Report from the Commission Financing the European Union Commission report on the operation of the own resources system

INTRODUCTION

Article 9 of the current own resources decision [1] calls on the Commission to

[1] Council decision (2000/597, EC, Euratom) on the system of the European Communities' own resources, OJ L 253, 7.10.2000, p. 42.

"undertake, before 1 January 2006, a general review of the own resources system, accompanied, if necessary, by appropriate proposals, in the light of all relevant factors, including the effects of enlargement on the financing of the budget, the possibility of modifying the structure of the own resources by creating new autonomous own resources and the correction of budgetary imbalances granted to the United Kingdom as well as the granting to Austria, Germany, the Netherlands and Sweden of the reduction pursuant to Article 5(1)".

In response to a request from the European Parliament and in agreement with the Council, the Commission committed itself to present the abovementioned review on the functioning of the financing system before the end of 2004.

On 10 February 2004 the Commission adopted its communication [2] on the Financial Perspective 2007-2013. The communication identified two main elements of the current own resources system deserving closer attention: first, the insufficient transparency of the system for EU citizens combined with limited financial autonomy from national treasuries; secondly, the need to reform the existing mechanism for correction of negative budgetary imbalances.

[2] COM(2004) 101 final of 10 February 2004.

In line with those orientations, this report provides an overview of the current system and its main drawbacks, proposes a generalised correction mechanism as a short term adjustment in order to address the main outstanding issue and outlines for the longer term an own resources structure that would be effective, transparent and democratic.

A more detailed assessment of these issues can be found in the Commission working document annexed to this report.

1. The current own resources system

The current own resources system is the result of successive modifications of the original system introduced in 1970. The system may be divided into the following three categories:

(1) Traditional own resources (TOR). These are mainly customs duties collected by Member States on behalf of the EU.

(2) The resource based on value added tax (VAT). The VAT resource is levied on the statistical 'notional' harmonised VAT bases of Member States, which is calculated on the basis of national VAT receipts.

Furthermore, the notional VAT base is 'capped', where applicable, at 50 % of each Member State's gross national income (GNI) to reduce the effect of the slightly 'regressive' character of VAT. In practice, this turns the VAT-based own resource into a GNI-based resource for the countries concerned by the capping rule.

The call rate on VAT cannot exceed 0.5 % of the base.

(3) The GNI-based resource. This is the residual resource used to balance the budget. It is levied as a uniform rate in proportion to the GNI of each Member State. There is no particular limit on this rate other than the own resources ceiling that limits the total amount of all own resources to a maximum of 1.24 % of the EU's GNI.

Finally, a specific mechanism for correcting the budgetary imbalance of the United Kingdom is also part of the own resources system (see section 3). It has been modified on several occasions, rendering the mechanism increasingly complex and non-transparent.

The latest changes to the own resources system were decided by the European Council in Berlin in 1999. These changes further reinforced the declining trend of traditional and VAT-based own resources and the corresponding increase in the relative share of the GNP [3]/GNI-based contributions.

[3] Prior to 2002, the GNP (gross national product) resource.

Table 1 - The composition of EU own resources

(in per cent of total own resources; cash basis)

>TABLE POSITION>

1 As from 2002 the % of TOR retained by Member States as a compensation for their collection costs was raised from 10 % to 25 %. This difference represented about EUR 2.2 billion in 2002 as well as in 2003.

2 Preliminary draft amending budget 8/2004 (EU-25).

3 Preliminary draft budget 2005.

2. Assessing the performance of the current own resources system

2.1. Assessment criteria

The own resources system and individual own resources can be assessed against specific criteria. It is virtually impossible for individual own resources to satisfy all possible assessment criteria. However, a system based on a combination of resources of different nature may reasonably meet the main relevant criteria.

The following seven assessment criteria are considered relevant to this report:

* Visibility and simplicity;

* Financial autonomy;

* Adding to the efficient allocation of economic resources;

* Sufficiency;

* Administrative cost-effectiveness;

* Revenue-Stability;

* Equity in gross contributions;

2.2. Assessment

The current system has performed well as regards the criteria of sufficiency and stability, but clearly fails to fulfil the visibility and simplicity criterion and does not contribute significantly to a more efficient allocation of economic resources in the EU. The financing system has grown increasingly complex over time, making it difficult even for the interested citizen to understand how it works. Financial autonomy is, furthermore, becoming more and more limited. Although the financing of the budget is ensured by rules that are binding for all Member States, there is virtually no direct link to citizens or tax-payers. Instead the financing of the budget relies on transfers from national treasuries. As for the remaining criteria the current financing system has shown various shortcomings, as explained more in detail in the Commission working document annexed to this report.

3. Preventing excessive negative budgetary balances

3.1. The issue of budgetary imbalances

The European Union is a community of solidarity with parts of the EU budget serving a clear solidarity goal, while others fund the achievement of specific objectives through EU agreed programmes. That gives rise to budgetary net benefits from, and net contributions to the EU budget, although the policy benefits accrue to the Union as a whole.

Budgetary net balances, measured by the difference between contributions to and receipts from the EU budget, obviously fail to account fully for the benefits resulting from membership in the EU.

Nevertheless, the size of some of these imbalances has been at the centre of political discussions. In 1984 the Fontainebleau European Council introduced the existing correction mechanism with regard to the net contribution of one member state, the UK. This mechanism reimburses the UK by 2/3 of its net contributions according to the concept of allocated expenditure. The introduction was based on the general principle 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.'

Although the correction was only decided for the UK, the principle of a generalised correction was therefore already acknowledged in Fontainebleau ('any Member State'), with the correction to be based on the size of the budgetary imbalance ('excessive') and the wealth of a Member State compared to the EU as a whole ('relative prosperity').

Over the last 20 years, economic developments, enlargement and changes in the structure of the EU budget have significantly modified the context in which the existing UK correction mechanism operates.

The table below shows the development of gross national income (GNI) per capita, expressed in purchasing power standards (PPS [4]), between the years 1984 and 2003 for all Member States that were net contributors to the EU budget in the year 2002 [5].

[4] The PPS is an artificial currency that reflects differences in national price levels that are not taken into account by exchange rates. This unit allows meaningful volume comparisons of economic indicators among countries.

[5] Net balances presented in this document, like those used for the UK correction, are calculated including administrative expenditure. For this reason, Belgium and Luxembourg do not appear among the net contributors. As the correction is paid one year later, the 2007 correction is to be paid in 2008.

>TABLE POSITION>

In view of the dramatic shift in the UK's position compared to the other net contributors and in application of the Fontainebleau principle the granting of a correction on an exclusive basis to the UK should be re-considered. Therefore, the existing mechanism should be transformed into a generalized correction mechanism, respecting the twin goals of

( preventing excessive negative budgetary balances combined with a reduction of differences between net contributors at comparable levels of prosperity;

( ensuring that the financing costs of the mechanism are kept at a reasonable level.

3.2. Impact of the existing correction mechanism on the net balances of

Member States

In the existing mechanism the UK's reimbursement of its net contribution is 66%. The mechanism is financed by all Member States according to their respective shares in GNI with the following exceptions:

- The UK does not participate in the financing of its own rebate

- The share of DE, NL, AT and SE is restricted to 25% of their normal shares

While the UK's net position before correction has changed little since its introduction (-0,48% of GNI in 1985 and -0,47% during the period from 1996 to 2002), its final net position has improved significantly compared to other Member States at similar or even lower levels of prosperity, like NL and DE (-0.47% and -0.44%, respectively).

A very significant factor for assessing the existing correction mechanism is its impact of enlargement. With the accession of new net beneficiaries the net balances of all old Member States will deteriorate as a growing share of expenditure is allocated to the new Member States. However, as a consequence of the current mechanism the volume of the correction will increase very significantly for the UK. The cost for the other Member States, including all new Member States, will increase. Should the current correction mechanism remain in force, the UK correction would, according to Commission estimates on the basis of the Commission's proposal for the 2007-2013 financial perspective, increase by more than 50%.

3.3. The proposed generalised correction mechanism

The Commission proposes a generalization of the correction mechanism, evolving from the existing correction in order to bring the system closer to the original objective of avoiding excessive budgetary burdens. By introducing a sort of 'safety net' for large net contributors whose net contribution exceed a certain level, it may also facilitate a more constructive approach to ensure budgetary means to meet the policy challenges of the enlarged Union.

The future correction is to be calculated on the basis of the net budgetary balance of each Member State in relation to the budget of the EU. The mechanism should be triggered if net contributions exceed a threshold, expressed as a percentage of each Member State's GNI, reflecting the minimum accepted level of unlimited financial solidarity between Member States. Net positions exceeding such a threshold will be eligible for a correction (partial refund), thus giving an insurance against excessive net contributions. Conversely, the total volume of corrections (refund volume) will be limited to a maximum amount, thus insuring those not benefiting from a correction against excessive costs of the mechanism. If the sum of all corrections exceeds the total predetermined volume, the refund rate is reduced accordingly.

Any correction mechanism entails complications to the financing of the budget. Therefore the basic proposal should be relatively simple and sufficiently transparent. In this respect, the current parameters used for the UK correction calculation should be modified only where necessary and simplified whenever feasible.

The new mechanism proposed by the Commission contains the following elements:

- setting a threshold level as a percentage of GNI;

- capping the total volume of corrections;

- simplifying the financing of the corrections by basing them on GNI shares, whereby all Member States participate in the financing of the global amount of the corrections in proportion to their relative prosperity;

- keeping the concept of allocated expenditure and the re-imbursement rate up to the maximum volume unchanged.

