Financing the European Union - Commission report on the operation of the own resources system
Date: 1998-10-07
Institutions: European Commission
Subjects: EU expenditure, Member States' contribution, budgetary equilibrium, financing of the EU budget, own resources

COMMISSION OF THE  EUROPEAN COMMUNITIES 

Brussels, 07.10.1998 
COM(.1998) 560 final 

Financing the European  Union 
Commission  Report on the Operation of the Own Resources  System 

Executive summary 

The  object  of the present  report  is to review  the  performance  of the  EU  own  resources 
system,  including  the  search  for  new  own  resources  as  well  as  the  possibility  of 
applying  a  fixed  rate  of  call  for  the  VAT  resource;  and  to  examine  the  correction 
mechanism  in  favour  of the  United  Kingdom  and  the  issue  of  contributions  to  the EU 
budget raised by several Member States. 

The  EU  own  resources  system  has  evolved  considerably  over  time  and,  following 
modifications  introduced  by  the  1988  and  1994  Own  Resources  Decisions,  the  equity 
among  Member  States  of  gross  contributions  to  the  EU  budget  has  improved 
substantially as they have become more aligned with their respective shares in EU GNP. 
This improvement  has been  primarily  a result  of the  increasing  importance  of the GNP 
resource  in  total  budget  contributions.  The  current  system  has  also  provided  the 
resources necessary to finance EU expenditure.  However, the present  system has shown 
shortcomings  in  at  least  two  respects.  By  relying  increasingly  on  transfers  from 
Member  States  treasuries,  the  system  has  not  secured  genuine  financial  autonomy  for 
the EU;  and  various  interventions  in the contributions  system,  including  the  correction 
mechanism  in  favour  of  the  United  Kingdom,  have  inhibited  transparency  in  the 
financial  relationships of the Member States and the EU budget. 

Reform  of the present  EU financing  system  could take either of two  forms.  It  could  be 
directed  towards  enlarging  the  fiscal  base  and  developing  new  own  resources  for  the 
Union  or  it  could  aim  towards  a  simplification  of  present  contributions  arrangements. 
In the former  case, the report  notes that  several  candidates for  new  own  resources  exist 
but  only  one  would  be  realistically  available  in  the  medium  term.  This  is  a  modified 
VAT  resource  which,  however,  would  not  be  entirely  consistent  with  the  equity 
criterion.  Under  the  latter  possibility,  the  present  system  of  contributions  could  be 
replaced  by  a  system  where  the  VAT  resource  or  even  the  so  called  Traditional  Own 
Resources  (TOR,  i.e.  essentially  customs  and  agricultural  duties)  are  replaced  by 
contributions  based  on GNP.  In this respect,  Spain,  supported  by  Greece  and  Portugal, 
has proposed  the introduction  of an element  of progressivity  into the  system taking  into 
greater  account,  albeit  modified,  each  Member  State's  GNP.  Although  prima  facie 
appealing, progressivity  in contributions would  not be consistent  with the current  acquis 
communautaire  of practising  solidarity  through  the  expenditure  side  of the budget  and 
promoting real convergence through  investment. 

Despite  conceptual  and  technical  difficulties  linked  to  the  relevance  and  measurement 
of budgetary (or net) balances, the issue of budgetary  imbalances  has re-emerged  in the 
budget  debate.  Germany,  the Netherlands,  Austria  and  Sweden,  have argued  that  their 

7-10-98 

budgetary  balances  ought  to  be  considered  as  excessive  under  the  terms  of  the 
Fontainebleau  agreement. 

The report,  as mandated  by the  1994 Own Resources Decision,  reviews  the  functioning 
of  the  existing  correction  mechanism  in favour  of  the  United Kingdom  and  of  the 
budgetary  imbalance  of this  Member  State.  The  report  notes that  circumstances  at  the 
background  of  the  UK  rebate  have  undergone  significant  changes  since  the  early  and 
mid-1980s.  The  UK  imbalance  is no longer  unique  since  several  other  Member  States 
record  similar  imbalances.  The  relative  prosperity  of  the  United  Kingdom  after 
enlargement  will  be  well  above  the  average  of  the  Union.  While  the  Fontainebleau 
mechanism  was  essentially  intended  to  provide  a  correction  for  the  low  share  of  the 
United  Kingdom  in agricultural  expenditure,  it  currently  confers  it  an  advantage  for  all 
expenditure.  Furthermore,  if  the  mechanism  were  to  remain  unchanged,  the  United 
Kingdom  would  pay  only one third  of what  it would  otherwise pay  for  the  forthcoming 
enlargement.  Nevertheless,  even after  the rebate, the United  Kingdom  remains  a  larger 
net contributor than some Member  States with higher capacity to pay. 

