds spending decided in Edinburgh in 1992 and 
by their concentration in the so called "cohesion" countries. Since 1995, the negative 
budgetary position of Germany has remained essentially stable. These developments 
have been largely consistent with the projections made at the time the 1988 Own 
Resources Decision was modified. In fact, had EU expenditure increased by as much 
as the current Financial Perspective would have allowed the negative budgetary 
balance of Germany would have been larger30. 
Table 6 
Budgetary balances of some Member States in 1999 and 
worst and best performance in the 1995-97 period 
(percentage of GNP; UK before correction) 
worst 
best 
1999 
worst 
best 
1999 Germany Netherlands Austria Sweden UK 
Operational balances 
-0.72 
-0.58 
-0.59 -0.76 
-0.65 
-0.79 -0.49 
-0.12 
-0.49 -0.59 
-0.35 
-0.61 -0.73 • 
-0.38 
-0.68 
UK correction definition 
-0.66 
-0.62 
-0.54 -0.46 
-0.23 
-0.45 -0.50 
-0.20 
-0.46 -0.62 
-0.35 
-0.54 -0.57 
-0.27 
-0.58 
More data can be found in Annex 8. 
The case of the Netherlands is different. The definitions of budgetary balance used 
in graph 8 and in table 6 do not take into account the effect known as the "reverse 
gateway effect", i.e. the fact that export restitutions paid where the port facilities are 
located, often do not go in favour of nationals of that country. The figures for the 
Netherlands are influenced by this effect. As long as export restitutions played a 
30 A study of the Bundesbank published in November 1993 (Die Finanzbeziehungen der 
Bundesrepublik Deutschland zu den Europâischen Gemeinschaften seit dem Jahr 1988, 
Monatsbericht, November 1993) had forecast a negative budgetary position for Germany in 1997 
30 per cent higher than the one effectively recorded. 
7-10-98 
26 
significant role in the Common Agricultural Policy (together with measures for 
storing surpluses temporarily withdrawn from the markets) the country was a 
significant recipient of this type of expenditure to the point of appearing for many 
years as a large net beneficiary. The reforms of the CAP have gradually altered this 
situation and the Netherlands has gradually become a net contributor to the EU 
budget as it receives low returns from both the Structural Funds and on direct aids 
from agricultural expenditure. 
However, the position of this country also depends to a large extent on the definition 
of budgetary balance used and, in particular, on the treatment of customs duties. If 
balances are calculated according to the provisions of the correction mechanism 
decided in Fontainebleau, which would neutralise the impact of traditional own 
resources in the measure31, the negative balance of the Netherlands is currently 
somewhat smaller than that of the other countries. 
Both Sweden and Austria were expected to have negative balances. The shares in 
Agricultural and Structural Funds spending that these countries can expect up to 1999 
are low. In 1997 these two countries were contributing 3.1 and 2.8 per cent of the 
EU financing, respectively. Their shares in CAP spending were 1.8 and 2.1 per cent, 
while their shares in the Structural Funds were 0.9 and 1.4 per cent. A significant 
amount of spending foreseen for these two countries in 1995 was paid only in 1996 
and this explains the apparent improvement of their position in 1996. In 1997, the 
two countries received Ecu 76 and Ecu 71 millions, respectively, as the penultimate 
instalment of the temporary compensations decided in the accession treaties. 
It has often been underlined that in 1997 Germany's budgetary balance amounted to 
more than 60 per cent of all negative balances. This estimate, however, was 
influenced by the strong fluctuations of the UK rebate. In 1999, the budgetary 
balance of Germany should represent slightly less than 50 per cent of all negative 
balances. In coming years this percentage is expected to come down further as, 
following enlargement, more Member States are likely to record negative budgetary 
balances; it is likely that by 2006 Germany's share in all negative budgetary balances 
will have decreased to around 40 per cent. 
2.3. The impact of Agenda 2000 on the most important budgetary imbalances 
To understand the impact of the Agenda 2000 programme on budgetary imbalances it 
is necessary to consider the effects of both enlargement and the proposed policy 
reforms. 
The countries which will join the Union on the occasion of the next enlargement 
have a level of prosperity well below that of all the current members and will 
therefore become large net beneficiaries. This implies that the budgetary positions of 
the present 15 Member States will have to undergo a corresponding deterioration 
31 See Annex 3 for a discussion of these issues. 
7-10-98 
27 
which, on the basis of the approach that the Commission outlined in its Agenda 2000 
communication32, can be estimated at around 0.15 per cent of their GNP by 2006. 
As the Commission has indicated in Agenda 2000, this development "cannot come as 
a surprise and should not give rise to claims for compensation ". 
The reform of the Common Agricultural Policy is not expected to affect 
significantly the budgetary balances of the five countries examined in this section of 
the report. However, this must be qualified since the proposals presented by the 
Commission in March of 1998 contain numerous provisions which may affect 
payments in the individual Member States. As a result, the eventual precise effects 
on the budgetary positions of the Member States will depend on the outcome of the 
current negotiations. 
In general terms, the proposed reform aims at reducing the level of guaranteed prices 
while partially compensating the resulting income losses through increases in direct 
aids.. This may have an effect on the budgetary balances of the Member States which 
is largely of a purely accounting nature and underscores the fragile nature of the 
budgetary balances calculations. The most notable example of this is in the case of 
the Netherlands. At present the Union intervenes in the Netherlands to support the 
price of produce for which a common market organisation exists through exports 
restitutions. The expenditure carried out in this country will benefit the producers 
which may well be situated in other countries; say, in neighbouring Belgium or 
Germany. As CAP spending moves from market support towards direct aids, the 
producers in these two countries will be receiving in direct aids some of the support 
which they were previously deriving from the market intervention measures carried 
out in the Netherlands. As a result of this change, the recorded budgetary balance of 
the Netherlands will deteriorate correspondingly while those of Belgium and 
Germany will improve without any fundamental change in the underlying situation. 
This consideration must be kept in mind when examining the impact of the CAP 
reform on the budgetary imbalances of the Member States since it explains some of 
the expected changes. 
In global terms, the reform is expected to lead to an initial increase in CAP spending 
(until 2003/2004) followed by a stabilisation as implementation of the reform is 
completed. The overall amount of spending plays also an important role considering 
that for most countries there is a significant difference between their share in the 
marginal financing of EU expenditure (i.e. their share in EU GNP) and their share in 
CAP expenditure which is not expected to change dramatically because of the reform. 
The main sectors affected by the reform are arable crops, beef and the dairy products. 
Considering the parameters of the reform and the importance of these sectors in the 
agricultural sector of the five countries examined in the previous sections, it is 
possible to predict that, if the Commission's proposals were to be confirmed by the 
32 Commission of the European Communities (1997): Agenda 2000 For a Stronger and Wider 
Union, COM (97) 2000 and Bulletin of the European Union, Supplement 5/97. 
7-10-98 
-28 
negotiations, the reform of the CAP should not have a significant effect on their 
budgetary imbalances. 
Once the reform of the CAP will have reached its full effect (i.e. towards the end of 
the period covered by the next Financial Perspective), the budgetary balances of 
Germany, Sweden and of the United Kingdom, measured as a percentage of their 
GNP, should hardly change compared to their pre-reform levels. The expected 
increases in CAP spending received by these countries should be offset by the 
increases in their contributions to the EU budget provoked by the change in total CAP 
spending. The budgetary imbalance of the Netherlands could record a small 
deterioration although this may be largely an accounting effect of the type mentioned 
at the beginning of the section. The budgetary imbalance of Austria could 
experience an improvement although this essentially would be the result of the 
proposed transfer of rural development measures from structural spending 
("heading 2" of the Financial Perspective) to agricultural expenditure ("heading 1"). 
More uncertain are the effects of the reform of Structural spending. The 
Commission has proposed to maintain the overall EU effort in the structural area 
constant as a percent of GNP at the level of 0.46 per cent of the GNP of the Union. 
This effort, however, will have to cover also the structural part of the pre-accession 
strategy and the aid to the new Member States. For the current 15 Member States the 
proposed reform implies some decline of total spending measured as a percentage of 
GNP between 1999 and 2006. 
The precise effects of the reform on the individual budgetary imbalances are still 
uncertain and will depend on the eligibility decisions to be made on the basis of the 
latest available data and on the outcome of the current negotiations. The general aim 
of the proposals presented by the Commission is to focus resources on the areas and 
sectors in greatest need. This is to be achieved through a stricter geographical 
concentration and through a rationalisation of the modes of intervention. In 
particular, it is proposed to reduce the number of regions receiving the highest levels 
of aid through a strict respect of the conditions for eligibility as "objective 1" regions 
(i. e. GDP per head in purchasing power parities lower than 75 per cent of the EU 
average). A greater geographical concentration is also sought for the so called 
"objective 2" regions. 
Additional elements which may affect the distribution of Structural Funds spending 
amongst Member States are the criteria which should be used to determine the level 
of per head aid in the eligible regions. These criteria include the gap between GDP 
in the region and the EU average, the relative prosperity of the country and the 
relative level of unemployment. 
However uncertain these elements may be, it is possible to venture some broad 
considerations which can contribute to a better assessment of the trend of the 
budgetary imbalances being discussed here. Austria, Germany, the Netherlands, 
Sweden and the United Kingdom all contribute to the EU budget with shares which 
are substantially higher than their shares in structural spending and are therefore 
7-10-98 
-29-
likely to see some improvement in their budgetary balances due to the lower overall 
expenditure resulting from the reform, even if this will be concentrated in the regions 
characterized by the greatest need. This improvement may be greater in the case of 
Germany. A strict respect of the 75 per cent benchmark for the choice of the 
"objective 1" regions will not affect this country (except East Berlin). In addition, 
the overall effect of the criteria for the determination of the aid per head may also be 
to the advantage of the new Lander. 
As a result of the whole Agenda 2000 package, of the five Member States examined 
in this section, only the Netherlands is expected to experience between 1999 and 2006 
a deterioration of its net balance of the same order of magnitude as that mentioned at 
the beginning of this section as the average impact of enlargement (about 0.15 per 
cent of GNP). This result, however, is strongly influenced by the mechanical effect 
of the shift away from CAP market support measures to direct aids payments and 
should not correspond to a parallel deterioration in the benefits derived by the Dutch 
economy. The reform of the Structural Funds, on the other hand, should have a 
small positive effect on the budgetary balance of this country. 
The budgetary balances of Austria, Germany and Sweden are expected to deteriorate 
somewhat less than the impact of enlargement. In the case of Austria, the transfer of 
rural development measures from the structural funds to the CAP should provoke a 
less favourable result of the reform of the structural funds matched by a 
corresponding better outcome of the CAP reform. 
Very different is the position of the United Kingdom whose budgetary position 
(measured as a percentage of its GNP) could remain broadly stable between 1999 and 
2006. The reforms of the CAP and of the Structural Funds would not affect 
negatively the budgetary balance of this country. Furthermore, unless the UK 
correction is modified, the negative impact of enlargement on the budgetary position 
of the United Kingdom would be reduced by the operation of the compensation 
mechanism. 
2.4. Options for reform 
If a broad agreement on the need to address the issue of budgetary imbalances were to 
emerge, some key options could be contemplated. These options, which are 
discussed below, obey a certain logic. First, on the financing side, it is possible to 
consider that an orthodox and transparent system should be put in place. This would, 
imply that the UK rebate is progressively eliminated. Secondly, it is possible to 
consider, in recognition of the fact that the principal cause of budgetary imbalances is 
the expenditure side of the EU budget, the possibility of implementing reforms on EU 
spending with the view to reducing these imbalances. And, third, ad hoc solutions on 
the revenue side of the budget, aimed at redressing the imbalances, can also be 
contemplated. The present section considers these possibilities sequentially. 
7-10-98 
30 
2.4.1. Return to a more straightforward system 
It could be envisaged progressively to phase out or to reduce the correction presently 
granted to the United Kingdom . This could find a justification in the fact that after 
enlargement, the relative prosperity of the United Kingdom, which is already around 
the EU average today, would almost certainly be above the EU average, thus 
weakening one of the conditions for the initial granting of the rebate. In addition, 
with five countries experiencing negative budgetary positions of a similar order of 
magnitude, the maintenance of a special treatment for just one of them could appear 
unjustified. The change in the nature of the mechanism mentioned in section 2.1 -
from correction of a specific structural agricultural problem to a reduction in the cost 
of all expenditure decisions - is also a strong argument. 
Furthermore, it is conceivable that other changes to the present arrangements might 
make the maintenance of the rebate superfluous or, at least, less justified. This could, 
for instance, be the case of the introduction of a correction on the expenditure side 
along the lines indicated in the next section. But ending the UK rebate by itself 
would not remove the current imbalances between the contributor Member States. 
Table 7 
Cost of the UK correction for Germany, the Netherlands, Austria and Sweden 
(percentage of GNP, 1995-1997 cash data, 1999 Preliminary Draft Budget) 
19-5 
1996 
1997 
1999 Germany 
0.02 
0.03 
0.03 
0.04 Netherlands 
0.03 
0.05 
0.05 
0.07 Austria 
0.03 
0.05 
0.05 
0.07 Sweden 
0.03 
0.05 
0.05 
0.07 
It is also important to mention that there exist additional possibilities that could 
contribute towards the development of a more straightforward financing system for 
the EU. One possibility would be to substitute the GNP resource for the VAT 
resource. Clearly, as noted earlier, the equity of the system would improve since the 
regressive elements associated with VAT would be removed. Table 3b (in section 
1.2.2) offers an indication, for the year 1997, of the effects, per Member State, of 
substituting the VAT resource with a theoretical GNP resource. Another possibility 
would be to substitute all other own resources (including traditional own resources) 
with the GNP resource (the results for each Member State are also shown in table 3b). 
It is clear that there is a trade-off between financial autonomy and simplicity. To 
replace fiscal resources with direct contribution from Member States may render the 
system more intelligible and cost effective, but it certainly reduces further financial 
autonomy and, in the case of TOR, would constitute a significant departure from EU 
orthodoxy. 
7-10-98 
-31 -
2.4.2. Correction on the expenditure side 
A correction on the expenditure side, which would not require modification of the 
Own Resources Decision, would be consistent with the Fontainebleau conclusions 
and would address the fundamental cause of budgetary imbalances. The current 
imbalances result essentially from Structural Funds and agricultural spending. It 
would not appear logical to correct the imbalances resulting from structural 
interventions as these have an explicit redistributive aim. It is however conceivable 
to modify agricultural spending. Given the integrated nature of the Common 
Agricultural Policy, it is not possible to modify spending by Member State, but it is 
possible to reduce the overall amount of spending which is allocated through the EU 
budget. 
Table 8 
Implications of a partial reimbursement (75%)1 of CAP direct aids 
(Year 2006, in Euro million and in percent of GNP, at current prices) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
Ô 
P 
SF 
S 
UK 
New 6 
Total Change in budgetary balance 
(before UK correction) 
Euro million 
110.7 
-100.6 
678.2 
-451.7 
- 528.2 
-648.5 
-195.8 
134.5 
11.6 
168.8 
43.8 
-23.9 
22.8 
62.3 
429.6 
286.4 
0.0 Percent of GNP 
0.03 
-0.05 
0.03 
-0.30 
-0.07 
-0.04 
-0.23 
0.01 
0.05 
0.03 
0.02 
-0.02 
0.01 
0.02 
0.03 
0.07 Change in budgetary balance 
(after UK correction) 
Euro million 
121.9 
-93.2 
733.5 
-446.3 
-503.4 
-585.2 
-192.8 
186.6 
12.4 
1.85.7 
53.2 
-19.2 
28.1 
72.6 
146.1 
300.0 
0.0 Percent of GNP 
0.04 
-0.04 
0.03 
-0.29 
-0.07 
-0.03 
-0.22 
0.01 
0.05 
0.04 
0.02 
-0.01 
0.02 
0.02 
0.01 
0.08 
1 ) A rate of reimbursement of 75% of CAP direct aids is equivalent to a reduction of agricultural expenditure spent 
out of the EU budget of about Euro 9 145 million or 17% of total CAP payments in 2006.. 
In particular, it is possible to imagine that, while market support expenditure will 
continue to be integrally reimbursed to Member States, that part of expenditure which 
7-10-98 
-32 
goes directly to individual beneficiaries could be reimbursed only partially. The 
scope for this type of action would increase as the proposed reform of the CAP aims 
at reducing the weight of market support measures, while the relative weight of direct 
aids would increase correspondingly (from 65 per cent in 2000 to 75 per cent in 
2006). The essential idea is to take advantage of the fact that all the Member States 
that record large budgetary imbalances have a share in the financing of the EU budget 
much higher than that in EU agricultural spending, and that a reduction in the overall 
amount of spending would improve their budgetary balances. Moreover, the original 
rationale for 100% financing of the CAP market support expenditure (i. e., that 
market support benefits farmers throughout the Community, not just those in the 
Member States where the expenditure occurs) is no longer valid for the income aid 
component. 
If implemented, this option would be consistent with and would represent a 
generalisation of the principles currently governing most EU expenditure and 
especially that under the Structural Funds. At the same time, it should not be seen as 
a dismantling of the CAP or a move towards its re-nationalisation. Neither the 
degree of integration, nor the level of decision making or the overall amount of 
financial resources available to pursue its objectives would be modified. Farmers 
would receive the same support as currently since CAP expenditure by Member State 
is compulsory once determined by the relevant legal provisions. The level and the 
conditions attached to the payment of these direct aids would continue to be an 
integral part of the CAP and would result only from EU decisions. The overall 
amount of spending available would remain the same, but would be shared between 
the EU budget and the national exchequers. 
The fact that a lower share of financial resources would need to be allocated through 
the EU budget suggests that the agricultural guideline should be reduced if this 
constraint is to maintain its effectiveness. A corresponding reduction in the Own 
Resources ceiling might also be appropriate. This could be done on the occasion of 
the first modification of the Own Resources Decision33 and, in the meantime, should 
be replaced by some form of strong engagement not to use the whole ceiling. 
Table 8 presents the impact of a 75 per cent partial reimbursement of CAP direct aids. 
The overall reduction of EU spending in 2006 amounts in this example to Euro 9 145 
million. More details on this simulation are presented in Annex 5. The table also 
shows the negative effects that the introduction of a measure of this type would have 
on the budgetary balances of some Member States. 
33 On the occasion of the first modification of the Own Resources Decision the reference will have to 
change from the GNP based on the 2nd edition of the European System of Accounts to the new 
ESA 95. If the level of the GNP of the EU according to the new system of accounts were to be 
different, this would justify a corresponding adaptation of the ceiling so as maintain the stability of 
the financial resources put at the disposal of the EU budget. 
7-10-98 
33 
2.4.3. A generalised correction mechanism 
Germany, the Netherlands, Austria and Sweden have asked to benefit from a 
transformation of; the present correction mechanism applying to the UK into a 
capping model. A simple transposition of the present mechanism is not possible. 
Applying the present mechanism to all countries that have a negative budgetary 
balance or simply extending to the four countries that have made the request would 
result in a three to fourfold increase of cost of the mechanism (see table 9 and the 
report by the European Court of Auditors (1998)34). In addition, depending on the 
assumptions made, this burden would have to be borne by a group of countries 
representing less than a fifth of the GNP of the European Union. 
The four countries that have made the request, aware of this difficulty, have asked for 
a modified version of the mechanism. They, correctly, point out that the present 
mechanism contains various implicit parameters that may be modified. In particular, 
they point out that whereas the current mechanism corrects 66 per cent of the entirety 
of the negative balance of the United Kingdom, it is conceivable that Member States 
be asked to accept a negative balance up to a given percentage of GNP - say 0.3 or 
0.4 per cent of GNP T and be granted a compensation only for the part exceeding this 
threshold. In addition, the benchmark of 66 per cent may also be modified. It is 
also possible to introduce modifications in the items included in the contributions to 
the EU'budget (e.g. traditional own resources could be excluded or re-apportioned 
according to different keys) and in those included in expenditure (e.g. to exclude 
administrative expenditure or expenditure in the new Member States or Structural 
Funds and so on). 
Table 9 
Overall redistribution induced by the UK correction mechanism 
for 19961 under different assumptions 
(Ecu million) 
Mechanism applied to the Mechanism aPPlied to a»the Mechanism applied to 5 i ini+aH Kinn^m countries with a negative ^«ML 
United Kingdom budgetary ba|ance countries 
(present situation) (UK D NL A S F I) (UK' D' NL'A* S) 
2 856 12 384 11138 
On the assumption that the beneficiaries are excluded from the financing, the burden would be spread 
over a number of countries representing the following percentages of EU GNP 
86.5% 17.0% 48.9% 
1) The simulation has been prepared on the basis of 1996 data to make the results comparable to those 
reported by the European Court of Auditors (1998): op. cit., footnote 38. 
34 European Court of Auditors (1998): Special report no 6/98 on the system of own resources based 
on VAT and GNP. Official Journal of the European Communities C 241, July 31,1998. 
7-10-98 
-34-
TablelO 
Changes in the budgetary balances induced by compensation 
mechanisms based on different parameters 
(Euro million: data based on projections for 1999^) 
Sum of all net 
rebates Germany Netherlands Austria Sweden UK 
Present mechanism 
(Threshold 0.0 per cent of GNP; rate of reimbursement 66 per cent) 
4 952 -1 008 311 -173 -189 + 4 952 
Unconstrained generalised correction mechanism 
(Threshold 0.0 per cent of GNP; rate of reimbursement 66 per cent) 
7 601 + 4110 + 112 + 68 + 185 + 3 126 
Difference relative to the present situation 
2 649 + 5118 + 423 + 241 + 374 1 826 
Constrained generalised correction mechanism 
(Threshold 0.3 per cent of GNP; rate of reimbursement 66 per cent) 
3 538 + 1 669 123 54 + 50 + 1 819 
Difference relative to the present situation 
-1 414 + 2 677 + 188 + 119 + 239 3 133 
1) The results are shown for 1999 only because the data for other years are not appropriate. 1996 is not 
representative for Sweden and Austria; 1997 and 1998 are unrepresentative for the United Kingdom 
because of the exceptionally high variability of the rebate in these years - see graph 7; the data in the 
first column under the various extensions of the correction mechanism correspond to the sum of all 
improvements (financed, equivalently, by the sum of all deteriorations) in budgetary balances reported in 
column (6) of tables 1 and 3 of Annex 6. 
An additional important modification could concern the financing of the rebates. In 
the present system the United Kingdom does not finance its own rebate. A 
generalisation could be seen as implying that the Member States benefiting from the 
system should not finance it. However this solution is not only very costly in a 
situation where many Member States benefit from the system, but is also fraught with 
risks. In particular, a "threshold effect" could appear whereby a country with a 
negative balance just above the threshold would receive a minimal rebate but would 
be exempted from the burden of financing whereas if it had been just below the 
threshold it would have had to contribute to the financing of all other rebates for 
substantial amounts. It seems logical therefore to assume that a Member State 
7-10-98 
35 
should not finance its own rebate, but that it should finance all the others35 (as 
assumed in the simulations presented in table 10). 
Modifying these parameters provides the system with a substantial degree of 
flexibility, albeit at the cost of significantly reducing transparency and increasing the 
complexity of the calculations. However, this flexibility yields mechanisms with 
different overall costs and different effects for the individual Member States. 
Annex 6 discusses some simulations and some key results are reproduced in table 10. 
The simulations show that any system based on the same parameters for all Member 
States, and under the assumption that its overall cost is to be maintained within 
reasonable limits, would lead to substantial reduction in the size of the rebate 
currently enjoyed by the United Kingdom. 
35 See Annex 6 for a discussion of this model and in particular for the opportunity to ignore second 
round effects, i.e. the case where a country is just below the threshold at the beginning of the 
exercise, but where it will exceed it once the cost of financing the other rebates is taken into 
account. 
7-10-98 
-36-
3. FINAL COMMENTS 
The proposals presented by the Commission in Agenda 2000 indicate that it is 
possible to face the challenges resulting from enlargement and from the reform of the 
major EU policies within the own resources ceiling set, for an unlimited time, by the 
current Own Resources Decision. To achieve this it is essential that the budgetary 
rigour pursued by the Member States in the framework of EMU characterises also the 
EU budget. 
The shortcomings of the system discussed in the first part of the report do not by 
themselves provide grounds to justify an urgent modification of the Own Resources 
Decision. If and when this Decision were to be modified so as to allow an in depth 
reform of the Own Resources system, these shortcomings could be corrected either 
through a simplification of the system of contributions or through the introduction of 
new own resources. The proposed introduction of an element of progressivity could 
also be discussed in this context. 
Currently, the most pressing source of dissatisfaction with the present arrangements 
appears to be linked to the issue of budgetary imbalances of Germany, the 
Netherlands, Austria and Sweden. It is not possible, at this stage, to determine with 
precision how these imbalances will evolve over the next few years as some 
important policy parameters have yet to be fully articulated. However, it is possible 
to predict that the imbalances of these large net contributors as a percentage of GNP 
should deteriorate somewhat, more for the Netherlands than for the others, but most 
likely less than the average deterioration due to enlargement. This outcome would 
be due to the proposed containment of spending in the present Member States over 
the period covered by the next Financial Perspective and to some specific provisions 
of the proposed reforms. 
Establishing correction mechanisms to ameliorate budgetary imbalances is a difficult 
task since, for a given size of the EU budget, an improvement in the budgetary 
position of some Member States invariably involves a corresponding deterioration in 
the budgetary position of others. If a consensus were to emerge on the need to 
address the issue of budgetary imbalances, a decision would have to be taken on how 
to achieve this result and on the timing of the changes. 
The report indicates three, mutually compatible, options. 
• on the financing side: a simplification of the financing structure in favour of a 
system more, or even totally, based on GNP contributions; such a simplification 
could also include the phasing out of the existing correction mechanism; 
• on the expenditure side: the introduction of a system of partial reimbursement 
of CAP spending aimed at directly supporting incomes; 
• on the balances: the application of a generalized correction mechanism to all 
Member States experiencing large imbalances. 
7-10-98 
-37-
None of the options discussed in the report provides an ideal solution. Technical and 
conceptual weaknesses can be found in all of them. The shifts in the burden of 
financing that results from some of these options present regressive elements that 
might need a redress in the context of an overall solution. 
The timing of any changes would depend on whether it will be necessary to modify 
the Own Resources Decision or not. A modification would entail long ratification 
delays and would suggest a process allowing the new financing system to become 
effective at the time of the accession of the first group of new Member States. 
Enlargement would indeed represent such a significant change of circumstances as to 
warrant a structural modification of this type. 
The significant methodological and conceptual reserves that the Commission has on 
the issue of budgetary imbalances have prompted it to limit this report to a review of 
options for their correction. If a broad agreement towards a solution of the problem 
were to appear within the European Council, the Commission would put forward the 
appropriate detailed proposals. 
7-10-98 
ANNEX 1 
The evolution of the EU financing system 
During the period 1958-1970 the Community budget was financed exclusively by 
contributions from the Member States. The Luxembourg European Council of 21-22 
April 1970 introduced for the first time a system of own resources for the general 
budget of the Community taking effect in 1971. One objective was to gradually 
enhance the Community's financial independence from Member States' transfers. The 
own resources introduced were customs duties and agricultural levies (which were to 
become known as the Traditional Own Resources, TOR) and one based on a harmonised 
VAT base. While traditional own resources became effectively own resources over the 
period 1971-1975, difficulties with establishing a common VAT system across the 
Member States and with defining the base for VAT assessment delayed the introduction 
of VAT as an own resource until 1979. 
In the period 1975-1987 revenue growth on the own resources account was eroded by a 
diminishing yield from TORs while revenues from VAT were adversely affected by the 
generally weak economic growth prevailing during this period. At the same time, the 
strengthening of existing and the launching of new policies, the inability to contain 
spending on the Common Agricultural Policy (CAP) and expenditure growth associated 
with the two enlargements2 led to pronounced resource inadequacy. Persistent 
complaints on the part of the UK concerning its financial contribution also became a 
feature of the budgetary disputes that were prominent during this period. 
A temporary resolution of the budget difficulties was secured at the Fontainebleau 
European Council. The Fontainebleau Council of June 25-26, 1984 increased the 
maximum rate of call for the VAT resource to 1.4 per cent and established a correction 
mechanism for budgetary imbalances which has since applied only to the UK3. 
The modifications to the financing system introduced by the Fontainebleau Council 
proved almost immediately insufficient. They failed to generate sufficient revenues 
owing to the continuing decline in revenues from TORs and to the slow growth in 
revenues from the VAT resource. In addition, some dissatisfaction started to appear 
with the VAT based resource which, being based on consumption, was felt to contain a 
significant regressive element. The problem of revenue inadequacy and inequity was 
compounded by rising, and incompletely anticipated, expenditure commitments. These 
1 For a detailed review of the history as well as an assessment of the EU financial arrangements up to the early 
years of the Edinburgh agreement see Commission of the European Communities (1995): European Union Public 
Finance, Luxembourg; see also the discussion in Commission of the European Communities (1997): "Budget 
Contributions, EU Expenditure, Budgetary Balances and Relative Prosperity of the Member States", paper 
prepared by DG-XIX and forwarded to the Ecofin Ministers by President Santer for their October 13 meeting. 
^ Greece joined the Community in 1981 followed by Spain and Portugal in 1986. 
3 See Fontainebleau European Council, Conclusions of the Presidency, Bulletin of the European Communities 6-
1984. 
7-10-1998 
ANNEX 1 
-2-
were related to difficulties in controlling spending on the Common Agricultural Policy 
(CAP), especially following the accession of Portugal and Spain, the dollar depreciation 
after the spring 1985 and the fall in international commodity prices, factors which added 
considerably to the financing of export restitutions. 
Fundamental reforms, which determined the character of the present own resources 
system, were adopted in June 19884. Among the principal reforms of the Brussels 
European Council was the introduction of a new own resource based on the Member 
States' GNP (intended to match contributions closer to the ability to pay), and that of an 
overall ceiling to the total amount of own resources which could be called to finance 
Community spending. This payments ceiling was set at 1.15 per cent in 1988 with 
progressive yearly increases which were to bring it to 1.20 per cent by 1992. The 
Council also limited the role of the VAT resource by introducing a capping of its base at 
55 per cent of GNP, a measure intended to reduce the effects of the regressive character 
of the resource. 
The consolidation of the 1988 reforms and ultimately of the Community finances took 
place within a context where the Community's ambitions, expressed in the Treaty on 
European Union, grew significantly. The Edinburgh agreement of December 1992, 
which adopted the financial perspective for the years 1993-1999, increased the overall 
ceiling of own resources from 1.20 to 1.27 per cent. In addition, it introduced steps to 
decrease further the importance of VAT in the financing of the budget. 
However, the system of own resources decided in Edinburgh could only enter into force 
on January 1, 1995. In the meantime, significant difficulties were experienced during 
the recession years of the early 1990s when initial budget estimates turned out to be too 
optimistic. Successive downward revisions in economic growth during 1992-1994 
resulted in corresponding revisions to budget revenues. Nevertheless, despite the 
adverse climate, it was possible to respect the constraints imposed by the own resources 
ceiling without undermining financial discipline. 
In subsequent years budgetary arrangements have proved generally successful. In 
addition, from 1997 cautious annual budgetary decisions have lead to spending levels 
significantly lower to those foreseen in the Financial Perspective. As a result, the 
European Union approaches the challenges resulting from enlargement to Cyprus and to 
the countries of central and eastern Europe and from the reform of its main policies with 
substantial margins under the own resources ceiling. 
V %* %* 
See Council Decision 88/376/EEC, Euratom of June 24, 1988, On the System of the Communities* Own 
Resources, Official Journal of the European Communities, L 185, July 15.1988. 
7-10-1998 
ANNEX 2 
A review of possible own resources for the European 
Union 
1. INTRODUCTION 
The issue of the financial autonomy of the EU is central to the debate about new own 
resources. The Luxembourg agreement of 21-22 % April 1970 provided that the 
replacement of Member States contributions by own resources was meant to finance the 
complete budget. However, this financial autonomy has proved elusive. A dominant 
part of the EU budget is currently financed by block grants in the form of VAT and 
GNP contributions from the treasuries of the Member States. To remedy this situation, 
proposals for different categories of new own resources have on occasion been made1. 
The purpose of this annex is to provide a critical review of some of the most important 
of these proposals. 
There are three sections in the Annex following the introduction. Section 2 presents the 
criteria against which the suitability of proposed own resources can be evaluated; 
section 3 examines eight specific proposals in detail; and section 4 concludes. 
2. CRITERIA FOR OWN RESOURCES 
The theory of fiscal federalism predicts that the assignment of tax competencies at 
different levels of authority rests on two important economic considerations and also on 
several subsidiary criteria. The former, which are the primary criteria, are: 
> the presence of externalities which transcend national borders; and 
> the regional arbitrariness of the tax base/of the tax revenue2. 
• If the tax in question has external effects which go beyond the locality where it is 
levied, then it ought to be optimally assigned to the higher level of authority. Two 
broad cases can be considered here. First, taxation that affects the prices of 
For the general principle in favor of own resources, see for example, European Parliament (1990). 
The report "Insists that the Community budget must be financed from the Community's own 
resources"; Part A, para. 10. Some of these issues have also been considered in Commission of 
the European Communities (1992). The quest for new own resources dates back to the 1970s; 
see, for example, the MacDougall (1977) report, vol. II, ch. 16, p. 479-504. 