According to this proposal, the UK would be by far the largest beneficiary from the generalised correction mechanism. According to the Commission's proposal on the next Financial Perspective and the proposal on a generalized correction mechanism, the UK would receive on average a net compensation approximately twice as much as that of D.

>TABLE POSITION>

The table above illustrates Member States' estimated average net budgetary balances resulting from the proposed generalised correction mechanism over the period till 2013 and compares it to the continuation of the current mechanism and to a situation without any correction.

The generalized correction mechanism will decrease the negative net balances, reduce the spread among net contributors, and, on the other hand, lessen the financing burden of those who do not benefit from the mechanism [6].

[6] See attached technical annex for more detail.

The Commission presents separately a specific proposal for modifying the current own resources decision in view of introducing the proposed generalised correction mechanism.

4. The own resources structure

4.1. Finding the optimal own resources structure

Three basic alternatives for the financing of the EU budget are discussed below. In all three cases traditional own resources (TOR) would be maintained, as the collection of import duties constitutes an instrument of the Union's trade policy whose yield 'naturally' accrues to the Union.

(1) Maintaining the present financing system unchanged

The present financing system has ensured a smooth financing of the EU budget. However, in its present form the financing system lacks a direct link to citizens. Past adjustments to accommodate specific interests have added to the system's opaqueness. The budgetary consequences of the Union's policies thus remain impalpable to the general public. With the overwhelming weight of the GNI resource, Member States, and in particular net contributors, tend to judge EU policies and initiatives exclusively in terms of their national allocation and with little regard to the substance of policies, with the risk of obscuring the added value of EU policies.

Because of the absence of any link to and visibility for EU citizens, and the increasing incentive to focus on narrow budgetary concept of 'juste retour', the current system should be reformed.

(2) A purely GNI-based financing system

Under a financing system exclusively based on the GNI key the Union would entirely depend on 'contributions' from Member States. The advantage of such a system is that it would be simple and easy to understand. The 'contributions' would correspond closely to Member States' relative prosperity. But financing the budget by contributions of the Member States may be adequate for an international organization such as the UN. It does, however, not reflect the status of the European Union.It would imply an idea of the Union in which citizens would be represented purely indirectly by their Member States. The status of the EU as a Union of Member States and the citizens, which is currently reflected in the Treaty, would be abandoned on the financing side of the budget. This, in turn, would imply ditching the concept of 'own' resources which has been a cornerstone of EU finances since the first own resources decision in 1970. The Commission rejects such an alternative.

(3) A financing system based on fiscal own resources

A system based to a large degree on tax-based own resources has the potential to increase the financial autonomy of the EU budget by creating a more direct financial relationship between the EU budget and EU citizens. The shift towards individuals and economic operators as contributors, and the corresponding reduction of Member States' contributions to the financing of the EU budget would entail higher visibility towards citizens and thus increased political accountability of the budgetary authority for their expenditure decisions. It would also contribute to shifting the political discussion away from the narrow focus on national contributions towards the merit of EU policies and the general European interest. Finally, increased visibility would enhance trust in the EU's finances, whose volume of less than 2.5% of total public expenditure in the EU is often over-estimated.

However, also a fully tax-based financing of the EU budget does not appear appropriate. As the balanced budget requirement of Art. 268 of the treaty is not and should not be put into question, a fiscal resource assuming the current role of GNI as 'residual' balancing resource would either involve a variable tax rate according to budgetary requirements or require a higher flexibility on the expenditure side than the current financial perspective framework allows. However, frequent amendments to the tax rate would in practice be unwelcome by taxpayers (legal uncertainty, technically and administratively cumbersome procedures) and could conflict with national tax-setting. A progressive approach, consisting in maintaining a limited GNI resource while increasing the share of tax-based resources, appears preferable.

A reform of the own resources structure should thus focus on the budgetary neutral introduction of a new tax-based own resource representing up to half of the budget.

5. Towards a financing system based on contributions by Member States and citizens

5.1. Increasing the share of tax-based own resources

The reform of the financing system should tackle the drawbacks of the current system, i.e. the absence of a direct link to EU citizens, dependence on transfers from national treasuries and unjustified complexity, while contributing as far as possible to an efficient allocation of resources. Other criteria become less relevant for the new resources, as long as the overall system allows them to be met to a reasonable degree.

For reasons of equity between citizens in different Member States, the introduction of new fiscal resources requires a sufficient prior harmonisation of the tax base. The choice of the most appropriate tax-based resource crucially depends on the actual degree of tax base harmonisation.

The existence of regional arbitrariness [7] or the presence of cross-border externalities are strong arguments for harmonising tax bases and rates, which could also justify assigning all or part of the corresponding tax revenue to the EU level. This could contribute to reducing inefficient allocation of economic resources.

[7] Regional arbitrariness refers to a situation where it is difficult to determine the exact share of a tax base to be allocated to individual Member States or where there is a high (potential) mismatch between the country collecting the tax and the country of residence of the economic agents bearing the burden of the tax.

Increasing the share of tax-based own resources for the EU budget does not require any new taxes. It does, however, imply a decision on sharing either revenue or tax rates between the national and the EU level. The EU share could be levied as part of the national rate paid by taxpayers. The total EU budget, anyway limited by the own resources ceiling to a maximum of 1.24% of EU-GNI, would not increase, as revenue from the tax-based resource would be offset by a corresponding decrease of the current GNI-based resource.

The following sections illustrate three main options in order to improve the functioning of the EU financing system. All three retain the current GNI-based resource as a residual balancing resource as well as the traditional own resources, but assume that up to half of the budget is financed by a new fiscal resource that would also replace the current statistical VAT.

5.2. Option 1 - An own resources system with fiscal resources related to

energy consumption

Under the new directive on energy taxation [8] most energy products are subject to Community taxation. Although the adopted directive on energy taxation was not prepared for the purpose of introducing new own resources, it nevertheless creates suitable conditions for it by harmonising tax bases and establishing minimum rates.

[8] Directive 2003/96/EC of 27.10.2003 of the Council restructuring the Community framework for the taxation of energy products and electricity (OJ L 283 of 31.10.2003).

A fiscal resource on energy products would, however, not need to be based on all products covered by the directive. An EU levy could be limited to the tax base related to motor fuel used for road transport (leaded and unleaded petrol, diesel, LPG and natural gas used for transport). This would be relatively simple from an administrative point of view as the tax base is already harmonized at EU level and as most possibilities of tax differentiation allowed by the directive apply to other energy products. EU rates below half of the minimum rates in the energy taxation directive would be enough to finance half of the EU budget. The main decisions would bear on the rates to apply and possible variations according to the product and use.

An EU levy on aviation fuel or the related emissions might be a useful complement to a levy on motor fuel for road transport. The European air transport system is highly integrated and aviation emissions transcend national borders. There are therefore good arguments for taxing such emissions at the EU level, as a way of internalising the external socio-economic costs of climate change and other environmental effects caused by aviation into the price of air travel. However, aviation fuel (kerosene) is currently exempted from taxation for cross-border flights.

From a technical point of view, the introduction of a fiscal resource based on road transport fuel would be possible in a relatively short period of time (around 3-6 years).

5.3. Option 2 - An own resources system with a fiscal VAT resource

Due to its direct link with daily consumption, and contrary to the current "statistical" VAT resource, the application of an EU rate to national VAT bases would create a clear direct link between the financing of the EU budget and the citizen and increase awareness of the costs of the Union.

A genuinely fiscal VAT resource would be implemented through an EU rate as part of the national VAT rate paid by taxpayers. The rate would be levied together with the national rate on the same taxable base. Citizens would not have to bear an additional tax burden as the EU rate would be offset by an equivalent decrease of the national VAT rate. For example, if the national VAT rate were at 21 %, and an EU rate at 1 %, the national rate would come down to 20 %. The total VAT rate levied would still be 21 %.

For visibility purposes, the EU VAT and the national VAT should appear as separate taxes on the invoice or receipt that a taxable person provides to his customer.

An EU rate of 1 % would be enough to cover about half of the financing needs of the EU budget.

Potential difficulties with this proposal are related to incomplete harmonisation of Member States' VAT systems mainly linked to zero-rated goods. Another potential difficulty may stem from a different share of the VAT base in national income across Member States (the so-called regressivity of VAT), which since 1988 has pushed Member States to reduce its share in own resources. On the other hand, seen from a consumer perspective, the EU rate would have the same impact on comparable consumers across the Union [9].

[9] Assuming the effect of zero-rates are neutralised (see also annex to this report).

Technically, the introduction of an EU VAT rate would be possible in a relatively short period of time (up to 6 years).

5.4. Option 3 - An own resources system with a fiscal resource based on

corporate income

As for the other two options, also an EU fiscal resource based on corporate income would require a prior definition of a common (consolidated) tax base, which would be applied to companies. Such harmonisation would contribute to the proper functioning of the internal market and a more efficient allocation of economic resources which are currently distorted by cross-border externalities. Today, the existence of 25 separate national tax systems and the multiplicity of tax laws, conventions and practices represent in itself a barrier to cross-border economic activity. It imposes substantial compliance costs on companies operating across borders in the EU and leads to numerous loopholes in the tax system.

Current work on a comprehensive reform of company taxation is focussed on the concept of a common (consolidated) tax base, in all likelihood for a sub-group of interested Member States, to remove tax obstacles to the internal market. This work does not envisage any action on tax rates, nor is it conceived as a method for raising revenues for the EU budget.

The option of a corporate income tax would imply setting a minimum tax rate to the harmonized tax base.