The  budgetary  imbalances  of  Germany,  the  Netherlands, Austria  and  Sweden  have 
become large in recent  years reflecting,  predictably, the  impact  of  several  factors.  For 
the years to  come, these  imbalances, when  measured  in terms  of GNP,  are  expected  to 
change  somewhat,  under  the  influence  of  the  forthcoming  enlargement  and  the 
prospective  reforms  of  expenditure  policies  and this would  be  more  pronounced  in  the 
case of the Netherlands.  Regarding  enlargement, there will  be  an average  deterioration 
in the budgetary balance  of the present  Member  States of around  0.15 per cent of GNP, 
which  should not  give rise to demands  for compensation.  With regard to the reforms,  it 
is  not  possible  to  estimate  precisely  their  impact  prior  to  the  completion  of  the 
negotiations.  However,  it  is  likely  that  the  reform  of the  Common  Agricultural  Policy 
will not affect  significantly  the budgetary balance of the Member  States in question  with 
the exception  of the Netherlands where there  is likely to  be an accounting  rather  than a 
substantive  effect.  The  impact  of  the  reform  of  Structural  policies  on  budgetary 
balances  is even  more  difficult  to  estimate  but,  in any  case, the reduction  in  Structural 
expenditure within  the present  15 Member  States will mean a reduction  in  contributions 
and  a  consequent  relative  improvement  in  the  budgetary  balances  of  these  Member 
States even if Structural  spending is concentrated  in less prosperous regions. 

If a political  consensus  on  the need  to address the issue of these imbalances  were  to 
develop, three courses of action would be possible.  An option on the financing  side  of 
the budget would  be to move towards an own  resources  system  characterised  by  greater 
transparency,  that  is  absence  of  ad  hoc  features,  and  equity,  that  is the  removal  of  the 
remaining  elements  of  regressivity.  This  would  encompass  the  reduction  or  even  the 
phasing out of the present  correction mechanism, whose rationale would  be weakened  if 
an  option  on  the  expenditure  side  were  to  be  adopted,  and/or  the  partial  or  complete 
substitution of the GNP resource for the other resources were to be implemented. 

7-10-98 

i ll  -

Another approach,  consistent with the Fontainebleau  conclusions, would be to introduce 
corrections  on  the  expenditure  side  of  the  budget.  The  report  discusses  an  option 
involving  the partial  (75  per  cent) reimbursement  of CAP  expenditure  on direct  aids  to 
farmers.  Without  affecting  either  the  Community  nature  of  the  CAP  or  the  overall 
assistance  to  farmers  -  since  the  conditions  attached  to  direct  aids  payments  will 
continue  to  be  an  integral  part  of  the  Common  Agricultural  Policy  and  would  result 
from  EU  decisions  -  the  possibility  exists  to  share  between  the  EU  and  the  national 
treasuries  the  amount  of  assistance  in  direct  aids.  This  option  would  benefit  those 
Member  States where the share in financing  is greater than the share in direct aids, but it 
would  affect  adversely  those Member  States where the  opposite holds.  Such  an  option 
would  permit  a  reduction  of  the  Agricultural  Guideline  and  possibly  of  the  own 
resources ceiling. 

Finally, there  is the option  of a generalised  correction  mechanism.  A  straightforward 
generalisation  of  the  present  mechanism  to  all  Member  States  recording  a  negative 
budgetary  balance  would  involve  a  huge  increase  in  the  redistribution  of  resources 
between Member  States.  However,  it would  be possible to modify  some parameters  of 
the present  mechanism,  for  instance  the threshold  for  compensation  or the value  of the 
compensation  coefficient.  This  would  generate  many  outcomes,  some  involving  less, 
and others involving more, resources than the current UK rebate. 

The report  concludes by confirming  the  view  put  forward  in Agenda  2000, that  neither 
the  need  for  an  increase  in  the  financial  resources  of  the  Union,  nor  the  limited 
shortcomings  of  the  financing  system  provide  grounds  to  modify  the  Own  Resources 
Decision at an early stage.  The options presented  in the report  are interchangeable,  can 
be completed and can be spread over time.  However,  none of these options provides an 
ideal solution.  Technical  and  conceptual  weaknesses can be found  in all of them.  The 
shifts  in  the  burden  of  financing  that  results  from  some  of  these  options  present 
regressive elements that might need a redress in the context of an overall  solution. 