For a discussion of these criteria as they apply to the case of the European Union see Commission 
of the European Communities (1993a), ch. 7, Begg et. al. (1997) and Keen (1995), section 2, p. 9-
39. See also Bureau and Champsaur (1992), Commission of the European Communities (1992c), 
section IV.3, European Parliament (1994), p. 3, and Commission of the European Communities 
(1993a), Table 30, p. 84 for a (somewhat dated) summary of the assignment of tax competencies in 
selected federal states in 1988. 
7-10-1998 
ANNEX 2 
internationally traded goods or factors of production in imperfectly competitive 
markets; this can lead to distortion of competition between national fiscal systems, 
an important factor at the background of the process of indirect tax harmonisation 
undertaken in the EU. And, second, taxation levied on mobile tax bases. A parallel 
version of the criterion states that if the benefit from a particular service transcends 
national borders, then the financing of the service ought to be assigned to a higher 
level of government. Clearly, in the presence of externalities subsidiarity, despite 
its importance, becomes a secondary issue since economic efficiency predicts that 
the tax should be assigned not to a national but to a supranational level3. 
Regional arbitrariness refers to the impossibility to reasonably define the base of 
the tax or, alternatively, to the arbitrary distribution of the revenue in the case 
where the tax is levied locally. Revenues from the common external tariff 
constitute a clear example of the latter. Here, especially as a consequence of the 
internal market, it is difficult to determine with accuracy the national base that 
ultimately bears the tariff. Should the tariff be levied in, say, the port of Genoa, the 
revenues from the tariff only partly belong to the citizens of Italy since such 
imports, once in the EU, are consumed widely by all European consumers. 
Revenues from customs and agricultural levies are currently assigned to the EU 
level (with the Member States simply collecting the levies) because they comply 
with the criterion of regional arbitrariness 4. 
Several secondary criteria for assigning tax instruments to a supranational level of 
government ought also to be considered. First, in order to ensure horizontal equity5 in • 
Leaving aside externalities or revenue arbitrariness, subsidiarity is a crucial issue here; see, for 
example, the importance accorded to it in the motion for a resolution in European Parliament (1994). 
It is possible to argue that full respect of the subsidiarity principle would be consistent with Member 
States contributing to the EU budget a specified amount, however defined, but themselves alone 
having the responsibility to decide on the sources of financing and the tax instruments to be used, in 
order to respect their EU financing obligation. However, Bureau and Champsaur (1992), p. 89, 
caution that "budgetary intervention at the Community level ought to be admitted only in the 
presence of cross-border externalities or economies of scale, which cannot be properly alleviated by 
a simple coordination between concerned national governments". 
Despite the presumption, there is very little concrete evidence on the quantitative importance of 
regional arbitrariness in the case of traditional own resources. Nevertheless, according to recent 
estimates 27 per cent of the total amount of customs duties levied in the Netherlands, and 31 per 
cent of the import duties levied in Antwerp, are related to final consumption of goods in other 
Member States. Taking account of this alters considerably the unadjusted shares of Belgium and of 
the Netherlands in traditional own resources. For example, instead of amounting to 7.4 per cent and 
12.2 per cent of total traditional own resources contributions in 1997, respectively, adjusting the data 
for the presence of the gateway effect would reduce the share of Belgium to 5.1 per cent and of the 
Netherlands to 8.9 per cent For the details of the estimates see Verbeke et. al. (1998a) and 
Verbeke et. al. (1998b). 
Horizontal equity refers to the concept of individuals (or nations) in identical circumstances are 
treated identically in their tax liability; vertical equity, on the other hand, refers to the notion where 
individuals (or nations) in different circumstances are accordingly differentiated in their tax liability. 
Clearly, it is not straightforward to extend the application of these principles from individual 
7-10-1998 
ANNEX 2 
contributions across Member States, a definition of equal treatment for tax purposes is 
important (the need for vertical equity, or solidarity to use a term commonly employed 
in the context of the EU, is addressed through the EU's expenditure policies). Here, the 
proportionality of the relationship between gross contributions and GNP is the basis on 
which horizontal equity can evaluated6. 
The second criterion, visibility to EU citizens, has an important accountability 
dimension. Given the complex nature of EU finances, comprehension and monitoring 
of the present system on the part of citizens is virtually absent. For example, from the 
point of view of EU citizens, the GNP contributions are clearly invisible, but also the 
relationship between VAT taxes paid and collected by the Member States and their 
contributions on the VAT resource is not easily comprehensible7. Moreover, while 
Member States themselves perform this monitoring function, the lack of a direct 
relationship between citizen and budget is another manifestation of the "democratic 
deficit"8. Changes through the introduction of new own resources ought to improve 
transparency by conveying information about EU financial relationships9. 
A third criterion concerns links to common policies and requires that new own 
resources ought to be those which are consistent with the other EU policy objectives. 
Financing the EU budget through taxes that, at the same time, advance common 
objectives on, say, transport policy or environmental standards would be consistent with 
this criterion. 
To avoid distortions and to enhance acceptability the tax ought to be levied on a 
harmonised base. Few existing taxes enjoy at present a sufficient degree of 
harmonisation in their base. VAT and excise taxes come closest to the necessary 
standard. 
A further set of criteria concerning sufficiency, efficiency and cost-effectiveness refer 
to administrative aspects of new own resources. The revenue from new own resources 
ought to be sufficient to finance a dominant part, if not all the resource needs, of the 
taxpayers within a nation to regions within a federation or to the Member States in their relationship 
with the EU budget. 
This was discussed already in Commission of the European Communities (1997a). Note, however, 
that suggestions have on occasion been made for a more progressive resource as, for example, in 
Padoa-Schioppa (1987), p. 136; in recent years, Spain has also insisted on the establishment of a 
progressive resource. 
' See European Communities Court of Auditors (1998) for a criticism related to this point. 
8 The "democratic deficit" is usually meant to suggest lack of full parliamentary scrutiny by and 
accountability to the European Parliament; presently, the term is used to indicate a manifestation of 
this in the form of the incomplete monitoring and control of the budget by the citizen. 
9 The European Parliament (1990) report emphasizes that "the development of a genuine system of 
own resources to replace the contributions from the Member States could take the form of a direct 
link between the Community and the taxpayer"; see European Parliament (1990), Part A, para. 15. 
7-10-1998 
ANNEX 2 
-4-
budget; it should also be stable and predictable and subject neither to unforeseen 
fluctuations nor to a trend decline. 
The manner in which this revenue is collected ought to be efficient in the sense of being 
assigned to the level of government where tax losses and fraud are minimised. The tax 
ought to be consistent with improving economic efficiency as well, in that it ought not 
to discriminate against activities promoted by national or EU policies. 
Cost-effectiveness as a criterion refers to tax administration arrangements that maximise 
the revenue/cost ratio. Assigning an EU tax to a higher level of government could 
contribute to reducing duplication of tax administration services, and it could also make 
possible the exploitation of economies of scale in tax collection. At the same time, 
however, legal, institutional and language differences among the Member States do not 
necessarily favour assigning the EU tax to a higher level of government; on the 
contrary, it may be less costly to permit a lower level of tax authority to implement 
collection, an arrangement which could be particularly effective if combined with 
incentives to Member States to act efficiently. A clear example is the collection of 
revenues from traditional own resources by Member States on behalf of the EU. 
3. PROPOSALS FOR NEW OWN RESOURCES 
The present section examines eight resources that have been proposed on various 
occasions as new own resources. These are, a C02/Energy tax; a modulated VAT tax; 
excise taxes on tobacco, alcohol and mineral oil; corporate income tax; 
communications taxes; personal income tax; withholding tax on interest income; and 
ECB seigniorage. The review takes the form of commentary and, for a convenient 
summary, of a tabular presentation of the principal issues at the end of the discussion of 
each resource. 
3.1. C02/Energy tax 
This tax was proposed by the Commission in October 1991, reflecting the increasing 
awareness of potential environmental degradation due to high carbon dioxide emissions. 
The Commission set the objective of stabilising C02 emissions by 2000 at their 1990 
level. The proposal, which foresaw an increase m the tax to USD 10 per barrel of oil by 
the end of the century, was virtually abandoned following considerable opposition in the 
Council. In order to overcome this opposition, a revised proposal was put forward in 
May 1995 which introduced the concept of a transitional stage whereby Member States 
would agree the scope and structure of a common tax but would be free to decide 
product by product, whether to introduce a positive rate of tax and the level of tax they 
wished to apply. However, discussions on this revised proposal broke down on the 
question of what was to happen at the end of the transitional period. Following this, the 
Ecofin Council of March 11, 1996 called on the Commission to prepare new proposals 
for the taxation of energy products by expanding the Community excise duty rules on 
mineral oils into a new taxation scheme for all energy products. The European 
7-10-1998 
ANNEX 2 
-5-
Parliament and the Economic and Social Committee have also argued in favour of such 
an approach. 
The Commission has prepared new proposals intended to strengthen the deepening of 
the internal market and at the same time to permit the introduction of energy taxation 
according to national preferences including the granting of tax exemptions for energy-
intensive industries. Furthermore, environmental protection, the development of a 
sustainable transport policy and the support of EU competitiveness are also objectives 
of the proposals10. The aim of the proposals is to establish minimum levels of taxation 
for an enlarged group of energy products. It is clear, however, that the proposals have 
not been prepared with the view to facilitating the establishment of new own resources. 
• The C02/energy tax meets the externality criterion since pollution transcends 
national frontiers. The tax as such could be seen as a means to internalise the 
negative externalities associated with pollution. However, given the disparate level 
of development and of energy use across the Member States, such a tax would 
undoubtedly not perform well on grounds of equity11. Furthermore, since it is 
possible, as envisaged in the initial Commission proposal, to exempt certain 
firms/sectors from the tax on grounds of undertaking energy-saving innovations 
this would also effect equity adversely. Failing the equity criterion, however, is 
secondary since the primary objective of such taxation is, inevitably, to penalise 
polluters. 
• Base harmonisation is non-existent although under the Commission's proposals for 
minimum taxation of energy products considerable harmonisation could be 
achieved in the future. 
• On the criterion of visibility, while it is possible to design the taxation in question 
in a transparent manner for the benefit of EU citizens, the possibility of taxing both 
intermediate and final products will likely attenuate the visibility link between the 
revenues and the financing of the EU budget. 
• Regarding links to common policies, a C02/Energy tax scores high since it is 
consistent with the EU's environmental objectives. Moreover, it is consistent with 
the Commission's proposals for establishing minimum levels of taxation for energy 
products across the Single Market. The Commission has also suggested using 
10 
11 See Commission of the European Communities (1997b) and Commission of the European 
Communities (1997c). 
Estimates by the Commission suggest that with a USD 10 per barrel the lax would amount to as little 
as 0.79 per cent of GDP in France and as much as 3.08 per cent of GDP in Luxembourg; Greece 
would contribute the equivalent of 2.45 per cent of GDP, Ireland 1.93 per cent of GDP and the UK 
1.53 per cent of GDP; see Commission of the European Communities (1993a), Table 33. 
7-10-1998 
ANNEX 2 
-6-
environmental taxes as a means to reduce the burden of taxation on labour and 
foster employment growth without endangering budget restraint12. 
• It is uncertain whether the tax would yield sufficient and predictable revenues. 
According to Commission estimates, a USD 10 per barrel would yield the 
equivalent of about one percent of EU GNP, clearly sufficient to finance a large 
part of current and projected EU expenditure. However, revenue from this tax will 
undoubtedly be unpredictable since it will be levied on cyclically prone sectors 
exhibiting large variability with respect to economic fluctuations. Moreover, it is 
possible that energy substitution will take place on a scale sufficiently large to/ 
undermine revenues from this source and its suitability as an own resource for the 
EU. 
• On grounds of efficiency and cost-effectiveness it is difficult to evaluate the C02 
tax. It is possible to levy the tax at the stage of primary production, at the import 
stage and at the stage of final consumption/use. The optimal stage, from the 
perspective of the criterion, is that of primary production and imports; however, in 
this case it would not be possible to exclude preferred sectors. Until explicit 
proposals have been defined at a practical level, it is difficult to determine the 
administrative costs/advantages, although it is likely that under some circumstances 
the tax would be administered effectively. 
• Several Member States have objected to this tax for reasons of protecting their 
international competitiveness. An additional consideration may have been the 
desire to keep their carbon taxes low in order to protect some energy-intensive 
domestic producers. A co-ordinated implementation of carbon taxes with EU wide 
tax exemptions would be necessary to internalise these externalities and also to 
reduce environmental damage. 
As they are predominantly allocative taxes, energy taxes should be expected to and, 
indeed, fare poorly in terms of equity and tend to be regressive across Member States. 
This is a lesser concern given the primary objective of the tax. At the same time, 
however, if it were possible to reach a Council agreement on the complex and 
fundamental issues involved, which until now has proved impossible, this tax would 
probably be one of the most serious candidates for a genuine EU resource. 
12 See Commission of the European Communities (1994a), p. 156, for a discussion, and also Drèze 
and Malinvaud (1994b). If revenue for the EU is indeed raised through a C02/energy tax, GNP 
contributions would decrease correspondingly and Member States could pass this on to their 
economies through lower taxes on labour. 
7-10-1998 
ANNEX 2 
7-
Bqx1 
CO^Energy tax 
Criteria Performance 
Equity would not be served well since the tax would be paid 
proportionately more by those Member States dependent on older and 
more pollution-intensive technology; however, this is an inevitable 
Equity consequence of such taxation. Should it be possible to exempt certain 
firms/sectors for the tax, adverse distributional consequences would also 
follow. Negative pollution-related externalities could be internalised 
through a tax assigned to the EU. 
Base harmonisation Currently non-existent. 
The link between the tax and EU policies could be made visible. 
Visibility to taxpayers However, with the tax applying to both final and intermediate products 
visibility may not be as transparent as desired. 
.... ... Clearly linked to Community environmental and tax harmonisation Link to common policies ... J 
r policies. 
A tax of USD 10 per barrel could raise revenues equivalent to about 1% 
R rr- . of EU GNP. However, it is possible that substitution away from pollution-
„. . Ht intensive activities could ultimately lead to diminishing revenues. 
/ .. ' Moreover, revenues may be too sensitive to business cycle movements 
undermining sufficiency at a time of an economic downturn. The tax 
could be administered efficiently and effectively. 
3.2. Modulated VAT tax 
The present VAT-based resource constitutes a significant source of financing in the EU 
budget. Although reforms implemented following the 1988 and the 1994 Own 
Resources Decisions have improved on undesirable characteristics of this tax significant 
difficulties remain to be addressed. Nevertheless, support for a tax based on VAT as a 
new own resource continues to remain buoyant. In recent years, the principal advocate 
for establishing a new own resource on VAT has been the European Parliament which 
has developed extensively the case in a 1994 report13. 
The report favours the replacement of the third and fourth resource by a new third 
resource based on VAT, and taking the form of a specific percentage of VAT imposed 
for the benefit of the EU and levied together with the national VAT taxation. There 
would, therefore, be a combined VAT rate consisting of the national and the EU rate. 
The report also argues in favour of a common rate across the Member States 
differentiated across commodities. To contribute to equity across individuals within the 
Member States, the report proposes that there would be two VAT rates, a lower one and 
13 See European Parliament (1994). It should be stressed, however, that there are reservations in the 
European Parliament itself regarding VAT as an own resource. The European Parliament (1990) 
report notes "that VAT, which has become the main source of revenue, while having the advantage 
of being applied to a tax which is almost harmonized, has the grave disadvantage of inter-personal 
and spatial regressivity, and should therefore not occupy in future the pre-eminent position it enjoys 
at the moment"; see European Parliament (1990), Part A, para. 16. 
7-10-1998 
ANNEX 2 
a higher one, for example, the former at 1.5 per cent and the latter at 3.0 per cent. The 
report argues that the tax would be imposed on a harmonised VAT base through 
declarations stating clearly on each invoice that it is an EU tax. Thus, both national 
parliaments and the EU would be granted the power to determine separately which rate 
would be imposed for purposes of the national budget and which for the EU budget, 
respectively. The amounts collected would therefore have a direct link to the EU budget 
in the eyes of citizens/taxpayers. 
Given the possibility of inequities in gross contributions resulting from such a system, 
the report favours an equalisation mechanism14 based on GNP. The proposed 
mechanism would be based on establishment of all EU budget resources in a given year 
in terms of a fixed share in EU GNP. If a Member State's total contributions at the end 
of the year as percent of its GNP was lower (higher) than the predetermined benchmark 
then the Member State would make additional payments (receive refunds) equal to the 
difference between the two shares. In this manner, the proposed system could 
accommodate country-specific characteristics (regional development etc) and fine tune 
the own resources system in order to ensure improved equity in gross contributions. 
• Taxation in the form of VAT is generally regressive with relatively less well off 
Member States contributing proportionately more as a result of the lower share of 
savings in national income (the criterion of vertical equity is not satisfied). 
Recognition of this aspect has led to the capping of the VAT base as well as to the 
reduction of the VAT call rate and, as a result, the share of VAT in total budget 
resources has diminished. 
It is difficult to see VAT payments as deriving from a common EU source. VAT 
revenues are nation-specific and, therefore, the criterion of regional arbitrariness is 
likely not satisfied. 
The implementation of this tax as proposed in the European Parliament (1994) 
report could conflict with national tax setting and especially national budgetary 
priorities unless close co-ordination of tax decisions at the two levels of 
government is put in place. In particular, there may 1?e difficulties in integrating an 
EU VAT tax within the national VAT taxation, especially in light of proposals for a 
minimum VAT taxation in the EU. However, Keen (1995) suggests that although 
it is possible that the combined (national and EU) VAT rate may be set too high, 
this remains an empirical question that cannot be resolved a priori. 
14 An equalization mechanism had already been proposed, also by the European Parliament, in the 
early 1980s; see European Parliament (1984), article 73. 
7-10-1998 
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-9-
• VAT base harmonisation is advanced. Following the Sixth VAT Directive15, and 
barring the possibility of changing the basket of goods and services subject to 
minimum VAT taxation, base harmonisation is now substantial. 
• In the form of two separate tax rates, a national and an EU one, the tax will 
undoubtedly be highly visible to taxpayers/citizens and is certain to be understood 
as a contribution to the EU budget, thus improving on the democratic deficit. 
• It is likely that the tax will yield sufficient revenues for the purposes of the EU 
budget. Nevertheless, private consumption, which would be the principal 
component of the VAT tax base, has pronounced cyclical characteristics. 
Fluctuations in private consumption are a leading cause of business cycles. The 
replacement of the current 3rd and 4th resources with a VAT resource of the type 
proposed would undoubtedly raise the variability of EU budget revenues. It is 
worth recalling that the recession of the early 1990s had significant effects on EU 
revenues during that period. 
• The co-occupancy of the same base by national and EU authorities will contribute 
to reducing compliance and monitoring costs (compared to introducing an 
independent a new tax) and to also limiting the extent of tax fraud, evasion and 
avoidance. With the national VAT rate exceeding significantly the EU one 
Member States should have sufficiently strong incentives to monitor compliance on 
the part of taxpayers. Nevertheless, the present experience with VAT revenue 
performance since the recession indicates that problems of compliance may be 
important. 
In order to ensure that fiscal obstacles to the completion of the Single Market are 
abolished the Sixth VAT Directive provided that a definitive VAT system ought to be 
based on taxation in the Member State where the goods or services are supplied16. The 
Commission has put forward ideas for minimum VAT taxation which are consistent 
with the origin-based system17 and which are likely to ease some of the drawbacks 
currently characterising VAT as an own resource. 
With an origin-based VAT system for the EU, VAT might present itself as a good 
candidate for a genuine own resource. It has considerable attractions in terms of 
visibility, adequacy and buoyancy although some key reservations cannot be ignored. 
However, a principal difficulty relates to the regressive nature of the tax. Should it be 
necessary to introduce corrections in the form of a GNP-related equalisation 
15 • See Council Directive 91/680/EEC. 
16 See Council Directive 91/680/EEC. 
17 See Commission of the European Communities (1996), and Commission of the European 
Communities (1997d). 
7-10-1998 
ANNEX 2 
10-
mechanism, some of the attractions of this resource (for example, the link with the tax 
actually paid by taxpayers and its transparency) would disappear. 
Box 2 
Modulated VAT tax 
Criteria Performance 
Despite modifications VAT continues to be a regressive tax for the EU. 
F .. No cross-border externalities although moving to an origin-based VAT 
q y goes in the directions of making VAT an EU tax. Not entirely consistent 
with national tax objectives. 
Base harmonisation Substantial, following the Sixth VAT Directive. 
\/-o>>•/•* * * Highly visible, especially if recorded on each transaction along with the visiDinty to taxpayers ,. ,. ..T- . t ... ., . 
3 national VAT, and familiar to taxpayers. 
Link to common policies Consistent with the establishment of EU-wide minimum tax rules. 
Re enu ff ' Likely sufficient resources will become available, although they could 
efTc'e d t exhibit high variability; it is possible to administer the system 
„ .. ' effectively although administrative costs will certainly be higher than 
under the present system. 
3.3. Excise duties on tobacco, alcohol and mineral oil 
Excise duties are taxes levied on the production or consumption of specific goods. In 
the EU excise duties apply to a narrow group of goods, tobacco, alcohol and mineral 
oils. One attraction of excise taxes is the perceived ease of introduction and the 
sufficiency of revenues. Currently all Member States impose such taxes but there are 
enormous differences between the rates applied. Although tobacco and alcohol excises 
in particular are regarded as important instruments of national social policy it is 
conceivable that part of their yield could be assigned to the EU level. 
Currently, excises rates are subject to minimum rules in the EU but the levels are very 
low and, as a result, they permit wide differences among Member States that have 
chosen to levy excises at often significantly higher rates. Excises are often employed 
for reasons of public health and, as a result, they reflect to a considerable extent national 
socio-political priorities. The European Parliament (1994) report, by referring to them 
as "educational taxes", considered such excises in a similar light too. The report also 
acknowledged that on equity grounds they would be inappropriate as new resources for 
the budget. 
The share of the bases of the excises in GNP differs substantially across the Member 
States. Consequently, if it were that Member States contribute on the basis of a 
common rate levied on the actual bases of excise duties, the proportions in contributions 
by Member State would differ widely. This would not be consistent with equity across 
the Member States while, at the same time, such taxes are also regressive across 
consumers (smoking is a clear case). Nevertheless, such regressivity is a part of the 
design and policy objectives of excise duties and should not necessarily be considered 
as a drawback in the present context. 
7-10-1998 
ANNEX 2 
-11 -
Beyond revenue considerations, taxing demerit goods is increasingly seen as promoting 
allocative objectives. Consumption of such goods can be a serious hazard to health and 
imposes considerable costs in containment and treatment of diseases. Moreover, excises 
on mineral oils can be regarded as serving environmental objectives. The tax base, 
especially for tobacco and alcohol excises, is narrow. Revenues from demerit goods are 
characterised by low elasticities with respect to GNP but they display high elasticities 
with respect to changes in the excise tax rates since the goods on which they are levied 
tend to be price-inelastic18. Despite their "educational nature" it is of course 
questionable whether it is appropriate to base the financing of the EU budget on 
dissuasive taxation, especially since in the long-run consumption of these goods could 
perhaps follow a diminishing trend. 
The EU's involvement in the area of excise taxation is based on the requirement to 
ensure unrestricted mobility of goods subject to these duties within the internal market. 
Presently, several directives govern excise rates and structures in the EU19. They define 
minimum excise rates for each product type and determine the product types subject to 
excise levies and explain the method of implementing the duties as well as the criteria 
for exemptions or preferential treatment as the case may be. As a result of these steps, 
considerable if yet still incomplete base harmonisation has been achieved. In the case 
of mineral oils in particular, exemptions continue to be numerous20. The Commission 
has proposed, in the context of the Single Market, extending the scope of taxation to 
cover all energy products, especially taking into account the wish of several Member 
States to pursue environmental objectives under the umbrella of EU initiatives21. The 
Commission considers the removal of indirect tax obstacles to the completion of the 
Single Market as a policy priority22. 
• Excise taxes, particularly those on demerit goods, are regressive both across 
Member States and across individuals. Equity concerns would, therefore, arise but 
this is not a decisive drawback being an inevitable consequence of such taxation. 
Moreover, the differences in shares across the Member States reflect differences in 
the rates of national tax systems. Taxation of mineral oil also creates equity 
problems as mentioned previously under heading 3.3. 
18 SeeBegget. al. (1997), p.40. 
19 The earliest dates back to original Single Market program and the latest concerns the harmonization 
of excises on mineral oil, Commission of the European Communities (1997b). There are in total 
seven Directives on excise rates and structures currently in force. 
20 While EU legislation governing excises on mineral oils requires a single rate per product, Member 
States can request to maintain or introduce reduced rates or exemptions on grounds of specific 
policy considerations under Article 8(4), Directive 92/81/EEC. 
21 See Commission of the European Communities (1995). 
See Commission of the European Communities (1997d), p. 5-7, 16 and 26 for a discussion. 
7-10-1998 22 
• ANNEX 2 
- 12-
The assignment of part of the excise taxation to the EU level would be favoured in 
the circumstances where it is necessary to internalise trans-border pollution 
externalities. 
On the other hand, however, national preferences for particular policies regarding 
demerit goods may not be adequately accounted for under an EU assignment, thus 
violating the subsidiarity principle. Respecting local preferences argues clearly in 
favour of assigning these taxes to national parliaments. 
There is only moderate visibility to taxpayers/citizens. 
The main area where there are links with common policies is in the field of mineral 
oils where there is some degree of interrelation with transport, environmental and 
energy policies. In addition, there are some, albeit tenuous, links with 
health/consumer protection objectives. 
Low price and income elasticities suggest that the revenue from these taxes is 
stable; also, consumption of demerit goods is not cyclical. Excise rates tend to be 
changed relatively frequently to adjust for inflation or to obtain increased 
government revenue but the revenue consequences of these changes are not 
predictable with a great degree of accuracy. 
Harmonisation at the EU level has not advanced as much as in the case of VAT 
particularly in respect of rate levels. 
Administration and collection costs will be substantially higher than it is the case 
for the current own resources. Nevertheless, relying on present administration 
structures could alleviate these costs. Co-habitation by national and EU authorities 
on the same tax base could also give rise to conflicts similar to those encountered in 
the case of VAT discussed previously. 
Box 3 
Excise duties on tobacco, alcohol and mineral oil 
Criteria Performance 
The equity of the yield of these taxes may be poor, but given the 
Equity characteristics of the goods being taxed this may be a secondary 
consideration. 
Base harmonisation Advanced. 
Visibility to taxpayers Moderate/Low. 
Link to common policies Tax harmonisation linked to internal market policies. 
Although the base is narrow, revenue could be substantial. Low 
Revenue sufficiency, income and price elasticities of tobacco and alcohol imply stable 
efficiency and cost- revenues. A Community tax is unlikely to cause additional compliance 
effectiveness costs. Evasion and fraud in the area of excises is significant, reflecting 
the generally high level of rates levied. 
7-10-1998 
ANNEX 2 
-13-
Excises suffer notably from equity concerns. Despite finding favour for discouraging 
consumption of demerit goods, and for promoting environmental objectives, Member 
States may not be willing to share important fiscal instruments. 
3.4. Corporate income tax 
Using corporate income as a tax base for a new own resource has been examined on 
several occasions23. At the background of these proposals is the evidence that revenues 
from corporate taxes are an important component of national budget revenues24 and also 
that in federations corporate tax revenues are either shared between different levels of 
government or the different levels of government impose their own corporate taxes. 
Moreover, the benefit taxation principle predicts that those benefiting from current 
policies ought to pay for the policies. In the present case, corporations are expected to 
benefit substantially both from the Single Market and from EMU, the former through 
the expansion of the domestic market and the latter as a result of price transparency and 
enhanced competition. In this perspective, corporate taxation holds the promise not 
only to provide sufficient resources for the EU budget as well but also to be consistent 
with the practice in national tax systems. 
Keen (1995) points to three dimensions of interest of the corporate tax system in 
Europe. First, the schedule of statutory rates at which the tax is levied; according to 
Albi et. al. (1997), in 1996 these ranged from 28 per cent in Finland and Sweden and 33 
per cent in the UK to 55.9 per cent in Germany and 53.2 per cent in Italy25. Second, the 
definition of the tax base upon which the tax is levied. Here, the variety of regulations 
and exemptions governing corporate income, including provisions for international 
taxation, constitute a complex and intractable problem. And, third, the extent to which 
the corporate tax is integrated with the personal income tax code so that corporate taxes 
are measured against personal tax liabilities26. He concludes that there is substantial 
variation across the Member States in terms of the three aspects although, as pointed out 
by the Ruding Report, there has been a considerable amount of convergence in recent 
years27. The severest difficulty for corporate taxation to become an own resource is the 
23 See, for example, the report by the European Parliament (1990); for a recent thorough review of the 
issues involved see Albi et. al. (1997). 
24 According to Eurostat, in 1995 these amounted to as little as 1.6 per cent of GDP in Germany and 
as much as 5.1 per cent of GDP in Luxembourg; for the EU-15, they were 2.4 per cent of GDP. 
They also ranged from a low of 2.9 per cent of total tax revenues in Austria to a high of 11.6 per cent 
in Luxembourg, while for EU-15 they amounted to 5.7 per cent of total tax revenues. 
25 See Albi et. al. (1997), chart 1, p. 39. 
26 See Keen (1995), section 3.8, p. 64 and also Commission of the European Communities (1993a), 
ch. 7, p. 87-88. 
27 See Commission of the European Communities (1992d), especially ch. 8, p. 153-185. Bureau and 
Champsaur (1992) attribute this convergence to the improved tax treatment accorded to capital 
7-10-1998 
ANNEX 2 
-14-
diversity of the tax base in the EU. Unlike similar obstacles encountered in the case of 
other potential candidates, the degree of base diversity in corporate taxation constitutes 
a serious disadvantage28. 
Albi et. al. (1997) examined the possibility of responding to the base diversity in the 
context of considering corporate taxation as an own resource. In reviewing potential 
indicators for measuring the corporate sector's contributive capacity to the EU, they 
concluded that the profit or loss account could be a reasonable base. However, it was 
found to be second best compared to the definition of the corporate base in terms of the 
"real" corporate flow of funds29. The latter, which is the equivalent of an expenditure 
tax in the area of corporate taxation, was found to be appealing from both the economic 
and the administrative perspective. Spahn (1993) is also favouring this concept30. 
However, even in this case significant difficulties would have first to be resolved before 
serious consideration is given to this candidate. 
• Assigning corporate taxation to the level of the EU reflects several concerns31. 
Because of the lack of exact specificity of the incidence of corporate taxes, some 
degree of centralisation at a higher level of authority can be optimal; corporate 
taxes are invariably paid by consumers and producers whose residence does not 
necessarily coincide with the jurisdiction of the tax-imposing authority resulting in 
revenues accruing to authorities different from those of the country where the 
income originates. 
• This is also the case for taxes imposed on shareholders of corporations residing in 
different countries; in effect, taxes on distributed corporate profits are paid by 
residents of nations other than the tax-imposing ones. 
• Corporate tax rates have declined considerably in recent years, reflecting both 
international competition for investment and supply-side concerns. It is possible 
that Member States could benefit from an increase in corporate taxation even 
though none has incentive to act alone. A collectively imposed increase at the level 
of the EU could serve as a vehicle for such a policy. 
income by European governments made necessary following the liberalization and integration of 
capital markets in EU. 
28 For the diversity of the corporate income tax provisions in several, including some EU, countries in 
1994 see Mintz (1996). 
29 This is defined in terms of all sales of real goods and services including proceeds from sale of fixed 
assets, net of purchases of real goods and services and of wages, salaries social security 
contributions and related charges. 
30 See Spahn (1993). 
31 See Begg et. al. (1997), p. 26-29. 
7-10-1998 
ANNEX 2 
-15-
• There are serious administrative hurdles in operating the tax when multinational 
firms engage in transfer pricing or thin capitalisation32 practices. Despite efforts to 
control such practices, much remains beyond the control of national 
administrations. 
• Different corporate tax systems impair economic efficiency while, with the Single 
Market, tax competition could lead to resource misallocation. 
• With capital mobile and labour immobile, corporate taxes would tend to be borne 
predominantly by the latter, thus pointing also to assigning the tax to a higher level 
of authority. Regarding horizontal equity across the Member States, corporate 
taxation not only reflects poorly contributive capacity but also could lead to 
substantial distortions in the presence of transfer pricing. 
• A corporate tax would not be visible to citizens as consumers but only as owners of 
firms; as a result, it would not enhance accountability. 
• In terms of links to other Community policies, clearly such a tax would advance 
integration in the context of the Single Market. In addition, as in the case of the 
C02/energy tax, it could help shifting the burden of taxation away from labour, thus 
contributing to better employment performances. 
• Revenues from corporate taxation are notoriously highly cyclical; as an EU 
resource, it would cause contributions to be variable. Potential revenues from a 
corporate tax resource would undoubtedly be sufficient33 and the tax could be 
administered through the Member States. However, corporate practices could 
result in significant tax evasion and fraud. 
Developing a corporate tax system assigned to the EU would be consistent with the 
Commission's view that taxes on labour ought to be replaced by taxes on corporations as 
a means to encouraging employment growth. However, a principal drawback of a new 
own resource in the form of corporate taxation is the absence of a harmonised base and 
32 Thin capitalization refers to the practice where, in order to take advantage of the differential tax 
treatment of debt and equity in different territories, and in view of the fact that interest on debt enjoys 
considerable tax relief, firms choose to finance operations through debt rather than equity, so that 
they shift tax liabilities from the high to low tax territories. A thinly capitalized firm is one whose 
debt/equity ratio is relatively high. Given the differential tax treatment of corporate income across 
the Member States, this practice can lead to significant resource misallocation. The term is due to 
Devereux and Pearson (1989). 