Revenue from corporate income taxes is significant, with total revenue in the EU currently representing on average 2.6 % of total EU GNI. Thus, for the needs of the EU budget less than a quarter of that revenue would need to be assigned to the EU.

Given the current state of affairs, this alternative would take longest to implement, both from a political as well as from an administrative perspective.

6. Summary and conclusions

The introduction of a new tax-based own resource replacing the current statistical VAT-based resource and financing a significant part of the EU budget would make it possible to overcome the main drawbacks of the current system, i.e. the absence of a direct link to EU citizens, overwhelming dependence on transfers from national treasuries and unjustified complexity. It could also contribute to a better allocation of economic resources in the EU. Even if accounting for a lower share of total own resources than under the current system, the GNI-based resource should continue to play an important role and ensure that the system reasonably fulfils all relevant criteria.

The Commission proposes three main candidates as possible future fiscal own resources: a resource based on 1. energy consumption, 2. national VAT bases and 3. corporate income.

A resource based on energy consumption and conceived as an EU levy on motor fuel for road transport would be a sufficient and stable financing source for the EU budget and would create a direct link to the citizens. The tax base is already harmonised at EU level. It could be complemented by an EU levy on aviation fuel or the related emissions thus ending the current tax exemption for jet fuel and setting a price on the environmental costs of aviation.

Tax base harmonisation in the field of VAT is quite advanced and it is a sufficient and stable source of revenue. A fiscal VAT resource would make the financing of the EU highly visible to EU citizens. It would also be evolutionary, since it would entail a reform of existing provisions rather than the introduction of a completely new resource. From an administrative point of view, its introduction would not present any insurmountable difficulties.

Due to the link to a common EU policy and the presence of cross-border externalities, revenue from a harmonised company tax base would also be a suitable financing source for the EU budget.

The European Union is a Union of Member States and citizens. Any of the three candidates for fiscal own resources examined above would transpose this concept into the area of financing the EU budget. Strengthening the direct link of citizens to the budget would also help focussing expenditure debates on substance rather than on purely "national" budget "net positions".

Obviously, any new assignment of a resource to the EU budget has not only to be decided unanimously by Council, but also has to be ratified by all Member States' parliaments.

The implementation of an energy- or VAT-based resource would be feasible over the medium-term, whereas a fiscal resource based on corporate income is to be seen as a much longer-term option. What is needed now is a political orientation to prepare the conditions for reforming the structure of the existing own resources. In this regard, the Commission calls on the Council:

- to discuss the options proposed in this report;

- to take note of the Commission's intention to prepare a roadmap in view of replacing, on the basis of a Commission proposal, the current VAT resource by a genuinely tax-based own resource by 2014.

In order to provide a short-term solution to the issue of excessive budgetary imbalances to be operational as from the beginning of the next Financial Perspective, the Commission proposes

- to introduce a generalized correction mechanism to correct excessive budgetary imbalances according to the proposed Council decision on the system of own resources and the accompanying proposed implementing measures.

TECHNICAL ANNEX

Financing the European Union Commission

report on the operation of the own resources system

INTRODUCTION

Article 9 of the current own resources decision [1] calls on the Commission to

[1] Council decision (2000/597, EC, Euratom) on the system of the European Communities' own resources, OJ L 253, 7.10.2000, p. 42.

'undertake, before 1 January 2006, a general review of the own resources system, accompanied, if necessary, by appropriate proposals, in the light of all relevant factors, including the effects of enlargement on the financing of the budget, the possibility of modifying the structure of the own resources by creating new autonomous own resources and the correction of budgetary imbalances granted to the United Kingdom as well as the granting to Austria, Germany, the Netherlands and Sweden of the reduction pursuant to Article 5(1)'.

In response to a request from the European Parliament and in agreement with the Council, the Commission committed itself to present the abovementioned review on the functioning of the financing system before the end of 2004.

On 10 February 2004, the Commission adopted its communication [2] on 'Building our common future - Policy challenges and budgetary means of the enlarged Union 2007-2013'. The communication identified two main elements of the current own resources system deserving closer attention: first, the insufficient transparency of the system for EU citizens combined with limited financial autonomy from national treasuries; secondly, the need to reform the existing mechanism for correction of negative budgetary imbalances.

[2] COM(2004) 101 final of 10 February 2004.

This report reviews those issues in more detail. For this purpose it is divided in four parts.

Part I of the report presents the main features of the current system, the relevant assessment criteria and provides an assessment of the functioning of the current financing system.

Part II examines the existing mechanism to correct budgetary imbalances and proposes to replace it with a generalised mechanism for correcting excessive negative budgetary balances in order to ensure an equitable treatment of net contributors at comparable levels of prosperity and financing costs that are kept at a reasonable level.

Part III reviews alternative scenarios for the system of financing the EU budget and outlines possible own resources systems that in the longer term might allow certain drawbacks of the current own resources system to be overcome. It is important to stress that future modifications of the own resources system in line with what is proposed in Part III would probably require a review of the generalised correction mechanism proposed in Part II.

Thus, whereas part II is to be seen as the short term adjustment of the current system in order to address the main outstanding issue, part III offers for the longer term the outline of a system that would be more effective, transparent and democratic.

Finally, Part IV of the report presents the final comments.

PART I - THE PERFORMANCE OF THE CURRENT OWN RESOURCES SYSTEM

This part provides an overview of the current system of own resources, presents the criteria used for assessing the performance of own resources individually and together as a system, and then provides an overall assessment.

1. The current own resources system

The current own resources system is the result of successive modifications of the original system introduced in 1970. The latest modifications were decided by the European Council in Berlin in 1999 and implemented through the own resources decision of 29 September 2000 [3] (see below).

[3] See footnote 1.

The current own resources may be divided into three categories that are used to finance the budget in a sequential way, i.e. recourse is made to the following category only when the previous one is exhausted. In practice this means that the third category, the one related to the gross national income (GNI) of Member States, is the residual one used to balance the budget. It is also the only resource to be affected by modifications of budgeted expenditure during the implementation of the budget, i.e. stemming from amendments to the budget. The three categories of own resources are the following:

(1) So-called traditional own resources (TOR). These are mainly [4] customs duties and are collected by Member States on behalf of the EU. Member States retain a fixed percentage of the amounts collected as a compensation for their costs of collecting them. The percentage was increased from 10 % to 25 % as from 2001.

[4] Traditional own resources also include agricultural duties, i.e. import duties collected on agricultural products, and sugar levies. Together, these two categories are estimated to account for around 10 % of total TOR and 1.2 % of total own resources in 2004).

(2) The resource based on value added tax (VAT). This resource is levied on the notional harmonised VAT bases of Member States. The statistical 'notional' VAT bases are calculated in order to compensate for differences in national VAT regimes due to incomplete harmonisation of VAT at EU level. The notional VAT base is calculated, for each Member State, by dividing total national VAT receipts by the so-called weighted average rate of VAT. The weighted average rate is derived from macro-economic statistics (mainly national accounts). In order to take account of the specific national procedures and arrive at a harmonised base for all Member States, changes are made, either to the net revenue collected (known as 'corrections'), or to the VAT base (known as 'financial compensations'). This implies, once again, that statistical elements are used in the calculation of the VAT base rather than fiscal data.

Furthermore, the notional VAT base is 'capped', where applicable [5], at 50 % of each Member States' GNI to reduce the effect of the 'regressive' character [6] of VAT. In practice, this turns the VAT-based own resource into a GNI-based resource for the countries concerned by the capping rule. Any increase in VAT receipts in a Member State whose VAT base is capped will have no effect on the EU VAT resource.

[5] Forecasts for 2005 indicate that for 13 out of 25 Member States their VAT base will exceed 50 % of their GNI.

[6] The share of consumption in national income tends to be higher in relatively less prosperous countries. As a result, VAT revenue tends to be proportionally higher than in more prosperous countries.

A uniform percentage rate is levied on the capped and harmonised VAT bases of all Member States. This call rate cannot exceed 0.5 % of the base but is furthermore reduced to take into account the theoretical impact of the amount of the UK correction (see below).

(3) The GNI-based resource. This resource is levied as a uniform rate in proportion to the GNI of each Member State. There is no particular limit on this rate, other than the own resources ceiling that limits the total amount of all own resources to a maximum of 1.24 % of the EU's GNI.

Finally, a specific mechanism for correcting the budgetary imbalance of the United Kingdom is also part of the own resources system. The basic principle of the correction mechanism is to reimburse the UK by 66 % of its budgetary imbalance. The mechanism reduces the own resources payments of the UK and increases the payments of all other Member States, including the 10 new Member States joining in 2004. The correction mechanism has been modified on several occasions since its introduction in 1985 in order to neutralise the impact on the UK budgetary balance of each subsequent modification of the own resources system. Several additional layers have therefore been added to the original calculation, rendering the mechanism increasingly complex and non-transparent.

According to the rules of the own resources system the amount of the UK correction also has an impact on the rate of call of VAT, which is reduced by a percentage theoretically needed to finance the correction ('the frozen rate'). This is a relic from the time the correction was financed on the basis of Member States' shares in the EU VAT base, whereas since 1988 the financing is in reality calculated on the basis of GNI.

The cost of the correction is borne by the other Member States in proportion to their GNI. However, in order to alleviate the budgetary imbalances of four other Member States (Austria, Germany, the Netherlands and Sweden) these countries pay only 25 % of their normal share. The financing of this reduction is added to the payments of the remaining 20 Member States.