If a consensus were to emerge on the need to address the issue of budgetary imbalances, 
it would  be necessary  to choose between  the options  presented  in the report  or to  agree 
on  a combination  of them  which  would  respect  their  logic.  The  timing  of  any  change 
would  depend  on  whether  a  modification  of  the  Own  Resources  Decision  would  be 
required,  and  enlargement  would  appear  to  present  a  change  of  circumstances  so 
significant  as to justify  such a major  structural  reform. 

7-10-98 

E U R O P E AN  C O M M I S S I ON 

Financing the European Union 

C o m m i s s i on  Report  on  the  Operation  of  the  O wn  R e s o u r c es  S y s t em 

Introduction 

1 

1. 

T he  P e r f o r m a n ce  of  the  O wn  R e s o u r c es  S y s t em 

< 

1 

1.1. 

The resource composition of the present system 

1.2. 

An assessment of the present own resources system 

1.2.1. 
1.2.2. 

Adequacy and equity 
Financial autonomy, cost effectiveness,  transparency and simplicity 

1.3. 

Options for a new system of contributions 

1.3.1. 
1.3.2. 
1.3.3. 
1.3.4. 

Simplification  of the present system of contributions 
Criteria for new own resources 
Possible future  own resources 
Progressivity  in contributions 

2. 

T he  Issue  of  Budgetary  I m b a l a n c es 

2.1. 

The UK budgetary imbalance 

2.2. 

The budgetary imbalance of Germany, the Netherlands, Austria  and Sweden 

2.3. 

The impact of Agenda 2000 on the most important budgetary imbalances 

2.4. 

Options for reform 

2.4.1. 
2.4.2. 
2.4.3. 

Return to a more straightforward  system 
Correction on the expenditure  side 
A generalised  correction mechanism 

3. 

Final  C o m m e n ts 

A n n e x es 

1.  The evolution of the EU financing  system 
2.  Criteria and proposals for new own resources for the European Union 
3.  The concept and measurement of the budgetary  balance 
4.  The budgetary compensation  for the United Kingdom 
5.  A partial reimbursement  of CAP direct aids 
6.  A generalised budgetary compensation  mechanism 
7.  Progressivity  in budget contributions 
8.  Statistical  Annex 

2 

5 
5 
8 

10 
11 
12 
13 
14 

17 

20 

23 

26 

29 
30 
31 
33 

36 

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INTRODUCTION 

The  current  Own Resources  Decision  foresees  that  the  Commission  will  submit  by 
the end of  1999 â report  on the operation  of the own resources  system  as well  as on 
the  correction  of  the  budgetary  imbalance  granted  to  the  United  Kingdom.  The 
Decision  also requires that the Commission report on the feasibility  of creating a new 
own  resource  as well  as on the arrangements  for the possible  introduction  of a  fixed 
uniform  rate levied on the VAT base1. 

The  report  has  been  prepared  at  a  time  when  the  EU  is  expected  to  widen  its 
membership  with  the  forthcoming  enlargement  and is  in the process  of  considering 
significant  policy  reforms.  Although  difficult  to  quantify,  the  likely  effects  of 
enlargement  and of the proposed reforms  are also an important part of the report. 

The  first  part  of  the  report  reviews  and  assesses  the  performance  of  the  financing 
system of the European Union.  A key argument developed in this part of the report is 
that  the current  system  has performed  adequately  both  in terms of sufficiency  and in 
terms  of  equity  in  gross  contributions.  However,  judged  against  the  criteria  of 
financial  autonomy, ' cost  effectiveness  and  transparency,  the  present  system  shows 
some  shortcomings.  The introduction  of a new own resource  is often  seen  as a way 
of  improving  the performance  of the  system.  This  part  of the paper  examines  the 
case  for  and the difficulties  in  introducing  a new own resource  and of  permanently 
fixing  the rate  of call  of VAT.  In addition,  it reviews  the recent  proposal  of  Spain, 
Greece  and Portugal  to introduce  a significant  element  of progressivity  into  the own 
resources  system. 