33 According to the European Parliament (1990), the proportion of corporate tax revenues accruing to 
the highest level of government in federal OECD states varies between varies from 30 per cent to 
over 100 per cent. If the average amount of 64 per cent of corporate tax revenues were to accrue to 
the EU budget this would generate some Ecu 65 billion in revenues (1988 prices), roughly "double 
the level of resources now available to the Community"; see European Parliament (1990), part C, p. 
21. 
7-10-1998 
ANNEX 2 
-16 
the difficulties involved in developing fully such a base. Should the harmonised base be 
defined differently from the national ones, this could raise administrative, compliance 
and monitoring costs. The integration of the corporate and the personal tax schedules in 
some Member States would also make it politically unattractive, although this would 
not be a concern if the Albi et. al. (1997)/Spahn (1993) proposal were to be 
implemented. Overall, corporate taxation does not perform well when judged against 
key criteria for own resources. 
Box 4 
Corporate income tax 
Criteria Performance 
Corporate taxes levied on profits are generally consistent with equity, 
although trans-border input purchases and output sales, together with 
transfer-pricing practices, make allocation of firms' profits to a single 
Member State difficult. To the extent that production is becoming 
Equity globalised there is justification for levying corporate taxes at EU level. 
With an increasing number of firms operating in more than one Member 
State harmonisation at a higher level of the corporate tax code is 
appropriate. Multiple corporate tax arrangements are an obstacle to full 
implementation of the Single Market. 
Base harmonisation Virtually non-existent. 
Limited visibility, not to consumers but only to firms. The tax could be 
Visibility to taxpayers presented as a contribution on the part of firms for benefits they enjoy 
as a result of the completion of the internal market. 
Link to common policies Linked to complementing the Single Market. 
Corporate taxes account for a considerable share of revenues in 
,-. lfr . ~ . national budgets and, thus, they are likely to yield sufficient resources. 
Revenue sufficiency, efficiency _ . ." ,• , ~ ,• _/ a- • 
and cast eff cte ss Corporate taxes are very cyclical. Compliance and efficiency costs, 
which will depend on the definition of the EU and the national tax base, 
are likely to be substantial. 
3.5. Communications taxation 
The proposal to use taxation of communications services as a source of revenue for the 
EU budget was made by Begg et. al. (1997)34 in the context of taking advantage of 
opportunities developing within the internal market. On the one hand, closer integration 
and market liberalisation have given rise to an increasing volume of activities related to 
communications; on the other, the presence of externalities favours assigning new taxes 
to the EU level and, indeed, regulation is shifting in this direction. Arguing also in 
favour of such taxes is the development of EU policies to improve links among the 
Member States. The bases for communications taxes are road and air transport and 
telecommunications services including possibly broadcasting, areas of rapidly 
expanding economic activities. 
34 See Begg et. al. (1997), p. 43-46. 
7-10-1998 
ANNEX 2 
- 17-
Begg et. al. (1997) suggest three bases for communications taxation. First, telephones 
and mobile telephone services; secondly, road transport, an area already suffering from 
congestion; and, third, air transport, an area where deregulation will boost further 
growth. 
• Road and air traffic congestion suggest the need to price these activities more in 
accordance with environmental objectives. Increasing integration, following the 
completion of the internal market, and the expansion of air travel indicate that it is 
not immediately possible to determine the ultimate base of the tax. Although the 
tax would belong to a higher level of authority, it would not be possible to 
determine how each Member State contributes. At the same time, assuming that 
income is positively correlated with air travel tax, then it would be progressive 
across individuals. 
• Telecommunications services are highly correlated with GNP and, as a result, they 
are not inconsistent with equity considerations. 
• 
• 
• The taxes would not be visible in the case of transport, but more so in the case of 
air travel; they would be clearly visible in the case of telecommunications. 
The taxes are linked to common policies mainly through transport directives and 
through initiatives to foster EU competitiveness by modernising transport and 
telecommunications infrastructure. 
Communications and transport services are already subject to VAT and/or excise 
duties. 
The base is well defined and harmonisation is already de facto advanced or can be 
easily accomplished. 
• Despite the projected high growth of communications services, it is certain that 
revenues from this source will be adequate to finance only part of the EU budget. 
Begg et. al. (1997) estimate that an airport departure tax of Ecu 15 would yield 
around 10 per cent of the EU budget, while an annual average tax per telephone 
line of Ecu 40 could finance another 10 per cent of the budget. 
• The administrative costs involved in the collection of these taxes would be 
substantially higher than under the present system; the taxation of communication 
would involve setting up a family of new own resources and not just one. 
It is possible that communications taxes will ultimately militate against long-term 
progress in competitiveness. A further possible disadvantage is the need to introduce 
new taxes as well as to change the rates currently charged by Member States. Although 
politically costly, such measures may encounter objections only during the initial 
introductory period. There is little to be done on base harmonisation in the case of road 
transport and air travel but in the case of telecommunications it will be necessary to 
attain some harmonisation. 
7-10-1998 
ANNEX 2 
Begg et. al. (1997) propose that the communications tax becomes part of a broader set 
of own resources over the next Financial Perspective, substituting gradually for the 
diminishing share of traditional own resources in the EU budget. Over the medium 
term, they see continuing use of these taxes provided that once introduced they prove to 
function well35. 
Box 5 
Communications taxes 
Criteria Performance 
Uncertain whether equity is well served: yes, if road and air transport 
and telecommunications services are correlated with income; no, if the 
former are relatively more important in poorer regions. By internalising 
Equity congestion costs transport taxes could said to belong to the EU level. 
Moreover, closer trade integration makes it difficult to determine which 
Member State would be paying the tax on road and air transport 
activities. Taxes would be paid by both consumers and producers 
Base harmonisation Already advanced or can be accomplished rather easily. 
......... . . For transport taxes, likely limited; for air travel and telecommunications Visibility to taxpayers , . . \\ . ... J . ^ J taxes highly visible. 
.... .. . Consistent with transport directives and with strengthening Link to common policies .... ,, . r_ _,_,... ... .. " competitiveness through the TEN initiatives. 
Given the growth potential of communications services, revenue growth 
could be buoyant but sufficiency is certainly not assured since only 
Revenue sufficiency, efficiency 20% of the EU budget could be expected to be financed through this 
and cost-effectiveness source. There is also an important cyclical component in such 
activities. Revenues could be collected easily through existing 
structures, scope for evasion and fraud rather limited. 
3.6. Personal income tax 
Personal taxes constitute the most direct and visible link between taxpayers/citizens and 
elected authorities. The attraction of imposing surcharges on personal income as the 
EU's own resources partly rests on the opportunity to exploit this direct link in order to 
enhance accountability and to contribute towards mitigating the importance of the 
"democratic deficit". Personal tax constitutes a buoyant source of revenues but its 
importance differs significantly across the Member States36. Steps towards 
harmonisation of indirect taxation at the EU level leave only personal income taxation 
35 
36 See Begg et. al. (1997), p. 68-71 for a discussion of these issues. 
According to Eurostat data, taxes on personal income amounted to 23.4 per cent of total tax 
revenues in 1995, ranging from 16.4 per cent in France to 47.7 per cent in Denmark. In terms of 
GDP, revenues from taxation of personal income represented 9.7 per cent in 1995, ranging from 7.3 
per cent in France to 24.5 per cent in Denmark. 
7-10-1998 
ANNEX 2 
-19-
to represent the limited discretionary room for Member States to exercise stabilisation, 
budgetary and social policy37. 
• There are no externalities favouring assignment of personal taxation to a higher 
level of authority. The conventional argument for efficient taxation of mobile tax 
bases does not apply to EU income earners who are currently a highly immobile 
labour force. 
• Income tax rules differ widely between the Member States and the complexity of 
the income tax schedule in terms of thresholds, personal and family exemptions and 
allowances poses significant problems for base harmonisation; it is certain that 
horizontal equity, across individual and Member States, will not be respected under 
present rules. Moreover, militating against base harmonisation is the very limited 
mobility of labour in the EU, as a result of which pressures for convergence in 
income tax rules are very weak. 
• There is political opposition to base harmonisation. Moreover, differences in tax 
and overall economic policies would make it impossible to achieve consensus on 
these issues. On at least these grounds, personal taxation ought to remain assigned 
at the national level. 
• The visibility of the tax would be particularly high, as would be the link between 
the financing of the EU and the husbandry of resources made available to the 
budget; it is certain that accountability would be enhanced. 
• There is no direct link between such a tax and other EU policies. 
• It is possible that the co-occupancy of the same tax base by national authorities and 
the EU could complicate the management of national economic and budgetary 
priorities. As noted previously, the ability to influence stabilisation policy through 
interventions in the personal tax code would be reduced. Moreover, the balance 
between direct and other taxes in national tax structure may be adversely affected. 
• The tax, depending on its design, can potentially yield sufficient revenues to 
finance completely the EU budget. However, personal income is highly correlated 
with the business cycle and revenues could exhibit considerable co-variability with 
the business cycle although the small share of the EU budget in EU GNP would 
tend to mitigate the importance of this effect. 
37 For references to the several proposals for an income tax-based EU resource see Begg et. al. 
(1997). 
7-10-1998 
ANNEX 2 
20 
• There are no major obstacles to revenue collection on the basis of current practices; 
however, evasion and under-reporting of income for tax purposes is a common 
problem in several Member States and will remain so in the case of an EU tax. 
Begg et. al. (1997) discuss some proposals for designing a new own resource on the 
basis of personal income tax. A key conclusion is that, with progressivity as a central 
objective and assuming that 50 per cent of budget expenditure is financed through the 
progressive resource, the resulting degree of progressivity in the context of Agenda 
2000 may be too sharply pronounced to be politically comfortable38. 
wnTimrnimrinirMm~i-~rrmrrrnrmmr^—^^ ——•—————-——.——.——.—— ••• ——^— , —— 
Box 6 
Personal income tax 
Criteria Performance 
Differential taxation of various sources of income and interventions in 
the form of personal and other allowances have led to significant 
- .. differences in the tax base which, should this become an own resource, 
qu,y would lead to horizontal (across individuals and Member States) 
inequities. Given the immobility of EU taxpayers/workers, conventional 
arguments in favour of centralisation of income tax do not apply. 
Base harmonisation Non-existent. 
Visibility to taxpayers Highly visible tax. 
Link to common policies No direct links. 
Re e fTc'encv Sufficient, generally stable, albeit variable, and likely substantial 
effete ° ndcost- revenues. Few additional costs in administering the system and 
i i n y a ' collecting tax revenues. Depending on the exact design of the system, 
e ec lv it is oossible that compliance and avoidance costs would increase. 
3.7. Withholding tax on interest income 
Differences in residence and the location of economic activities gives rise to potential 
avoidance of taxation of income, a case particularly pronounced in flows of interest and 
dividend income. In practice, differences in the tax treatment of savings and capital 
income has the potential of allocating capital towards the lowest tax jurisdiction, a 
possibility that could cause harmful tax competition and could cause serious resource 
misallocation; taxing at a higher level of authority would limit such resource allocation 
costs. 
38 See Begg et. al. (1997), p. 23-24; they estimate that on the basis of an EU budget of 1.27 per cent 
of EU-15 GNP and with 50 per cent of expenditure financed through the progressive resource, 
Portugal would contribute as little as 0.47 per cent of GNP and Luxembourg as much as 2.07 per 
cent of GNP and the contribution of the remaining Member States would fall in between these 
shares. 
7-10-1998 
ANNEX 2 
-21-
In the EU, Luxembourg the Netherlands and Denmark are exceptions in that they have 
no withholding tax. All other Member States - except Belgium, Austria, Finland and 
Sweden - levy no withholding tax on non-residents. As a result, following the removal 
of exchange controls, it is possible for foreigners to avoid taxes altogether by using 
Member States where no withholding tax exists to channel their earnings. 
Following an invitation from the Council, the Commission presented a proposal for a 
Directive to ensure a minimum of effective taxation of savings income in the form of 
interest payments within the Community on 20 May 199839. The Commission's 
proposal aims at ensuring a minimum taxation on interest income paid in a Member 
State to a beneficiary in another Member State. The proposed minimum rate is set at 20 
per cent and Member States can choose to levy a higher rate if they so wish. Member 
States can choose to either apply this withholding tax rate or to provide information on 
income earned to all other Member States where the beneficiary has his residency (in 
the commentary on the proposal, this is called the "coexistence model"). As will be 
seen below, the proposal does not form a promising base for the establishment of a new 
EU own resource. 
• Economic efficiency would argue in favour of assigning the tax to a higher level of 
authority. 
• It is unclear what the equity implications of this tax would be, and there are no 
immediately available data to evaluate this aspect properly. In principle, the 
imposition of the tax would not offend the equity criterion given that the level of 
savings, and wealth, are likely highly correlated with the level of income. 
• The tax would be greatly visible to (perhaps a narrow group of) taxpayers. 
• Base harmonisation is inadequate. In some cases withholding taxes may be 
imposed on interest and dividend income earned from investments abroad, in others 
on income earned from investments abroad and at home, and yet in other cases 
withholding taxes may be levied on interest but not on dividend income, and vice 
versa, while the tax treatment of capital gains can be also diverse. 
• The Commission's proposal for a minimum withholding tax, while it defines the 
overall base on which the tax will be levied40, opens, at the same time, through the 
"coexistence model", the possibility of shifts between the individual national bases. 
• The Commission's proposal for a minimum withholding tax has a strong link to 
common policies. Since the logic of a withholding tax is directly linked to the 
39 See Commission of the European Communities (1998). 
40 See Commission of the European Communities (1998), Articles 4 and 5. 
7-10-1998 
ANNEX 2 
-22 
liberalisation of capital and financial markets and the removal of exchange controls 
in recent years, it clearly complements the liberalisation policies by ensuring that 
capital does not enjoy undue advantage over the immobile factor labour in its tax 
treatment. 
• It is not possible to determine whether sufficient revenues would flow from this 
tax41. Furthermore, interest rate and capital markets fluctuations could make these 
revenues particularly variable and unpredictable especially in periods of rapid 
structural change in the financial system as has been witnessed in recent years. It is 
also possible that financial institutions will develop new instruments to avoid the 
tax. 
TTT*TT """• ' — I M ——-— ILJHL ll J_J._.. _•__•• A . --UIII.I. 11. — —T———^—»—fry—^^f^—— • .,. I .i •! —BB~J 1M1MR.1 
Box 7 
Withholding tax on interest income 
Criteria Performance 
Because of capital mobility the tax is necessary to ensure symmetric 
treatment of capital and labour for tax purposes. Although this would 
suggest assigning the tax to the EU, it is questionable whether it would 
P .. be consistent with horizontal equity. The level of savings is positively 
y correlated with the level of income, so that this tax could be seen as 
progressive. However, this at the moment is only a conjecture since 
there is no data concerning trans-border investment by Member State to 
evaluate this proposition. 
Base harmonisation Incomplete, although progress has been made in this direction. 
Visibility to taxpayers Greatly visible. 
Linked to the proposed Directive on a minimum withholding tax. It would 
l ' kto m n ool'cies also ^e comPfementinC tne removal of exchange controls and the 
p liberalisation of capital and financial markets in that it ensures that capital 
does not enjoy preferential treatment relative to labour. 
Uncertain revenue, also variable and unpredictable. Collection of the tax 
Revenue sufficiency, by financial institutions is simple and involves no additional compliance 
efficiency and cost- costs. Establishing a common minimum tax would require the 
effectiveness establishment of a corresponding administrative apparatus for monitoring 
and compliance purposes. 
The purpose of the Commission's proposal is to prevent harmful competition between 
national tax systems which could be contributing to the erosion of the tax base in some 
Member States, to remove tax-induced distortions and to ensure compatibility with the 
internal market rules. Consequently, the proposal has not been made with a view to 
exploiting a potential new own resource. Indeed, the proposal offers little promise for 
founding a new own resource on a withholding tax since, first, it applies only to non­
residents who earn interest in a given Member State and, secondly, the "coexistence 
model" would make it difficult to quantify the base on which the tax would be levied. 
41 One estimate, put forward by Drèze and Malinvaud (1994), section 9.2, p. 98, places potential 
revenues at 1 per cent of EU GNP or more. This is clearly sufficient to meet a large part of the 
budgetary needs. However, the authors offer no indication of how they have arrived at this 
estimate. 
7-10-1998 
ANNEX 2 
-23-
3.8. ECB seigniorage 
Seigniorage derives from the central bank's monopoly position as note issuer 
constituting legal tender, the liabilities of which are not remunerated or, in the case of 
compulsory reserves, they are remunerated at below-market interest rates. These 
unremunerated liabilities constitute the monetary base, the counterpart of which 
(holdings of government bonds and of other assets such as foreign exchange reserves) 
yields interest at market rates. The profits so derived constitute the principal source of 
central bank revenue. In practice, a tax on seigniorage amounts to a tax on ECB or 
national central bank profits. 
Seigniorage does not accrue directly to the treasury but to the central bank which, in 
turn, transfers part of its profits to the government. Seigniorage was an important 
source of government finance in several Member States during years of high inflation 
and in countries where the financial system was regulated42. Since the advent of the 
convergence process and the sharp decline of inflation in recent years seigniorage has 
become a very small fraction of the revenue in the budget of virtually all Member 
States. Moreover, with the establishment of central bank independence in virtually all 
the Member States in recent years there can be no presumption that the profits of the 
central bank will automatically accrue to the government. Finally, in future years, 
according to the rules set out in the Treaty on European Union, seigniorage will accrue 
to the European Central Bank (ECB) as a result of its note-issuing monopoly position. 
This revenue will be distributed to constituent central banks according to their capital 
subscription in the ECB43 and indirectly to the governments in the Member States. 
Thus, to make possible the transfer of seigniorage to the EU budget it would be 
necessary to tax directly the national central bank profits associated with this. 
42 There are many estimates of seigniorage revenues in the literature. See, for example, the estimates 
reported in Commission of the European Communities (1993a), Table 32, p. 90. Gros (1990) 
estimates that in 1982 seigniorage amounted to 5.86 per cent of GDP in Portugal but were only 0.80 
per cent of GNP in 1993; the corresponding data for Greece are 3.39 per cent and 0.90 per cent; 
for Italy, 1.45 per cent and 0.75 per cent; for Spain 1.87 per cent and 0.91 per cent; and for 
Germany, 0.48 per cent and 0.52 per cent; see Gros (1990), Table 7.1, p. 165. See also Rovelli 
(1994) for additional and more detailed estimates of the sources and role of seigniorage in the public 
finances of several Member States. Finally, Buiter et. al. (1998), Table 10.1, p. 183, provide the 
most recent update concerning the role of seigniorage in the public finances of the Member States 
covering the period 1985 to 1994. 
43 See Article 33 of the Protocol on the Statute of the European System of Central Banks and of the 
European Central Bank, Treaty on European Union. This article states that "The net profit of the 
ECB shall be transferred in the following order: (a) an amount to be determined by the Governing 
Council, which may not exceed 20 per cent of the net profit, shall be transferred to the general 
reserve fund subject to a limit equal to 100 per cent of the capital; (b) the remaining net profit shall 
be distributed to the shareholders of the ECB in proportion to their paid-up shares". 
7-10-1998 
ANNEX 2 
-24-
Seigniorage belongs to the EU level since it derives from the common monetary 
policy exercised by the ECB on a non-regional scale. In this respect, seigniorage 
resembles traditional own resources revenues deriving from the exercise of 
commercial policy through a common external tariff. The issue of equity does not 
directly arise in the present case. If transactions technology is less advanced in the 
poorer nations, it is possible that there may be elements of regressivity since 
seigniorage is a tax on cash holdings. This may be of minor importance, however, 
as the adoption of the same transactions technology will be widespread under 
EMU. 
The tax base is completely harmonised, and is defined by the profits of the central 
bank. 
The treatment of Member States not participating in EMU poses a particular 
problem for the transitional period. Moreover, for those not joining for an 
uncertain period of time a way ought to be devised to contribute through a 
corresponding tax. The necessary arrangements to effectively exploit the potential 
of seigniorage as an own resource could in this case be complex. 
Seigniorage is not visible to taxpayers. 
Seigniorage as an own resource would be simple to administer, would involve little 
administration, and would not be subject to fraud and avoidance. 
It is also possible that it may yield considerable revenue for the EU budget. In the 
steady state seigniorage can be approximated by the tax on nominal balances, or the 
rate of inflation, and the ratio of holdings of nominal balances to GNP. If price 
stability is interpreted to mean an inflation rate of between 0 per cent and 2 per 
cent, and assuming that money holdings amount to around 10 per cent of GNP, 
seigniorage revenues could amount to between zero and 0.2 per cent of GNP in the 
EU44. However, it is clear that this can be an unreliable and unstable revenue, 
likely subject to severe shocks emanating from changes in the transactions 
technology. 
A principal drawback of seigniorage is its lack of visibility to taxpayers. Although the 
underlying source of revenue, inflation, would be very visible, it would convey no 
information about the costs of the EU and its financing. Finally, with transactions 
technology making it increasingly possible to hold cash balances in interest bearing 
assets, the tax base of seigniorage will become very narrow indeed in future years. • 
44 As another example, Rovelli (1994) uses a similar framework to estimate potential seigniorage 
revenues under different combinations of holdings of sight deposits and nominal interest rates 
(which stand for inflation); he shows that these revenues could range from 0.004 per cent of GDP to 
as much as 0.3 per cent of GDP; see Rovelii (1994), Table 6, p. 41. 
7-10-1998 
ANNEX 2 
25-
i I II • ===i i m m i II izssas =s== M i in c==s==^= i l n n^— 
Box 8 
Tax on seigniorage 
Criteria Performance 
Equity In EMU it will be impossible to allocate seigniorage to Member States. 
Base harmonisation Complete; identical in all Member States. 
Visibility to taxpayers As an implicit tax, seigniorage is not visible. 
Link to common policies Results directly from EMU. 
Likely to raise considerable revenue which could be particularly 
unstable since it depends on the demand for cash balances, itself 
affected by the business cycle. Although price stability in EMU would 
Revenue sufficiency, also ensure a stable base for seigniorage, shocks to transactions 
efficiency and cost- technology as well as real income shocks could cause the seigniorage 
effectiveness tax base to narrow and could make revenues unreliable and 
unpredictable. Administration would be extremely simple. It would 
involve the smallest number of "taxpayers" (national central banks) and 
compliance and monitoring costs would be negligible. 
4. CONCLUDING COMMENTS 
Economic theory provides criteria for the assignment of tax instruments by level of 
government in a federal context. Once it is determined that certain taxes belong to a 
higher level of authority, additional secondary criteria can be used to determine the 
suitability of the tax instruments to serve as own resources for the ^nancing of the EU. 
The discussion in this Annex has shown that while several taxes can be considered 
consistent with the economic criteria, they virtually all fail, to one degree or another, to 
fully satisfy the secondary criteria. Clearly, some taxes perform better than others 
according to certain criteria but, if it were the case to fully finance the EU budget with 
new own resources, none fulfils to the necessary degree all criteria. 
This is partly a reflection of value judgements on the part of the study about the relative 
importance of each criterion to be applied in assessing the performance of each 
candidate resource. Table 1 summarises the assessment of each candidate resource 
ranked according to the criteria in the three studies cited in the Table and mentioned 
throughout this Annex. 
The ranking is ordinal; 1 indicates the most preferred and 8 indicates the least favoured 
among the eight candidates; identical marks indicate that the candidates in question 
perform equally well under the specific criterion. In contrast to the other studies under 
review, Spahn (1993) finds merits in all proposals without ranking them45. It is clear 
that if, a second-best choice had to be made, possibly a VAT tax version of an own 
45 See Spahn (1993), especially section 5 (Concluding remarks), p. 580-581. 
7-10-1998 
ANNEX 2 
-26-
resource may be attractive; this proposal is ranked first by two of the three studies 
reported in the Table and it also has the strong support of the European Parliament in 
the European Parliament (1994) report; as noted previously, the Commission has also 
supported a C02/Energy tax. This lack of consensus is a reflection of more fundamental 
difficulties at the present state of European integration. 
Table 1 
Ordinal Ranking of Candidates for New Own Resources in Three Studies 
European Economy121 Begg et. al.'3> Keen'4' 
C02/Energy tax<1> •_ _ 1 | 6 2 
Modulated VAT . 3 | _ 1 _ __ _ 1__ 
Excises on tobacco, alcohol and mineral oil 4 3 4 
Corporate income tax 2/3 4 3/4 
•Communications taxes 2 
Personal income tax 5)5 5 
Withholding tax on interest income*1) 4 j 7 2 
ECB seigniorage 2 8 3 
- not available; (1) this does not refer to recent Commission proposals. 
Source: (2) Commission of the European Communities (1993a): op. cit., Table 31, p. 85, line providing an "overall appreciation"; 
(3) Begg et. al. (1997): op. cit., Table 6.1, p. 51; (4) Keen (1995): op. cit., Table 3.14, p. 81. 
It is clear that, while possible, introducing a new own resource will require substantial 
preparation on the part of all actors involved. However, it is not evident that 
introducing new own resources on grounds of strengthening financial autonomy alone 
would suffice. If other, possibly wider political considerations, support it then new own 
resources could be introduced as part of more fundamental and wide-ranging reforms. 
Finally, the present review suggests that it is unlikely to find one tax that alone respects 
all the criteria to become an EU own resource. A more promising possibility could be 
that the desirable features of more than one resource will be taken into consideration in 
order to form the ground for the development of new own resources in the future. This 
could conceivably involve more fundamental changes in the EU's own resources system 
of which the introduction of new resources can be only one part. 
One possibility, in the medium term, may be to introduce a modulated VAT system with 
strengthened visibility, much along the lines suggested in the European Parliament 
(1994) report. Over the long term, where an important objective would undoubtedly 
be the strengthening of financial autonomy, several alternatives present themselves. 
The ECB seigniorage, some form of withholding tax on interest income, excises and the 
communication tax could realistically become own resources provided additional steps 
towards the integration of the EU took place. Less positive are the prospects for a new 
own resource based on either corporate or personal incomes. If developments in 
7-10-1998 
ANNEX 2 
-27-
environment or transport policy called for the introduction of specific taxes in these 
areas, their yield could be usefully attributed to the EU budget thus contributing to 
financial autonomy. 
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Albi, E., R. Paredes and E. Corona (1997): "Corporate Tax as a Possible Fifth Own Community 
Resource: How Much Harmonisation is Necessary?", study XIX/B1/9602 prepared for the 
Commission of the European Communities DG-XIX, June. 
Begg, I., N. Grimwade and P. Price (1997): "The Own Resources of the European Union: Analysis and 
Possible Developments", Report prepared for the Directorate-General for Research of the European 
Parliament, Draft 19th August 1997. 
Buchanan, J. (1950): "Federalism and Fiscal Equity", American Economic Review, 50. 
Buiter, W., G. Corsetti, P. Pesenti (1998): Financial Markets and European Monetary Cooperation The 
Lessons of the 1992-93 Exchange Rate Mechanism Crisis, Cambridge University Press. 
Bureau, D. and P. Champsaur (1992): "Fiscal Federalism and European Economic Unification", American 
Economic Review, Papers and Proceedings, May. 
Commission of the European Communities (1989): Proposal for a Council Directive on a Common 
System of Withholding Tax on Interest Income, COM(89) final, Official Journal of the European 
Communities, C 14906. 
Commission of the European Communities (1992a): "The Climate Challenge Economic Aspects of the 
Community's Strategy for Limiting C02 Emissions", European Economy no. 51, May. 
Commission of the European Communities (1992b): "The Economics of Limiting C02 Emissions" 
European Economy Special Edition no. 1. 
Commission of the European Communities (1992c): The System of Own Resources, COM (92) 81 final, 
March 10. 
Commission of the European Communities (1992d): Report of the Committee of Independent Experts on 
Company Taxation, March. 
Commission of the European Communities (1993a): "Stable Money - Sound Finances Community Public 
Finance in the Perspective of EMU", European Economy no. 53. 
Commission of the European Communities (1993b): "The Economics of Community Public Finance", 
European Economy, Reports and Studies, no.5. 
Commission of the European Communities (1994a): Growth, Competitiveness, Employment, The 
Challenges and Ways Forward into the 21st Century, White Paper, Luxembourg. 
Commission of the European Communities (1994b): "Applying Market Principles to Government 
Borrowing; Growth and Employment, The Scope for a European Initiative", European Economy, 
Reports and Studies, no. 1. 
Commission of the European Communities (1995): Amended Proposal for a Council Directive Introducing 
a Tax on Carbon Dioxide Emissions and Energy, COM (95) 172 final, May 10. 
Commission of the European Communities (1996): A Common System of VAT A Programme for the 
Single Market, COM (328) final, July 22. 
Commission of the European Communities (1997a): "Budget Contributions, EU Expenditure, Budgetary 
Balances and Relative Prosperity of the Member States", paper prepared by DG-XIX and forwarded 
to the Ecofin Ministers by President Santer for their October 13 meeting. 
7-10-1998 
ANNEX 2 
-28-
Commission of the European Communities (1997b): Proposal for Council Directive 97/30/EC 
Restructuring the Community Framework for the Taxation of Energy Products, Working Paper 
XXI/1055/97-EN. 
Commission of the European Communities (1997c): Proposal for Council Directive Restructuring the 
Community Framework for the Taxation of Energy Products, COM (97) 30 final. 
Commission of the European Communities (1997d): Action Plan for the Single Market, Communication of 
the Commission to the Council, CSE (97)1 final, June 4. 
Commission of the European Communities (1997e): "A Package to Tackle Harmful Tax Competition in 
the European Union", COM (97) 564 final, November 5. 
Commission of the European Communities (1998): Proposal for a Council Directive to Ensure a Minimum 
of Effective Taxation of Savings Income in the Form of Interest Payments within the Community, 
COM (1998) 295 final, May 20; and Official Journal of the European Communities, C 212, July 8, 
1998. 
Council Directive 91/680/EEC of December 16, 1991, Supplementing the Common System of Value 
Added tax and Amending Directive 77/388/EEC with a View to the Abolition of Fiscal Frontier, 
Official Journal of the European Communities L 37, December 31,1991. 
Courchene, T. (1993): "Reflections on Canadian Federalism: Are there Implications for European 
Economic and Monetary Union?", in Commission of the European Communities (1993b). 
De Grauwe, P. and L. Papademos (éd.): The European Monetary System in the 1990s, CEPS and Bank 
of Greece, Longman. 
Devereux, M. and M. Pearson (1989): Corporate Tax Harmonisation, Institute of Fiscal Studies Report 
Series no. 35, Institute of Fiscal Studies, London. 
Devereux, M. (éd., 1996): The Economics of Tax Policy, Oxford University Press. 
Drèze, J. and E. Malinvaud (1994): "Growth and Employment: The Scope for a European Initiative", in 
Commission of the European Communities (1994b). 
Ecofin Council (1997): Conclusions of the Ecofin Council Meeting on 1 December 1997 Concerning 
Taxation Policy, Official Journal of the European Communities 98/C 2/01. 
European Communities Court of Auditors (1998): "Bilan du Système des Ressources Fondées sur la TVA 
et le PNB", draft, Spring. 
European Parliament (1984): "Draft Treaty Establishing the European Union", Rapporteur A. Spinelli, 
February. 
European Parliament (1990): "Interim Report of the Committee on Budgets on the Financing of the 
European Community", Rapporteur Joan Colom I Naval, A3-0317/90. 
European Parliament (1994): "Draft Report on a New System of Own Resources for the European 
Union", Rapporteur Horst Langes, Committee of Budgets, A3-0000/94. 
Gros, D. (1990): "Seigniorage and EMS Discipline", chapter 7 in De Grauwe and Papademos (éd.). 
Keen, M. (1995): "Objectives and Criteria of the Community's Fifth Own Resource", study prepared for 
the Commission of the European Communities DG-XIX, Final Report, December. 
MacDougall, D. (1977;.- Report of the Study Group on the Role of Public Finance in European Integration, 
vol. I and II, Commission of the European Communities, Economic and Financial Series. 
Mintz, J. (1996): "The Corporation Tax", chapter 4 in M. Devereux (éd., 1996). 
Padoa-Schioppa, T. (1987): Efficiency, Stability and Equity A Strategy for the Evolution of the Economic 
System of the European Community, Report of a Study Group Appointed by the Commission of the 
European Communities, and Presided by T. Padoa-Schioppa, II/49/87. 
7-10-1998 
ANNEX 2 
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Rovelli, R. (1994): "Reserve Requirements, Seigniorage and the Financing of the Government in an 
Economic and Monetary Union", in Commission of the European Communities (1994b). 
Spahn, B. (1993): "The Consequences of Economic and Monetary Union for Fiscal Federal Relations in 
the Community and the Financing of the Community Budget", in Commission of the European 
Communities (1993b). 
Verbeke, A., W. Winkelmans, H. Haralambides, A. van Klink and A. Veenstra (1998a): "Empirical 
Estimation of the Final Destination of Goods Imported through the Major European Gateways, Final 
Report - Partim Antwerp", study prepared for the Commission of the European Communities DG-
XIX, March 11. 
Verbeke, A., W. Winkelmans, H. Haralambides, A. van Klink and A. Veenstra (1998b): "A Calculation of 
the Rotterdam Effect", ", study prepared for the Commission of the European Communities DG-XIX, 
February. 