The latest changes to the own resources system were implemented through the current own resources decision of 29 September 2000 and notably concerned the following elements:

- An increase in the percentage of traditional own resources retained by Member States from 10 % to 25 %.

- A reduction of the maximum rate of call of the VAT resource from 1 % to 0.75 % in 2002 and 0.5 % in 2004.

- Some changes to the method of calculating the UK correction in order to compensate for effects related to enlargement and the increase in the percentage of traditional own resources retained by Member States.

- A reduction of the share of Austria, Germany, the Netherlands and Sweden in the financing of the UK correction to one fourth of its normal value. Previously only Germany had a reduction, by one third, of its financing share.

- The European system of accounts 1995 (ESA 95) replaced the previous version, ESA 79, also in the budgetary and own resources area. As a consequence gross national income (GNI) replaced the concept of gross national product (GNP) in the area of the EU budget.

This package further reinforced the declining trend of traditional and VAT-based own resources and the corresponding increase in the relative share of the GNP/GNI- based contributions.

Table 1 - The composition of EU own resources

(in per cent of total own resources; cash basis)

>TABLE POSITION>

1 As from 2002 the % of TOR retained by Member States as a compensation for their collection costs

was raised from 10 % to 25 %. This difference represented about EUR 2.2 billion in 2002 as well as in 2003.

2 Preliminary draft amending budget 8/2004 (EU-25).

3 Preliminary draft budget 2005.

2. Assessment criteria

The own resources system and individual own resources can be assessed against specific criteria. It is virtually impossible for individual own resources to satisfy all criteria. However, a system based on a combination of resources of different natures may reasonably meet the different criteria. The 'systemic' assessment is discussed in more detail in part III of the report.

The following seven assessment criteria are relevant to this report:

- Visibility and simplicity; i.e. the financing of the EU budget should be visible to and understood by EU citizens.

- Financial autonomy; i.e. the financing of the EU budget should provide a sufficient degree of autonomy from national treasuries to reduce the tendency towards a narrow focus on national interest. Autonomy is enhanced if the financing relies to a significant degree on a direct link with citizens/taxpayers.

- Efficient allocation; i.e. the financing of the EU should contribute to an efficient allocation of economic resources, for example by contributing to the proper functioning of the internal market or by setting a price tag on negative externalities, such as pollution.

- Sufficiency; i.e. the resources used for financing the EU must be sufficient to cover the expenditure of the EU in the long run. As for individual own resources, their yield should be significant in relation to the size of the EU budget.

- Cost-effectiveness; the administration costs should be low relative to the yield.

- Stability; the resources should be reasonably stable over time.

- Equity in gross contributions; i.e. the burden should be fairly shared among Member States as well as citizens.

A more extensive presentation of these criteria can be found in annex I to this report.

3. Assessing the performance of the current own resources system

To summarise the conclusions of this section, the current system has performed well as regards the criteria of sufficiency and stability, but clearly fails to fulfil the visibility and simplicity criterion and it does not contribute significantly to a more efficient allocation of economic resources. The financing system has grown increasingly complex over time, making it difficult even for the interested citizen to understand how it works. Financial autonomy is, furthermore, becoming increasingly limited. Although the financing of the budget is ensured by rules that are binding for all Member States, there is virtually no direct link to citizens or tax-payers. Instead the financing of the budget relies on transfers from national treasuries. As for the remaining criteria the current financing system has shown various shortcomings, as explained more in detail below.

3.1. Visibility and simplicity

The current financing system is mainly and increasingly based on national contributions paid directly by the treasuries of Member States to the Commission and lacks a visible direct link to citizens. Most citizens do not know what they pay to the EU budget. This gives much scope for misperceptions of the costs and for a feeling of unfair burden-sharing.

In the current system, traditional own resources (TOR) is the only direct link between the EU budget and the citizens, since they are levied directly on the economic agents paying the import duty. However, since it is a relatively small number of agents that bear the direct burden of the tax and since TOR only represent a very small part of total own resources, they do not contribute much to the visibility of the EU budget.

The lack of a direct and visible link to the EU citizens also results in reduced accountability of the European Parliament, which might make it less sensitive to the cost of financing different policy measures.

Furthermore, the current system has grown increasingly complex over time, making it difficult even for the interested citizen to understand how it works. The VAT resource is levied on a theoretical harmonised base in order to compensate for national derogations from Community VAT legislation and varying tax rates, requiring complicated calculations. Moreover, because of the tendency of the VAT base to be relatively higher in less prosperous Member States (i.e. the so-called regressivity of the VAT base), rules for limiting the base as a percentage of the national income ('capping') have been introduced. The VAT-based contribution from capped countries is therefore in practice based on their gross national income. The main reason for the lack of transparency of the system is, however, the UK correction. Not only is the correction mechanism itself highly complex, the amount of the correction also influences the rate of call of both the VAT and the GNI resource. Finally, in order to alleviate the net budgetary position of other large net contributors, some Member States have been granted a 'rebate on the rebate', i.e. a reduction on the financing of the correction, the cost of which is borne by the remaining Member States.

3.2. Financial autonomy

The rules governing the financing of the budget are laid down in detail in the own resources decision and its different implementing provisions, which are binding for all Member States. The financing of expenditure is therefore guaranteed up to the own resources ceiling. This also means that the financing of the annual budget is completely technical with no room for political discussions. The budgetary authority's room of manoeuvre is extremely restricted, since the level and composition of revenue are largely determined by the own resources decision and by the strict application of the rule of budgetary balance. The financial sufficiency of the EU budget is ensured. As for financial autonomy from the treasuries of the Member States the picture is, however, quite different.

Traditional own resources (TOR) currently represent the only truly fiscal own resources of the EU. They are collected by Member States on behalf of the EU, after deduction of 25 % of the amount collected. The percentage deducted represents an increase compared to the 10 % retained by Member States prior to 2001 (see also next section). As a result, the weight of these fiscal resources in the financing of the EU budget was reduced. TOR do, however, only represent around 10 % of total own resources.

The other own resources are calculated as a percentage of statistical aggregates (GNI or the notional harmonised VAT base) and paid directly by the treasuries of Member States to the Commission. The GNI-resource, initially envisaged as the 'residual' resource to ensure a balanced budget, has in fact become the overwhelming source of revenue for the EU budget.

The increasing dependence of the EU budget on inter-governmental transfers from national treasuries, accounting for almost 90 % of EU total revenue in later years, encourages Member States to seek to maximise ill-defined concepts of national benefit from the EU budget. Such a trend may well impair the future EU budget to adequately reflect the new challenges and needs to meet the legitimate expectations and concerns of all European citizens. In shaping a European Union with more than 25 Member States, narrow national interests will need to be pushed into the background, allowing instead for serious and more focused discussions about common European concerns. Increased autonomy of the EU budget from national treasuries would contribute to a more constructive approach to the benefits of the Union's policies.

Financing the budget by contributions of the members is adequate for an international organisation. It does not necessarily reflect the status of the European Union and is in contradiction with the spirit of the treaty provision, introduced in 1970, whereby the Community budget should be financed by own resources.

3.3. Efficient allocation of economic resources

As the current own resources are mainly levied directly on the treasuries of the Member States, they do not have a direct impact on the relative prices in the economy and the behaviour of the economic agents.

It is only the traditional own resources (TOR) that have a direct impact on relative prices (on imported goods relative to goods produced in the Union) and therefore on the allocation decisions of the economic agents. TOR are, however, the result of common policies such as the customs union and the common agricultural policy and were not primarily introduced for the purpose of financing the EU budget. Due to the mismatch between the country collecting the duties and the country of residence of the economic agents bearing the economic burden of this tax it was then logical to attribute the corresponding revenue to the EU level. The introduction of a Common Customs Tariff has contributed to an efficient allocation of economic resources between Member States by creating a level playing field for import of goods into the Union.

In this context it could also be mentioned that the increase from 10 % to 25 % in the percentage of traditional own resources retained by Member States was introduced irrespective of the actual collection costs. To a large extent it was the result of difficult negotiations about ways to correct excessive negative budgetary balances. The current level could, however, be seen as a useful incentive for Member States to collect TOR. On the other hand, it is not necessarily the Member States bearing the highest costs related to the protection of the external border of the Union that collect the duties and retain the corresponding 25 % of the collected amount. This is because customs operations are undertaken in stages in different Member States. Under the present system, Member States undertaking controls at the external frontier may be in a less favourable position than those Member States actually collecting the duties. In this regard, it is not surprising that some Member States have concluded bilateral agreements, especially in the context of simplified customs procedures, in order to share the 25 % compensation for the costs of collecting import duties in order to better reflect the actual collection and control costs.

Although the present VAT-based resource has today in practice evolved into a national contribution, it earlier served as an impetus for establishing a common VAT system and therefore contributed to the proper functioning of the internal market.

3.4. Sufficiency and stability

The present system has generated sufficient and stable resources to finance expenditure plans. The decline of traditional and VAT-based own resources is automatically compensated by the GNI-based resource, which guarantees financing up to the own resources ceiling of 1.24 % of total EU GNI. The margin available under the own resources ceiling in the current financial perspective is around 0.15 % of EU GNI for the whole 2000-2006 period.

3.5. Cost-effectiveness

The collection of TOR and VAT is the duty of Member States. The collection of traditional own resources is cumbersome and demands significant administrative resources. However, import duties are primarily levied to protect producers in the Union [7] and not to finance the EU budget. The costs of collecting them should therefore only marginally be charged to the financing rules of the EU. Furthermore, if import duties were not to be attributed to the EU level, given the mismatch between the country collecting the duties and the country of residence of the economic agents bearing the economic burden of this tax, complex tax-sharing rules would normally have to be defined, which would entail additional costs.