The  combination  of  the  present  financing  arrangements  and  of  the  expenditure 
decisions  has resulted  in budgetary  imbalances  which  some  Member  States  consider 
as too large.  The second  part  of the report  examines  issues  related  to the budgetary 
In  the  current  system,  the  sole  Member  State 
positions  of  the  Member  States. 
benefiting  from  a correction of its budgetary  imbalance is the United  Kingdom  (also, 
Germany's  share  in  the  financing  of  the  UK  rebate  is  reduced  by  one  third). 
Recently,  other  Member  States  have  argued  that  they  also  meet  the  conditions 
mentioned  in  the  Fontainebleau  agreement  as justifying  the  granting  of  budgetary 
relief.  This section of the report comments on the budgetary  imbalances of this group 
of Member States and presents some options for addressing the perceived  difficulties. 

1. THE PERFORMANCE OF THE OWN RESOURCES SYSTEM 

The  present  part  of  the  report  extends  over  three  sections.  The  first  provides  a 
description  of the resource  composition of the current  system of own resources  while 
its  historical  development  is  briefly  summarised  in  Annex  1.  The  second  section 

Article  10  of  the  Council  Decision  of  31  October  1994  on  the  system  of  the  European 
Communities'  own  resources 
the  European 
Communities  No. L 293/9, November  12, 1994. 

(94/728/EC,  Euratom),  Official  Journal  of 

7-10-98 

- 2-

provides  an  assessment  of  the  present  system  according  to  the  criteria  of  adequacy, 
equity, financial  autonomy,  transparency/simplicity and cost effectiveness.  The third 
section  addresses  the  issue  of  possible  new  own  resources  for  the  EU.  Several 
potential  new resources  are considered  while a detailed  review  of new own  resources 
options  is presented  in  Annex  2.  Given  the unequal  tax base  each potential  resource 
represents  in  each  of  the  Member  States,  this  section  also  alludes  to  the  possible 
conflict  between  increasing  the  financial  autonomy  of  the  EU  and  improving  the 
equity of the system 

1.1.  The resource composition  of the present system 

The  most  recent  modification  of  the  system  of  own  resources  was  agreed  in  the 
Edinburgh  meeting  of  the  European  Council  in  December  1992. 
This  political 
agreement  was  then  transformed  into  a  formal  decision  in  October  19942  while  the 
ratification  by  all  national  parliaments  was  finally  obtained  in  the  spring  of  1996. 
The  present  system  of  own  resources  came  into  force,  retroactively,  on  January  1, 
1995. 

Table 1 

The composition  of EU own  resources 
(as  percent  of  total,  accrual  basis; data for  1998  and  1999  are  projections) 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

Traditional 
own  resources 

VAT( 1) 

GNP 

29.1 

28.7 

29.4 

26.4 

23.6 

20.3 

20.6 

21.3 

19.1 

18.8-

16.7 

16.1 

60.0 

60.7 

69.9 

59.5 

61.9 

54.0 

51.9 

57.8 

51.3 

45.5 

39.7 

35.4 

10.9 

10.6 

0.7 

14.1 

14.5 

25.7 

27.5 

20.9 

29.6 

35.7 

43.6 

48.4 

(1) Including the UK correction. 

The  changes  introduced  on  this  last  occasion  went  in  the  same  direction  of  those 
introduced  in  1988 and have  had significant  implications  for  the composition  of own 
resources.  Table  1 presents  the  share  of  each  category  of  resources  in  the  budget, 
and  graph  1 shows  the  absolute  value  of  contributions  by  resource,  over  the  period 
1988-1999. 

A notable feature  of these data is, first,  the trend decline in the relative contribution of 
the  so  called  "traditional  own  resources"  (TOR,  customs  and  agricultural  duties) 
whose share has  fallen  from  29.1 per cent of the total in  1988 to  19.1 per cent in  1996 
and  about  16 per  cent  in  1998-99.  The impact  of trade  liberalisation  on tariff  levels 
has  meant  that  the  total  yield  of  this  resource  has  failed  to  increase  in  line  with  the 
In  absolute  terms,  traditional  own  resources  have 
expansion  of  world  trade. 
remained  in  the  range  of  Ecu  12 to  14 billion  thus  giving  the  observed  reduction  in 
the share of total resources. 

Council  Decision  94/728/EC,  Euratom  of  October  3 1,  1994, footnote  1. 

7-10-98 

Graph 1 

Composition  of  EU own  resources  1988-1999 
(Current  prices, billions  of  Ecu) 

100 

/ 

80 

60 

40 

20 

m  GNP 
m  VAT 
m  TOR 

ggg&J 

till  1 -- 11» 

| |- ||i|-111 

-
H 

-

1988  1989  1990  1991  1992  1993  1994  1995  1996  1997  1998  1999 

A  second  important  development  is  represented  by  the  decline  in  the  share  of  VAT 
contributions  from  almost  70 per  cent  of  total  resources  in  1990 to  51.3  per  cent  in 
1996 and about 35 per cent in  1999.  Correspondingly, the share of the GNP resource 
has risen to 35.7 peT cent in  1997 and is projected  to be close to 50 per cent in 1999. 