Wildasin, D. (1990): "Budgetary Pressures in the EEC: A Fiscal Federalism Perspective", American 
Economic Review, Papers and Proceedings, May. 
V V V 
7-10-1998 
ANNEX 3 
The concept and measurement of the 
budgetary balance 
1. INTRODUCTION 
Budgetary balances1, i.e. the difference between payments made by a Member State to 
the EU budget and expenditure made by the EU in that Member State, are often seen as 
a simple way of capturing through a single figure the net financial benefits of being a 
member of the European Union. The Commission has repeatedly warned against such 
a simple and misleading approach that fails to capture the real balance of the advantages 
and disadvantages of belonging to the Union2. 
The present Annex addresses briefly the methodological issues raised by the calculation 
of budgetary balances. Section 2 examines difficulties associated with the measurement 
and interpretation of budgetary balances; section 3 discusses alternative measures of 
budgetary balances based on various definitions of the expenditure and the contributions 
side; and section 4 explains the two principal definitions - operational balance and 
balance à la UK rebate - used in the report. 
2. PROBLEMS WITH THE CONCEPT OF BUDGETARY BALANCE3 
Budgetary balances, while appealing in their simplicity, either invariably misrepresent 
or are inadequate measures of the benefits from membership in the EU. 
Budgetary flows do not capture all the benefits from membership in the EU. EU 
membership, which gives rise to financial and non-financial advantages as well as 
obligations, has a non-budgetary dimension the importance of which dwarfs the 
budgetary one. For example, the benefits from the pursuit of common objectives, such 
as trade liberalisation and European economic integration, cannot be evaluated in terms 
of budgetary flows alone. Moreover, flows from the EU budget invariably benefit not 
only recipients but other Member States in the form of return flows; typical examples 
are structural funds and external expenditure, where the implementation of projects 
often gives rise to purchases of goods and services from other Member States. 
Budgetary balances are often referred to as net balances. The term budgetary balances used in this report, in 
preference to net balances, is more appealing because, first, the concept of a balance is by itself indicative of a 
difference and, secondly, it is redundant to characterize budgetary positions as net or gross. What the concept is 
specifically meant to indicate is the difference between contributions to and receipts from the EU budget. 
These issues were reviewed in detail in Commission of the European Communities (1997): "Budget Contributions, 
EU Expenditure, Budgetary Balances and Relative Prosperity of the Member States" paper presented by 
President Santer to the Ecofin Council, October 13. 
This section is based substantially on the arguments put forward in a 1997 Ecofin paper; see Commission of the 
European Communities (1997): op. cit., footnote 2, part 4, p. 7-9. 
7-10-1998 
ANNEX 3 
Conventionally measured budgetary balances fail to adequately represent the benefits of 
EU membership for at least three reasons: 
• first, recorded budgetary flows fail to account for positive externalities arising 
from EU policies; for example, CAP, structural operations and external 
expenditure benefit not only the immediate recipients but also give rise to spill­
over effects transcending national borders; 
• secondly, there are often difficulties associated with the identification of the 
ultimate beneficiaries of EU expenditure policies. CAP spending on export 
restitution is an example where expenditure may be recorded as allocated to the 
Member State from which goods are exported when in fact the ultimate 
beneficiaries are the producers in other Member States; research expenditure, 
where multinational consortia ask for EU payments to be made to one member of 
the consortium or to a bank account opened in Belgium or Luxembourg, also 
gives rise to similar difficulties; and, 
• thirdly, EU budget expenditure is heterogeneous and comparisons of total 
amounts received have often limited meaning in appreciating the "benefit" 
resulting from such payments. Transfers under the structural operations increase 
the resources available in recipient countries by the exact amount of the recorded 
payment (although significant spillovers may result from the ultimate spending of 
these moneys); on the other hand, payments made for the purchase of goods and 
services (a large part of administrative expenditure) increase the resources 
available in the recipient country only for a part of their total amount (the value 
added generated in the country). Between these two extremes lie different 
categories of expenditure with different degrees of "benefit" for the recipient that 
make it difficult to either exclude some items of expenditure or to regroup them in 
meaningful categories. 
3. PROBLEMS OF MEASUREMENT AND INTERPRETATION: ALTERNATIVE 
DEFINITIONS OF BUDGETARY BALANCES 
The present section discusses some important definitional problems that qualify and 
often undermine the reliability of simple measures of budgetary balances. 
To calculate budgetary balances it is necessary to make assumptions about four main 
issues: 
i) the items to be included in the calculation of the payments made by the Member 
States to the EU budget; 
ii) the items to be included in the calculation of the expenditure made by the EU in 
each Member State; 
iii) the use of cash versus accrual data (with the problem of how to account for the 
carry over of the unspent balances from previous years); and 
7-10-1998 
ANNEX 3 
-3-
iv) the possibility of adjusting the resulting set of budgetary balances so that they sum 
to zero. 
On payments to the EU budget an assumption must be made concerning the most 
appropriate treatment of customs and agricultural duties (traditional own resources, 
TOR). There are certainly good arguments for excluding them altogether from the 
calculations as these contributions result from common policies and they typically 
belong to a higher level of government rather than to the region or the state that collects 
them. While this may be formally correct, it is often preferred to find a way of 
including them so as to mirror the reality of a balanced budget. The inclusion may be 
done either on the basis of the actual cash flows or by reallocating the total yield of 
TOR to each Member State according to a given key (e.g. according to shares in EU 
GNP). 
Of interest is the treatment of TOR in the UK rebate mechanism. Given that the 
calculation of the rebate takes as a starting point the share of the United Kingdom in the 
combined VAT and GNP payments4, the mechanism implicitly takes TOR into account 
but reallocates them among Member States in proportion to their combined VAT and 
GNP payments (which, as it shown elsewhere in the report, is not very different from re­
allocating them according to a straightforward GNP key). 
Expenditure made by the European Union in the Member States must, by definition, 
be lower than total EU expenditure. The expenditure made by the EU in third countries 
has certainly important spill over effects for the Member States and is often paid 
directly to EU nationals. However, it would be illogical - as well as nearly impossible 
from a practical point of view - to attribute it explicitly to any specific Member State. 
In addition, there are some minor items which, for practical considerations, are also 
almost impossible to allocate to individual Member States (e.g. transfers relative to the 
Union's share in the European Investment Fund capital, mission expenditure by EU 
officials). The remaining expenditure is usually referred to as allocated expenditure5 
and represents around 94 per cent of total expenditure. 
Whereas there is a broad consensus on the exclusion of the items just mentioned, views 
differ on the need to make other adjustments. The most contentious issue is the 
inclusion of administrative expenditure. The arguments for its exclusion rest on the 
non homogeneity of EU expenditure mentioned at the beginning of this Annex. The 
subset of allocated expenditure which excludes administrative expenditure is called in 
Through the tortuous way of initially calculating the share on the pre-1988 VAT mechanism and subsequently 
adding or deducting the change with respect to the present mechanism (the so called "advantage to the UK of the 
new system"; see Annex 4). 
The definition of allocated expenditure for the UK rebate is established in "Method of Calculation, Financing, 
Payment and Entry in the Budget of the Correction of Budgetary Imbalances in Accordance with Articles 4 and 5 
of the Council Decision on the System of the Communities' Own Resources", Council of the European Union, 
5455/94, March 9, 1994. chapter IV.2. 
7-10-1998 
ANNEX 3 
the EU terminology operational allocated expenditure 6 and is computed excluding the 
items found in Part A of the EU budget and spending of other EU Institutions. The 
definition of budgetary balance measured by this concept of expenditure is called here 
operational budgetary balance. 
Some Member States calculate and publish budgetary balance estimates based on an 
even narrower definition of expenditure that takes into account only the financial flows 
which transit through the national treasuries (and which are easily identifiable by the 
Finance ministries). This definition of expenditure excludes not only administrative 
expenditure but also all the payments that the EU institutions make directly to the final 
beneficiaries (e.g. research contracts, grants and subsidies under various so called 
"internal*1 policies, etc.). 
Cash and accruals data are sometimes significantly different. In particular, the need to 
adjust the VAT and GNP contributions of all Member States and the figures for the UK 
rebate on the basis of reliable statistical data which become available with a long delay 
implies that non negligible payments - in both directions - can be made outside the 
reference year. However, the most important distortion results from the existence of 
unspent balances from the previous years which show a high variability over time. For 
instance, in 1995 there was an exceptionally large surplus at the end of the year (Ecu 9.2 
billion) which turned out to be more than the double the unspent surplus at the end of 
1996 (Ecu 4.4 billion). As a result, on the basis of cash figures, the 1996 budgetary 
balances of all Member States were higher by a total amount of about Ecu 5 billion due 
to the fluctuation in the size of the unspent surplus. Such an effect can seriously distort 
the comparison of the budgetary balance data of different years. 
The definition of budgetary balance used in the calculation of the UK rebate eliminates 
the problem of the unspent surpluses. Since the calculation of the balance is based on 
the difference between the share in contributions to the EU budget and the share in EU 
expenditure multiplied by the total amount of EU expenditure, the calculation implicitly 
assumes that every year the sum of all payments to the EU budget is identical to the 
amount of EU expenditure. 
Constraining the sum of budgetary balances to add up to zero is often proposed as a 
way of focusing the debate on the intra-EU distributional issue: what is "paid" net by 
one country must be "received" net by another. Unadjusted figures, however, will not 
add up to zero. They should add up to a negative figure equal to the non-allocated 
expenditure (essentially expenditure made outside the EU). This, it is argued, results in 
Member States claiming to have transferred to other partners financial resources that 
have left the EU. 
Operating expenditure is defined in Article 19.1 of the Financial Regulation of 21 December 1977 (OJ n° L 356 of 
31.12.1997) as the expenditure for policies by the Commission contained in part B of the Budget. 
7-10-1998 
ANNEX 3 
Adjusting budgetary balances to add up to zero can be done in a number of ways which 
inevitably introduce other distortions and complicate the comparisons of budgetary 
balances from year to year. The two most widely used methods consist of either 
reducing contributions to the EU budget to the level of allocated expenditure (while 
maintaining the relative shares of each Member State constant) or increasing allocated 
expenditure to match the actual level of payments. The first method implicitly assumes 
that non allocated expenditure is shared out among Member States in proportion to their 
contributions to the EU budget; the second assumes that non allocated expenditure is 
shared out in the same proportion as allocated expenditure. In addition, both methods 
reduce the overall size of each of the budgetary balances (and the sum of the absolute 
value of all balances). 
The method underlying the calculations for the UK rebate - based on the differences 
between shares in contributions and shares in expenditure - provides a set of budgetary 
balances which add up to zero. Implicitly it assumes that non allocated expenditure is 
shared out in the same proportions as allocated expenditure. 
4. THE DEFINITIONS USED IN THE REPORT 
Combining only the two or three most important assumptions which can be made on the 
four issues discussed in the previous section produces no fewer than 30 to 40 perfectly 
defensible definitions of budgetary balances. While the estimates that emerge from 
these different definitions do not change substantially the picture for the larger Member 
States, the use of different definitions can produce substantially different results for the 
smaller ones and may distort significantly the comparisons from year to year. 
In this report the Commission has used two definitions called the UK rebate budgetary 
balance and the operational budgetary balance. The first is the only one that has a 
degree of formal recognition, being based on the Fontainebleau agreement and also in 
the determination of the UK rebate; the second is consistent with the information the 
Commission has been supplying to the Member States annually since 1995, albeit on a 
confidential basis. 
4.1. The UK rebate balance 
This definition uses cash data, i.e. all payments made in a year to or from the EU 
budget7. Its most important implications are: 
For the sake of simplicity the calculations have been performed without taking into account the so called 
"advantage to the UK of the new system" and using cash instead of accruals data. 
7-10-1998 
ANNEX 3 
- 6 -
• TOR payments are implicitly reallocated among Member States in proportion to 
their VAT and GNP payments; 
• the estimates are restricted to sum to zero and the overall absolute size of the 
balances is reduced by exclusion of those ifems of expenditure that cannot be 
allocated (i. e. by about 5 to 6 per cent); 
• the data are influenced by the adjustments to contributions relating to previous 
years but insulated from the fluctuation of the size of the unspent surplus of the 
current year. 
• the expenditure flows taken into consideration are those of the so-called allocated 
expenditure. This means that about 6 per cent of expenditure is excluded 
(essentially expenditure made outside the Union plus some very small items which, 
for technical or conceptual reasons, are too difficult to allocate). Included also is 
administrative expenditure and expenditure in favour of the other EU institutions. 
4.2. The operational balance 
This definition also uses cash data. The most important implications of this definition 
are: 
• The concept of EU expenditure used is operational allocated expenditure, that is, 
allocated expenditure excluding administrative expenditure referred to in part A of 
the EU budget and expenditure relating to the European Parliament, the Council, 
the Court of Justice, the Court of Auditors, the Economic and Social Committee 
and the Committee of the Regions8; 
• 
• TOR payments are considered as paid wholly by the Member State that transfers 
them to the EU budget; 
the estimates are not restricted to sum to zero; 
• the estimates show significant variability because of adjustments relating to 
previous years and, above all, because of the carry over of the unspent balances 
from previous years. 
• no corrections are made to the expenditure flows which are integrally taken into 
account. 
Ideally, these estimates ought to be presented in a table including a 16th line for the Rest 
of the World and a 17th line which would correspond to payments to the surplus of the 
current year and the drawing from the previous year's surplus (with corresponding 
adjustments to the 15 lines for the Member States) as well as the amount of expenditure 
corresponding to part A of the budget. 
8 See footnote 6. 
7-10-1998 
ANNEX 4 
The budgetary compensation for the United Kingdom 
1. INTRODUCTION 
This annex reviews the performance of the compensation mechanism for the United 
Kingdom set up with the 1984 Fontainebleau agreement. It starts by recalling the steps 
which led to this decision and its contents. Subsequently it reviews the past trend of the 
budgetary imbalance of the United Kingdom and discusses its possible future evolution 
in the light of the reform proposals presented by the Commission (Agenda 2000). The 
third section assesses the operation of the mechanism and discusses some issues it raises. 
The final section examines its consequences for the rate of call of the VAT resource and 
analyses the possibility of permanently fixing this rate. 
Graph 1 
Budgetary imbalance of the UK and compensation 
("operational" balance before and after compensation; percentage of the GNP of the UK) 
0.8 
0.6 
0.4 
0.2 : compensation before compensation after compensation 
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 
2. ORIGIN OF THE MECHANISM 
The question of the budgetary imbalance of the United Kingdom appeared immediately 
after the accession of the country to the European Community. The large imbalance was 
essentially due to two factors: 
i) an agricultural sector relatively smaller and structurally different from those of other 
Member States, which results in lower CAP spending in the United Kingdom; 
7-10-98 
ANNEX 4 
2-
ii) a proportionally larger contribution to the financing of the Community budget due to 
the fact that the United Kingdom has a relatively higher share in the harmonised 
VAT base than in the total GNP of the Community. 
A first mechanism aimed at addressing the issue of the budgetary imbalance of the 
United Kingdom was agreed in March 1975 in Dublin. This mechanism - known as the 
"dynamic brakes" - aimed at preventing the size of the United Kingdom contribution to 
the EU budget from becoming too large. The contribution would be capped if three 
conditions were met simultaneously (GDP per capita lower than 85 per cent of the 
Community average, rate of economic growth less than 120 per cent of the Community 
Graph 2 
Budgetary balance of the United Kingdom 
(UK rebate definition, percentages of GNP; actual data, see table 7, Annex 8 and this Annex;1998: forecast) 
0 
-0.7 after compensation 
before compensation 
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 
average, share in own resource payment more than 10 per cent higher than the share in 
GDP). The three conditions never applied for any Member State and the mechanism was 
never triggered. 
A second arrangement was introduced at another Dublin Council in November 1979. It 
provided for a compensation on the expenditure side in the form of specific measures for 
the United Kingdom. 
The current mechanism was decided in Fontainebleau in June 1984 and given effect by 
the Decision of May 7, 1985. This decision contained a transitional arrangement - a 
reduction of one billion Ecu in the VAT contribution of the United Kingdom for 1985 -
and the rules governing the calculation of future rebates, i.e., 
7-10-98 
ANNEX 4 
-3-
• the contribution of the United Kingdom tô the Community budget is reduced by an 
amount equal to 66 per cent of its budgetary imbalance. This imbalance is 
calculated by multiplying the difference between the UK's percentage share in VAT 
payments to the Community budget and its share in allocated expenditure times 
allocated expenditure (see below). Given that some expenditure (e.g. external 
expenditure) cannot be considered to have been made for the benefit of any 
particular Member States, in the calculation of the share of the United Kingdom in 
the payments made by the Community and in that of the overall imbalance, total 
Community payments are replaced by the total of all payments that can be allocated 
to an individual country (usually referred to as "allocated expenditure" - see 
footnote 5 of Annex 3). 
• the shortfall in financing is made up by all the Member states in accordance with 
their respective percentage shares of VAT payments (with the exception of 
Germany, which pays only two thirds of its normal share, the balance being divided 
up between the other Member States). 
The Own Resource Decision of 1988 modified substantially the system of Own 
Resources through the introduction of a new resource based on GNP and the reduction in 
the importance of the one based on VAT. These changes, which went in the direction of 
reducing the causes of the budgetary imbalance of the United Kingdom, necessitated 
some adjustments in the compensation mechanism. These were: 
i) The calculation of the amount of the refund as if the budget were still fully financed 
by non-capped VAT (pre-1988 system); 
ii) the reduction of the resulting amount of the rebate by the "savings"1 in its 
contribution that the United Kingdom derives from the modifications introduced in 
1988 (the so called "UK advantage from the new system "); 
iii) the financing of the UK correction by the other Member States according to their 
shares in the GNP of the Community. The one-third reduction for Germany was 
maintained. 
3. DEVELOPMENTS IN THE UK REBATE SINCE ITS INCEPTION 
There is no clear trend characterizing either the budgetary imbalance of the United 
Kingdom or the rebate (see graph 1). 
All budgetary balances show a high degree of variability for the reasons indicated in 
Annex 3 (underlying expenditure trends, different rates of economic growth, exchange 
These savings are equal to the difference between the amount the United Kingdom pays on the basis of the 
(capped) VAT and GNP resources under the 1988 system, and what the United Kingdom would have paid under 
the pre-1988 system (only uncapped VAT). 
7-10-98 
ANNEX 4 
-4 
Graph 3 
0.5 
0.4 
0.3 
0.2 
0.1 UK compensation 
(percentage of GNP; accruals figures; 
1995-97: provisional figures; 1998: forecasts) 
87 88 89 90 91 92 93 94 95 96 97 98 
rate fluctuations, carry over of unspent surpluses from previous years, adjustments for 
previous years, etc.). The budgetary balance of the United Kingdom, however, shows an 
even greater variability because of the operation of the correction mechanism itself which 
foresees the payment of the compensation with a one year lag (an exceptionally large 
imbalance in one year leads to a large compensation which is paid in the following year, 
thus reducing further what may have been a normal imbalance, and so on). Furthermore, 
budgeting rules require that in the budget of year t under the heading "UK correction", 
two different corrections are recorded: the provisional correction for year t-1 and the 
definitive correction for year t-4. Clearly, the sum of the two corrections has no 
economic meaning. Table 7 of Annex 8 shows in column (5) the UK correction as 
reported in the budget in year / (that is, the sum of the UK correction for year t-4 plus the 
provisional correction for year t-1) and, in column (2) the definitive UK correction for 
year t-4. 
Budgetary rules also require that, in order to calculate the definitive UK correction for 
year t-4, to construct a UK imbalance on the basis of the GNP, VAT and allocated 
expenditure outturns for year t (that is, four years later). These data permit the estimation 
of the UK imbalance for year t-4 shown in column (1) of Table 7, Annex 8. Note also 
that the imbalance of the UK measured in this manner differs from the imbalances 
reported in Tables 6a and 6b of Annex 8; the latter are estimated on the basis of GNP, 
VAT and allocated expenditure outturns as they are known one year after the budgetary 
year. The use of the definition implicit in the rebate mechanism (graph 2) itself provides 
a more stable picture as this definition is not influenced by the carry over of the unspent 
surpluses (see Annex 3). 
Beyond short-term fluctuations, the budgetary imbalance of the United Kingdom since 
1985 has been relatively stable with the imbalance before correction averaging about half 
7-10-98 
a point of the country's GNP. 
remained relatively stable. ANNEX 4 
Correspondingly, the amount of the rebate has also 
Various factors have been at work, which appear to have broadly offset each other. As 
already indicated, the origin of the budgetary imbalance of the United Kingdom is to be 
found in two factors: its relative high share of the combined VAT and GNP base on the 
revenue side, and the low agricultural returns on the expenditure side. 
Graph 4 
25 Share of the United Kingdom in (VAT and GNP) 
payments and in EU (allocated) expenditure 
(percentage of totals; accruals figures; 
1995-97: provisional figures; 1998: forecasts) 
87 88 89 90 91 92 93 94 95 96 97 98 
The reduction in the relative weight of the VAT resource brought about by the decisions 
of 1988 and 1992 should have contributed to a reduction in the imbalance and in the 
rebate. However, the effect on the rebate was explicitly excluded by the provision which 
imposed the continuation of its computation on the basis of the pre-1988 system and of 
the reduction of the result by an amount corresponding to the so-called "advantage" that 
the United Kingdom was obtaining from the new system. The calculations of this 
"advantage" done every year show that until now the effect of the changes on the 
imbalance have been very small. They may have become more significant over the last 
two or three years in correspondence with the effective reduction of the weight of the 
VAT resource, but even so their order of magnitude is not large enough to be discernible 
in the overall trend. 
More fundamental changes have taken place on the expenditure side of the EU budget. 
Agricultural spending, which in 1984 represented about 70 per cent of allocated 
expenditure, is now down to about 50 per cent. Per se, this change should have 
contributed to reducing the imbalance of the United Kingdom. However, over the same 
7-10-98 
ANNEX 4 
period, the component of expenditure that grew most rapidly was the Structural Funds. 
Given the explicit redistributive nature of this type of spending and of its concentration 
on the so called "cohesion countries", the share of the United Kingdom in total EU 
spending could not increase. In fact, since 1992 the redistributive component in total EU 
spending has become stronger. 
The factors which have played the greatest role in determining the trend of the rebate -
and especially its fluctuations from year to year - have been the difference between the 
rate of growth of the economy of the United Kingdom and that of the other Member 
States and the instability of exchange rates. Since the end of the 1980s, the economic 
cycle of the United Kingdom has been markedly different from that of the rest of the 
Union. In addition, the pound sterling has fluctuated significantly vis-à-vis the other 
European currencies between 1992 and 1997. 
Underlying expenditure trends have also played a significant role, although in 
quantitative terms they have been less important and have been overshadowed by 
macroeconomic developments just mentioned. For instance, in 1994 the United 
Kingdom was very successful in drawing on structural funds spending and in 1997-98 the 
BSE crisis led to increased agricultural spending in the country. 
Over the next years the imbalance of the United Kingdom (and its compensation) are 
expected to increase somewhat. This will be essentially the result of the enlargement of 
the Union to a number of countries that will certainly be net beneficiaries. 
4. ASSESSMENT OF THE PERFORMANCE OF THE MECHANISM 
The rebate mechanism has been effective in achieving its intended goal: a significant 
reduction in the United Kingdom's budgetary imbalance. As graph 1 shows, over recent 
years the negative budgetary balance of this country, after correction, has averaged 
around 0.2-0.3 per cent of GNP. 
However, some of the conditions that prevailed at the time the mechanism was decided 
do not apply any more: 
i) The changes in the composition of EU spending have modified the rationale of the 
compensation. Whereas in 1984, it had essentially the nature of a correction for the 
specific agricultural problem (CAP represented about 70 per cent of total allocated 
expenditure), it has now lost to a great extent this characteristic since it corrects 
equally the persistent agricultural problem as well as the United Kingdom's 
contribution to the solidarity effort of the EU and to its other policies. 
ii) The budgetary imbalance of the United Kingdom is not unique any longer. In 
recent years, as graph 5 shows, the imbalance of the United Kingdom, before 
7-10-98 
ANNEX 4 
7-
correction, was the largest of the Community. In 1997, four more countries have 
budgetary imbalances as large as or even larger than the United Kingdom's. 
iii) The gap in relative prosperity between the United Kingdom and the other largest, 
contributors to the EU budget has narrowed. Depending on the measure used, the 
United Kingdom has a relative prosperity or a relative capacity to pay around the EU 
average and will certainly be above this mark after the forthcoming enlargement of 
the EU. 
The mechanism has also some drawbacks, which although not new or unexpected, are 
worth recalling at this stage. 
• The existence of the rebate leads to the contribution paid by the United Kingdom 
representing a lower proportion of its income than those paid by the other Member 
States. This situation contrasts with the principle of horizontal equity. At the 
national level, this would be analogous to granting tax relief to individuals who 
cannot use some public services or who are not recipients of public assistance. 
Graph 5 
Budgetary balances of the UK, 
Germany, and the Netherlands 
(UK rebate definition ; before UK rebate ; percentages of GNP) 
United Kingdom 
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 
The compensation mechanism works as a shock absorber for all changes in the 
imbalance of the United Kingdom and places this country in a unique position with 
respect to common budgetary decisions. For example, a budgetary decision that 
would have a net cost of Ecu 100 to a Member State in fact costs the UK Ecu 33. 
Conversely, a measure that would improve the balance of another country by 100, 
improves the balance of the United Kingdom again by only one third of this amount. 
7-10-98 
ANNEX 4 
This situation, not only risks decoupling the UK from budgetary decision making, 
but will also have significant adverse effects at the time of enlargement. The 
accession of a large number of new Member States with very low standards of living 
is expected to have a negative effect on the budgetary balances of the current 
Member States. But the United Kingdom will see its budgetary balance deteriorate 
by only one third of what would have happened in the absence of the correction 
mechanism. This puts into question a fair sharing out of the burden resulting from 
enlargement. 
Also in this context, it will be necessary to adapt the definition of allocated 
expenditure to prevent the United Kingdom from benefiting from purely statistical 
factors. In effect, at the time of accession of the new Member States some items of 
present expenditure in these countries (e.g. PHARE) will be replaced by full 
participation in EU policies. This would lead to their reclassification from external 
expenditure (excluded from the calculation of the rebate) to internal expenditure 
(included in the calculation) leading to a mechanical increase in the size of the UK 
rebate. 
The Commission indicated that it would take into consideration, on the re­
examination of the correction system, the opposition of Belgium and Luxembourg to 
current procedures governing the entry in the accounts and the allocation of 
administrative expenditure. The position of the Commission was that administrative 
expenditure could not be treated differently from other expenditure and that it is, 
therefore, appropriate to include it in the determination of allocated expenditure to 
any given country. This position was based on the consideration that if it is true that 
administrative expenditure is, in economic terms, very different from the unrequited 
transfers typical of the structural funds, there exist various other items of expenditure 
whose economic nature lays between these two extremes. It would be arbitrary to 
make a distinction only for administrative expenditure when, for instance, some 
items of research spending have a very similar nature. 
5. THE IMPACT OF THE UK REBATE MECHANISM ON THE RATE OF CALL OF VAT 
The rules determining the calculation of the UK rebate and of its financing contain 
provisions that affect the rate of call of the VAT resource. In 1984, when the mechanism 
was established, the VAT resource played the role of the complementary resource to be 
called up on the occasion needed to finance the budget of the Community. It was 
therefore logical that the rebate be financed according to the share of each country in this 
resource (with the exception of Germany that was granted a reduction). 
The 1988 Own Resources Decision provided for a reduction in the role of the VAT 
resource and for the introduction of a new one based on GNP. As a result, the role of 
complementary resource was assigned to GNP and it was decided that the UK rebate 
7-10-98 
ANNEX 4 
-9-
would be financed according to the share of each country in this new, more equitable, 
resource. 
However, the shares of the Member States in the VAT and GNP bases are not equal and 
the introduction of the GNP resource favoured some countries relative to others. The 
countries which desired to reduce further the role of the VAT resource, failing to obtain a 
reduction in its maximum call rate, obtained some reduction indirectly through the UK 
rebate mechanism. It was, in effect, decided to calculate the amount of VAT 
theoretically necessary to finance the UK rebate and not to call a corresponding amount 
ofVAT2. 
The provisions of the Mode de Calcul3 determine an amount (called the "gross 
equivalent" and which is actually larger than the UK rebate) that must be left aside for the 
notional financing of the UK rebate. The percentage of the total EU VAT base 
necessary to generate this amount (called the "frozen rate") is deducted from the 
maximum rate foreseen in the Own Resources decision to obtain the yearly rate of call. 
This rate of call changes every year depending on the size of, and shows the same high 
variability as, the UK rebate. 
This situation generates additional complications every time the amount of the UK rebate 
is revised4. An upward or a downward revision of the UK rebate provokes a change in 
the opposite direction of the rate of call of VAT and in the amount to be called (or that 
should have been called). Given that the size of the budget to be financed remains the 
same, a change in the amount of VAT called must be compensated by a corresponding 
change of opposite sign in the amount of GNP called. Since Member States have 
different shares in the bases of the two resources, these changes are not neutral (this 
effect of the rebate on the VAT and GNP contributions of the Member states is usually 
called the "indirect effect,r). If the amount of the UK rebate must be revised, it becomes 
necessary to compensate Member States for the incorrect amount of the VAT and GNP 
contributions that have been called. This calls for complicated calculations for each 
revision of the UK rebate and its budgeting in two different chapters (Chapter 15 and 
chapter 35) which produces the somewhat surprising result that the United Kingdom 
appears to participate in the financing (albeit for very small amounts) of its own rebate. 
In 1992, the Commission argued forcefully that the same reduction in the role of the 
VAT resource could be obtained through a straightforward reduction in the maximum 
call rate equal to the average frozen rate of the last years. The maximum rate of call was 
indeed reduced from 1.4 in 1994 to 1.00 per cent in 1999, but the notional financing of 
See Article 5 of the Council Decision 88/376/EEC, Euratom on the system of the Communities' own resources, 
June 24,1988; Official Journal of the European Communities L 185, July 15,1988. 
See "Method of Calculation, Financing, Payment and Entry in the Budget of the Correction of Budgetary Imbalances 
in Accordance with Articles 4 and 5 of the Council Decision on the System of the Communities' Own Resources", 
Council of the European Union, 5455/94, March 9,1994. 
This is done at least twice during the budgetary process, once in the first supplementary amending budget of the 
year in which the rebate is paid and three years later when the final calculations are made. 
7-10-98 
ANNEX 4 
-10-
the rebate through VAT (with its "gross equivalent", "frozen rate", "indirect financing" 
and two budgetary chapters) has remained. 
The Commission hopes that on the occasion of a revision of the Own Resources Decision 
it will be possible to suppress these unnecessary complications. Over recent years the 
amount frozen for the notional financing of the rebate has averaged 0.12 per cent of the 
total EU VAT base. 
•*• •*• •*• 
7-10-98 
ANNEX 5 
The effects of a partial reimbursement of 
CAP direct aids 
1. INTRODUCTION 
The budgetary imbalances which have emerged in recent years are fundamentally due to 
the structure of the expenditure rather than to the revenue side of the EU budget (see 
Graph 1 and table 1). As underlined on several occasions in the report, gross 
contributions to the EU budget are broadly equitable, and are expected to become more 
so in coming years as the weight of GNP resource increases and that of the VAT 
resource diminishes. The principal source of imbalances is the expenditure side of the 
EU budget. Graph 1 shows that while VAT and GNP contributions respect a 
proportional relationship with the Member States' GNP, EU expenditure bears no 
relations to GNP. 
Graph 1 
Allocated operating expenditure, 
VAT and GNP own resources payments (before UK correction) and 
total own resources payments, 1997 (as percent of national GNPs) 
7,0% T— 
6,0% 
5,0% 
4,0% 
3,0% 
2,0% — 
1,0% Allocated 
Operating 
Expenditure 
• Allocated operating expenditure 
— - VAT and GNP own resources 
Total own resources 
0,0% 
*? * Ar & # * " * & # V * "v ^ 
#* 
The uneven distribution of EU spending across the Member States is the result of 
deliberate policy decisions. Some 85% of EU spending is concentrated in two main 
categories of expenditure: Common Agricultural Policy (CAP) and Structural 
expenditure. While it is clearly incoherent to interfere with the budgetary outcomes 
resulting from Structural expenditure, it is conceivable to intervene in the area of CAP 
7-10-1998 
ANNEX 5 
2-
spending. Section 2 of this annex examines a possibility which has been put forward 
recently of modifying the financing of direct aids to farmers, and section 3 illustrates the 
effect of such a modification on the budgetary balances of the Member States on the 
basis of results from a representative simulation. 