[7] Furthermore, in shaping its common commercial policy the Union does not act alone but in the multilateral context of the World Trade Organisation.

The VAT-based resource imposes an additional workload on national administrations, since the harmonised VAT resources base is only calculated for the purposes of the EU budget. However, this can be considered as acceptable in relation to its potential yield. The administrative cost of the GNI resource is marginal, since it is incurred for the establishment of national accounts, irrespective of the EU budget.

3.6. Equity

Equity may refer to the situation of individuals or to the fair burden-sharing among Member States. Since the budget is currently financed almost exclusively by contributions from Member States, the assessment here focuses on equity between Member States.

As the ability to contribute to the EU budget can best be measured by a nation's national income, the increasing importance of the GNI [8] resource means that equity between Member States in the financing of the budget has improved over time. As the GNI resource now accounts for ¾ of total own resources in the 2004 budget, Member States' contributions are, generally speaking, becoming closely correlated to income levels across Member States.

[8] Prior to 2002 the GNP (gross national product) resource.

There is, however, one important exception to this rule. Due to the specific correction mechanism in its favour, the UK contributes clearly less than the other Member States in relation to its GNI. Furthermore, the UK correction also distorts equity indirectly since the financing of the correction by the other Member States is not proportional to GNI. The distorting effect of the UK correction is, furthermore expected to increase in the future due to enlargements of the Union.

PART II - PREVENTING EXCESSIVE NEGATIVE BUDGETARY IMBALANCES

1. Introduction

The European Union creates a community of solidarity with parts of the EU budget serving a clear cohesion goal, whereas other parts fund the achievement of specific objectives through EU agreed programmes. As a result, net beneficiaries of, and net contributors to, the EU budget will always exist, although the policy benefits accrue to the Union as a whole.

Budgetary balances (also called net balances), measured by the difference between contributions to and receipts from the EU budget, fail to account fully for the benefits resulting from EU membership. For example, research or border protection expenditure benefits not only the immediate recipients but also gives rise to spill-over effects transcending national borders [9]. It may not be possible to quantify the extent of these spill-overs, but their consideration would modify the assessment of the accounting imbalances.

[9] These spill-over effects include the spending of income generated in the receiving Member State on goods or services produced in another Member State, the purchase of financial asset denominated in various Member States currencies etc.

The definition of budgetary balances is also fraught with significant conceptual and accounting problems. Numerous choices have to be made in computing budgetary balances on the items to be included in the receipts and expenditure flows, and on the reference periods (e.g. cash vs. accrual figures, surpluses from previous years, etc.). The resulting budgetary balances vary significantly depending on the choices made.

Nevertheless, the size of some of these imbalances has been at the centre of discussions. After years of budgetary stalemate and agonizing discussions in 1984 the Fontainebleau European Council introduced the existing UK correction, which was then given effect by the own resources decision of 7 May 1985. The decision was based on the following general principle [10]:

[10] See Fontainebleau European Council, 'Conclusions of the Presidency', Bulletin of the European Communities, 6-1984.

'... 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.'

The principle of a generalised correction was therefore already acknowledged by the European Council in 1984 ('any Member State'). The decision for granting a correction should be based on two criteria: the size of the budgetary imbalance ('excessive') and the wealth of a Member State compared to the EU as a whole ('relative prosperity').

The justifications for granting a correction on an exclusive basis to the UK are today less justified than at the time of the Fontainebleau European Council, since several other Member States can legitimately claim that their current situation is comparable to the UK's. Furthermore, the cost of enlargement should be fairly shared. Consequently, it is argued that, in light of the principle set in the Fontainebleau conclusions, the conditions exist for the introduction of a generalised correction mechanism. The parameters defining such a correction mechanism are examined and a proposal is made with the twin goals of:

- preventing excessive negative budgetary balances combined with a reduction of differences between net contributors at comparable levels of prosperity;

- ensuring that the financing costs of the mechanism are kept at a reasonable level.

After briefly recalling the origin and main effects of the existing UK correction (Section 2), this report provides a brief analysis of the UK's relative prosperity and net budgetary balance in comparison with the other net contributors (Section 3). The subsequent sections of the report contain an analysis of the likely evolution of the UK correction till 2013 (Section 4) and examine proposals for a possible phasing out of that correction in its current form (Section 5). Section 6 defines the key parameters for a generalised correction mechanism and, finally, Section 7 proposes a new generalised mechanism to correct excessive negative budgetary imbalances.

2. The budgetary compensation for the United Kingdom

2.1. Origin of the mechanism

The budgetary imbalance of the United Kingdom was at the centre of the political debate for about a decade (1974-1984), frequently provoking stalemates in the EU decision-making process. The question appeared immediately after the accession of the country to the European Community. The large negative budgetary balance of the UK at that time was essentially due to two factors:

(a) an agricultural sector relatively smaller and structurally different from those of other Member States, which results in lower CAP spending in the United Kingdom;

(b) a proportionally larger contribution to the financing of the EU budget [11].

[11] The United Kingdom had a relatively higher share in the harmonised VAT base than in the total GNP of the EU. At that time the VAT resource was the primary source of EU revenue. The GNI resource was introduced in 1988.

Furthermore, it should be recalled that during the first years after its accession, the United Kingdom was one of the least prosperous Member States with a GDP per capita well below the EU average [12]. This tended to exacerbate the problem of the UK's negative budgetary balance.

[12] In the five years preceding the introduction of the UK correction (1979-1983), only Ireland (and as of 1981 Greece) had a lower GDP per capita than the UK, expressed in purchasing power standards (PPS).

The issue was finally settled at the Fontainebleau European Council of 1984 and the resulting rebate mechanism constitutes an integral part of the own resources decisions (ORD) taken subsequently. Being an integral part of the ORD, the UK rebate continues until modified or abolished by a new ORD. Modifications to the ORD require unanimity in Council and ratification by all national Parliaments. The rebate was reviewed in 1988, 1992 and 1999 and on all occasions the European Council decided to maintain it.

2.2. Description of the mechanism

While technically very complicated to calculate, the underlying principle of the UK correction mechanism is quite simple: to reimburse to the UK 66% of its net contribution to the EU budget. In essence this is calculated in three steps.

- The UK's percentage share in allocated expenditure (i.e. what the UK receives from the EU budget) is subtracted from the UK's percentage share in payments to the EU budget [13].

[13] These payments exclude payments of so-called traditional own resources, which are considered as resources that cannot be allocated to individual Member States.

- This difference is multiplied by the total amount of allocated expenditure [14] to obtain a measure of the UK's net contribution to the EU budget.

[14] Allocated expenditure includes all utilised appropriations for payments, with the exception of external expenditure (namely expenditure headings 4, 6 and 7 of the current financial perspective 2000-2006) and expenditure that cannot be reasonable allocated or identified. However, pre-accession expenditure relating to actual payments in the last year before accession of any acceding country is also deducted from allocated expenditure.

- The result is multiplied by 0.66 (i.e. 66% percent of the whole net contribution is reimbursed).

Most of the additional complications in the calculation arise from the fact that the overall contribution to the EU budget actually paid by the UK (including so-called traditional own resources and the UK correction) has to be equivalent to the overall contribution that the UK would have paid if the rules of the 1985 ORD (i.e. the rules that were applicable as a result of the Fontainebleau European Council) were still in force today. In practice this means that all subsequent modifications to the own resources system, introduced by successive ORD's, have to be neutralised through the calculation of the UK rebate. This includes the effect of the introduction of the GNP/GNI resource, the reduction of the VAT call rate, the capping of the VAT base and the increase of the traditional own resources collection costs [15].

[15] Besides the issues mentioned in this paragraph, the UK rebate also complicates the calculation of the VAT own resource through the mechanism of the so-called 'frozen' rate of call for VAT. While the original logic behind the 'frozen' rate disappeared in 1988 with the introduction of the GNP own resource, the mechanism continues to exist today. It now functions as a complicated and roundabout way to reduce the VAT own resource.

The financing of the correction for a given year 't' is made up by all the Member States in accordance with their respective percentage shares in GNI payments in the year t+1, with the following exceptions:

- the UK does not participate in the financing of its own rebate;

- the share of DE, NL, AT and SE is restricted to 25% of the shares resulting from the calculation above. The difference is made up by the remaining 10 (20 since May 2004) Member States according to their share in GNI payments.

3. Current situation of the UK compared to other net contributors

This section examines the relative prosperity and the size of the net budgetary balances for all net contributors to the EU budget.

3.1. Relative degree of prosperity

The table below gives an overview of the gross national income (GNI) per capita expressed in purchasing power standards (PPS [16]) for the years 2003 and 1984 for all Member States that were net contributor in the year 2002 [17]. (The 2003 figures for all 25 Member States are presented in the annexed Table I.

[16] The PPS is an artificial currency that reflects differences in national price levels that are not taken into account by exchange rates. This unit allows meaningful volume comparisons of economic indicators among countries. Data on PPS are calculated by Eurostat.

[17] Net balances presented in this document, like those used for the UK correction, are calculated including administrative expenditure. For this reason, Belgium and Luxembourg do not appear among the net contributors.

>TABLE POSITION>

In 2003, GNI per capita of all net contributors to the EU budget, expressed in PPS, ranges between 97% and 111% of the EU-15 average. At 111.2%, the UK's relative prosperity is at the top of the range. This is in sharp contrast with the situation in 1984, when the UK was the least prosperous of the net contributors and only Greece and Ireland had a lower GNI per capita than the UK.