The declining  share of VAT revenues primarily reflects  policy reforms  introduced  by 
the  1988  and  1994  Own  Resources  Decisions.  In  1988  it  had  been  agreed  that  the 
VAT  base  of the  Member  States  should  be  limited  to  55  per  cent  of  their  GNP.  In 
1994  it  was  decided  to  lower  this  limit  to  50  per  cent  from  1995  onwards  for  the 
Member  States whose  GNP per head  was  below  90 per  cent  of the  EU  average  (i. e. 
Greece,  Ireland,  Portugal  and  Spain)  and  to  reduce  progressively  the  capping  of  the 
VAT  bases  of  the  other  Member  States  from  54  per  cent  in  1995  to  50  per  cent  in 
1999.  Table  2  records  the  capping  threshold  and  the  Member  States  whose  VAT 
base  has  been  capped  over  the  period  1988-1999  as  well  as  time  series  on  the 
maximum and the uniform  call rate for VAT. 

In  addition,  in  1994 it was  decided  to  lower,  from  1995 onwards, the  maximum  call 
rate for VAT from  1.4 per cent to  1 per cent in  1999.  However, the rate  determining 
actual  VAT  contributions  is  the  so  called  uniform  rate  which  is  lower  than  the 
maximum rate because of the need to leave aside an amount for the notional  financing 
of the UK correction3.  This rate has  fluctuated  between  1.20  and  1.28  per  cent  until 
1994, but has since declined  in line with the maximum rate and is projected  to drop to 
0.84 per cent in  1999 (see table 2). 

See Annex 4 for a discussion of these issues. 

7-10-98 

The  role  of  the  GNP  resource,  introduced  by  the  1988  Decision,  is  one  of  a  buffer 
serving a residual  function  to equate revenue and aggregate budget expenditure.  As a 
consequence,  the  uniform  call  rate  for  GNP  varies  according  to  annual  budgetary 
requirements;  in  1995, for  example, it was 0.339 per cent  ;  in  1997, it was 0.403 per 
cent;  in the  1999 budget, it is estimated to be 0.534 per cent4. 

The  budgetary  balance  from  the previous  year  can  affect  resource  availability  in  the 
current  year  and,  correspondingly,  the  need  to  draw  on  the  GNP  resource.  For 
example, the budget  surplus  of  1989 reduced  GNP  financing  in  1990 to  a  minimum; 
in  contrast,  the  slow  growth  in  VAT  revenues  during  the  recession  years  of  1992-
In  general,  however, 
1994  made  it  necessary  to  increase  residual  GNP  financing. 
with  the progressive  decline  in the  share  of  revenues  from  traditional  own  resources 
as well  as  from  VAT,  the  GNP  resource  is taking  on  an  increasingly  significant  role 
in the financing  of the  EU budget. 

Table  2 

Capping threshold, Member States whose  VAT  base is capped, 
the  maximum  VAT call  rate and the  uniform  VAT call  rate 

i 

i 

i 

i 

i 

i 

i 

i 

II 

II 

1988  | 1989 j 1990 j 1991 j 1992 j 1993 j 1994  j 1995 j 1996  j 1997  J1998(1) |1999(1> 

Capping threshold 

55% I  55% i  55% j  55% j  55% I  55% j  55% j 

j 

j 

I 

j 

Greece, Ireland, 
Portugal, Spain 
Other Member 
States 

Member States 
whose VAT base 
is capped 

j 
j 
j 
| 

j 
I 
j 
! 

j 

j  E 
|RL  L  j  IRL. L,  :  p  ^ 
' 

j  P. UK  ! 

| 
I 
j 
I 

j 
j 
; 

p 

j 
i
j 
| 

ll 

j 

| 
: 

I 

j 

j 
; 

! 

j  50% j  50% j  50% |  50% | 50% 
j 
|  54% I  53% j  52% j  51%  j 50% 
j 

! 