Table 1 
Member States' shares in EU financing and in spending 
under the CAP and structural operations, 1997 
(percentage shares in EU total, cash data) 
Total 
> VAT/GNP 
> TOR 
Total <1> 
> CAP 
> Structural 
Operations B 
3.9 
3.1 
7.4 
2.5 
2.4 
1.4 DK 
2.0 
2.0 
2.0 
2.2 
3.0 
0.7 D 
28.2 
29.1 
24.2 
14.2 
14.2 
14.0 GR 
1.6 
1.7 
1.1 
7.8 
6.7 
10.2 E 
7.1 
7.7 
4.5 
15.8 
11.3 
24.5 F 
Fin 
17.5 
19.0 
10.9 
Sp( 
17.1 
22.5 
9.4 IRL 
ancin 
0.9 
0.8 
1.6 
;ndin< 
4.7 
5.0 
4.7 I 
g 
11.5 
12.3 
7.9 
3 
11.8 
12.5 
11.1 L 
0.2 
0.2 
0.2 
0.2 
0.1 
0.1 NL 
6.4 
5.1 
12.2 
3.5 
4.3 
1.6 A 
2.8 
3.0 
1.8 
1.9 
2.1 
1.4 P 
1.4 
1.5 
1.1 
5.3 
1.6 
11.3 FIN 
1.4 
15 
1.0 
1.5 
1.4 
1.5 S 
3.1 
3.2 
2.6 
1.7 
1.8 
0.9 UK 
11.9 
9.6 
21.5 
9.9 
10.8 
7.4 
(1 ) Total operational expenditure (net of administrative expenditure). 
2. A PARTIAL REIMBURSEMENT OF CAP DIRECT AIDS TO FARMERS 
CAP spending consists essentially of expenditure to support market prices and of direct 
aids to farmers. Market expenditure, which is allocative in nature, aims at redistributing 
income from consumers towards the farm economy. Direct aids to farmers are 
intrinsically a redistributive policy that transfers income to farmers from the taxpayers 
at large1. It is has been proposed that this last type of expenditure be partly financed by 
the Member States concerned. Member States would continue to pay direct aids on the 
basis of Community legislation as at present, but instead of receiving a 100 per cent 
reimbursement from the EU budget they would receive only a partial one. The 
rationale for the partial reimbursement would be that direct aids to farmers constitute 
strict interpersonal redistribution, with no allocative aim. According to the subsidiarity 
principle, interpersonal redistribution is better implemented at the level of Member 
States rather than at the level of the EU. 
If implemented, this option would be consistent with and would represent a 
generalisation of the principles currently governing Structural Funds expenditure. In 
this area, there is already a system for sharing the financial burden between the 
The overall redistribution induced by the CAP is greater than the reported budget costs. According to the OECD, 
in 1990 the transfers to farmers associated with the CAP were equivalent to Ecu 64 billion consisting of Ecu 50 
billion from consumers and Ecu 14 billion from European taxpayers; see OECD (1990): Agricultural Policies, 
Markets and Trade Monitoring and Outlook, Paris. 
7-10-1998 
ANNEX 5 
Community and national exchequers since Member States are required to match EU 
spending. 
Proponents of such a modification of current CAP arrangements stress that it should not 
be seen as a dismantling of the CAP or a move towards its re-nationalisation. Farmers 
would receive the same support since CAP expenditure by Member State is compulsory. 
The level and the conditions attached to the payments of these direct aids would 
continue to be an integral part of the Common Agricultural Policy and would be 
determined only through EU decisions. The overall amount of financial resources 
available would also remain the same, but would be shared between the EU budget and 
the national exchequers. 
A partial reimbursement of direct aids along these lines while not reducing the overall 
amount of spending would reduce the amount of financial resources channelled through 
the EU budget. For instance, if such a measure were introduced from next year and the 
level of partial reimbursement was set at 75 per cent, the level of payments 
appropriations of the EU budget in 1999 could be automatically reduced by about 8 per 
cent. Given that the shares of individual Member States in the financing of the EU 
budget and in direct aids spending are very different, a reduction in the part of this 
expenditure to be financed through the common budget will influence their budgetary 
balances. Table 2 presents the relevant figures: the shares of each Member States in 
total GNP, which is equal to its share in the marginal financing of the EU budget, and 
the shares in spending for direct aids. Given the importance of the current reform for 
the amount of direct aids the table presents also figures for 2006; these are calculated on 
the assumption of full implementation of the proposals that the Commission presented 
on 18 March 1998. 
Table 2 
Member States 
( 
B 
3.0 DK 
2.0 D 
25.3 GR 
1.4 E 
6.7 ' shares in total GNP and in direct aids spending 
Dercentage shares in the EU-15 total) 
F 
17.0 IRL 
GNP' 
0.8 I 
1999/2 
14.0 L 
006 <1> 
0.2 NL 
4.5 A 
2-5 P 
1.3 FIN 
1.4 S 
2.8 UK 
17.1 
Spending for direct aids in 1999 
1.1 | 2.9 | 15.2 | 7.9 | 14.3 J 23.9 | 2.3 | 12.6 | 0.1 | 1.3 | 1.7 | 1.5 | 1.0 | 1.9 | 12.3 
Spending for direct aids in 2006 
1.7 | 3.0 | 17.4 | 6.3 | 12.3 | 23.7 | 2.9 | 12.2 | 0.1 | 2.6 | 2.0 | 1.5 | 1.2 | 2.0 | 11.0 
(1) based on the assumption that all Member States will experience the same rate of growth and the same rate of inflation. 
All the Member States presenting large budgetary imbalances have a share in financing 
higher than the share in direct aids receipts and would therefore see a reduction in their 
imbalance if such a measure were implemented. For this reason, a partial 
reimbursement of CAP direct aids can be seen as a way of defusing the issue of the 
budgetary imbalances; moreover, this policy would be consistent with the Fontainebleau 
7-10-1998 
ANNEX 5 
principles which stressed that the preferred way to address any budgetary imbalances 
was through the expenditure side of the budget. 
From the administrative point of view, the option of a partial reimbursement would be 
very simple and would entail no additional costs. In addition, the decision could be 
taken under the same voting procedures used to modify the CAP and would therefore be 
easier to put into practice than any solution requiring a modification of the Own 
Resources decision. Should a measure of this type be adopted, it would be appropriate 
to lower correspondingly the agricultural guideline to maintain its effectiveness. It 
would also be necessary to lower the own resources ceiling. If a revision of the Own 
Resources decision were not possible, it would be necessary to find a sufficiently strong 
form of engagement not to use the margins liberated by the reduction in CAP spending. 
3. EFFECTS OF A REIMBURSEMENT LIMITED TO 75 PER CENT OF EXPENDITURE 
To give an idea of the quantitative impact of the introduction of a partial reimbursement 
this section presents the results of a simulation based on the assumption that Member 
States would receive a reimbursement equal to 75 per cent of the expenditure incurred. 
In 1999, agricultural expenditure under Heading 1 of the Financial Perspective, 
excluding the monetary reserve, should amount to Euro 40.4 billion (at current prices)2 
of which 27.9 would be due to direct aids. Under the assumption of 75 per cent 
reimbursement, Member States would have to finance directly about Euro 7 billion and 
the size of the EU budget would be reduced correspondingly. However, if the proposal 
of the Commission for the reform of the CAP were implemented, by 2006 direct aids 
spending would reach Euro 36.6 billion (current prices) and, if the partial 
reimbursement option were implemented, Member States would have to finance Euro 
9.15 billion. 
Tables 3 (data for 1999) and 4 (data for 2006) illustrate the financial consequences on 
the budgetary balances of each Member State of such a measure3. To allow a correct 
appreciation of the impact of the modification, the data are presented before the 
application of the UK correction mechanism. The first two columns of the tables show 
the amounts of direct aids spending that Member States would have to finance directly. 
These amounts would have to be entered into the national budgets and would increase 
correspondingly national spending. At the same time, however, the national 
contributions to the EU budget would be reduced by the amounts indicated in columns 
(3) and (4). The overall net effects of the measure are shown in columns (5) and (6). A 
positive (negative) figure indicates an improvement (deterioration) in the budgetary 
balance relative to the current situation. The same results are presented in Graphs 2 and 
2 Preliminary Draft Budget of the European Union for the financial year 1999, COM (98) 300. 
3 The simulation is based on the assumption of a linear partial reimbursement, i.e. irrespective of the product. All 
other CAP rules would remain unchanged. This means that market support expenditure would continue to be 
integrally reimbursed to Member States. Export refunds, market intervention expenditure, storage costs, 
promotion measures and other minor items, such as monitoring and preventative measures would not be covered 
by this proposal, as they do not constitute expenditure paid directly to farmers. Finally, those type of agricultural 
expenditure which are already co-financed, such as rural and accompanying measures and some other income 
supports, are also excluded from this proposal, as they would lead to supplementary national co-financing beyond 
the level which is agreed upon for structural operations. 
7-10-1998 
ANNEX 5 
5-
3 where the Member States are ranked from that with the largest improvement in the 
budgetary balance to that with the largest deterioration, in absolute terms (Graph 2) and 
as a percentage of GNP (Graph 3). 
Table 3 
Implications of a partial reimbursement (75%) of CAP direct aids 
(Year 1999, in Euro million and in percent of GNP, at current prices, before UK correction) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
0 
P 
SF 
S 
UK 
Total National financing 
Share in CAP direct aid 
payments'1' 
Euro million 
(D 
77.8 
201.3 
1 057.8 
551.5 
993.5 
1 663.0 
163.0 
877.3 
3.8 
90.3 
120.5 
106.5 
72.0 
134.8 
854.0 
6 966.8 Percent of GNP 
(2) 
0.03 
0.13 
0.05 
0.50 
0.19 
0.13 
0.26 
0.08 
0.02 
0.03 
0.06 
0.11 
0.06 
0.06 
0.06 
0.09 EU budget financing 
Share in the GNP resource (2) 
Euro million 
(3) 
208.6 
138.5 
1 762.0 
99.2 
463.7 
1 184.5 
56.4 
972.7 
14.8 
315.9 
175.6 
87.8 
100.5 
191.7 
1 194.8 
6 966.8 Percent of GNP 
(4) 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 
0.09 Difference 
Euro million 
(5) 
130.9 
•62.8 
704.3 
• 452.3 
• 529.8 
• 478.5 
-106.6 
95.4 
11.1 
225.6 
55.1 
-18.7 
28.5 
56.9 
340.8 
0.0 Percent of GNP 
(6) 
0.06 
- 0.04 
0.04 
-0.41 
-0.10 
•0.04 
-0.17 
0.01 
0.07 
0.06 
0.03 
•0.02 
0.03 
0.03 
0.03 
0.00 
(1) Determined according to the projected CAP refunds for each Member State in 1999; (2) determined according to the share of 
each Member State in EU GNP (Preliminary Draft Budget 1999). 
The results presented in tables 3 and 4 are not surprising and correspond to what could 
have been derived from a simple inspection of the figures of table 2: the relatively large 
beneficiaries of CAP spending see a deterioration of their budgetary balances while the 
five Member States with the largest imbalances would experience an improvement. 
Two elements need be underlined. The first is that the operation of the correction 
mechanism will reduce by two thirds the gains of the United Kingdom that appear in the 
tables with corresponding small improvements for the other Member States (in most 
cases small enough not to change the figures expressed as a percentage of GNP). The 
second is that in 2006 the new Member States would see a significant improvement in 
their budgetary imbalance since they would see a reduction in their contributions made 
possible by the lower amount of CAP spending which would not be offset by any 
increase in spending at the national level (direct aids are not foreseen for these 
countries). 
The results of this simulation are proportional to the initial assumption and can be 
extrapolated to different assumptions about the rate of partial reimbursement (e. g. a rate 
7-10-1998 
ANNEX 5 
of national co-financing fifty per cent higher would give changes in the budgetary 
balances which would also be fifty per cent larger). 
Table 4 
Implications of a partial reimbursement (75%) of CAP direct aids 
(Year 2006, in Euro million and in percent of GNP, at current prices, before UK correction) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
ô 
P 
SF 
S 
UK 
New 6 
Total National financing 
Share in CAP direct aid 
payments(,) 
Euro million 
(1) 
157.4 
278.7 
1 586.6 
579.5 
1 123.7 
2 169.7 
268.4 
1 115.2 
7.5 
237.2 
181.9 
136.6 
106.3 
185.9 
1 010.7 
0.0 
9 145.3 Percent of GNP 
(2) 
0.05 
0.13 
0.06 
0.38 
0.16 
0.12 
0.31 
0.07 
0.03 
0.05 
0.07 
0.10 
0.07 
0.06 
0.06 
0.00 
0.08 EU budget financing 
Share in the GNP resource(2) 
Euro million 
(3) 
268.1 
178.1 
2 264.8 
127.8 
595.5 
1 521.2 
72.6 
1 249.7 
19.1 
406.0 
225.7 
112.8 
129.1 
248.2 
1440.3 
286.4 
9 145.3 Percent of GNP 
(4) 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 
0.08 Difference 
Euro million 
(5) 
110.7 
-100.6 
678.2 
-451.7 
- 528.2 
-648.5 
• 195.8 
134.5 
11.6 
168.8 
43.8 
-23.9 
22.8 
62.3 
429.6 
286.4 
0.0 Percent of GNP 
(6) 
0.03 
-0.05 
0.03 
• 0.30 
-0.07 
- 0.04 
-0.23 
0.01 
0.05 
0.03 
0.02 
-0.02 
0.01 
0.02 
0.03 
0.07 
0.00 
(1) Determined according to the projected CAP refunds for each Member State in 1999; (2) determined according to the share of 
each Member State in EU GNP; the underlying macro-economic assumptions are those in European Commission (1998), 
(C0M(1998)164 final, p.2). 
7-10-1998 
ANNEX 5 
-7-
7-10-1998 ANNEX 5 
-7-
7-10-1998 
ANNEX 6 
A generalised budgetary compensation mechanism: 
Evidence from simulations 
1. INTRODUCTION 
The emergence of what some Member States consider as large negative budgetary 
balances in recent years has led Ministers of Finance from Germany, the Netherlands, 
Austria and Sweden to write to the President of the Commission putting forward 
proposals for granting budgetary corrections, in a non-discriminatory manner, to all 
Member States that qualify1. 
This Annex reviews the generic proposal made by these four countries and provides 
estimates of its implications for the EU budget and for the distribution of the financing 
burden across the Member States. Section 2 of the Annex presents the proposal; 
section 3 examines an unconstrained scenario where a simple extension of- the UK 
rebate is granted to other Member States; section 4 reviews a scenario where a modified 
version of the generalisation of the UK rebate along the line proposed by these four 
Member States is assumed to be applied; this scenario involves essentially a partial 
compensation of the excess of the measured negative budgetary balances above a pre­
determined threshold; and, finally, section 5 presents a graphical summary of the 
results. 
2. A PROPOSAL TO GENERALIZE THE UK CORRECTION MECHANISM 
Minister Waigel submitted to the President of the European Commission on March 5, 
1998 a proposal with the view to correcting the perceived large budgetary imbalance of 
Germany. In subsequent days, the Austrian, the Dutch and the Swedish Finance 
Minister also wrote to President Santer with virtually identical proposals favouring the 
introduction of such a correction mechanism. 
Minister Waigel's proposal is based on the Conclusions of the Fontainebleau European 
Council of June 1984, according to which "any Member State sustaining a budgetary 
burden which is excessive in relation to its relative prosperity may benefit from a 
correction at the appropriate time'"2. The Minister argues that while initially this 
principle benefited only the UK, it should now form the basis for introducing a 
generalised correction mechanism to benefit those Member States experiencing 
disproportionate budgetary imbalances. Accordingly, the proposal is intended 
• to be non-discriminatory, by being available to all eligible Member States; 
See the discussion in part 2 of the report. 
See Fontainebleau European Council, Conclusions of the Presidency, Bulletin of the European Communities 6-
1984. 
7-10-1998 
ANNEX 6 
-2-
• to take into account each Member State's capacity to pay3; 
• to correct not all but only those budgetary imbalances considered as excessive 
(in order to respect the fundamental policy decisions on the expenditure side of 
the budget); 
• to foster budgetary discipline for both net contributors and net beneficiaries; 
• to be sufficiently flexible to facilitate the achievement of fair solutions. 
The precise framework of the proposed correction mechanism is defined as follows: 
Amount of compensation = (Net burden - threshold) * coefficient of compensation 
Three parameters determine the amount of compensation. First, the budgetary position 
or net burden, secondly, the threshold beyond which compensation applies and, third, 
the coefficient of compensation. The first two variables are measured in current Ecu, 
and the third in percentage points. 
It is suggested that the budgetary balance, or net burden, be calculated in accordance 
with the UK correction mechanism4. 
The threshold beyond which compensation applies is a measure of the maximum 
solidarity among the Member States and can be determined as a function of the relative 
prosperity of the Member State in question. In the proposal under review, only a part of 
the budgetary imbalance will be corrected, that is, the excess of the budgetary position 
above a pre-determined threshold value. In the case of the UK rebate this threshold is 
zero, that is, the total of the budgetary imbalance is used as the base for the estimation 
of the compensation. In the most general form of the proposal, the threshold can vary 
from one case to another. 
Finally, the amount of compensation is determined by the coefficient of compensation. 
The coefficient will be bound in the range between greater than zero and less than or 
equal to one. In the case of the UK rebate, the coefficient is 0.66. In the proposed 
scheme, alternative values of this coefficient are also conceivable. The threshold and 
the coefficient constitute the flexible parameters of the proposed mechanism5. 
The proposal does not specifically deal with the issue of the financing of the rebates 
that are granted. In the present system, the UK does not finance its own rebate. A 
3 In the original: "Leistungsfâhigkeit". 
4 The Commission has argued on several occasions that there is no single best definition of the concept of net 
burden and Annex 3 of the present report deals specifically with this point. Clearly, if the proposed mechanism is 
to be a generalisation of the current UK correction, it seems logical to apply the same procedure and to use the 
same concept of net burden that has been used in the last 15 years for the calculation of the UK correction. 
5 In sections 3 and 4 of the Annex two simulations, that differ according to the threshold used but have the same 
coefficient of compensation (0.66), have been prepared. The threshold determines which Member States are 
eligible for the rebate and which are not, while the coefficient of compensation is a simple arithmetic factor which 
scales the magnitude of the results (e.g. using a coefficient of compensation equal to 0.33 one would obtain 
results which are half of those obtained by using 0.66). 
7-10-1998 
ANNEX 6 
straightforward extension of the present model could be seen as implying that the 
Member States benefiting from the system should not finance their own rebates. 
However, this solution would not only be very costly in a situation where many 
Member States benefit from the system, but is also fraught with risks. In particular, a 
threshold effect could appear whereby a country with a negative balance just exceeding 
the threshold would receive a (small) rebâte, but would be exempted from the burden of 
financing the rebate of others. A small difference between the net burden of two 
Member States before application of the mechanism could be converted into a much 
larger once the correction has been applied. It appears coherent, therefore, to assume 
that a Member State should not finance its own rebate, but that it should finance all the 
others. This would eliminate any unwanted "threshold effect". 
Eliminating the threshold effect also helps to reduce (but not to eliminate) the second 
round problem. This refers to Member States that are below the solidarity threshold 
before the mechanism is applied but find themselves above after the mechanism as a 
result of their participation in the financing of the other Member States' rebates. The 
simulations in the following sections are calculated without taking into account possible 
second round effects which - while eliminating possible inequities arising from the 
mechanism - would lead to an additional increase in complexity and a further 
diminishing of transparency in the EU budgetary relationships. 
As in the UK rebate, it is proposed that the compensation should be financed according 
to the respective share of each Member State in EU GNP6. 
3. AN UNCONSTRAINED GENERALIZED CORRECTION MECHANISM 7 
This section examines the cost and financing implications of a generalisation of the 
current UK rebate system to all Member States presenting negative budgetary balances. 
In this case, the threshold is set to zero and the coefficient of compensation to 0.66. 
Member States participate in the financing of all rebates except their own according to 
their share in EU GNP. 
The definition of the net burden is an important element in the exercise since the cost of 
the mechanism depends on how the budgetary balance is defined. For purposes of 
illustration the concept used here is the same as in the UK correction mechanism8. 
In these simulations, a reduction of Germany's share in the financing of the UK correction, as laid down in Article 5 
of the Own Resources Decision, is ignored. Therefore, it is assumed that Germany would participate in the 
financing of the rebates of all other Member States eligible for compensation, according to its actual share in EU 
GNP. 
The Court of Auditors in its recent special report on the own resources system has presented some evidence, for 
the year 1996 on the implications of an unconstrained generalized correction mechanism. See European Court of 
Auditors (1998): Rapport spécial no. 6/98 relatif au bilan du système des ressources fondées sur la TVA et le 
PNB, June and Official Journal of the European Communities C 241, July 31, 1998. The Court's evidence is 
mentioned in section 3.27 of the report. The present Annex extends and qualifies the Court's results for 1999. It 
is clear that an unconstrained generalized correction mechanism is not the system proposed by the ministers of 
Finance of Germany, Austria, the Netherlands and Sweden. 
7-10-1998 
ANNEX 6 
4-
Table 1 
Implications for budgetary balances of an unconstrained generalised 
correction mechanism 
Projections for 1999; "UK rebate" balance 1 (data in Euro million and in % of GNP) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK<2> 
TOTAL Budgetary balance "à la 
UK correction" 
(before UK correction) 
Euro million 
(D-
2131,7 
188,8 
-9 804,8 
5 221,0 
8 006,8 
-516,8 
2 570,4 
-649,5 
717,8 
-1342,0 
• 770,2 
3 173,1 
-124,9 
•1 001,6 
•7 799,8 
0,0 % of GNP 
(2) 
0,92 
0,12 
-0,50 
4,71 
1,55 
-0,04 
4,08 
-0,06 
4,33 
•0,38 
•0,39 
3,24 
•0.11 
•0,47 
-0,58 
0,00 MS eligible 
for a rebate 
Threshold 
0,0% or GNP 
(3) 
0,0 
0,0 
•9 804,8 
0,0 
0,0 
-516,8 
0,0 
-649,5 
0,0 
•1342,0 
• 770,2 
0,0 
-124,9 
-1 001,6 
-7 799,8 
-22009,6 Amount of 
compensation 
Coefficient 
0,66 
(4) 
0,0 
0,0 
6 471,2 
0,0 
0,0 
341,1 
0.0 
428,6 
0,0 
885,7 
508,4 
0,0 
82,4 
661,1 
5 147,9 
14 526,3 Financing 
GNP share 
(5) 
- 538,9 
-357,7 
•2361,1 
- 256,4 
-1 197,8 
-2 990,1 
-145,7 
-2 443,1 
-38,3 
- 773,9 
•440,5 
-226,7 
- 258,4 
•476,5 
-2 021,0 
-14 526,3 Total 
redistributive 
effect 
(4) + (5) 
Gains/losses from 
the mechanism 
(6) 
- 538,9 
-357,7 
4110,1 
- 256,4 
-1 197,8 
-2 649,1 
-145,7. 
-2 014,5 
- 38,3 
111,8 
67,9 
- 226,7 
-176,0 
184,6 
3 126,9 
0,0 New budgetary balance 
Euro million 
(1) + (6) 
(7) 
1 592,7 
-168,9 
-5694,7 
4 964,6 
6 808,9 
-3 165,8 
2 424,6 
-2 664,0 
679,5 
•1230,2 
• 702,3 
2 946,4 
-300,9 
-8f7,f 
-4 672,9 
0,0 % or GNP 
(8) 
0,68 
-0,11 
•0,29 
4,48 
1,32 
-0,24 
3,85 
-0,25 
4,10 
•0,35 
•0,36 
3,01 
-0,27 
•0,38 
-0,35 
0,00 
(1 ). In order to avoid distortions due to fluctuations in the size of the UK rebate . the projected amount of the UK correction for 1999, 
instead of the one of 1998, has been chosen for comparison purposes (in principle the financing is lagged one year); 
(2) the UK correction for 1999 is estimated at Euro 4 952 million; the difference between this amount and Column (4) is due to the 
procedure foreseen in Article 4, paragraph 2 d) of the Own Resources Decision which takes into account the so-called "advantage" 
that the UK enjoys due to the changeover to a capped VAT own resource and the introduction of the GNP-based own resource. 
The results reported in Tables 1 and 2 refer to 19999, the last year of the current 
Financial Perspective. The final results are presented in terms of the difference relative 
to the present system; that is, the results show the improvement (deterioration) of the 
budgetary balance of each Member State relative to the current regime. 
The budgetary balance à la UK correction is a cash concept defined by the difference between the share in 
financing and the share in allocated operational expenditure; traditional own resources (TOR) are reallocated 
among Member States according to their VAT and GNP shares, while the sum of all balances is restricted to be 
zero. See Annex 3 for a discussion of the definitions of the budgetary balance used in this report. 
Data based on the Preliminary Draft Budget of the European Union for the financial year 1999, COM (98) 300. 
The concept of EU expenditure used in the simulations is allocated expenditure including administrative 
expenditure; if the estimates were prepared on the basis of operating expenditure, excluding administrative 
expenditure, the order of magnitude by which the rebates and their financing would be modified is somewhat less 
than 5 per cent. 
7-10-1998 
ANNEX 6 
5-
Table 2 
Implications for budgetary balances by applying an unconstrained generalised 
correction mechanism 
(data for 1999 in Euro million and in percent of GNP) 
B 
DK 
0 
GR 
E 
F 
IRL 
I. 
L 
NL 
A 
P 
FIN 
S 
UK Budgetary balance à la UK.correction 
Redistributive effects 
of the mechanism 
Euro mio. 
- 538.9 
- 357.7 
4110.1 
- 256.4 
-1 197.8 
-2 649.1 
- 145.7 
-2 014.5 
-38.3 
111.8 
67.9 
- 226.7 
- 176.0 
184.6 
3 126.9 % of GNP 
-0.23 
-0.23 
0.21 
-0.23 
-0.23 
-0.20 
-0.23 
-0.19 
-0.23 
0.03 
0.03 
-0.23 
-0.16 
0.09 
0.23 Difference to the 
current system 
Euro mio. 
-333.7 
-221.5 
5117.9 
-158.8 
-741.8 
-1 483.9 
- 90.2 
-1 057.8 
-23.7 
422.5 
240.6 
-140.4 
- 77.2 
373.1 
-1 825.2 % of GNP 
-0.14 
-0.14 
0.26 
-0.14 
-0.14 
-0.11 
-0.14 
-0.10 
-0.14 
0.12 
0.12 
-0.14 
-0.07 
0.17 
-0.13 "Operational" budgetary balance 
Redistributive effects 
of the mechanism 
Euro mio. 
237 
-440 
3 980 
-318 
-1502 
-3 235 
-184 
-2 510 
38 
760 
-6 
-281 
-230 
174 
3 517 % of GNP 
0.10 
-0.29 
0.20 
-0.29 
-0.29 
-0.24 
-0.29 
-0.23 
0.23 
0.22 
0.00 
-0.29 
-0.20 
0.08 
0.27 Difference to the 
current system 
Euro mio. 
400 
-332 
4 780 
-241 
-1139 
-2 310 
-140 
-1750 
49 
1007 
131 
-212 
-151 
324 
-414 % of GNP 
0.17 
-0.22 
0.24 
-0.22 
-0.22 
-0.17 
-0.22 
-0.16 
0.30 
0.29 
0.07 
-0.22 
-0.13 
0.15 
-0.03 
The parameters of the correction mechanism are: Threshold = 0.0% of GNP; coefficient oi compensation = 0.66; the 
definition of the budgetary balance as "a la UK correction" and as "operational" is provided in Annex 3. 
Graph 1 
Implications of an unconstrained generalized correction mechanism 
("UK rebate" balance) Projections for 1999 in percent of GNP 
0,30% 
0,20% 
0,10% Differences from present UK 
system (changes in 
- budgetary balances) 
Redistributive effects 
of the mechanism 
B DK GR E IRL L P 
D A NL FIN I F UK B DK GR E IRL L P 
7-10-1998 
ANNEX 6 
-6-
The budgetary balance of the Member States for 1999 (calculated "à la UK correction") 
appears in column 1, the gross amounts of the rebates to the eligible Member States 
appear in column 4, the financing of the rebates in column 5, and the amount net of 
financing in column 6. Columns 7 and 8 give in absolute value and in percentage terms 
the new budgetary balances. The changes in the budgetary balance of each Member 
State in 1999, both in Euro and in percent of GNP, are presented in Table 2 where also 
data with respect to the current regime are shown. The last two columns in Table 2, 
which cannot be reconstructed from the data in Table 1, give the difference with respect 
to the present system (which includes the UK correction). In particular, the difference 
relative to the present system, for each Member State, is equal to the new budgetary 
balance resulting from the application of the proposed mechanism (column (7) of Table 
1) minus the sum of the budgetary balance reported in column (1) of Table 1 (which is 
reported before the UK correction) and the financing of the UK correction. 
Whereas the application of the present correction mechanism would redistribute in 1999 
Euro 4.9 billion towards the United Kingdom alone, the unconstrained correction 
mechanism would redistribute Euro 7.6 billion towards five countries (Germany, the 
Netherlands, Austria, Sweden and the United Kingdom). This amount would have to 
be financed by the other 10 Member States that would pay Euro 4.3 billion more than 
under the present correction mechanism (Euro 3.3 billion). The United Kingdom 
would be worse off by Euro 1.8 billion. The new beneficiaries of the system 
(Germany, the Netherlands, Austria, and Sweden) would therefore see an improvement 
in their aggregate budgetary balance by Euro 6.1 billion (5.1 billion for Germany alone). 
Graph 1 helps to visualise the redistribution induced by this unconstrained generalised 
mechanism. The shaded area corresponds to the difference between the unconstrained 
mechanism and the present system and includes all financing effects for the UK rebate; 
the bars refer only to the redistribution (corresponding to column (6) of Table 1) 
induced by the new unconstrained system. The Member States are ranked from the one 
with the greatest improvement in the budgetary balance to that with the greatest 
deterioration. 
Those Member States that are currently recording a positive budgetary balance 
(Belgium, Denmark, Greece, Spain, Ireland, Luxembourg and Portugal) would not 
receive any rebate but would only participate in the financing of the mechanism. They 
will all witness an equal deterioration in their budgetary balance in terms of national 
GNP. 
Those Member States who are net payers would, on the contrary, receive a rebate for 
their budgetary imbalance. In some cases this rebate would more than compensate the 
financing of others' rebate, in other cases not. This obviously depends on the size of the 
initial budgetary imbalance. 
The case of the United Kingdom is somewhat more complex. The UK would be 
entitled to the same rebate as under the current rebate mechanism but it would also have 
to contribute its share in the financing of the unconstrained generalised mechanism. 
7-10-1998 
ANNEX 6 
7-
Thus, relative to the present system, the UK finds its budgetary balance deteriorating 
due to the financing of the others' rebate; in the new system, as shown by the bars, the 
UK would be as big a beneficiary as Germany (as a percentage of GNP). 
4. A CONSTRAINED GENERALIZED CORRECTION MECHANISM 
As discussed in section 2, a constrained generalised correction mechanism has been 
explicitly proposed by Germany, Austria, Sweden and the Netherlands. This section 
examines the implications of this proposal. The constraint in the mechanism is given by 
the threshold; budgetary imbalances exceeding the threshold ought to be corrected. In 
the proposal, a threshold of 0.30 per cent or 0.40 per cent of GNP has been suggested. 
Table 3 
Implications for budgetary balances of a constrained generalised 
correction mechanism 
Projections for the year 1999; "UK rebate" balance 1 (data in Euro million and in % of GNP) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
TOTAL Budgetary balance "à la 
UK correction" 
(before UK correction) 
Euro million 
(1) 
2 131,7 
188,8 
-9 804,8 
5 221,0 
8 006,8 
-516,8 
2 570,4 
- 649,5 
717,8 
•1 342,0 
• 770,2 
3 173,1 
-124,9 
•1 001,6 
-7 799,8 
0,0 % of GNP 
(2) 
0,92 
0,12 
-0,50 
4,71 
1,55 
-0,04 
4,08 
-0,06 
4,33 
•0,38 
•0,39 
3,24 
-0,11 
-0,47 
-0,58 
0,00 MS eligible for 
a rebate 
Threshold 
0,3 % or GNP 
(3) 
0,0 
0,0 
•3 903,8 
0,0 . 
0,0 
0,0 
0,0 
0,0 
0,0 
- 284,2 
-182,2 
0,0 
0,0 
- 359,6 
-3 798,3 
-8 528,1 Amount of 
compensation 
Coefficient 
0,66 
(4) 
0,0 
0,0 
2 576,5 
0,0 
0,0 
0,0 
0,0 
0,0 
0,0 
187,6 
120,2 
0,0 
0,0 
237.4 
2 506,9 
5 628,5 Financing 
GNP share 
(5) 
-210,8 
-139,9 
- 907,9 
-100,3 
- 468,5 
-1 196,7 
- 57,0 
- 982,7 
-15,0 
- 310,2 
-174,3 
- 88,7 
-101,5 
-187,0 
- 688,2 
•5 628,5 Total 
redistributive 
effect 
(4) + (5) 
Gains/losses from 
the mechanism 
(6) 
-210,8 
-139,9 
1 668,6 
-100,3 
- 468,5 
-1 196,7 
- 57,0 
- 982,7 
-15,0 
- f22,6 
- 54,0 
-88,7 
-101,5 
50,4 
1 818,7 
0,0 New budgetary balance 
Euro million 
(1) + (6) 
(7) 
1 920,9 
48,9 
•8 136,2 
5 120,7 
7 538,3 
-1 713,5 
2 513,4 
-1 632,1 
702,9 
-1 464,7 
- 824,3 
3 084,5 
- 226,4 
- 951,2 
-5 981,1 
0,0 % of GNP 
(8) 
0,82 
0,03 
-0,4f 
4,62 
1,46 
-0,13 
3,99 
-0,15 
4,24 
•0,42 
•0,42 
3,15 
-0,20 
-0,44 
-0,45 
0,00 
(1 ) See footnote (1 ) of Table 1. 