In view of the considerable shift in the UK's position compared to the other net contributors, it is therefore necessary to reassess whether the UK correction mechanism as it stands is still justified in light of the Fontainebleau principle whereby a Member State's net balance should be viewed in relation to its relative prosperity.

3.2. Net budgetary balances before UK correction

The net budgetary balance of the UK for the year 1985 (the first year for which the correction was calculated) amounted to -0.48% of GNI before correction. (Although accurate data are not available for the other Member States, Germany was the only other major net contributor to the EU budget at that time.) As illustrated in the table below, on average the UK's net balance has remained at a comparable level in recent years. Over the period 1996-2002 the net budgetary balance of EU-15 net contributors - before UK correction and including administrative expenditure - was on average the following:

Table 2

Net budgetary balances before UK correction

for EU-15 selected members (annual averages 1996-2002)

// in % of GNI

United Kingdom // -0.47%

Germany // -0.44%

Netherlands // -0.43%

Sweden // -0.38%

Austria // -0.24%

Italy // -0.06%

France // -0.04%

Average net budgetary balances for the period 2008-2013 [18] will deteriorate for all net contributors across-the-board because of the financing cost of enlargement. According to internal Commission estimates and assuming expenditure levels equal to the financial perspective ceilings as proposed by the Commission in its communication of 10 February 2003 [19], the estimated net balances of the net contributors would be the following. (The figures for all 25 Member States are presented in the annexed Table II).

[18] The net balances for the period 2007-2013 have been estimated on the basis of the expenditure level (payment appropriations) as proposed by the Commission for the EU-27. Where feasible, the allocation across Member States was based on a detailed calculation on the basis of an established methodology (e.g. cohesion expenditure). In other cases, an indicative breakdown was used on the basis of historical data. Expenditure for the 10 new Member States that acceded on 1 May 2004 was calculated according to an identical methodology as for the EU-15, except for the phasing-in of the EAGGF Guarantee direct payments. Expenditure for Bulgaria and Romania is included in a manner which is coherent with the Commission communication Financial package for the accession negotiations with Bulgaria and Romania, SEC(2004) 160/4 adopted on 10 February 2004.

[19] COM(2004) 101 final.

Table 3

Estimated net budgetary balances before UK correction

for EU-15 selected members (annual averages 2008-2013 [20])

[20] As corrections are reimbursed one year later, averages in this table and the following ones are calculated over a six-year period since the 2007 correction is paid in 2008 and the 2013 correction takes place in 2014.

// in % of GNI

United Kingdom // -0.62%

Netherlands // -0.55%

Germany // -0.52%

Sweden // -0.47%

Austria // -0.37%

Italy // -0.29%

France // -0.27%

Denmark // -0.20%

Finland // -0.14%

Under the assumption that the level of agricultural expenditure for the EU-25 agreed by the Brussels European Council in October 2002 and the 'cohesion' expenditure proposed by the Commission under the so-called Objective 1 and Cohesion fund remained unchanged, a reduction of the overall level of payment appropriations from the 1.14% of GNI proposed by the Commission to, say, 1.00%, would only have a very limited impact on the size of the estimated net balances. This is because the expenditure for the new Member States would in essence not be touched and the reduction could only be achieved by drastically cutting the other non-agricultural expenditure going to the EU-15 and/or external expenditure that does not enter in the calculation of net balances. As a consequence, the resulting reduction of own resources payments for the net contributors would to a large extent be offset by a corresponding reduction in EU allocated expenditure in these same Member States.

In the absence of any correction mechanism, the UK would have been on average the largest net contributor over the last 7 years, and would probably remain the largest net contributor to the EU budget over the period 2007-2013. However, the net balances of NL, DE and, to a lesser extent, SE have been and are expected to remain of a comparable order of magnitude. As shown in the previous section, all these three Member States are currently relatively less prosperous than the UK.

Whether the size of net budgetary balances is 'excessive' in view of the relative prosperity of the Member States concerned largely depends on the political perception of the acceptable degree of financial solidarity within the Union. If the UK net balance was judged 'excessive', then the application of the Fontainebleau principle would rather point to the extension of a correction mechanism to other Member States, who - at lower levels of prosperity - bear negative net balances of a similar order of magnitude.

In any event, granting a correction on an exclusive basis to only one Member State appears to be unjustified, especially when taking into account the expected evolution of net budgetary balances in the enlarged Union under unchanged conditions, as illustrated in the next section.

4. Estimated net balances with unchanged Own Resources Decision

Estimates indicate that over the period 2007-2013 the UK correction will increase by more than 50% compared to the average over the latest 7 years to reach an estimated EUR 7.1 billion from EUR 4.6 billion in the period 1997-2003.

Although the envisaged enlargement to 10 new Member States was unanimously agreed at the Berlin European Council in March 1999, the UK insisted and obtained that enlargement-related expenditure be taken into account [21] when calculating the UK correction, thus shielding it from most of the financial consequences of enlargement. That is the main reason for the expected future increase in the UK correction.

[21] Pre-accession expenditure relating to actual payments in the last year before accession of any acceding country is permanently deducted from the allocated expenditure.

As a consequence, the cost for the Member States that pay a full share in the financing of the UK correction, including all the new Member States, will increase proportionally. The average estimated financing cost over the period 2008-2013 for all 25 Member States is presented in the annexed Table IV.

Should the current own resources decision remain in force, the average net balance for the net contributors over the 2007-2013 period after UK correction is estimated as follows (Table III in annex II provides estimates for all 25 Member States):

Table 4

Estimated net budgetary balances after UK correction

for all expected net contributors

(annual averages 2008-2013)

// in % of GNI

Netherlands // -0.56%

Germany // -0.54%

Sweden // -0.50%

Italy // -0.41%

Austria // -0.38%

Cyprus [22] // -0.37%

[22] Throughout this document estimates are based on areas controlled by the Republic of Cyprus.

France // -0.37%

Denmark // -0.31%

Finland // -0.25%

United Kingdom // -0.25%

According to these estimates, the UK will become (together with Finland) the smallest net contributor to the EU budget, therefore clearly departing from the Fontainebleau principle mentioned above. The persistence of such a growing anomaly risks undermining the legitimacy of EU policies in general, particularly in new Member States. The current system of a unique correction for the UK therefore cannot continue. Instead, the generalization of the correction mechanism, evolving from the existing correction would allow bringing the system closer to the original objective of avoiding excessive budgetary burdens in relation to the relative prosperity of Member States. By introducing a sort of 'safety net' for large net contributors beyond a certain level, it may also facilitate a more constructive approach to ensure the budgetary means necessary to meet the policy challenges of the enlarged Union.

5. Reduction or phasing-out of the UK correction

5.1. Estimated net balances with a reduction of the refund rate

One simple way to rectify the expected 'overshooting' of the UK correction would be to reduce the reimbursement percentage from 66% to - for instance - 33%.

The results in terms of net budgetary balances, expressed as a percentage of each Member State's GNI are summarised below for the net contributors:

Table 5

Estimated net budgetary balances after UK correction

with refund rate reduced to 33%

for all expected net contributors

(annual averages 2008-2013)

// in % of GNI

Netherlands // -0.55%

Germany // -0.53%

Sweden // -0.48%

United Kingdom // -0.46%

Austria // -0.38%

Italy // -0.34%

Cyprus [23] // -0.32%

[23] Estimates based on areas controlled by the Republic of Cyprus.

France // -0.32%

Denmark // -0.25%

Finland // -0.19%

The UK's net contribution would be more in line with that of other net contributors, although it would remain rather low in comparison with some of the other net contributors that have lower levels of relative prosperity. Among these net contributors, F and I would benefit most from a reduction of the rebate since these countries unlike AT, DE, NL and SE do not benefit from a reduction in their financing share of the UK correction.

Conversely, the net position of NL, DE and SE hardly improves. A reduction of the UK rebate would therefore not address the perceived excessive net balances of these Member States. Furthermore, it would perpetuate the situation whereby one Member State continues to receive a correction on an exclusive basis, while others in an almost identical, or relatively worse, situation do not.

5.2. Estimated net balances with the UK correction frozen at its current

level

An alternative to the reduction of the refund rate could be to freeze the amount of the correction at a certain level. For instance, the UK correction could be frozen at the level actually enjoyed by the UK on average over the period 1996-2002, which is around EUR 4.5 billion. However, as the result would be comparable to a reduction of the refund rate, the same disadvantages would persist.

Table 6

Estimated net budgetary balances after UK correction

with UK correction frozen at its current level

for all expected net contributors

(annual averages 2008-2013)

// in % of GNI

Netherlands // -0.55%

Germany // -0.53%

Sweden // -0.49%

United Kingdom // -0.38%

Austria // -0.38%

Italy // -0.37%

Cyprus [24] // -0.34%

[24] Estimates based on areas controlled by the Republic of Cyprus.

France // -0.34%

Denmark // -0.27%

Finland // -0.21%

5.3. Estimated net balances with a phasing-out of the UK rebate

Phasing-out the UK rebate over the period covered by the next financial perspective, as advocated by certain Member States, would certainly be the easiest solution to limit the unintended effects of the existing UK correction. In its simplest form, this could be done by leaving the calculation method unchanged, while progressively reducing the result by a given percentage over a certain number of years, say over seven years. Thus, the 2007 rebate (to be paid and financed in 2008) could amount to 6/7th of the amount obtained according to the current calculation method, the 2008 rebate to 5/7th and so on. The 2012 rebate, to be paid and financed in 2013, would amount to 1/7th of the normal calculation. In this example it would also constitute the last correction.