I 

; 

| 

I 

i 

i 

j 
\  IRL, P  j  L 
: 

j 

j 
j 
;  IRL, P  : 
j 
i 

p 

j 
: 

; 

p 

j 
|  p 
; 

j 
j  GR 
i  p  {JK  j  I R L'Li 
; 

' 

!  P, UK 

Maximum VAT call 
rate 

UQ 

|  1 4Q  :  UQ 
i 

: 

|  1 4Q  j  1 4Q  :  1 4Q  j  1 4Q 
: 

: 

: 

i 

j 

]32 
: 

\  ^ 

\  1 / |g 
I 

j  1 og  j  1  QQ 
i 
i 

i 

rate(2)T Ca" 

Unif°r
(1)  Projections;  (2)  the  difference  between  the  "maximum  VAT  call  rate"  and  the  "uniform  rate"  depends  on the 
size of the UK  correction. 

1'27  :  1'28  '  1>21  i  1 l 2° 

Î  1,2S  !  1'25  I  128 

i  1-05  !  °-99 

Î  125  ^ 112 

i  °'84 

In  addition  to  the  resources  mentioned  in  the  previous  paragraphs,  the  EU  budget 
receives  other  revenues,  which  are  not  considered  own  resources,  resulting  from 
specific  Community  provisions.  These  revenues  consist  of  fines,  revenues  accruing 
from  the  administrative  operations  of  the  Community  institutions,  contributions 
related  to  activities  in the  European  Economic  Area,  interest  on  late payments,  taxes 
on the salaries of employees of the  European Institutions, income from borrowing and 
In  1997,  such  revenues 
lending  operations  and  other  miscellaneous  revenues. 
amounted  to Ecu 612 million or 0.74 per cent of all resources available to the budget. 

refer  to  the  Supplementary  A m e n d i ng  Budget  1/95  a nd 1/97, 
T he  1995  a nd  1997  data 
respectively; 
the  figures  are 
rounded  to  three  decimals  while  the  actual  budgetary  calculations  are  performed  using  15 
decimals. 

the  1999 estimate  is  from  the  Preliminary  Draft  Budget  1999; 

7-10-98 

- 5-

Graph 2 

Own  resources ceiling, financial perspective and  budgets 

(as  a  percentage  of  EU GNP) 

Own resources ceiling 

1.35 

1.25 

1.15 

1.05 

0.95 

1988 

1990 

1992 

1994 

1996 

1998 

Budgets 

1.2. An assessment of the present own resources system 

The  key  criteria  according  to which  the performance  of the  system  can  be  evaluated 
are: 
• 

Resource  adequacy, i.e. the resource must have a significant  yield  relative to the 
size of the EU budget; 
equity  in  gross  contributions,  i.e.  the  burden  should  be  fairly  shared  among 
Member States; 
financial  autonomy i.e. the resource  should  increase the independence  of the EU 
budget  from  national treasuries; 
transparency  and  simplicity,  i.e.  the  determination  of  the  tax  should  be  easily 
understood by  citizen; and 
cost  effectiveness,  i.e.  the  collection  and  administration  costs  of  the  resource 
should be low relative to its yield. 

To  anticipate  the  conclusions  of  this  section,  the  present  own  resources  system  has 
performed  satisfactorily  when  judged  against  the  first  two  criteria,  but  some 
shortcomings are encountered with regard to the last three. 

1.2.1.  Adequacy  and equity 

The present own resources system has performed  well against the criteria of adequacy 
of resources and equity in gross contributions. 

7-10-98 

Adequacy 

The present own resources  arrangements have' generated  sufficient  revenue to  finance 
expenditure plans.  The decline of the traditional  and VAT resources has been  made 
up by the GNP resource.  The previous own resources ceiling of  1.20 per cent of GNP 
proved  barely  adequate  and  difficulties  were  experienced,  particularly  during  the 
recession  of  1993.  The  recovery  of  1994  and  the  accession  of  three  new  Member 
States  in  1995  eased  somewhat  the  constraints.  More  recently,  however,  the 
progressive  increase  in the own resources  ceiling agreed  in Edinburgh  has  gone  hand 
in  hand  with  greater  restraint  in  spending  decisions.  As  a  result,  a  margin  has 
appeared  under both the Financial  Perspective and the own resources ceiling which  is 
expected to increase further  in  1999 (see graph 2). 

Equity 

The equity of gross contributions of the Member States has improved, largely  because 
of the progressive  replacement  of the VAT resource with the GNP resource. 
In  this 
context, equity is interpreted  to mean proportionality of gross contributions to  income 
across the Member States5. 