Table 3 shows the results of a simulation for the year 1999 of the constrained correction 
mechanism. The net burden is calculated as in the UK rebate, and a threshold of 0.30 
per cent of GNP and a coefficient of compensation of 0.66 have been assumed. The 
principal effects of the mechanism, both in terms of the redistributive impact and in 
terms of differences with respect to the current regime, are summarised in Table 4. 
7-10-1998 
ANNEX 6 
Table 4 
Implications for budgetary balances by applying a constrained 
generalised correction mechanism 
(data for 1999 in Euro million and in percent of GNP) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK Budgetary balance à la UK correction 
Redistributive effects 
of the mechanism 
Euro mio. 
-210.8 
-139.9 
1 668.6 
-100.3 
-468.5 
-1 196.7 
-57.0 
-982.7 
- 15.0 
-122.6 
• 54.0 
-88.7 
-101.5 
50.4 
1 818.7 % of GNP 
-0.091 
-0.091 
0.085 
- 0.091 
-0.091 
-0.091 
-0.091 
• -0.091 
-0.091 
- 0.035 
• 0.028 
-0.091 
-0.091 
0.024 
0.136 Difference to.the 
current system 
Euro mio. 
-5.6 
-3.7 
2 676.4 
-2.6 
-12.4 
- 31.6 
-1.5 
-25.9 
- 0.4 
188.0 
118.7 
-2.3 
-2.7 
239.0 
-3133.4 % of GNP 
-0.002 
-0.002 
0.136 
- 0.002 
-0.002 
- 0.002 
-0.002 
-0.002 
-0.002 
0.053 
0.061 
-0:002 
-0.002 
0.112 
-0.235 "Operational" budgetary balance 
Redistributive effects 
of the mechanism 
Euro mio. 
114 
-209 
1727 
-151 . 
-714 
-1827 
-88 
-1504 
30 
563 
•108 
-134 
-156 
63 
2 393 % of GNP 
0.05 
-0.14 
0.09 
-0.14 
-0.14 
-0.14 
-0.14 
-0.14 
0.18 
0.16 
•0.05 
-0.14 
-0.14 
0.03 
0.18 Difference to the 
current system 
Euro mio. 
277 
-101 
2 527 
-74 
-352 
-902 
-43 
-744 
42 
809 
29 
-65 
-77 
213 
-1538 % of GNP 
0.12 . 
-0.07 
0.13 
-0.07 
-0.07 
-0.07 
-0.07 
-0.07 
0.25 
0.23 
0.01 
-0.07 
-0.07 
0.10 
-0.12 
The parameters of the correction mechanism are: Threshold = 0.30% of GNP; coefficient of compensation = 0.66; the 
definition of the budgetary balance as "à la UK correction" and as "operational" is provided in Annex 3. 
The results show that the constrained version of the correction mechanism entails a 
significantly lower redistribution of budgetary resources. Only three countries would 
benefit from the system (Germany, Sweden and the United Kingdom) since in the case 
of the Netherlands and Austria, the benefit from the capping of their budgetary balances 
would be smaller than their contributions to the financing of the system. On the whole, 
the 12 Member States financing the rebates would be paying Euro 3.5 billion which is 
0.2 billion less than what they would have paid to finance the current UK rebate 
mechanism. The United Kingdom, on the other hand, would be worse off by Euro 3.1 
billion. This amount would be divided between the 12 Member States already 
mentioned (Euro 0.2 billion), Sweden, (Euro 0.2 billion) and Germany (Euro 2.7 
billion). 
The results of Table 4 are also shown in Graph 2. Here, the shaded area shows the 
differences in the Member States' budgetary balances between the present system, 
which includes the UK correction, and the system of the constrained generalised 
mechanism. In the Graph, the Member States are again ranked from the one with the 
greatest improvement in the budgetary balance to that with the greatest deterioration. 
The changes in the budgetary balances are identical for all the financing Member States 
that are not eligible for the rebate. Their budgetary balance is projected to deteriorate by 
some 0.002 per cent of GNP in 1999. 
7-10-1998 
ANNEX 6 
9-
Graph 2 
Implications of a constrained generalized correction mechanism: 
(Threshold: 0,3% of GNP, "UK rebate" balance) 
Projections for 1999, in percent of GNP 
0,20% v 
0,10% 
0,00% 
-0,10% -Difference from present 
system UK 
-0,20% * 
-0,30% 
D Difference from present 
system (changes in 
budgetary balances) 
NL B DK GR E F IRL I FIN UK 
The UK, on the contrary, will find itself substantially worse off. Under the 
unconstrained version of the mechanism the UK rebate was determined in a manner 
identical to the current system and, therefore, the UK saw a deterioration only because 
of its participation in the financing of the rebate of the others. In the present, 
constrained, simulation the UK rebate is restricted to the excess of its negative 
budgetary balance above the 0.30 per cent of GNP threshold. As a consequence, the 
budgetary imbalance of the UK, as measured by the "UK rebate" budgetary balance, 
would worsen by some 0.24 per cent of GNP in 1999. 
5. A GRAPHICAL REPRESENTATION OF THE RESULTS 
Budgetary correction mechanisms similar to the current one in favour of the United 
Kingdom are imperfect and, since they operate on the revenue side of the budget, do not 
affect the fundamental source of imbalances, the expenditure side. Moreover, beyond 
the conceptual and practical difficulties involved, they require an agreed definition of 
budgetary imbalance. Notwithstanding these imperfections, an explicit proposal has 
been made by Germany, the Netherlands, Austria and Sweden to address concerns about 
excessive budgetary imbalances. 
The analysis in this Annex reviewed two versions of a correction mechanism: an 
unconstrained correction mechanism and a constrained one. It is clear that, given the 
complexity and lack of transparency of the present system involving only the UK 
rebate, extending it to other Member States would inhibit further the comprehension and 
clarity of EU budgetary relationships. 
7-10-1998 
ANNEX 6 
10-
Graph 3 
Redistributive effects of the two correction mechanisms under review 
% of GNP 
0.3 
-0.3 (Projections for 1999, budgetary balances defined as in the UK 
rebate, percentages of GNP) 
Constrained (threshold 0.3%) 
UK D S A NL FIN I F DK B GR E IRL L 
Applying the present mechanism to all Member States that record a negative budgetary 
balance, or simply extending to the four countries that have made the request, would 
increase the sum of all rebates by about 50 per cent compared to the present system 
involving only the UK rebate. A constrained mechanism would involve a lesser amount 
of resources to be. 
Graph 4 
Changes in budgetary balances with respect to the current regime 
due to the two correction mechanisms under review 
% of GNP 
0.3 
-0.3 (Projections for 1999, budgetary balances defined as in the UK 
rebate, percentages of GNP) 
A NL FIN I F DK UK B GR E IRL L 
7-10-1998 
ANNEX 6 
-11 -
The results of the various simulations are summarised in Graphs 3 and 4. Graph 3 
shows the redistributive effect of the introduction of the generalised correction 
mechanisms (this corresponds to the bars of Graphs 1 and 2) and Graph 4 compares the 
changes that either of the two correction systems would entail with respect to the current 
situation (this corresponds to the shaded area of Graphs 1 and 2). The imposition of 
constraints limits the resources to be redistributed as well as the number of Member 
States benefiting from these dwindling resources. 
• • • • • • 
7-10-1998 
ANNEX 7 
Progressivity in budget contributions 
1. INTRODUCTION 
On July 1, 1998 Mr Rodrigo Rato, Spain's Economics Minister and second Deputy 
Prime Minister, and Mr Abel Matutes, Foreign Minister wrote a joint letter to the 
Commission President proposing the introduction of a new own resource based on 
progressivity and requesting the Commission to examine this proposal in the framework 
of the Own Resources Report. The Spanish delegation reiterated the proposal during the 
EcoFin meeting of July 6, while Portugal and Greece voiced their support. Some days 
later, the Portuguese and the Greek authorities also wrote to President Santer to express 
their support for the Spanish proposal. 
As in the case of the suggestion of the four Finance Ministers (of Germany, the 
Netherlands, Austria and Sweden) who have asked for an extension of the 
Fontainebleau rebate to their countries, the Spanish authorities do not propose one 
specific course of action, but indicate a number of ways - all based on the GNP resource 
- in which the objective of progressivity in contributions could be achieved. 
The Spanish authorities base their initiative on the text of the Protocol on Economic and 
Social Cohesion where the high contracting parties "declare their intention of taking 
greater account of the contributive capacity of individual Member States in the system 
of own resources, and of examining means of correcting, for the less prosperous 
Member States, regressive elements existing in the present own resources system". 
Ministers Matutes and Rato acknowledge that the introduction of the GNP resource 
represents a marked improvement with respect to the previous situation. However, they 
regret that proportionality of contributions to income, characterizing the present system, 
does not take into account sufficiently the contributive capacity of Member States. The 
Ministers state clearly that a fair system of contributions ought to be based on 
progressivity as are the fiscal systems of all the Member States. They believe that the 
phase of integration reached by the European Union with the signature of the 
Amsterdam Treaty clearly warrants a move towards a financing system based on "equity 
and progressivity ". 
The present Annex, which together with the introduction, includes five sections, reviews 
the proposal and its implications. Section 2 presents the proposal; section 3 provides a 
brief review of the history of the concept of progressivity; section 4 examines 
progressivity in relation to economic and social cohesion; and section 5 provides some 
final remarks. 
7-10-1998 
ANNEX 7 
2. THE PROPOSAL CONCERNING PROGRESSIVITY AND SOME IMPLICATIONS 
Spain proposes to achieve progressivity by applying "modulation coefficients" (to 
reflect "relative wealth" and "relative prosperity", two terms used interchangeably) to 
the actual GNP bases so as to derive new GNP bases to be used in the calculation of the 
GNP resource contributions. No clear mention is made of which "modulation 
coefficients" are to be used, but it is said that the measure of "relative wealth" should be 
GNP per capita in ECU. 
The proposal involves a fundamental adjustment to be applied in either of two ways in 
order to achieve progressivity. 
A) To use as coefficient for the construction of the new GNP bases an index of 
GNP per capita in ECU (with EU= 100, in 1996 this was 124.9% for Germany, 
64.5% for Spain, 85.8% for the U.K. and 114.2% for France etc.). 
B) To apply the correction coefficients only to a part of the GNP bases (e.g. 50 per 
cent) leaving the remaining unaffected. In this case, the GNP resource would be 
disaggregated into a proportional and into a progressive component, each with 
its own uniform contributions rate. 
C) To group countries on the basis of GNP per capita and to apply the same 
coefficients for all the countries in the same group; no indication is given of 
what these coefficients should be and how they should be calculated. 
Finally, it is suggested that the current VAT resource could be replaced by this modified 
GNP resource. The proposal amounts to substituting the actual GNP keys with keys 
more favourable to poorer Member States, and to apply the new keys either to less than 
40% of contributions to the EU budget1 (version B), or to about 40% of them (version B 
and possibly C), or even to more than 80 per cent of the total, if the VAT resource were 
to be suppressed. 
It is clear that, in terms of redistributing the burden of the financing of the EU budget, 
the proposal would make those countries whose GNP per capita in ECU is higher 
(lower) than the average pay more (less) than under the current rule. This is because the 
proposal amplifies (reduces) the GNP base of the Member States with a GNP higher 
(lower) than the average. 
Under either option Belgium, Denmark, Germany, France, Luxembourg, the 
Netherlands, Austria and Sweden, would be expected to contribute significantly more 
than under the present system. Table 1 presents results (in Ecu million and in percent of 
total contributions) of the application to the data of 1996 and 1997 of the idea of 
modifying the GNP bases according the ECU index of GNP per head (option A). 
According to the results, in 1997 Belgium would have paid Ecu 70 million more, 
1 Which is the current importance of the GNP resource in the EU budget. 
7-10-1998 
ANNEX 7 
Denmark Ecu 180 million, Germany Ecu 1043 million, France Ecu 260 million, 
Luxembourg Ecu 48 million, the Netherlands Ecu 45 million, Austria Ecu 102 million, 
and Sweden Ecu 70 million. Greece would have seen its contributions fall by Ecu 204 
million, Spain by Ecu 803 million, Ireland by Ecu 45 million, Italy by Ecu 465 million, 
Portugal by Ecu 200 million and the UK by Ecu 100 million. Finland's contributions 
would have been largely unchanged. 
Table 1 
Modifications of the national contributions relative to the present system 
Proposal applied to the total of the GNP resource 
(adaptation of the GNP bases using the ECU index of GNP per head, in Ecu million and in per cent of 
total contributions) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1996 
Ecu million 
75.9 
134.9 
1105.6 
-155.4 
-551.1 
311.0 
-45.4 
-404.0 
38.2 
55.3 
102.3 
-152.2 
-6.7 
67.9 
-576.2 
0.0 % 
2.7 
9.6 
5.2 
-13.8 
-11.9 
2.5 
-6.5 
-4.4 
23.5 
1.2 
5.4 
-17.6 
-0.7 
3.4 
-6.8 1997 
Ecu million 
70.0 
178.6 
1043.4 
-204.1 
-803.9 
259.1 
-45.4 
-466.4 
47.9 
44.5 
102.0 
-199.3 
1.3 
71.1 
-98.9 
0.0 % 
2.3 
11.6 
4.8 
-17.1 
-14.8 
1.9 
-6.4 
-5.3 
27.7 
0.9 
4.8 
-18.2 
0.1 
3.0 
-1.1 
1) The technicalities of the proposal result in these countries marginally benefiting from the operation of the 
progressivity mechanism even if their index of GNP per head is slightly above 100 (see section 4 of this Annex) 
Option B would clearly give the same results as option A but scaled in proportion to the 
part of the GNP base to which the "modulation coefficients" are to apply. 
Table 2 presents results of the application of the same adjustment to the GNP base after 
suppressing the VAT resource. In this case, the suppression of the VAT resource and its 
replacement by the progressive GNP resource results in larger differences compared to 
both the previous simulation and, clearly, to the present system. Finally, it is not 
possible to simulate the third option since it would be necessary to determine the 
"modulation coefficients" for each group of Member States. Nevertheless, it should be 
clear that with plausible values the simulation would give quantitative results not 
differing substantially from those shown in Tables 1 and 2. 
7-10-1998 
ANNEX 7 
-4-
The implications of the proposal for contributions are consistent with what could be 
predicted a priori. However, the fact that under progressivity there will be a significant 
redistribution of the burden of financing EU expenditure, from the more wealthy in 
favour to the less wealthy Member States, cannot constitute a criticism of the proposal 
since, indeed, this redistribution is its fundamental purpose. The proposal, with its 
prima facie appeal, ought to be examined principally in terms of its consistency in 
relation to the predictions of economic theory as well as against its consistency with the 
practice of implementing progressivity in the EU through expenditure policies. 
Table 2 
Modifications of the national contributions relative to the present system 
Proposal applied to the GNP resource, VAT resource suppressed 
(adaptation of the GNP bases using the ECU index of GNP per head, in Ecu million and in per cent of 
total contributions) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1996 
Ecu million 
31.0.4 
450.5 
2 034.4 
-445.2 
-1 396.9 
821.9 
-137.3 
-234.5 
89.4 
128.6 
263.8 
-432.9 
35.3 
323.7 
-1811.2 
0.0 % 
10.9 
32.2 
9.6 
-39.7 
-30.2 
6.53 
-19.5 
--2.57 
55.0 
2.8 
13.9 
-49.9 
3.6 
16.1 
-21.3 1997 
Ecu million 
303.0 
493.7 
1 396.0 
-471.3 
-1 758.9 
504.3 
-117.6 
11.8' 
98.6 
115.3 
184.9 
-475.5 
39.5 
259.8 
-583.8 
0.0 % 
9.8 
32.1 
6.5 
-39.4 
-32.4 
3.8 
-16.5 
0.1 
56.9 
2.3 
8.6 
-43.4 
3.7 
11 
-6.3 
These considerations are examined in the next two sections. Section 3 reviews the 
argument for the adoption of progressivity for personal taxation, while section 4 reviews 
the argument for the transposition of the concept of progressivity from personal taxation 
to the Member States' contributions to the EU budget; and the closing section 5 
presents some final remarks. 
3. A BRIEF REVIEW OF THE CONCEPT OF PROGRESSIVITY IN PERSONAL TAXATION 
The concept of progressivity is well known in the optimal taxation literature. It is 
closely linked with the concept of equity. The debate on equity in taxation has revolved 
around two doctrines, the benefit doctrine (taxes should be paid according to one's 
interests in the public estate) and the ability to pay doctrine (one should pay according 
7-10-1998 
ANNEX 7 
- 5 -
to her/his means)2. One of the desirable characteristics of the tax system, argued by 
Adam Smith, is that some progressivity is desirable (especially for income from 
capital). However, this was not subscribed to unanimously by benefit theorists. 
The ability to pay doctrine can be said to originate with John Stuart Mill3 and his 
concept of "equality of sacrifice". Mill, concerned about the disincentive effect of 
progressive taxation, argued for a proportional taxation of income. Having stated the 
equity issue in terms of equal sacrifice,. Mill initiated the debate concerning equal 
absolute and equal marginal sacrifice, the former calling for proportional and the latter 
for progressive taxation. 
Both the benefit doctrine and the ability to pay doctrine need an index to define 
inequality among individuals. Since Adam Smith, the emphasis has traditionally been 
on the income and wealth base (with higher taxation concentrated on the latter), but a 
comprehensive and global income tax, as the current used in most Member States4, 
emerged only in this century. However, a consumption base for taxation was also in the 
mind of several theorists beginning with Adam Smith. 
Mirrlees' (1971) seminal contribution extended further the analysis of these issues5. 
Here, to ensure that vertical equity is respected, a constraint is imposed so that the order 
of the gross income cannot be different from the order of the net income. The 
government is choosing the tax schedule that maximises social welfare subject to an 
exogenous state revenue requirement and the constraint. Mirrlees concluded that, 
a First, "an approximately linear income-tax schedule, with all the administrative 
advantages it would bring, is desirable"6. This corresponds to proportional taxation 
across individuals. This is not contrary to the desirability of progressivity. 
Progressivity should be related to the average tax, and it is attained as long as the 
Curiously enough, Adam Smith, the father of the laissez-faire doctrine, deserves credit for linking taxation to ability 
to pay (or, in our context, contributive capacity) but tempering it by a benefit principle. The importance he 
attached to proportionality is also worth noting. His first "maxim" (The Wealth of Nations, G. P. Putnam's Sons, 
New York, 1904, Vol. II, p. 310) reads: The subject of every State ought to contribute towards the support of the 
government, as nearly as possible in proportion to their respective abilities; that is in proportion to the revenue 
which they respectively enjoy under the protection of the state. The expense of the Government to the individuals 
of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to 
contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim 
consists what is called equality or inequality of taxation" (italics added). Whether this is more supportive of the 
benefit principle or of the ability to pay principle is not easy to answer. 
See John Stuart Mill, Principles of Political Economy, Collier and Son, New York, 1900. 
Scandinavian countries that have adopted the so-called Dual Income Tax are a notable exception. The Dual 
Income Tax levies more taxes on labour income than capital income on simple efficiency grounds (labour is less 
mobile than capital). For a discussion of the Dual Income Tax see S. Cnossen (1998): Taxing Capital Income in 
the European Union, the Case for Adopting the Dual Income Tax", mimeo presented at a conference on Tax 
Competition and Co-ordination of Tax Policy in the European Union" organised by the Austrian Federal Ministry of 
Finance in co-operation with the Austrian Institute of Economic Research, Vienna, July 13-14. 
See J. A. Mirrlees (1971): "An Exploration in the Theory of Optimum Income Taxation", Review of Economic 
Studies, vol. 38, p. 175-208. 
Mirrlees (1971): op. cit., p. 208. 
7-10-1998 
ANNEX 7 
marginal tax rate exceeds the average one. It is, however, clear that there are few 
arguments in favour of a strong progressivity of the tax system in terms of a steeply 
increasing marginal tax rate78. 
a Second, "the income tax is a much less effective tool for reducing inequalities than 
has often been thought"9. 
a Third, marginal tax rates are quite low, which implies a reduced use of 
progressivity10. 
The idea that relative (among individuals) prosperity must be an element in the 
determination of the tax burden is, therefore, confirmed and while progressivity is 
accepted, its "optimal" magnitude is lower than initially thought. 
The evolution of most European tax systems since the beginning of the 1970s appears to 
suggest that most of Mirrlees' points have been very well understood and widely 
adopted in public policy. Marginal rates on personal taxation have been reduced 
dramatically across Europe accompanied by a widening of the tax base. Income 
redistribution has been pursued via targeted expenditure policy. A lesson generally well 
understood is that the more inelastic the labour supply is, the higher labour can be taxed, 
but when the labour supply is elastic the disincentives contained in the progressive 
income tax are powerful. Later studies in this area have further confirmed the 
robustness of Mirrlees' conclusions. 
4. PROGRESSIVITY OF MEMBER STATES CONTRIBUTIONS AND ECONOMIC AND 
SOCIAL COHESION 
When taxpayers are Member States instead of single individuals the issues at hand are 
different. A transposition of the optimal taxation rule from the area of personal taxation 
to a national level is not possible, essentially because it involves the problem of 
aggregation across individuals. Moreover, it is not even clear that it is meaningful to 
apply principles of personal taxation to national states as a whole. 
7 
10 Mirrlees (1971): op.cit. obtained three technical results. 1) The marginal tax rate is always between zero and one; 
2) at the top income the marginal tax rate is zero; 3) At the bottom, if the lowest paid is working, the marginal tax 
rate is zero. For a thorough discussion of the optimal non-linear income taxation see N. Stem (1984): "Optimum 
Taxation and Tax Policy", IMF Staff Papers, Vol. 31, no.2, June. 
M. Tuomala ("On the Optimal Income Taxation, Some Further Numerical Results" Journal of Public Economics 23, 
1984) proved that zero taxation at the "top" applies to an extremely limited subset of individuals (much less than 
the last centile). Other interesting numerical results are also reported in M. Tuomala (1990): Optimal Income Tax 
and Redistribution, Clarendon Press, Oxford. 
Mirrlees (1971): op. cit., p. 208. 
Mirrlees himself was surprised by this result. "I must confess that I had expected the rigorous analysis of income 
taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so"; Mirrlees (1971): op. 
cit., p. 207 
7-10-1998 
ANNEX 7 
-7 
In the EU, steps towards reducing the regressive elements of the own resources system, 
in accordance with the Protocol on Economic and Social Cohesion, have already been 
put in place. 
This Protocol reads "The high contracting parties...NOTING the proposal to take 
greater account of the relative prosperity of Member States in the system of own 
resources...DECLARE their intention to take greater account of the contributive 
capacity of individual Member States in the system of own resources, and of examining 
means of correcting, for the less prosperous Member States regressive elements existing 
in the present own resource system" {italics added, capital letters in the original). 
The High Contracting Parties have, therefore, established through this protocol that the 
proper way to take greater account of the Member States' relative prosperity in the 
system of own resources is by considering their contributive capacity and by eliminating 
any regressive elements for the less prosperous Member States. 
Graph 1 
Actual GNP own resources payments in 1996, GNP payments 
under the progressivity proposal, index of GNP per head 
Ecus 
pro capita Index Of GNP 
per head 
200 
150 
100 
50 
L DK D A B S F NL FIN I UK IRL E GR P 400 
300 
200 
100 
The Own Resource Decision of 31 October 1994, which transposes into law the 
declaration of Protocol 15, has indeed taken greater account of Member States' 
contributive capacity by reducing progressively the VAT maximum rate (thus increasing 
the weight of the GNP resource) and has corrected the regressive elements for the less 
prosperous Member States by immediately reducing the maximum VAT share to 50% 
of GNP for the Cohesion Member States. Both measures are aimed at making Member 
States' contributions proportional to their GNP. 
7-10-1998 
ANNEX 7 
-8-
Proportionality of contributions to Member States' GNP ensures at the same time 
proportionality with GNP contributions per head, as Graph 1 shows. Substituting for 
the proportional GNP resource a progressive one means tilting payments around the 
average, imposing higher charges on those above and lower charges on those below the 
average. This raises several problems of technical and conceptual nature. 
> Progressivity is generally achieved by differentiating the tax rates which taxpayers 
face, but not by enlarging or restricting the base on which taxes' are levied. This is 
due to the need to avoid offending the principle of horizontal equity and to respect 
the principle of base invariance which guaranties respect of vertical equity. On the 
contrary, the Spanish proposal to use Ecu GNP per capita as the coefficient of 
progressivity to be applied to the GNP shares, amounts to achieving progressivity 
by enlarging or restricting ones' base11 and leaving the rate (GNP call rate), at least 
in one variants of the proposal, equal for all. Affecting the GNP bases amounts to 
artificially widening the differences in total income among the Member States. 
Two Member States with the same "true" GNP base will appear to have different 
"fictitious" bases. Clearly, determining contributions by the adjusted bases would 
offend horizontal equity. 
> The resulting adjustment in the base is not without other, more significant, 
consequences. Since the weights used in the construction of the new GNP bases are 
GNP per head, the weighted sum of the GNP base on which the GNP resource is 
levied will not be equal, except by coincidence, to the unweighted sum of the 
original GNP base. Furthermore, it is inevitable that the adjusted GNP base will be 
greater than the original one since the richer Member States are invariably the larger 
ones too. For example, in 1997 the original GNP base is estimated at Ecu 70 202 
million; the weighted GNP base becomes Ecu 73 418 million. As a result of this, 
and given the fixed amount to be financed through the GNP resource, the GNP call 
rate is lower than the original one - in 1997 the original one was 0.403 and the 
one obtained from the adjusted base is 0.385. The implicit reduction in the GNP 
call rate implies that those Member States with an index of GNP per capita less than 
100 (the EU average) will see their contributions on the GNP resource reduced by 
the influence of two effects, first, the reduction in the base as a result of the 
adjustment and, second, a reduction due to the fall in the call rate. The richer 
Member States with per capita GNP higher than 100, on the other hand, will see 
their increased contributions somewhat compensated by the reduction in the GNP 
call rate. One of the clear difficulties of the proposal is those Member States 
around the EU average may see their GNP contributions fall, compared to the 
present regime, if the increase in the GNP base is more than compensated by a 
reduction in the GNP call rate. This occurs in the case of Finland and the UK in the 
years reported in Table 1 and in Table 2 below. 
11 It would be as if the taxable base of the affluent (poor) taxpayers would be multiplied by a coefficient higher than 1 
because of their affluence (poverty) and this would widen the differences between taxpayers beyond reality. To 
the best of our knowledge, there are no significant examples of this type of procedure for income taxation in any 
fiscal code. 
7-10-1998 
ANNEX 7 
-9-
> Substituting proportionality with respect to the GNP resource with progressivity 
may not necessarily foster real convergence and economic and social cohesion. 
• Whether progressivity in budgetary contributions is an efficient way to achieve 
economic convergence is an open question. Solidarity and convergence 
policies in the EU take the form of a common effort to improve the structural 
endowment of the less prosperous regions, not of money redistribution. These 
EU policies direct aid to less wealthy Member States in areas where 
development needs and convergence gaps are greatest. The EU contributes 
significantly through its Structural Funds and through many of its other policies 
to improving the level of infrastructure, education, and scientific research in the 
less prosperous regions and Member States. This differs significantly in both 
political and economic terms from forms of financial redistribution like, for 
instance, the "Finanzausgleich" mechanism existing in the Federal Republic of 
Germany, which require as political background a much greater sense of 
solidarity and common purpose than currently present in European integration. 
• If solidarity were to take the form of redistributing moneys, and assuming that 
present-consumption and future consumption (investment) are normal goods12, 
it is certain that aid would be partly used to finance current consumption. By 
implementing redistribution on the expenditure side, this potential "waste" is 
minimised. Policy financing rather than money redistribution is presumed to 
be a superior way to ensure that solidarity and real convergence are pursued 
both consistently and efficiently and that money is channelled towards 
investment, rather than consumption, thus increasing the recipients' growth rate 
and reducing development gaps. 
• Progressivity could foster convergence, ceteris paribus, if the funds made 
available were to supplement existing, expenditure based, convergence 
expenditure. However, it is possible that those Member States, who have 
prominently displayed what might be called "contributions fatigue" (Germany, 
the Netherlands, Austria and Sweden) may not accept a further deterioration of 
their budgetary position, but instead they demand a corresponding decrease of 
expenditure policy to offset the money made available to benefiting Member 
States through progressivity in contributions. Under these circumstances, the 
convergence process could undoubtedly be retarded since a part of the newly 
available funds will be spent on current consumption. 
> The present system of expenditure-based progressivity may be thought of as a 
rules-based system in which convergence expenditure is "tied" to specific projects 
and to explicit financial and other procedures and parameters. A system of 
12 Normal goods are those whose consumption increases as income increases. This means that for a given Ax 
increase in income a proportion aAx is spent in good X and the remaining (1-a)Ax is spent for good Y, where 
0<a<1. 
7-10-1998 
ANNEX 7 
- 10-
progressive contributions would introduce a degree of discretion in convergence 
policy which structural expenditure has so far not possessed. 
A prediction of economic theory is that policy implementation characterised by 
discretion leads to suboptimal macroeconomic outcomes compared to policy based 
on rules13. Although this prediction was initially restricted to the study of monetary 
policy, its applicability is more general and can be readily applied to the questions 
under review. The sub-optimality has much to do with myopic behaviour on the 
part of those responsible for the policy-making as well as with pressures arising 
from electoral cycles in democratic societies; with the possibility that under 
discretionary conditions policy makers may pursue objectives in addition to, or 
even other than, those consistent with maximising social welfare; and with the 
possibility that they may even make systematic errors in their assessment of the 
economic situation and in deciding the appropriate policy. Rules, by contrast, 
introduce predictability and certainty about the future course of policy and they 
minimise the interference of political concerns with the optimal policy. Moreover, 
rules enforce time consistency in policy by ensuring that the optimal policy over a 
given horizon is not revised halfway in favour of a sub-optimal policy. 
Pursuing the objective of real convergence, financed through the taxes of European 
citizens, requires an unwavering commitment to dedicated policies. This 
commitment cannot be ensured under a regime of discretionary spending for the 
same reasons that it cannot be guaranteed (indeed, the opposite) in a regime of 
discretionary monetary or fiscal policy. 
> An important component of expenditure-based progressivity as practised in the EU 
is the multilateral surveillance and monitoring function performed in a 
framework where both benefiting Member States and the EU through the 
Commission agree on the Community Support Framework (CSF) and its 
implementation. One reason for this framework is to provide a surveillance and 
monitoring function ensuring, however successfully, that convergence aid is indeed 
used as intended. This provides a guarantee to the taxpayers of Europe concerning 
the use of convergence aid. The involvement of recipient Member States is 
intended to respect subsidiarity in that it acknowledges that recipient Member 
States are in the best position to propose projects and to judge the appropriateness 
of convergence expenditure. Under pfogressivity-related discretionary expenditure, 
this surveillance and monitoring function would be lost. 
13 The debate about rules versus discretion in economic policy, which has been particularly applied to monetary 
policy, was initiated by F. Kydland and E. Prescott (1977): "Rules rather than Discretion: The Inconsistency of 
Optimal Plans", Journal of Political Economy, June, p. 473-491; the model was further refined in R. Barro and D. 
Gordon (1983): "A Positive Theory of Monetary Policy in a Natural-Rate Model", Journal of Political Economy, 
August, p. 589-610. This literature is now large; see finally, as an example, A. Alesina and L. Summers (1993): 
"Central Bank Independence and Macroeconomic Performance", Journal of Money, Credit and Banking, vol. 25, 
no. 2, May. 
7-10-1998 
ANNEX 7 
- 11-
> A final issue relates to the character of solidarity in the EU. The objective of 
solidarity and real convergence has a horizontal dimension and is pursued through 
transfers to regions, irrespective of whether they are in the more or the less wealthy 
Member States. By contrast, the proposal under review would establish a vertical 
dimension in solidarity and convergence assistance, directing it to Member States 
themselves rather than to regions within Member States. This is inconsistent with 
the present acquis in Community practice. 
5. CONCLUDING REMARKS 
While the proposal to establish progressivity in the EU contributions system is prima 
facie appealing, it has nevertheless some significant drawbacks. 
First, it does not respect horizontal equity. This arises from the fact that, instead of 
calculating contributions according to the true GNP bases, it proposes to establish 
contributions on different bases, which correspond to an artificial expansion or 
reduction of the true GNP bases. No tax system in the world knows this procedure. 
Progressivity in national tax systems is pursued through differential tax parameters 
without affecting the tax base. Furthermore, in the case of financing the EU the base 
adjustment can have other unwarranted effects for those Member States around the EU 
average in GNP per capita terms. 
Second, the proposal disregards the importance and the virtue of practising solidarity in 
the Community through the expenditure side of the EU budget rather than through the 
equivalent of simple cash transfers. Expenditure-based progressivity enhances the 
probability of allocating expenditure for the purpose of real convergence, as intended, 
rather than for the purpose of present, and possibly future, consumption. Thus, the 
present, rules-based, system produces, in principle, superior convergence outcomes than 
the proposed alternative. 
Third, the present system provides ex ante assurance to the taxpayers of the EU who 
finance convergence expenditure that the funds are indeed used for the intended 
purpose. 
Finally, the proposal implies higher gross budgetary contributions from those Member 
States already voicing concerns about their budgetary burden under the present system. 
One possible outcome would be that the proposal could be acceptable to these Member 
States if there is a corresponding and offsetting reduction in structural expenditure. 