The estimated net balances of the net contributors over the period 2007-2013 resulting from such a phasing-out regime are presented below:

Table 7

Estimated net budgetary balances after UK correction

with a linear phasing-out of the UK correction over 7 years

for all expected net contributors

(annual averages 2008-2013)

// in % of GNI

Netherlands // -0.55%

Germany // -0.53%

Sweden // -0.49%

United Kingdom // -0.43%

Austria // -0.38%

Italy // -0.35%

Cyprus [25] // -0.32%

[25] Estimates based on areas controlled by the Republic of Cyprus.

France // -0.32%

Denmark // -0.26%

Finland // -0.19%

However, it should be borne in mind that the figures in the table above represent the average for the phasing-out period. After the period under consideration, the UK would no longer benefit from any correction mechanism. The phasing-out of UK correction would have only a minor impact on the net balances of the other large net contributors, since they are to a large extent protected from the financing cost of the UK rebate. Therefore, this alternative would not solve the problem of the 'excessive' net balances of the other net contributors.

5.4. Estimated net balances with a phasing-out of the frozen UK

correction

Alternatively, as advocated by certain Member States, the UK correction could be frozen at an agreed level (for instance EUR 4.5 billion, equivalent to the average over the period 1996-2002) and then phased-out linearly over a number of years. This is the equivalent of combining the effects discussed in Sections 5.2 and 5.3 above. The disadvantages mentioned in the previous paragraphs would remain unchanged.

Table 8

Estimated net budgetary balances after UK correction

with a linear phasing-out of the frozen UK correction over 7 years

for all expected net contributors

(annual averages 2008-2013)

// in % of GNI

Netherlands // -0.55%

Germany // -0.53%

United Kingdom // -0.50%

Sweden // -0.48%

Austria // -0.37%

Italy // -0.33%

Cyprus [26] // -0.31%

[26] Estimates based on areas controlled by the Republic of Cyprus.

France // -0.31%

Denmark // -0.23%

Finland // -0.17%

5.5. Estimated net balances with enlargement-related expenditure

excluded from the calculation of the UK correction

The calculation of the UK correction takes into account all the expenditure that is 'internal' to the EU and that can reasonably be allocated to an individual Member State [27]. Expenditure in the new Member States is also taken into account, with the exception of a small correction related to the amount of the pre-accession expenditure in the year before accession. The expenditure in the new Member States is the principal cause of the expected 50% increase in the size of the UK correction. It is therefore appropriate to consider the effect of continuing the current system while fully excluding the expenditure in the new Member States from the calculation.

[27] This issue is discussed under Section 6.2.

This approach would have the advantage of at least assuring fair burden sharing between all Member States of the cost related to the current and the future enlargements of the EU.

If the expenditure going to the 12 new Member States would be excluded, the UK correction is expected to be on average reduced to EUR 4.2 billion over the period 2007-2013. The results in terms of net budgetary balances, expressed as a percentage of each Member State's GNI are summarised below for the net contributors:

Table 9

Estimated net budgetary balances after UK correction

with enlargement-related expenditure excluded

for all expected net contributors

(annual averages 2008-2013)

// in % of GNI

Netherlands // -0.55%

Germany // -0.53%

Sweden // -0.49%

United Kingdom // -0.39%

Austria // -0.38%

Italy // -0.37%

Cyprus // -0.33%

France // -0.33%

Denmark // -0.27%

Finland // -0.21%

The net balances of DE, AT, SE and NL would only be affected in a very marginal way compared to the situation under the unchanged own resources decision, since these countries pay only 25% of their normal financing share of the financing of the UK correction.

Again, such a solution would not solve the problem whereby only 1 Member State would be eligible for a correction, while others at comparable or lower levels of relative prosperity and bearing negative net balances of similar size would continue to be excluded. Furthermore, it would effectively create in a durable way two categories of EU expenditure (within the EU-15 and in the new Member States).

6. Parameters of a generalised correction mechanism

6.1. Introduction

The proposed generalised correction mechanism has to be seen in the context of the Commission overall 'package' for the post-2006 financial framework. The final outcome is thus likely to be affected by decisions to be taken on the expenditure side of the package.

If it is accepted that the net contributions of certain Member States are excessive, then none of the alternatives presented in Sections 3 through 5 namely, unchanged own resources decision, abolishing, reducing or phasing-out the UK correction - seems to generate acceptable results in terms of equitable burden sharing among Member States. That is why the Commission proposes to introduce a generalised corrective mechanism.

The generalised correction mechanism is a tool for correcting 'excessive' net budgetary balances in an own resources system primarily financed through contributions from the Member State's treasuries. Any substantial changes to the own resources system (see Part III of this report), would of course require a re-assessment of the need for a corrective mechanism.

A generalised correction mechanism would be calculated on the basis of the net budgetary balance of each Member State in relation to the budget of the EU. The mechanism should be triggered beyond a threshold, expressed as a percentage of each Member State's GNI, reflecting the minimum accepted level of unlimited financial solidarity between Member States and representing a sort of basic reasonable net contribution. Net positions exceeding such a threshold will be eligible for a correction (partial refund). The amount of the correction is to be based on the part of the net balance exceeding this threshold, multiplied by a refund rate (i.e. the percentage of the amount in excess of the agreed threshold to be compensated). The amount corresponding to the sum of all corrections could be capped at a total predetermined volume.

The net balance would be calculated on the basis of a zero-sum situation, i.e. the sum of the net balances of all Member States should be equal to zero [28]. (This principle is also applied in the calculation of the UK correction.)

[28] For a discussion of the different types of net balances and their calculation methods, see the Commission's 1998 own resources report, Annex 3.

6.2. Categories of expenditure to be taken into account

The current definition of allocated expenditure used in the calculation of the UK rebate as well as the Commission's yearly report on the allocation of expenditure to Member States is based on the principle whereby all expenditure for which it can reasonably be shown that the recipient is a resident of a certain Member State is being allocated to that Member State. Recipients are not limited to public bodies but also include private firms, individuals, etc...The allocation is limited to the first round effect [29]. The Commission recognises that this instrument is an imperfect tool and that certain problems of correct allocation continue to exist [30].

[29] This means the Commission does not include possible second-round effects into the allocation. Often cited examples of these effects are for instance the possible repatriation of profits by foreign firms or consortia involved in cohesion projects and salaries of European officials residing in Belgium or Luxembourg that is not necessarily exclusively spent in these countries.

[30] Although the Commission is constantly trying to refine the data to improve the quality of the allocation, a number of problems continue to persist. Agricultural export subsidies for instance are allocated to the country exporting the goods, an allocation method which tends to unduly increase the expenditure allocated to gateway countries such as Belgium and the Netherlands. Likewise it is not always easy to identify exactly the final beneficiary of certain payments made to international consortia, for example for research expenditure. Since these consortia often have their administrative base located near the EU institutions, an exaggerated share in this type of expenditure may be allocated to Belgium and Luxembourg.

According to this definition, allocated expenditure includes all categories of expenditure that are 'internal' to the EU. This includes virtually the total amount of expenditure headings 1 (agriculture) and 2 (structural operations) as well as the vast majority of expenditure under headings 3 (internal policies) and 5 (administration), excluding only some minor items of expenditure that cannot be reasonably allocated to any individual Member State [31]. Headings 4 (external policies), 6 (reserves) and 7 (pre-accession expenditure) relate explicitly to 'external' expenditure and are therefore not taken into account when calculating the net budgetary balance of a Member State.

[31] In terms of the newly proposed expenditure headings in the Commission communication of 10 February 2003, this corresponds roughly with the content of the new headings 1a, 1b, 2, 3 and administrative expenditure.

It has on occasion been argued that certain categories of this internal expenditure should be fully or partially excluded from the calculation of the net balances. The arguments advanced to defend this are based on perceived conceptual and practical difficulties related to expenditure allocation. However, it should be noted that, while the European Council has reviewed the calculation method of the UK correction on several occasions, it has each time decided to keep the expenditure categories included in the calculation unchanged. Indeed, excluding any of these expenditure categories would constitute a different approach than the basic principle evoked at the beginning of this section. That is why the Commission proposes to keep the current accepted definition unchanged [32]. Thus, all expenditure that can reasonably be allocated to an individual Member State (i.e. broadly speaking, the headings 1, 2, 3 and 5 under the 2000-2006 financial perspective) would continue to be taken into account for the calculation of the net budgetary balance in the context of the proposed generalised correction mechanism.

[32] The only envisageable amendment concerns the agricultural export refunds which could be excluded on the grounds that there is no clear link between the port of exit and the final beneficiary of these interventions. A similar argument is used to exclude traditional own resources from the revenue to be taken into account (cf. section 6.3).

6.3. Categories of revenue to be taken into account

The calculation of the UK rebate excludes the traditional own resources (TOR) from the categories of revenue to be taken into account. This is justified for 2 reasons. First, TOR are not considered to be a Member State contribution but constitute revenue belonging to the EU by virtue of the customs union. Second, TOR are often levied at the port of entry into the EU in application of the Common Customs Code. Since the final consumer of the imported goods does not necessarily live in the country of the port of entry there is no clear geographical link between the collection of the duties and the economic burden they represent. TOR should therefore continue to be excluded in any future proposal to introduce a generalised correction mechanism.

Consequently, the combined share in VAT and GNI own resources would be used as the proper base to calculate any Member States' share in EU budgetary revenue.