Graph 3 

Share in VAT and GNP contributions and share in EU GNP 

(Data for 1997, in percent, after UK correction) 

30 

20 

10 

Share in VAT and GNP 
contributions 

D 

F  UK 

E  NL  B 

S  A  DK  GR  SF  P 

IRL  L 

As  a  result  of  the  1988  Own  Resources  Decision,  which  opted  for  introducing  the 
GNP  resource  rather  than  meeting  financial  needs  through  increasing  the  VAT  call 
rate, and of the confirmation  of this choice in  1994, Member States' contributions  are 
now  becoming  more  closely  correlated  with  national  GNPs6.  As  the  ability  to 
contribute  to  the  EU  budget  can  best  be  measured  by  a  nation's  national  income 

The issue of progressivity  in the EU financing system is discussed in section  1.3.2  and in 1.3.4. 
It  is  generally  considered  that  the  contributions  on  the  VAT  resource  are  regressive  since  they 
represent a higher proportion of GNP in poor rather than in rich Member States. 

7-10-98 

converted  at  current  exchange  rates  into  a  common  currency,  the  increasing 
importance  of  the  GNP  resource  translates  into  improved  equity  in  gross  budget 
contributions. 

Graph  3 presents data for shares in VAT and  GNP financing,  which  is the part of the 
contributions that can be seen as coming directly from the Member States' treasuries, 
and shares in EU-15 GNP in  1997 for  all Member  States ranked  in descending  order, 
starting  with  Germany.  The  data  confirm  that  contributions  mirror  closely  GNP 
shares with  the particular  exception  of Italy,  and  of the UK  where the rebate has  led 
to contributions that are considerably  lower than the GNP share.  Each year, however, 
the relationship  between  VAT  and  GNP  contributions  and  GNP  shares  is  influenced 
by several  factors. 

Table  3a 

Member  States'  shares  in  EU financing  and  in  EU-15  GNP 
(in percent of total, data for  1997, including the UK correction) 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Share in EU GNP 

3.1 

1.9 

26.0 

1.5 

6.6 

17.2 

0.8 

14.2 

0.2 

4.5 

2.6 

1.2 

1.4 

2.7 

16.1 

Share in the financing of the EU budget 

3.9 

|  2.0 

|  28.2  |  1.6 

|  7.1 

|  17.5  |  0.9 

|  11.5  |  0.2 

|  6.4 

|  2.8 

|  1.4 

|  1.4 

|  3.1 

|  11.9 

of which : Traditional Own Resources 

7.4 

2.0 

24.2 

1.2 

4.5 

10.9\  1.6 

'  7.9 

0.2 

72.2 

1.8 

1.1  ]  1.0  |  2.6 

21.5 

3.1 

2.0 

29.1 

1.7 

7.8 

19.0 

0.8 

12.4 

0.2 

5.1 

3.0 

1.5 

« 

3, 

9.6 

of which : VA T and GNP contributions 

First, because all Member States pay an identical percentage of their VAT base and/or 
GNP,  differences  in  the  rates  of  growth  of  the  VAT  harmonised  base  (influenced 
largely  by  the  growth  of private  consumption)  and  in  that  of  GNP  imply  changes  in 
relative  shares  and  corresponding  changes  in  relative  contributions.  Secondly,  the 
corrections  of the VAT  and  GNP  contributions  made  once the outturn  is known  (i.e. 
in the year following  that in which the contributions  are paid) usually tend to  amplify 
movements  in  contributions  resulting  from  growth  in  the  economy  (when  good 
economic  growth  is  sustained  for  a number  of  years,  the  initial  forecasts  tend  to  be 
underestimated  and  therefore  result  in  large  supplementary  payments  when  the 
correction  is made and  vice  versa  in the  case of  a downturn).  As a result, trends  in 
national  contributions  tend  to  show  a  cyclical  pattern  that  is  more  pronounced  than 
the economic cycle which influences  its bases. 

The  inclusion  of  traditional  own  resources  modifies  somewhat  the  pattern  of  total 
contributions (see table 3a for the percentage  shares and table 3b for absolute values). 
The  share  of  Belgium,  Ireland,  the  Netherlands  and  the  UK  in  TOR  is  markedly 
higher than their shares  in GNP, a reflection  of substantial  port  facilities  that serve as 

7-10-98 

gateways  of  entry  of  foreign  goods  into  the  EU;  studies  suggest  that  this  effect  may 
be  substantial. 
Its  existence  underscores  one  of  the  many  difficulties  involved  in 
interpreting  a simple difference  between budget  contributions  and budget  expenditure 
as a measure of the benefits  a Member State enjoys from membership in the EU. 