Under these circumstances, this will inhibit progress in cohesion and solidarity in the 
short run and in the long run it reduce the real convergence prospects of the benefiting 
Member States. 
• 
7-10-1998 
ANNEX 8 
Statistical Annex 
Table 1a 
EU expenditure in the Member States: FEOGA Guarantee1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
1 374.2 
1 168.0 
4 817.6 
2 237.4 
3 668.3 
6 924.7 
1 435.6 
5151.4 
1.0 
2 380.6 
476.0 
2 459.4 
32 094.1 % 
4.3 
3.6 
15.0 
7.0 
11.4 
21.6 
4.5 
16.1 
0.0 
7.4 
1.5 
7.7 
100.0 1993 
Mecus 
1 286.5 
1 318.3 
4 901.9 
2 710,2 
4 172.7 
8 072.6 
1 635.8 
4 825.4 
7.3 
2 324.8 
478.1 
2 762.8 
34 496.4 % 
3.7 
3.8 
14.2 
7.9 
12.1 
23.4 
4.7 
14.0 
0.0 
6,7 
1.4 
8.0 100.0 1994 
Mecus 
1174.4 
1 287.9 
5 271.6 
2 723.5 
4 426.9 
8 048.8 
1 527.1 
3 481.4 
12.7 
1 935.9 
713.3 
3 001.9 
33 605.3 % 
3.5 
3.8 
15.7 
8.1 
13.2 
24.0 
4.5 
10.4 
0.0 
5.8 
2.1 
8.9 
100.0 1995 
Mecus 
1 623,4 
1 403.6 
5 385.1 
2 425.5 
4 575.0 
8 423.3 
1 419.7 
3 390.7 
14.4 
1 944.6 
87.5 
708.1 
63.3 
76.5 
2 955.9 
34496.6 % 
4.7 
4.1 
15.6 
7.0 
13.3 
24.4 
4.1 
9.8 
0.0 
5.6 
0.3 
2.1 
0.2 
0.2 
8.6 
100.0 1996 
Mecus 
1 152.8 
1 358.4 
6050.3 
2 801.6 
4 054.6 
9 572.3 
1 700.0 
4 231.3 
20.0 
1 536.2 
1 214,1 
646.0 
649.2 
624.1 
3 470.0 
39 080.9 % 
2.9 
3.5 
15.5 
7.2 
10.4 
24.5 
4.4 
10.8 
0.1 
3.9 
3.1 
1.7 
1.7 
1.6 
8.9 
100.0 1997 
Mecus 
983.4 
1 235.7 
5 778.4 
2 730.8 
4 605.6 
9 149.0 
2 034.0 
5 090.8 
22.8 
1 757.3 
861.3 
656.9 
570.6 
747.0 
4 399.7 
40 623.2 % 
2.4 
3.0 
14.2 
6.7 
11.3 
22.5 
5.0 
12.5 
0.1 
4.3 
2.1 
1.6 
1.4 
1.8 
10.8 
100.0 
1) Heading 1 of the Financial Perspective (Subsection B1 of the Community Budget). 
Table 1b 
EU expenditure in the Member States: Structural Operations1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
s 
UK 
Total 1992 
Mecus 
236,1 
66:6 
2 096,6 
1811.3 
3 704.9 
1 664.7 
1 075.2 
2 196.9 
13,4 
136.3 
2 316.0 
1 462.7 
16 780.8 % 
1.4 
0.4 
12.5 
10.8 
22.1 
9.9 
6.4 
13.1 
0.1 
0,8 
13.8 
8.7 
100.0 1993 
Mecus 
236.0 
119.2 
1 939.4 
2 261.7 
3 743.8 
1891.0 
1 255.2 
3 585.9 
15,8 
223.7 
2711.4 
1 325.7 
19 308.8 % 
1.2 
0.6 
10.0 
11.7 
19.4 
9.8 
6.5 
18.6 
0.1 
1.2 
14.0 
6.9 
100.0 1994 
Mecus 
266.0 
127.3 
2 041.8 
2 034.0 
3 221.8 
1 413.6 
794.5 
1 494.4 
13.9 
274.6 
2 252.2 
1728,0 
15 661.9 % 
1.7 
0.8 
13.0 
13.0 
20.6 
9.0 
5.1 
9.5 
0.1 
1.8 
14.4 
11.0 100.0 1995 
Mecus 
236.1 
120.4 
2130.1 
1 969.1 
6101.7 
1 283.3 
1 069.1 
1 926.9 
16.9 
231.8 
175.1 
2 485.4 
173.8 
125.6 
1 103.6 
19 149.0 % 
1.2 
0.6 
11.1 
10.3 
31.9 
6.7 
5.6 
10.1 
0.1 
1.2 
0.9 
13.0 
0.9 
0.7 
5.8 
100.0 1996 
Mecus 
437.0 
103.7 
3 423.9 
2 221.9 
6 304.8 
1 958.7 
1 189,3 
3 037.1 
15.2 
262.4 
270,6 
2 941.3 
155.9 
132.7 
1 963.9 
24 418.4 % 
1.8 
0.4 
14.0 
9.1 
25.8 
8.0 
4.9 
12.4 
0.1 
1.1 
1.1 
12.0 
0.6 
0.5 
8.0 
100.0 1997 
Mecus 
357.9 
169.6 
3 636.0 
2 643,7 
6 376.8 
2 460.3 
1211.2 
2 895.0 
19.9 
421.3 
364.0 
2 941.5 
379.9 
230.6 
1 928.9 
26 036.7 % 
1.4 
0.7 
14.0 
10.2 
24.5 
9.4 
4.7 
11.1 
0.1 
1.6 
1.4 
11.3 
1.5 
0.9 
7.4 
100.0 
1) Heading 2 of the Financial Perspective. 
7-10-1998 
ANNEX 8 
2-
Table 1c 
EU expenditure in the Member States: Internal policies1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
348.6 
75.3 
437.7 
260.5 
139.8 
510.6 
58.6 
654.0 
38.7 
173.0 
159.0 
478.6 
3 334.3 % 
10.5 
2.3 
13.1 
7.8 
4.2 
15.3 
1.8 
19.6 
1.2 
5.2 
4.8 
14.4 
100.0 1993 
Mecus 
414.1 
101.6 
475.3 
124.7 
271.1 
466.9 
63.7 
656.3 
51.5 
187.7 
162.4 
524.4 
3 499.8 % 
11.8 
2.9 
13.6 
3.6 
7.7 
13.3 
1.8 
18.8 
1.5 
5.4 
4.6 
15.0 
100.0 1994 
Mecus 
458.8 
89.4 
512.9 
97.6 
216.3 
520.3 
76.4 
364.6 
69.9 
248.0 
84.2 
547.5 
3 285.8 % 
14.0 
2.7 
15.6 
3.0 
6.6 
15.8 
2.3 
11.1 
2.1 
7.5 
2.6 
16.7 
100.0 1995 
Mecus 
439.4 
82.9 
493.7 
106.4 
195.0 
486.5 
78.3 
344.7 
75.5 
210.4 
53.7 
99.6 
37.7 
67.3 
480.7 
3 251.9 % 
13.5 
2.5 
15.2 
3.3 
6.0 
15.0 
2.4 
10.6 
2.3 
6.5 
1.7 
3.1 
1.2 
.2.1 
14.8 
100.0 1996 
Mecus 
524.8 
122.7 
614.6 
152.0 
275.6 
579.8 
96.9 
496.6 
88.2 
265.8 
58.7 
103.0 
69.9 
108.0 
606.9 
4163.4 % 
12.6 
2.9 
14.8 
3.7 
6.6 
13.9 
2.3 
11.9 
2.1 
6.4 
1.4 
2.5 
1.7 
2.6 
14.6 
100.0 1997 
Mecus 
492.5 
137.2 
726.7 
163.7 
296.2 
604.9 
105.7 
528.1 
75.6 
341.9 
78.2 
190.2 
88.7 
127.7 
716.8 
4 674.0 % 
10.5 
2.9 
15.5 
3.5 
6.3 
12.9 
2.3 
11.3 
1.6 
7.3 
1.7 
4.1 
1.9 
2.7 
15.3 
100.0 
1) Heading 3 of the Financial Perspective. 
Table 1d 
Operational expenditure in the Member States1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
1958.9 
1 309.8 
7 351.9 
4 309.2 
7 513.1 
9 100.0 
2 569.4 
8 002.3 
53.1 
2 689.9 
2 951.0 
4 400.6 52 209.2 % 
3.8 
2.5 
14.1 
8.3 
14.4 
17.4 
4.9 
15.3 
0.1 
5.2 
5.7 
8.4 
100.0 1993 
Mecus 
1 936.6 
1 539.1 
7 316.7 
5 096.7 
8187.6 
10 430.5 
2 954.7 
9 067.6 
74.6 
2 736.2 
3 351.9 
4 612.9 
57 305.0 % 
3.4 
2.7 
12.8 
8.9 
14.3 
18.2 
5.2 
15.8 
0.1 
4.8 
5.8 
8.0 
100.0 1994 
Mecus 
1 899.2 
1 504.5 
7 826.3 
4 855.0 
7 865.0 
9 982.7 
2 398.0 
5 340.4 
96.5 
2 458.4 
3 049.6 
5 277.4 % 
3.6 
2.9 
14.9 
9.2 
15.0 
19.0 
4.6 
10.2 
0.2 
4.7 
5.8 
10.0 52 553.1 100.0 1995 
Mecus 
2 298.9 
1 606.9 
8 008.9 
4 501.0 
10 871.7 
10193.2 
2 567.1 
5 662.3 
106.8 
2 386.9 
899.3 
3 293.0 
750.8 
757.5 
4 540.1 
58 444.5 % 
3.9 
2.7 
13.7 
7.7 
18.6 
17.4 
4.4 
9.7 
0.2 
4.1 
1.5 
5.6 
1.3 
1.3 
7.8 
100.0 1996 
Mecus 
2114.5 
1 584.8 
10 088.8 
5175.5 
10 635.0 
12110.8 
2 986.2 
7 765.0 
123.4 
2 064.3 
1 649.4 
3 690.3 
1038.0 
1296.8 
6 040.8 
68 363.7 % 
3.1 
2.3 
14.8 
7.6 
15.6 
17.7 
4.4 
11.4 
0.2 
3.0 
2.4 
5.4 
1.5 
1.9 
8.8 
100.0 1997 
Mecus 
1 833.8 
1 542.4 
10141.1 
5 538.2 
11278.6 
12 214.2 
3 350.9 
8 514.0 
118.3 
2 520.4 
1 374.6 
3 788.6 
1 104.2 
1 181.3 
7 045.4 
71 545.9 % 
2.6 
2.2 
14.2 
7.7 
15.8 
17.1 
4.7 
11.9 
0.2 
3.5 
1.9 
5.3 
1.5 
1.7 
9.8 
100.0 
1)Table 1d equals the sum of tables 1a, 1b, 1c plus the budgetary compensation for the new Member States 
7-10-1998 
ANNEX 8 
3-
Table 1e 
EU expenditure in the Member States: Administrative expenditure1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
s 
UK 
Total 1992 
Mecus 
1 504.4 
20.4 
84.0 
7.7 
23.0 
74.0 
12.8 
45.9 
696.6 
25.5 
12.8 
45.7 
2 552.4 % 
58.9 
0,8 
3.3 
0.3 
0.9 
2.9 
0.5 
1.8 
27,3 
1.0 
0.5 
1.8 100.0 1993 
Mecus 
1791.4 
24.3 
100.0 
9.1 
27.4 
88.1 
15.2 
54.7 
829.4 
30.4 
15.2 
54.4 
3 039.3 % 
58.9 
0.8 
3.3 
0.3 
0.9 
2.9 
0.5 
1.8 
27.3 
1.0 
0.5 
1.8 100.0 1994 
Mecus 
2 062.6 
28.3 
74.4 
11.1 
24.7 
102.9 
8.8 
53.2 
676.4 
24.6 
10.9 
66.0 3143.8 % 
65.6 
0.9 
2.4 
0.4 
0.8 
3.3 
0.3 
1.7 
21.5 
0.8 
0.3 
2.1 
100.0 1995 
Mecus 
2 099.4 
33.5 
116.9 
12.3 
26.7 
143.5 
11.2 
78.7 
754.9 
41.5 
3.0 
13.0 
2.6 
3.1 
72.3 
3 412.6 % 
61.5 
1.0 
3.4 
0.4 
0.8 
4.2 
0.3 
2.3 
22.1 
1.2 
0.1 
0.4 
0.1 
0.1 
2.1 
100.0 1996 
Mecus 
2 052.2 
31.9 
125.6 
11.5 
26.5 
174.9 
11.4 
87.2 
825.0 
39.4 
11.1 
11.2 
14.0 
15.7 
71.6 
3 509.0 % 
58.5 
0.9 
3.6 
0.3 
0.8 
5.0 
0.3 
2.5 
23.5 
1.1 
0.3 
0.3 
0.4 
0.4 
2.0 
100.0 1997 
Mecus 
2 217.1 
31.9 
132.7 
12.0 
25.0 
190.6 
12.8 
91.8 
777.8 
41.0 
12.2 
11.0 
13.8 
15.3 
83.9 
3 669.1 % 
60.4 
0.9 
3.6 
0.3 
0.7 
5.2 
0.3 
2.5 
21.2 
1.1 
0.3 
0.3 
0.4 
0.4 
2,3 
100.0 
1) Heading 5 of the Financial Perspective. 
Table 1f 
Total EU expenditure1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Tot. EU 
Non-EU2 
Total 1992 
Mecus 
3 463.3 
1 330.3 
7 435.9 
4 316.9 
7 536.0 
9 174.1 
2 582.2 
8 048.2 
749.7 
2 715.4 
2 963.8 
4 446.4 
54 761.7 
3 864.7 
58 626.4 % 
5.9 
2.3 
12.7 
7.4 
12,9 
15.6 
4.4 
13,7 
1.3 
4.6 
5.1 
7.6 93.4 
6.6 
100.0 1993 
Mecus 
3 728.0 
1 563.4 
7 416.7 
5 105.8 
8 215,0 
10518.7 
2 969,9 
9 122.3 
904.0 
2 766.6 
3 367.1 
4 667.3 
60 344.3 
3 807.5 
64152.2 % 
5.8 
2.4 
11.6 
8.0 
12.8 
16.4 
4.6 
14.2 
1.4 
4.3 
5.2 
7.3 
94.1 
5.9 
100.0 1994 
Mecus 
3 961.8 
1 532.8 
7 900.6 
4 866.2 
7 889.7 
10 085.6 
2 406.8 
5 393.5 
772.9 
2 483.1 
3 060.5 
5 343.4 
55 696.9 
4 607.8 
60 304.8 % 
6.6 
2.5 
13.1 
8.1 
13.1 
16.7 
4.0 
8.9 
1.3 
4.1 
5.1 
8.9 
92.4 
7.6 
100.0 1995 
Mecus 
4 398.3 
1 640.4 
8 125.7 
4 513.4 
10 898.4 
10 336.7 
2 578.3 
5 741.0 
861.7 
2 428.3 
902.3 
3 306.0 
753.4 
760,7 
4 612.4 
61 857.1 
5 043.9 
66 901.0 % 
6.6 
2.5 
12.1 
6,7 
16.3 
15.5 
3.9 
8.6 
1.3 
3.6 
1.3 
4.9 
1.1 
1,1 
6.9 
92.5 
7.5 
100.0 1996 
Mecus 
4166.8 
1 616.7 
10 214.4 
5 187.0 
10 661.5 
12 285.7 
2 997.7 
7 852.2 
948.4 
2103.7 
1 660.5 
3 701.4 
1 052.0 
1312,5 
6112.4 
71 872.7 
4 993.9 
76 866.6 % 
5.4 
2,1 
13.3 
6.7 
13.9 
16.0 
3.9 
10.2 
1.2 
2.7 
2.2 
4.8 
1.4 
1.7 
8.0 
93.5 
6.5 
100.0 1997 
Mecus 
4 050.9 
1 574.4 
10273.8 
5 550.2 
11303.6 
12 404.8 
3 363.7 
8 605.8 
896.1 
2 561.4 
1 386.8 
3 799.6 
1118.0 
1 196.6 
7 129.3 
75 214.9 
5 021.5 
80 236.4 % 
5.0 
2.0 
12.8 
6.9 
14.1 
15.5 
4.2 
10.7 
1.1 
3.2 
1.7 
4.7 
1.4 
1.5 
8.9 
93.7 
6.3 
100.0 
1) Heading 1 - Heading 7 of the Financial Perspective (the flows taken into account are those which actually took 
place during the year, i.e. appropriations used in a given financial year and those carried over from year n-1), 
not included is the cash balance at the end of a period. 2) Expenditure made outside the EU, guarantees and 
reserves plus some minor amounts which cannot be allocated. 
7-10-1998 
ANNEX 8 
4-
Table 2a 
Payments to the EU budget: Traditional own resources1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 1992 
Mecus I % 
887.1 
272.9 
3928.9 
173.4 
775.1 
1680.4 
156.2 
1 318.1 
15.2 
1 455.1 
209.4 
2408.3 6.7 
2.1 
29.6 
1.3 
5.8 
12.7 
1.2 
9.9 
0.1 
11.0 
1.6 
18.1 1993 
Mecus I % 
873.7 
260.5 
3894.0 
176.5 
597.7 
1 695.2 
186.0 
1134.4 
15.2 
1 470.8 
188.2 
2493.2 6.7 
2.0 
30.0 
1.4 
4.6 
13.1 
1.4 
8.7 
0.1 
11.3 
1.5 
19.2 1994 
Mecus I % 
958.5 
275.7 
3872.7 
150.3 
592.7 
1683.0 
219.0 
1155.2 
18.1 
1546.9 
202.8 
2 577.2 7.2 
2.1 
29.2 
1.1 
4.5 
12.7 
1.7 
8.7 
0.1 
11.7 
1.5 
19.5 1995 
Mecus 
1003.5 
286.4 
3 879.9 
152.2 
727.1 
1711.4 
228.1 
1 186.0 
19.9 
1663.7 
221.9 
205.8 
137.1 
351.3 
2678.8 6.9 
2.0 
26.8 
1.1 
5.0 
11.8 
1.6 
8.2 
0.1 
11.5 
1.5 
1.4 
0.9 
2.4 
18.5 1996 
Mecus 
985.9 
265.6 
3500.2 
149.8 
622.6 
1542.6 
206.7 
1047.5 
18.3 
1609.3 
263.8 
135.6 
151.8 
383.5 
2700.2 % 
7.3 
2.0 
25.8 
1.1 
4.6 
11.4 
1-5. 
7.7 
0.1 
11.8 
1.9 
1.0 
1.1 
2.8 
19.9 1997 
Mecus 
1048.9 
288.6 
3432.5 
163.7 
631.7 
1550.8 
224.7 
1120.4 
22.0 
1 728.5 
254.4 
155.1 
144.3 
362.9 
3043.9 7.4 
2.0 
24.2 
1.1 
4.5 
10.9 
1.6 
7.9 
0.2 
12.2 
1.8 
1.1 
1.0 
2.6 
21.5 19982 
Mecus 
1 079.6 
293.9 
3280.8 
167.5 
695.4 
1566.5 
220.2 
1 103.8 
20.8 
1 597.4 
257.2 
160.2 
138.8 
365.9 
2 795.1 7.9 
2.1 
23.9 
1.2 
5.1 
11.4 
1.6 
8.0 
0.2 
11.6 
1.9 
1.2 
1.0 
2.7 
20.3 19992 
Meuros I % 
1128.6 
287.4 
3216.2 
161.4 
709.5 
1546.8 
214.9 
1 205.6 
19.9 
1589.3 
273.2 
167.7 
128.8 
381.5 
2 784.2 8.2 
2.1 
23.3 
1.2 
5.1 
11.2 
1.6 
8.7 
0.1 
11.5 
2.0 
1.2 
0.9 
2.8 
20.2 
Total 13 280.2 100.0 12985.5 I 100.0 I 13 252.2 I 100.0 14453.2 100.0 13 583.6 100.0 14172.3 100.0 13 743.2 100.0 13 814.9 100.0 
1) Customs duties, agricultural duties and sugar levies after deduction of the collection fees. 
2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 
7-10-1998 
-5-ANNEX 8 
Table 2b 
Payments to the EU budget: VAT own resource 1 
1992 
Mecus I % 1993 
Mecus I % 1994 
Mecus I % 1995 
Mecus I % 1996 
Mecus I % 1997 
Mecus 19982 
Mecus 19992 
Meuros I % 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 982.8 
537.0 
10 329.2 
431.1 
3082.5 
6585.6 
233.9 
4 857.1 
83.9 
1 553.7 
487.5 
5598.7 2.8 
1.5 
29.7 
1.2 
8.9 
18.9 
0.7 
14.0 
0.2 
4.5 
1.4 
16.1 910.0 
558.9 
9 897.4 
568.8 
2 965.1 
6 018.9 
258.8 
5 593.8 
106.3 
1 624.7 
477.1 
5 709.4 2.6 
1.6 
28.5 
1.6 
8.5 
17.4 
0.7 
16.1 
0.3 
4.7 
1.4 
16.5 1121.6 
580.3 
11419.9 
535.2 
2 469.6 
6 633.4 
277.1 
3 725.7 
95.6 
1 648.5 
689.5 
4 021.4 3.4 
1.8 
34.4 
1.6 
7.4 
20.0 
0.8 
11.2 
0.3 
5.0 
2.1 
12.1 1 143.4 
691.7 
12 862.1 
584.4 
2 058.9 
7 216.5 
321.0 
3 377.2 
109.0 
1 887.3 
1 105.6 
488.2 
529.2 
891.3 
5 861.6 2.9 
1.8 
32.9 
1.5 
5.3 
18.4 
0.8 
8.6 
0.3 
4.8 
2.8 
1.3 
1.4 
2.3 
15.0 951.5 
619.3 
10 885.4 
556.1 
2 327.5 
6452.3 
315.1 
4450.0 
89.7 
1 663.5 
947.2 
465.7 
444.8 
900.6 
5466.5 2.6 
1.7 
29.8 
1.5 
6.4 
17.7 
0.9 
12.2 
0.2 
4.6 
2.6 
1.3 
1.2 
2.5 
15.0 907.0 
616.3 
10 009.9 
552.3 
2 576.3 
6282.3 
250.8 
3 447.6 
82.5 
1 681.2 
1 035.6 
530.3 
469.5 
1 084.7 
4 825.3 2.6 
1.8 
29.1 
1.6 
7.5 
18.3 
0.7 
10.0 
0.2 
4.9 
3.0 
1.5 
1.4 
3.2 
14.0 851.3 
569.7 
8 786.0 
541.8 
2 226.4 
5 663.6 
279.5 
3 661.2 
75.8 
1549.1 
894.3 
431.9 
421.9 
861.8 
5 938.6 2.6 
1.7 
26.8 
1.7 
6.8 
17.3 
0.9 
11.2 
0.2 
4.7 
2.7 
1.3 
1.3 
2.6 
18.1 782.5 
529.9 
8 079.0 
467.6 
2 082.3 
5 192.7 
265.8 
3 390.0 
70.0 
1 439.8 
825.3 
413.5 
389.4 
816.2 
5 630.2 2.6 
1.7 
26.6 
1.5 
6.9 
17.1 
0.9 
11.2 
0.2 
4.7 
2.7 
1.4 
1.3 
2.7 
18.5 
Total 34763.2 100.0 34689.3 100.0 33 217.9 100.0 39127.3 100.0 36 535.0 100.0 343515 100.0 32 752.8 100.0 30 374.2 100.0 
1) VAT own resources payments at the uniform rate (excluding the UK correction); balances of VAT own resources 
2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 for previous years are included. 
7-10-1998 
ANNEX 8 
Table 2c 
Payments to the EU budget: GNP own resource 1 
1992 
Mecus I % 1993 
Mecus I % 1994 
Mecus I % 1995 
Mecus I % 1996 
Mecus I % 1997 
Mecus 1998 
Mecus 19992 
Meuros I % 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 255.5 
154.0 
2 188.1 
82.2 
671.4 
1 543.4 
50.8 
1 469.8 
17.5 
367.1 
99.7 
1 268.8 3.1 
1.9 
26.8 
1.0 
8.2 
18.9 
0.6 
18.0 
0.2 
4.5 
1.2 
15.5 484.7 
306.0 
4 617.2 
217.9 
1 290.2 
3037.4 
99.0 
2 800.8 
37.5 
746.3 
193.5 
2 584.0 3.0 
1.9 
28.1 
1.3 
7.9 
18.5 
0.6 
17.1 
0.2 
4.5 
1.2 
15.7 636.8 
374.7 
5 537.3 
267.0 
1 392.6 
3600.8 
123.4 
2 370.1 
44.8 
898.0 
279.2 
2132.1 3.6 
2.1 
31.4 
1.5 
7.9 
20.4 
0.7 
13.4 
0.3 
5.1 
1.6 
12.1 467.4 
275.9 
4 243.9 
221.4 
723.9 
2569.9 
102.5 
1 586.6 
34.2 
704.1 
378.8 
145.5 
192.4 
361.9 
2 179.3 3.3 
1.9 
29.9 
1.6 
5.1 
18.1 
0.7 
11.2 
0.2 
5.0 
2.7 
1.0 
1.4 
2.6 
15.4 693.2 
408.5 
5 745.3 
345.8 
1 350.7 
3741.9 
133.2 
2959.8 
44.5 
990.1 
559.5 
202.3 
312.5 
582.5 
2997.2 3.3 
1.9 
27.3 
1.6 
6.4 
17.8 
0.6 
14.0 
0.2 
4.7 
2.7 
1.0 
1.5 
2.8 
14.2 917.9 
538.2 
7 281.3 
416.4 
1 940.0 
4 793.1 
190.3 
3 666.2 
59.5 
1 283.1 
738.0 
353.0 
402.8 
793.0 
3 517.8 3.4 
2.0 
27.1 
1.5 
7.2 
17.8 
0.7 
13.6 
0.2 
4.8 
2.7 
1.3 
1.5 
2.9 
13.1 1090.6 
714.2 
9 208.4 
555.7 
2381.2 
6 159.4 
286.6 
5 058.4 
76.2 
1 635.5 
910.5 
442.9 
519.3 
974.8 
5 971.4 3.0 
2.0 
25.6 
1.5 
6.6 
17.1 
0.8 
14.1 
0.2 
4.5 
2.5 
1.2 
1.4 
2.7 
16.6 1 243.6 
825.4 
10503.8 
591.6 
2 764.1 
7 061.2 
336.3 
5 798.3 
88.5 
1 883.0 
1 046.7 
523.1 
599.2 
1 142.8 
7 122.8 3.0 
2.0 
25.3 
1.4 
6.7 
17.0 
0.8 
14.0 
0.2 
4.5, 
2.5 
1.3 
1.4 
2.8 
17.2 
Total 8168.2 100.0 16414.4 100.0 17 657.0 100.0 14187.7 100.0 21 067.1 100.0 26 890.6 100.0 35 985.2 100.0 41 530.4 100.0 
1) including "reserves" and balances of GNP own resources for previous years 
2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 
7-10-1998 
ANNEX 8 
-7-
1 ) The figures include the financing of the UK correction for the previous year as well as the adjustment of that for the year n-4 . 
2) The share of Germany in financing the UK rebate is restricted to two-thirds of its normal share. 
3) Variations in exchange rates, "reserves" and balances of GNP own resources from previous years explain the non-zero sum in the total in certain years. 
4) Figures entered into the draft SAB for 1998 and the draft budget for 1999. 