A proposal for a generalised correction mechanism should be as simple and transparent as possible. Therefore all existing complications in the UK rebate calculation which are related to the preservation of the UK's 1984 revenue position (share in uncapped VAT, calculating the 'advantage' as well as the 'TOR windfall gains'), should be abolished.

6.4. The level of the threshold

6.4.1. Fixed threshold

Simulations have been run for different levels of the threshold (using a refund rate of 66%) ranging from zero to 0.50% of GNI. The results are summarised in the annexed Tables V through IX [33]:

[33] A minus (-) sign means an increase of a Member State's total own resources payments compared to the estimated future (2008-2013 average) situation under an unchanged own resources decision. Conversely a plus (+) sign means a reduction in total own resources payments for the Member State concerned.

- Table V: estimates of the level of the gross corrections;

- Table VI: estimates of the financing of the corrections;

- Table VII: estimates of the net level of the corrections (= sum of tables V + VI);

- Table VIII: estimates of the impact of introducing a GCM compared to the situation with unchanged own resources decision;

- Table IX: estimates of the net budgetary balances as a percentage of GNI;

The total sum of the corrections at different threshold levels is estimated as follows (details for individual Member States are presented in Table V):

Table 10

Estimated gross corrections

(average 2008-2013)

Level of the threshold

(as a % of GNI, EU-27) // Sum of all corrections

(in billion of euros)

0.00% // 25.8

0.10% // 19.8

0.20% // 13.8

0.25% // 11.1

0.30% // 8.8

0.40% // 5.2

0.50% // 1.9

A threshold level of around -0.25% would represent a sort of neutral point whereby the estimated future cost of financing the generalised correction mechanism would be equal to the estimated future cost of financing the current UK correction mechanism. This is illustrated in Table V in annex II: the effect of introducing a GCM is zero or close to zero at a threshold of 0.25% for all Member States that are currently financing a full share in the UK correction [34]. A threshold lower than 0.25% would mean that the Member States paying in full the UK rebate (they currently bear more than 90% of the total cost) would have to pay more than the estimated cost of financing the current UK correction mechanism in the future. With thresholds higher than 0.25% the mechanism would become less costly for those Member States, including all net recipients from the EU budget, than financing the estimated future UK correction mechanism.

[34] This is valid for all Member States that do not receive a gross correction and therefore only participate in the financing. However, as can be observed in Table V in the annex, at a threshold of 0.25% a few of the 20 Member States that currently pay a full share in the financing of the UK correction would actually receive a gross correction. Consequently, as illustrated in Table VIII, these Member States would still be better off at 0.25% compared to the future cost of financing the UK correction.

The table above (as well as the annexed Table V) illustrates that the total sum of the corrections with a 0.25% threshold would be substantially higher than the estimated level of the future UK correction with the current own resources decision (ORD) unchanged. Applying a threshold of -0.25% would generate a level of (gross) corrections slightly above EUR 11 billion, which is significantly higher than the approximately EUR 7 billion average (net) UK correction for the same period. This difference is linked to the assumption that the financing of the corrections would be shared by all Member States according to their share in GNI (see section 6.7 below).

Thus, for those Member States who would not benefit from the GCM, an overall volume of up to EUR 11 billion of corrections could be financed before the GCM became more expensive than the continuation of the current ORD.

The impact of introducing a generalised mechanism with a threshold is not linear. The effect on Member States' net balances, compared to the current situation, is influenced by a combination of the following three elements: a) the level of the Member States' budgetary imbalance before correction; b) the level of the threshold; and c) the financing rules under the existing UK correction.

The estimated impact is shown in the annexed Table VIII on the basis of which the following observations can be made:

- Net beneficiaries from the budget do not receive any corrections, regardless of the threshold level. As previously indicated, the cost of financing the correction mechanism becomes more expensive for these countries compared to the future financing cost of the UK correction at threshold levels lower than 0.25%.

- All major net contributors to the EU budget (UK, DE, NL, SE) would benefit from the correction mechanism with thresholds lower than or equal to 0.50% of GNI.

- Smaller net contributors would receive corrections depending on the threshold level. The relative position of each individual net contributor, compared to their estimated future position under the current ORD, is determined by a combination of the following two factors:

- the size of the negative net balance before correction, whereby larger net contributors such as DE, NL, SE tend to benefit more at lower threshold levels (compared to smaller net contributors);

- the current financing regime of the UK correction, whereby Member States currently benefiting from a special arrangement (DE, NL, SE, AT) tend to benefit less at higher threshold levels (compared to smaller net contributors).

- The case of AT merits a specific mention since it illustrates the mechanism at work here. Since this Member State is expected to be a smaller net contributor than NL, DE and SE, it would receive smaller corrections (comparable to the corrections received by FR and IT). However, as it would lose the 75% reduction in the financing of the UK correction (whereas countries such as FR and IT do not enjoy such a reduction at present) it would see its net balance deteriorate at higher threshold levels (compared to the estimated situation with unchanged own resources decision).

- The UK would experience a deterioration of its net balance at any threshold level, even in the situation where there is no threshold at all. In this case the UK would receive a correction of an order of magnitude similar to the current UK correction but it would have to participate in the financing of both its own and the other Member States' corrections. It is worth recalling that the deterioration of the UK net balance illustrated in the tables above is in comparison with the UK's estimated future position, i.e. in comparison with the situation where the UK is expected to become the smallest net contributor to the EU budget.

Any future 'fairer' mechanism should ensure in particular that the resulting financing cost does not lead to a heavier burden than under the current UK correction mechanism for 'cohesion' Member States.

6.4.2. Variable threshold

It is possible to include an element of progressivity into the correction mechanism by introducing a variable threshold related to the relative prosperity of each Member State rather than the fixed threshold illustrated in the previous paragraphs. This would ensure a closer link between levels of relative prosperity and net balances. In other words, relatively more prosperous Member States would be expected to have proportionally larger negative budgetary imbalances than less prosperous Member States.

One possible approach would be to use a multi-layer threshold, based on each Member States' GNI per capita expressed in purchasing power standards (PPS). By way of example, the results of a simulation based on the following differentiation criteria are presented below:

GNI per capita PPS (where EU-15 avg. = 100) // Threshold

(in % of GNI)

110% < PPS // - 0.40%

100% < PPS <110% // - 0.35%

PPS < 100% // - 0.30%

The variable threshold, based on the multi-layer schedule given above, would be the following for the net contributors to the budget:

Member State // Threshold

Denmark // - 0.40%

Germany // -0.30%

France // -0.35%

Italy // -0.30%

Cyprus // -0.30%

Netherlands // -0.35%

Austria // -0.35%

Finland // -0.35%

Sweden // -0.35%

UK // -0.40%

The UK's threshold would be increased to -0.40% while the threshold applied to DE, IT and CY would be reduced to -0.30%. The threshold for the other net contributors would not be affected.

Using such a variable rather than a fixed threshold would only have a limited impact on the gross level of the corrections, since the reduction of the correction for certain Member states would of necessity be (partially) offset by the increased correction for others. Fundamentally, any introduction of progressivity in the correction mechanism will -ceteris paribus- benefit DE (and possibly IT) while deteriorating the position of the UK. Extending or decreasing the range of the threshold variability will not modify this.

6.5. Maximum Available Refund Volume

A legitimate concern of many net beneficiaries of the EU budget is that the financing cost of a generalised correction mechanism could spiral out of control at some point. Thus, if the financing cost exceeded the future financing cost of the UK correction, the generalised correction mechanism would become more expensive to finance than the unchanged UK correction. As a safeguard against such a risk, a maximum available refund volume (MARV), i.e. a cap, could be introduced. This cap would be applied automatically to the total level of corrections in case the sum of these corrections exceeds an agreed MARV. All corrections would then be linearly reduced. Such a cap (MARV) would be determined ex-ante as an ad hoc amount valid for the duration of the financial perspective.

Fixing the level of the MARV is clearly a discretionary decision.

In any case, it seems reasonable to assume that the cost of financing the corrections should not exceed the equivalent of the estimated future financing cost of the UK correction for those Member States currently financing a full share (i.e. all except UK, DE, NL, SE and AT).

6.6. Percentage of excess negative balance to be corrected

Beyond the agreed threshold, a certain percentage of the net budgetary balance is to be corrected. The percentage used in the existing UK correction is equal to 66%. This variable is purely linear. For instance, at a given threshold a refund of 66% of the excess balance will yield a correction which is exactly twice as big as a correction with a 33% refund percentage. Since the European Council of Fontainebleau agreed on a refund rate of 66%, and given the relatively low sensitivity of results to different refund rates, it is proposed to keep this parameter at the same level used for the current UK correction mechanism.

Additionally, the Commission proposes as a safeguard for the net beneficiaries who might be concerned about the future evolution of the financing cost of the correction mechanism to make the refund rate the adjustment variable with 66% being the maximum rate. This maximum rate would normally be applied when the total amount of corrections is below the maximum available refund volume (MARV). However, should the sum of the corrections in any given year exceed the MARV at the 66% refund rate, then the refund rate will be automatically reduced to a lower level generating total corrections equal to the MARV.

6.7. Financing rules

The financing of the UK rebate is based on the respective shares of the Member States in EU GNI. The UK itself does not participate in the financing of its own rebate. The Berlin European Council restricted the financing shares of the four net contributors (DE, AT, NL and SE) to 25% of their normal share.

Since the introduction of a generalised correction mechanism would limit and reduce the budgetary net balances of these countries, it does not seem warranted to maintain this distortion in the financing of the correction. The