7-10-1998 Table 2d 
Payments to the EU budget: Correction of budgetary imbalances1 
B 
DK 
D2 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total5 1992 
Mecus 
113.7 
71.0 
551.2 
41.9 
299.0 
683.9 
21.5 
634.8 
6.9 
158.0 
41.5 
-2 573.3 50.1 % 
4.4 
2.8 
21.4 
1.6 
11.6 
26.6 
0.8 
24.7 
0.3 
6.1 
1.6 
-100.0 1.9 1993 
Mecus 
126.5 
81.1 
667.9 
47.9 
339.6 
794.0 
23.6 
736.1 
8.0 
188.8 
50.6 
-3160.0 
• 96.0 % 
4.0 
2.6 
21.1 
1.5 
10.7 
25.1 
0.7 
23.3 
0.3 
6.0 
1.6 
-100.0 - 3.0 1994 
Mecus 
105.2 
65.5 
536.4 
39.7 
263.2 
633.6 
19.5 
508.6 
6.9 
152.5 
44.1 
- 2 313.3 61.8 % 
4.5 
2.8 
23.2 
1.7 
11.4 
27.4 
0.8 
22.0 
0.3 
6.6 
1.9 
-100.0 2.7 1995 
Mecus 
65.8 
41.4 
338.1 
27.1 
135.3 
378.9 
13.2 
263.9 
4.6 
94.5 
56.6 
25.4 
28.8 
53.8 
-1 468.1 
59.4 % 
4.5 
2.8 
23.0 
1.8 
9.2 
25.8 
0.9 
18.0 
0.3 
6.4 
3.9 
1.7 
2.0 
3.7 
-100.0 
4.0 1996 
Mecus 
120.4 
75.5 
611.7 
54.2 
246.4 
686.5 
26.5 
547.3 
8.1 
172.6 
103.5 
48.2 
55.0 
102.4 
- 2 945.3 
- 87.0 % 
4.1 
2.6 
20.8 
1.8 
8.4 
23.3 
0.9 
18.6 
0.3 
5.9 
3.5 
1.6 
1.9 
3.5 
-100.0 
- 3.0 1997 
Mecus 
97.7 
62.7 
493.6 
46.0 
219.6 
559.7 
21.2 
432.8 
6.7 
144.9 
82.4 
39.4 
45.3 
85.4 
- 2 458.8 
- 121.4 4.0 
2.5 
20.1 
1.9 
8.9 
22.8 
0.9 
17.6 
0.3 
5.9 
3.4 
1.6 
1.8 
3.5 
-100.0 
- 4.9 19984 
Mecus 
134.7 
88.2 
660.8 
68.6 
294.1 
760.8 
35.4 
624.8 
9.4 
202.0 
112.5 
54.7 
64.1 
120.4 
-3 230.6 
0.0 4.2 
2.7 
20.5 
2.1 
9.1 
23.5 
1.1 
19.3 
0.3 
6.3 
3.5 
1.7 
2.0 
3.7 
-100.0 
0.0 19994 
Meuros 
162.9 
108.1 
800.1 
77.5 
362.1 
924.9 
44.1 
759.5 
11.6 
246.6 
137.1 
68.5 
78.5 
149.7 
-3 931.2 
0.0 % 
4.1 
2.8 
20.4 
2.0 
9.2 
23.5 
1.1 
19.3 
0.3 
6.3 
3.5 
1.7 
2.0 
3.8 
-100.0 
0.0 
ANNEX 8 
Table 2e 
Own resources: National contributions1 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 1992 
Mecus I % 
1 352.0 
762.0 
13068.5 
555.3 
4 052.9 
8813.0 
306.1 
6961.8 
108.3 
2078.8 
0.0 
628.7 
0.0 
0.0 
4 294.1 3.1 
1.8 
30.4 
1.3 
9.4 
20.5 
0.7 
16.2 
0.3 
4.8 
0.0 
1.5 
0.0 
0.0 
10.0 1993 
Mecus I % 
1 521.3 
946.0 
15182.4 
834.6 
4 594.9 
9850.3 
381.4 
9 130.6 
151.8 
2 559.9 
0.0 
721.3 
0.0 
0.0 
5 133.4 3.0 
1.9 
29.8 
1.6 
9.0 
19.3 
0.7 
17.9 
0.3 
5.0 
0.0 
1.4 
0.0 
0.0 
10.1 1994 
Mecus I % 
1 863.6 
1 020.5 
17 493.7 
842.0 
4 125.4 
10 867.9 
419.9 
6 604.4 
147.3 
2 699.0 
0.0 
1 012.8 
0.0 
0.0 
3 840.2 3.7 
2.0 
34.3 
1.7 
8.1 
21.3 
0.8 
13.0 
0.3 
5.3 
0.0 
2.0 
0.0 
0.0 
7.5 1995 
Mecus I % 
1 676.6 
1009.0 
17 444.1 
833.0 
2 918.1 
10165.4 
436.7 
5 227.7 
147.7 
2 685.9 
1541.0 
659.1 
750.3 
1 307.0 
6 572.8 3.1 
1.9 
32.7 
1.6 
5.5 
19.0 
0.8 
9.8 
0.3 
5.0 
2.9 
1.2 
1.4 
2.4 
12.3 1996 
Mecus I % 
1 765.1 
1103.3 
17 242.4 
956.1 
3 924.6 
10880.7 
474.8 
7 957.1 
142.3 
2826.2 
1 610.2 
716.1 
812.2 
1 585.6 
5 518.3 3.1 
1.9 
30.0 
1.7 
6.8 
18.9 
0.8 
13.8 
0.2 
4.9 
2.8 
1.2 
1.4 
2.8 
9.6 1997 
Mecus 
1 922.5 
1 217.2 
17 784.7 
1 014.7 
4 736.0 
11635.1 
462.3 
7 546.7 
148.7 
3109.2 
1 856.0 
922.7 
917.6 
1963.1 
5 884.2 3.1 
2.0 
29.1 
1.7 
7.7 
19.0 
0.8 
12.3 
0.2 
5.1 
3.0 
1.5 
1.5 
3.2 
9.6 19982 
Mecus 
2076.7 
1 372.2 
18 655.2 
1 166.1 
4 901.7 
12 583.7 
601.5 
9 344.5 
161.4 
3 386.6 
1 917.2 
929.5 
1 005.3 
1 957.0 
8 679.4 3.0 
2.0 
27.1 
1.7 
7.1 
18.3 
0.9 
13.6 
0.2 
4.9 
2.8 
1.4 
1.5 
2.8 
12.6 19992 
Meuros I % 
2189.1 
1 463.4 
19 382.9 
1 136.7 
5 208.5 
13178.9 
646.2 
9 947.8 
170.0 
3 569.4 
2009.1 
1005.2 
1 067.0 
2 108.7 
8 821.7 3.0 
2.0 
27.0 
•1.6 
7.2 
18.3 
0.9 
13.8 
0.2 
5.0 
2.8 
1.4 
1.5 
2.9 
12.3 
Total 42 981.5 100.0 51 007.7 100.0 50 936.7 100.0 53 374.4 100.0 57 515.1 100.0 61120.7 100.0 68 738.0 100.0 71 904.6 100.0 
1) Sum of tables 2b, 2c and 2d including "reserves" and balances of GNP own resources for previous years 
2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 
7-10-1998 
9-ANNEX 8 
Table 2f 
Total own resources1 
1992 
Mecus I % 1993 
Mecus I % 1994 
Mecus I % 1995 
Mecus I % 1996 
Mecus I % 1997 
Mecus 19982 
Mecus 19992 
Meuros I % 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 2 239.1 
1034.8 
16997.5 
728.6 
4 828.0 
10 493.4 
462.3 
8 279.9 
123.5 
3534.0 
838.1 
6 702.4 4.0 
1.8 
30.2 
1.3 
8.6 
18.7 
0.8 
14.7 
0.2 
6.3 
1.5 
11.9 2 394.9 
1 206.5 
19076.4 
1011.2 
5 192.6 
11545.5 
567.4 
10 265.0 
167.0 
4 030.6 
909.4 
7 626.6 3.7 
1.9 
29.8 
1.6 
8.1 
18.0 
0.9 
16.0 
0.3 
6.3 
1.4 
11.9 2 822.1 
1 296.2 
21 366.3 
992.3 
4 718.1 
12 550.9 
638.9 
7 759.6 
165.4 
4 245.9 
1 215.6 
6417.4 4.4 
2.0 
33.3 
1.5 
7.4 
19.5 
1.0 
12.1 
0.3 
6.6 
1.9 
10.0 2 680.1 
1295.4 
21 324.1 
985.2 
3645.2 
11876.8 
664.8 
6413.7 
167.6 
4 349.6 
1 762.9 
864.9 
887.4 
1 658.3 
9 251.6 4.0 
1.9 
31.4 
1.5 
5.4 
17.5 
1.0 
9.5 
0.3 
6.4 
2.6 
1.3 
1.3 
2.4 
13.6 2750.9 
1 368.9 
20742.6 
1106.0 
4 547.2 
12423.3 
681.5 
9004.7 
160.7 
4435.5 
1 874.0 
851.7 
964.0 
1969.0 
8 218.6 3.9 
1.9 
29.2 
1.6 
6.4 
17.5 
1.0 
12.7 
0.2 
6.2 
2.6 
1.2 
1.4 
2.8 
11.6 2 971.4 
1505.8 
21 217.3 
1 178.4 
5 367.6 
13 185.9 
687.0 
8 667.1 
170.7 
4 837.6 
2110.4 
1 077.8 
1061.9 
2 326.0 
8928.1 3.9 
2.0 
28.2 
1.6 
7.1 
17.5 
0.9 
11.5 
0.2 
6.4 
2.8 
1.4 
1.4 
3.1 
11.9 3 156.3 
1 666.0 
21 935.9 
1 333.5 
5597.1 
14150.3 
821.7 
10448.2 
182.2 
4 984.0 
2174.4 
1 089.7 
1 144.1 
2 323.0 
11474.5 3.8 
2.0 
26.6 
1.6 
6.8 
17.2 
1.0 
12.7 
0.2 
6.0 
2.6 
1.3 
1.4 
2.8 
13.9 3 317.7 
1 750.8 
22 599.1 
1 298.1 
5 918.0 
14 725.7 
861.1 
11 153.5 
189.9 
5 158.7 
2 282.2 
1 172.8 
1 195.8 
2490.2 
11605.9 3.9 
2.0 
26.4 
1.5 
6.9 
17.2 
1.0 
13.0 
0.2 
6.0 
2.7 
1.4 
1.4 
2.9 
13.5 
Total 56 261.7 100.0 63 993.2 100.0 64188.8 100.0 67 827.6 100.0 71 098.7 100.0 75 293.0 100.0 82481.1 100.0 85 719.5 100.0 
1 ) Sum of tables 2a, 2b, 2c and 
2) Figures entered into the draft 2d including "reserves" and balances of GNP own resources for previous years 
SAB for 1998 and the draft budget for 1999 
7-10-1998 
ANNEX 8 
10 
Table 3a 
Structure of EU expenditure 
EAGGF 
guarantee 
Structural Funds 
Internal policies 
External expenditure 
Administrative 
expenditure 
Compensations to MS 
Total 
Rate of increase 1992 
Mecus 
31 234.3 
17748.8 
4 008.3 
1 857.5 
2900.9 
876.8 
58 626.6 % 
53.3 
30.3 
6.8 
3.2 
5.0 
1.5 
100.0 
+ 8.6 % 1993 
Mecus 
34 423.3 
20084.8 
3618.0 
2718.1 
3 308.0 
0.0 
64152.2 % 
53.7 
31.3 
5.6 
4.2 
5.2 
0.0 
100.0 
+ 9.4 % 1994 
Mecus 
33605.3 
15 767.0 
3907.1 
3459.7 
3565.6 
0.0 
60 304.8 % 
55.7* 
26.2 
6.5 
5.7 
5.9 
0.0 
100.0 
- 6.0 % 1995 
Mecus 
34497.7 
19292.0 
4 004.5 
3700.2 
3859.7 
1 547.0 
66 901.0 % 
51.6 
28.8 
6.0 
5.5 
5.8 
2.3 
100.0 
+ 10.9% 1996 
Mecus 
39080.9 
24426.8 
4 544.4 
4 040.1 
4 073.3 
701.0 
76 866.6 % 
50.8 
31.8 
5.9 
5.3 
5.3 
0.9 
100.0 
+ 14.9% 1997 
Mecus 
40623.2 
26059.2 
4 934.7 
4 278.0 
4 129.2 
212.0 
80 236.4 - % 
50.6 
32.5 
6.2 
5.3 
5.1 
0.3 
100.0 
+ 4.4% 
7-10-1998 
ANNEX 8 
-11 
Table 3b 
Structure of payments to the EU budget 
TOR 
VAT 
GNP 
UK rebate 
Total OR 
%increase 
Other 
Revenue1 
Total 199, 
Mecus 
13 280.2 
34 763.2 
8168.2 
50.1 
56 261.7 
+ 6.5 
3450.1 
59 711.8 2 
% 
23.6 
61.8 
14.5 
0.1 
100.0 
% 
— 
— 199 
Mecus 
12 985.5 
34 689.3 
16414.4 
-96.0 
63 993.2 
+ 13.7 
1 679.5 
65 672.7 3 
% 
20.3 
54.2 
25.7 
-0.2 
100.0 
% 
— 
— 199-
Mecus 
13 252.2 
33 217.9 
17 657.0 
61.8 
64188.8 
+ 0.3°/ 
1 813.3 
66 002.1 i 
% 
20.6 
51.8 
27.5 
0.1 
100.0 
'o 
— 
-1995 
Mecus % 
14 453.2 
39 127.3 
14 187.7 
59.4 21.3 
57.7 
20.9 
0.1 
67 827.6 100.0 
+ 5.7% 
7249.5 
75 077.1 — 
— 1996 
Mecus % 
13 583.6 
36 535.0 
21 067.1 
-87.0 19.1 
51.4 
29.6 
-0.1 
71098.7 100.0 
+ 4.8% 
10176.4 
81 275.1 — 
— 1997 
Mecus 
14 172.3 
34 351.5 
26890.6 
-121.4 18.8 
45.6 
35.7 
-0.2 
75293.0 100.0 
+ 5.9% 
5254.7 
80 547.7 — 
— 19982 
Mecus 
13 743.2 
32 752.8 
35985.2 
0.0 
82481.1 
+9.5% 
1 628.0 
84109.1 16.7 
39.7 
43.6 
0.0 
100.0 
— 
— 19992 
Meuros % 
13 814.9 
30 374.2 
41 530.4 
0.0 
85 719.5 
+3.9% 
630.9 
86 350.4 16.1 
35.4 
48.4 
0.0 
100.0 
— 
-~ 
1) Other miscellaneous revenues, such as surpluses from previous years, interests on late payments, fines, taxes on salaries of the employees of European Institutions, 
proceeds from borrowing and lending operations, etc. 
2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 
7-10-1998 
ANNEX 8 
-12-
Table 3c 
Member States shares in EU financing and in EU-15 GNP 
(in percent of total, data for 1997) 
Financing share 
OTOR 
S VAT/GNP 
GNP share B 
3.9 
7.4 
3.1 
3.1 DK 
2.0 
2.0 
2.0 
1.9 D 
28.2 
24.2 
29.1 
26.0 GR 
1.6 
1.2 
1.7 
1.5 E 
7.1 
4.5 
7.8 
6.6 F 
17.5 
10.9 
19.0 
17.2 IRL 
0.9 
1.6 
0.8 
0.8 I 
11.5 
7.9 
12.4 
14.2 L 
0.2 
0.2 
0.2 
0.2 NL 
6.4 
72.2 
5.1 
4.5 A 
2.8 
1.8 
3.0 
2.6 P 
1.4 
1.1 
1.5 
1.2 FIN 
1.4 
1.0 
1.5 
1.4 S 
3.1 
2.6 
3.2 
2.7 UK 
11.9 
21.5 
9.6 
16.1 
Table 4 
Accounting budgetary balances(1): "Table 1f less "Table 2f 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
1 224.2 
295.4 
-9561.6 
3 588.2 
2 708.1 
-1319.3 
2119.8 
- 231.7 
626.2 
- 818.6 
2 124.4 
-2256.1 
-1 501.2 % 
GNP 
0.71 
0.29 
-0.62 
4.66 
0.61 
-0.13 
5.88 
-0.03 
5.24 
-0.33 
2.93 
-0.28 -0.03 1993 
Mecus 
1 333.1 
356.9 
-11 659.7 
4 094.7 
3022.4 
-1 026.9 
2402.5 
-1 142.8 
737.0 
-1 263.9 
2457.7 
-2959.3 •3 648.6 % 
GNP 
0.72 
0.33 
-0.71 
5.17 
0.74 
-0.10 
6.58 
-0.14 
5.91 
-0.48 
3.44 
-0.37 
• 0.07 1994 
Mecus 
1139.6 
236.6 
-13465.7 
3873.9 
3171.6 
-2465.3 
1 767.9 
-2366.0 
607.6 
-1 762.9 
1 844.9 
-1 074.0 
•8491.9 % 
GNP 
0.58 
0.20 
-0.78 
4.62 
0.79 
-0.22 
4.45 
-0.28 
4.55 
-0.62 
2.50 
-0.13 
•0.15 1995 
Mecus 
1 718.2 
345.1 
-13198.3 
3 528.5 
7 253.2 
-1 540.1 
1 913.7 
- 672.7 
694.1 
-1921.2 
- 860.5 
2441.1 
- 133.9 
- 897.7 
-4639.1 
•5969.7 % 
GNP 
0.81 
0.27 
-0.72 
3.99 
1.70 
-0.13 
4.48 
-0.08 
4.88 
-0.64 
-0.49 
3.08 
-0.14 
-0.53 
-0.55 
-0.09 1996 
Mecus 
1 415.8 
247.8 
-10528.3 
4 081.0 
6114.3 
- 137.6 
2 316.1 
-1152.5 
787.8 
-2 331.8 
- 213.5 
2849.7 
88.0 
- 656.6 
-2106.1 
774.0 % 
GNP 
0.66 
0.19 
-0.57 
4.20 
1.34 
-0.01 
4.86 
-0.12 
5.49 
-0.75 
-0.12 
3.41 
0.09 
-0.35 
-0.23 
0.01 1997 
Mecus 
1 079.5 
68.6 
-10943.5 
4 371.8 
5936.0 
- 781.1 
2 676.7 
- 61.3 
725.4 
-2 276.2 
- 723.6 
2721.8 
56.1 
-1129.5 
-1 798.8 
• 78.0 % 
GNP 
0.50 
0.05 
-0.60 
4.13 
1.28 
-0.06 
4.84 
-0.01 
4.89 
-0.71 
-0.40 
3.12 
0.06 
-0.59 
-0.16 
-0.00 
(1) For an explanation of the concepts see Annex 3. 
7-10-1998 
ANNEX 8 
-13-
Table 5 
Operational budgetary balances{1): "Table 1d" less "Table 2f' 
(1) For an explanation of the concepts see Annex 3. 
Table 6a 
"UK rebate" budgetary balance (before UK correction)*1* 
7-10-1998 1) Simplified calculation, see Annex 3, point 4.1. B 
OK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
-280.2 
275.0 
-9645.6 
3580.6 
2 685.1 
-1 393.4 
2 107.1 
-277.6 
-70.4 
-844.1 
2112.9 
-2 301.8 
-4052.5 % 
GNP 
-0.16 
0.27 
-0.62 
4.65 
0.60 
-0.14 
5.84 
-0.03 
-0.59 
-0.34 
2.91 
-0.29 
-0.07 1993 
Mecus 
-458.3 
332.7 
-11759.7 
4 085.5 
2 995.0 
-1 115.0 
2 387.3 
-1 197.4 
-92.4 
-1 294.4 
2442.4 
-3 013.7 
-6 688.2 % 
GNP 
-0.25 
0.30 
-0.72 
5.16 
0.73 
-0.11 
6.54 
-0.14 
-0.74 
-0.49 
3.42 
-0.38 
-0.12 1994 
Mecus 
-922.9 
208.3 
-13540.0 
3862.7 
3 146.9 
-2 568.2 
1 759.1 
-2419.2 
-68.9 
-1 787.5 
1834.0 
-1140.0 
-11 635.7 % 
GNP 
-0.47 
0.18 
-0.78 
4.61 
0.78 
-0.23 
4.42 
-0.29 
-0.52 
-0.63 
2.48 
-0.13 
-0.20 1995 
Mecus 
-381.2 
311.5 
-13315.2 
3515.8 
7 226.5 
-1 683.6 
1902.3 
-751.4 
-60.8 
-1 962.7 
-863.6 
2428.1 
-136.6 
-900.8 
4711.5 
-9 383.1 % 
GNP 
-0.18 
0.25 
-0.72 
3.98 
1.69 
-0.14 
4.45 
-0.09 
-0.43 
-0.65 
-0.49 
3.06 
-0.15 
-0.53 
-0.56 
-0.15 1996 
Mecus 
-636.4 
215.9 
-10 653.8 
4 069.6 
6 087.8 
-312.5 
2304.7 
-1 239.7 
-37.3 
-2 371.2 
-224.6 
2838.6 
74.0 
-672.2 
-2 177.8 
-2 735.0 % 
GNP 
-0.30 
0.16 
-0.58 
4.19 
1.34 
-0.03 
4.84 
-0.13 
-0.26 
-0.76 
-0.12 
3.40 
0.08 
-0.35 
-0.24 
-0.04 1997 
Mecus 
-1137.6 
36.6 
-11076.2 
4 359.8 
5 911.0 
-971.7 
2 663.9 
-153.1 
-52.4 
-2 317.2 
-735.8 
2 710.8 
42.3 
-1 144.7 
-1 882.7 
-3 747.1 % 
GNP 
•0.52 
0.03 
-0.60 
4.12 
1.27 
-0.08 
4.82 
-0.02 
-0.35 
-0.73 
-0.41 
3.11 
0.04 
-0.59 
-0.17 
-0.05 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
1 884.9 
448.8 
-8 515.9 
3 665.2 
2 759.5 
-1194.6 
2 219.4 
3.1 
620.4 
267.0 
2 214.2 
-4 371.7 0.0 % 
GNP 
1.09 
0.43 
-0.55 
4.76 
0.62 
-0.12 
6.15 
0.00 
5.19 
0.11 
3.05 
-0.54 
-1993 
Mecus 
2 078.9 
540.3 
-9 762.2 
4 176.6 
3 207.7 
- 201.2 
2548.7 
- 784.4 
733.9 
- 40.5 
2 576.9 
- 5 074.4 
0.0 % 
GNP 
1.13 
0.49 
-0.60 
5.27 
0.79 
-0.02 
6.98 
-0.09 
5.88 
-0.02 
3.61 
-0.63 _ 1994 
Mecus 
2037.5 
488.6 
-10643.8 
3 990.2 
3 665.6 
-1104.7 
1 969.0 
-1 274.2 
619.3 
- 301.7 
2001.4 
-1 447.1 0.0 % 
GNP 
1.03 
0.42 
-0.62 
4.76 
0.91 
-0.10 
4.95 
-0.15 
4.64 
-0.11 
2.71 
-0.17 — 1995 
Mecus 
2 530.5 
518.2 
-11704.5 
3 580.3 
7 674.3 
-1 009.0 
2087.9 
6.0 
695.7 
- 576.4 
- 818.8 
2 571.7 
- 83.2 
- 691.0 
-4 781.7 
0.0 % 
GNP 
1.20 
0.41 
-0.64 
4.05 
1.80 
-0.09 
4.88 
0.00 
4.90 
-0.19 
-0.46 
3.24 
-0.09 
-0.41 
-0.57 
-~ 1996 
Mecus 
2113.4 
333.0 
-10 559.3 
4 058.8 
6 067.1 
- 448.8 
2436.5 
-1 440.4 
780.8 
-1 209.5 
- 220.9 
2 866.7 
107.2 
- 543.3 
-4341.2 
0.0 % 
GNP 
0.99 
0.25 
-0.57 
4.18 
1.33 
-0.04" 
5.11 
-0.15 
5.44 
-0.39 
-0.12 
3.43 
0.11 
-0.29 
-0.48 
--1997 
Mecus 
1 809.7 
156.5 
-10 962.5 
4 360.5 
5 756.9 
-1 197.6 
2822.0 
- 131.2 
721.7 
-1 079.1 
- 791.5 
2 714.8 
46.7 
-1109.6 
-3117.3 
0.0 % 
GNP 
0.83 
0.11 
-0.60 
4.12 
1.24 
-0.10 
5.11 
-0.01 
4.87 
-0.34 
-0.44 
3.12 
0.05 
-0.58 
-0.27 
— 
ANNEX 8 
-14-
Table 6b 
"UK rebate" budgetary balance (after UK correction)*1* 
1) Simplified calculation, see Annex 3, point 4.1. 
Table 7 
Size of the UK rebate 
1) The imbalance is calculated as in the "Mode de Calcul", see Annex 4 
2) Other factors include the adjustment for the definitive calculation of the year "n-4" and exchange rate effects(see 
Annex 4, page 3-4) 
7-10-1998 B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
Total 1992 
Mecus 
1 740.8 
359.5 
-9 214.4 
3609.4 
2372.4 
-2054.3 
2192.1 
- 821.6 
611.7 
66.8 
2162.7 
-1 024.7 0.0 % 
GNP 
1.00 
0.35 
-0.59 
4.69 
0.53 
-0.20 
6.08 
-0.09 
5.12 
0.03 
2.98 
-0.13 — 1993 
Mecus 
1 928.4 
444.3 
-10544.8 
4118.4 
2 779.0 
-1134.7 
2 518.6 
-1 679.7 
724.4 
- 261.7 
2513.8 
-1 405.8 0.0 % 
GNP 
1.05 
0.41 
-0.64 
5.20 
0.68 
-0.11 
6.90 
-0.20 
5.81 
-0.10 
3.52 
-0.18 — 1994 
Mecus 
1 924.0 
417.0 
-11227.9 
3945.5 
3 378.8 
-1 798.0 
1 947.6 
-1 828.1 
611.9 
- 468.2 
1 953.1 
1144.4 0.0 % 
GNP 
0.97 
0.36 
-0.65 
4.71 
0.84 
-0.16 
4.90 
-0.22 
4.58 
-0.17 
2.64 
0.13 — 1995 
Mecus 
2455.2 
471.1 
-12090.9 
3 548.2 
7 516.4 
-1 444.3 
2072.3 
- 317.6 
690.5 
- 684.5 
- 883.5 
2542.2 
- 116.0 
- 754.1 
-3005.1 
0.0 % 
GNP 
1.16 
0.37 
-0.66 
4.02 
1.76 
-0.12 
4.85 
-0.04 
4.86 
-0.23 
-0.50 
3.21 
-0.12 
-0.44 
-0.36 
--1996 
Mecus 
1 961.1 
238.0 
-11332.3 
3992.2 
5 757.2 
-1311.2 
2 404.3 
-2 091.3 
770.6 
-1 428.1 
- 351.6 
2806.6 
37.1 
- 668.9 
- 783.5 
0.0 % 
GNP 
0.91 
0.18 
-0.62 
4.11 
1.26 
-0.11 
5.05 
-0.22 
5.37 
-0.46 
-0.20 
3.36 
0.04 
-0.35 
-0.09 
-~ 1997 
Mecus 
1 712.0 
93.8 
-11456.1 
4 314.5 
5 537.2 
-1 757.2 
2 800.8 
- 564.0 
715.0 
-1 224.0 
- 873.9 
2 675.4 
1.4 
-1 195.0 
- 658.5 
0.0 % 
GNP 
0.79 
0.07 
-0.62 
4.07 
1.19 
-0.14 
5.07 
-0.06 
4.82 
-0.38 
-0.48 
3.07 
0.00 
-0.62 
-0.06 
— 
1985 
1986 
1987 
1988 
1989 
1990 
1991 
1992 
1993 
1994 
1995 
1996 
1997 
1998 Imbalance 
(1) 
Mecus 
2847.0 
2 748.0 
3 310.1 
3 943.0 
4 272.3 
3 833.8 
4 331.1 
4 164.7 
4 706.6 
3575.8 
4 686.3 
4 570.6 
3 442.7 
6 945.0 %GNP 
0.50 
0.46 
0.50 
0.57 
0.57 
0.51 
0.54 
0.52 
0.59 
0.42 
0.55 
0.50 
0.30 
0.56 Correction 
(2) 
Mecus 
1 879.0 
1 813.7 
2 194.7 
2150.6 
2 516.6 
2 452.4 
2 787.0 
2 659.7 
2 940.3 
2276.5 
3079.1 
2856.5 
1 977.5 
3 931.2 %GNP 
0.33 
0.30 
0.33 
0.31 
0.34 
0.32 
0.34 
0.33 
0.37 
0.27 
0.36 
0.31 
0.17 
0.32 Imbalance less 
correction 
(3}=(1)-(2) 
Mecus 
968.0 
934.3 
1 115.4 
1 792.4 
1 755.7 
1 381.4 
1 544.1 
1 505.1 
1 766.3 
1 299.3 
1 607.2 
1 714.1 
1 465.2 
3013.8 %GNP 
0.17 
0.16 
0.17 
0.26 
0.24 
0.18 
0.19 
0.19 
0.22 
0.15 
0.19 
0.19 
0.13 
0.24 2 Other factors 
(4) 
Mecus 
-897.6 
57.4 
-381.0 
44.0 
-324.8 
41.3 
773.5 
-86.4 
219.7 
36.8 
-1611.0 
88.8 
481.3 
-700.6 %GNP 
-0.16 
0.01 
-0.06 
0.01 
-0.04 
0.01 
0.10 
-0.01 
0.03 
0.00 
-0.19 
0.01 
0.04 
-0.06 Budgeted 
correction 
(5) = (2) H4) 
Mecus 
981.4 
1871.1 
1 813.7 
2194.6 
2191.8 
2 493.7 
3 560.5 
2 573.3 
3 160.0 
2 313.3 
1 468.1 
2 945.3 
2 458.8 
3 230.6 %GNP 
0.16 
0.33 
0.30 
0.32 
0.29 
0.33 
0.44 
0.32 
0.39 
0.27 
0.17 
0.32 
0.22 
0.26 
ANNEX 8 
15 
Table 8 
Gross national product at current market prices per head of population 
(until 1990: EUR-15 excluding East Germany = 100; from1991: EUR-15 including new Lander = 100; 1998-99: forecasts) 
ECU 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR-15 1980 
121.3 
126.1 
131.9 
52.1 
55.8 
123.8 
57.7 
79.8 
157.8 
120.9 
103.1 
28.5 
105.6 
149.9 
95.2 
100.0 1982 1984 1986 1988 1990 
103.8 101.0 104.0 102.9 104.0 
124.6 131.1 139.7 134.9 127.8 
126.5 129.9 132.4 129.2 127.3 
58.4 53.5 43.1 42.6 440 
55.5 52.3 53.7 58.3 66.7 
120.6 1157 118.9 113.2 111.4 
64.2 61.9 61.4 58.0 61.3 
83.8 92.7 95.8 97.1 101.1 
163.1 171.4 179.4 173.3 1840 
115.8 112.0 111.1 102.9 100.7 
106.1 109.3 111.7 109.5 109.2 
29.9 26.2 29.6 31.5 35.8 
122.1 130.1 126.1 136.1 139.5 
142.1 144.5 140.9 139.8 137.8 
102.9 98.6 89.5 96.2 89.1 
100.0 100.0 100.0 100.0 100.0 1991 1992 1993 1994 1995 
106.0 108.5 115.3 117.9 121.5 
124.3 125.7 132.8 134.7 140.2 
114.6 1197 127.1 127.8 130.9 
46.6 46.9 48.1 48.5 49.2 
714 71.6 65.9 62.2 63.4 
110.3 111.0 115.3 115.5 116.4 
62.4 63.8 64.4 66.9 69.1 
105.3 102.4 91.4 88.7 83.2 
192.3 191.6 197.6 199.5 201.8 
101.2 102.1 1094 110.7 113.7 
111.8 114.5 122.5 123.8 127.6 
41.5 46.4 45.7 45.3 46.8 
123.3 98.2 85.3 937 105.9 
1424 134.3 110.4 110.9 111.7 
91.2 87.4 86.9 88.5 83.8 
100.0 100.0 100.0 100.0 100.0 1996 1997 1998 1999 
117.4 112.8 111.4 110.8 
138.8 137.4 137.6 138.8 
124.9 118.6 116.6 116.1 
51.6 53.3 50.2 50.2 
64.5 62.6 63.0 63.9 
114.2 109.9 109.1 108.8 
73.1 79.9 79.4 82.7 
91.4 92.2 91.5 91.8 
192.1 186.4 186.1 186.2 
111.7 108.1 108.0 108.4 
124.0 118.8 117.6 117.3 
47.0 467 46.8 47.6 
103.6 104.9 105.1 106.1 
1184 114.2 114.3 115.0 
85.8 101.8 106.7 106.2 
100.0 100.0 100.0 100.0 
7-10-1998 
ANNEX 8 
16 
Table 9 
Gross national product at current market prices per head of population 
(until 1990: EUR-15 excluding East Germany = 100; from1991: EUR-15 including new Lander = 100; 1998-99: forecasts) 
PPS 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR-15 1980 
108.5 
102.9 
117.8 
66.6 
70.0 
112.9 
62.3 
102.1 
146.7 
105.1 
104.9 
53.6 
94.9 
110.9 
97.0 
100.0 1982 1984 1986 1988 1990 
107.9 106.8 104.1 104.7 105.3 
103.7 106.7 109.6 104.6 100.6 
116.4 119.0 118.2 116.1 117.8 
65.2 62.8 614 59.9 59.3 
69.7 69.0 69.5 72.1 74.2 
115.3 111.7 110.1 109.5 109.7 
62.3 59.6 58.0 58.6 64.3 
101.9 101.9 102.4 102.9 101.9 
168.7 173.5 181.5 176.7 185.2 
102.3 102.7 102.7 98.4 101.3 
106.5 106.1 105.2 103.5 105.8 
53.1 49.4 52.3 557 58.9 
98.3 99.1 99.1 101.3 99.9 
110.3 111.8 111.0 109.1 104.5 
97.4 99.6 101.5 103.5 99.5 
100.0 100.0 100.0 100.0 100.0 1991 1992 1993 1994 1995 
109.2 111.8 1167 116.6 1157 
102.4 100.5 107.0 108.5 110.8 
107.3 109.6 109.1 110.6 110.4 
62.3 63.8 65.3 66.2 66.5 
79.4 774 78.3 75.7 76.8 
113.0 110.8 108.5 106.8 106.7 
68.7 71.3 73.0 77.3 80.5 
105.5 104.8 102.4 103.1 103.7 
196.6 191.8 188.2 183.9 181.6 
102.3 101.8 104.0 104.6 106.8 
108.8 109.0 112.3 1120 111.1 
64.5 65.6 68.7 70.3 70.0 
91.1 840 87.5 87.8 93.6 
102.4 96.7 95.5 95.5 97.3 
96.3 98.0 99.2 99.0 964 
100.0 100.0 100.0 100.0 100.0 1996 1997 1998 1999 
115.2 115.3 115.3 115.2 
111.6 112.5 112.7 112.9 
110.5 1094 109.1 108.8 
68.1 69.0 69.1 69.8 
77.3 777 78.8 79.8 
104.6 104.3 1044 104.3 
80.0 82.4 84.8 86.8 
103.2 102.6 102.5 102.7 
175.8 176.2 175.0 174.9 
105.6 106.0 106.3 106.2 
113.1 112.6 112.5 112.4 
68.9 69.6 70.5 71.2 
93.2 964 984 99.4 
95.2 93.7 93.8 93.8 
98.8 100.3 99.4 98.6 
100.0 100.0 100.0 100.0 
7-10-1998 
ANNEX 8 
-17-
Table 10 
Gross National Product at current market prices 
(Ecu-Euro millions; 1998-1999: forecasts) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR-15 1992 
173 285 
103 348 
1 533 230 
76 979 
443 957 
1012148 
36070 
925 235 
11954 
246 411 
144027 
72485 
78 691 
185 075 
806 011 
5 848 906 1993 
184 518 
109 322 
1 636 447 
79 211 
408476 
1 054 623 
36 518 
827 616 
12478 
265 427 
155 310 
71422 
68 572 
152 696 
802726 
5 865 362 1994 
197 653 
116 203 
1 725 209 
83 817 
403 293 
1 108 652 
39 760 
841 397 
13350 
282152 
164 805 
73 913 
79062 
161 400 
856 957 
6 147 623 1995 
211690 
126 018 
1 837 598 
88 328 
427 168 
1163 060 
42 752 
819264 
14 210 
302 185 
176503 
79 271 
93 011 
169 937 
844 401 
6 395 397 1996 
214 466 
131 339 
1 839 972 
97 098 
455 245 
1 198 541 
47 645 
944 011 
14 356 
311923 
179687 
83476 
95 509 
189 562 
907 294 
6 710125 1997 
217 025 
137 032 
1837 908 
105 948 
465 373 
1217 015 
55 273 
1 001 758 
14 825 
318 548 
181 492 
87098 
101 827 
192 439 
1134 509 
7 068 070 1998 
224 335 
143 815 
1892 649 
104 786 
489 076 
1268 038 
57 871 
1039 694 
15662 
334 421 
188 199 
91326 
106 880 
201 625 
1246 095 
7 404472 1999 
234 203 
152454 
1976 634 
110127 
519 717 
1329 741 
63702 
1 094 776 
16614 
353 054 
197 137 
97 217 
113 306 
212 725 
1 301 867 
7 773 274 
7-10-1998 
ANNEX 8 
-18-
Table 11 
Total population 
(1000) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR-15 1992 
10045 
5171 
80 594 
10322 
39 008 
57 374 
3555 
56 859 
392 
15182 
7 914 
9833 
5 042 
8 668 
58 006 
367 965 1993 
10085 
5189 
81179 
10380 
39 086 
57 654 
3 574 
57 049 
398 
15 290 
7 991 
9 840 
5 067 
8 718 
58191 
369 690 1994 
10116 
5 205 
81422 
10426 
39150 
57 900 
3 586 
57 204 
404 
15 381 
8 030 
9 840 
5 088 
8 782 
58 395 
370 927 1995 
10137 
5 228 
81661 
10454 
39 210 
58138 
3601 
57 301 
410 
15460 
8 047 
9 847 
5108 
8 847 
58 606 
372 054 1996 
10157 
5 262 
81895 
10 465 
39 270 
58375 
3 626 
57 403 
416 
15 523 
8 059 
9 866 
5125 
8 901 
58 782 
373 124 1997 
10182 
5 278 
82060 
10 518 
39323 
58607 
3661 
57 506 
421 
15 603 
8 084 
9 876 
5140 
8918 
58 977 
374153 1998 
10208 
5 298 
82 250 
10570 
39 371 
58 877 
3 696 
57 609 
426 
15692 
8108 
9 886 
5155 
8 936 
59172 
375 254 1999 
10233 
5 316 
82425 
10623 
39371 
59148 
3730 
57 714 
432 
15 761 
8132 
9896 
5170 
8 954 
59 367 
376 272 
7-10-1998 
ISSN 0254-1475 
COM(98) 560 final 
DOCUMENTS 
EN 14 15 03 10 
Catalogue number : CB-CO-98-571-EN-C 
ISBN 92-78-39684-2 
Office for Official Publications of the European Communities 
L-2985 Luxembourg