Table 3b 

Difference  between  actual  VAT  contributions,  TOR  collection  and 
theoretical  GNP  contributions 
(Ecu million, data for  1997, excluding the UK correction) 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Difference between VAT contributions and theoretical GNP ones 
(a minus sign means that the VAT contributions are lower than those to be paid urder a system based only on GNP) 

-266 

-71 

708 

20 

98  j  159  | 

8 

-1236 

7 

42 

93 

79 

- 45 

72 

332 

Difference between 
(a minus sign means that TC 

TORc 
)R collec 

ollected in each country and theoretical GNP contributions 
ted are lower than a contribution to be paid under a system based only on GNP) 

565 

5 

-405 

-56 

-391 

-975 

124 

-812 

-9  1052 

-135 

-31 

-68 

-55  1190 

299 

-66 

303 

-36 

-292 

-816 

132 -2 048 

-2  1094 

-42 

48 

-113 

17  1521 

Sum of the previous two lines 

Additional  advances  towards  improving  equity  in  contributions  will  take  place  over 
the  next  years  as  the  share  of  TOR  and  VAT  in  own  resources  will  decline  further. 
However,  perfect  equity cannot  be expected  since the VAT resource  will continue to 
yield revenues which will not be correlated  with national  income and will continue to 
introduce an element, albeit small, of regressivity into the system.  In addition, equity 
in gross contributions is hindered by the presence of the UK rebate mechanism, which 
reduces their  correlation with the ability to pay. 

1.2.2.  Financial autonomy, cost effectiveness, transparency and simplicity 

In  certain  respects,  the  present  system  shows  shortcomings  in  terms  of  financial 
autonomy,  cost  effectiveness  and  transparency.  To  a  large  extent,  this  is  due  to  the 
fact  that  there  are  inevitable  trade-offs  between  financial  autonomy,  equity  and  cost 
effectiveness.  The dominant part of EU resources derives from national  contributions 
from  the treasuries  of the Member  States;  this reduces  the financial  autonomy  of the 
EU,  but  offers  a good  degree  of  equity  and  of  cost  effectiveness.  Traditional  own 
resources  contribute  to  financial  autonomy,  but  their  equity  is  contested  and  their 
collection and control are very cumbersome. 

Financial  autonomy 

Traditional  own  resources  represent  currently  the  only  true  own  resource  of  the  EU. 
However,  the  importance  of  TORs  in  financing  EU  expenditure  is  diminishing 
markedly.  Moreover,  although  customs  duties  and  related  revenues  resulting  from 
the  EU's  commercial  policy  formally  belong  to  the  EU,  Member  States  that  collect 

7-10-98 

9-

these  duties  tend  to  regard  them  as  national  contributions.  This  is  not  appropriate 
and it reduces further  the significance  of budgetary balances7. 

The  lack of  financial  autonomy resulting  from  the low share of real own resources in 
the  financing  of the budget  is considered  responsible  for  various  shortcomings  of the 
present  system. 

• 

• 

First,  it has made the EU increasingly  dependent  on intergovernmental  transfers; 
such  dependence  has  already  contributed  to  conflicts  and  has  encouraged 
Member  States  to  seek  to  maximise  ill-defined  concepts  of  the  national  benefit 
from  the EU budget; 

second, the system whereby all financing  needs not covered by TOR or the VAT 
resource  are covered  by the GNP resource  is very  cost  effective,  but  it results  in 
changes  in  EU  expenditure  at  the  margin  being  reflected  in  changes  in  national 
spending.  This  entangles  EU  financing  issues  with  domestic  financial  and 
budgetary  policies  at  the  expense  of  revealing  to  the  citizens  the  EU-wide 
priorities at stake; and 

• 

third,  democratic  accountability  is  obscured  because  of  lack  of  a  direct 
relationship between citizens and taxes paid to the EU budget. 

Cost effectiveness 

The  collection  of  traditional  own  resources  is  very  cumbersome  and  the  attitude  of 
Member  States  towards  these  resources  is  ambiguous.  Customs  legislation  is  very 
elaborate  with  over  eleven  thousand  tariff  positions  and  a Community  customs  code 
of about  400 articles8.  However,  international  trade is a much more  complex  reality 
with new products and new trade flows  appearing every day.  Under these conditions, 
there is scope  for fraud,  irregularities and litigation. 

In  the  present  institutional  system,  Member  States  are  responsible  for  collecting 
traditional  own  resources  and  putting  them  at the disposal  of the  Commission.  The 
latter  has  the responsibility  to control  the way  Member  States  perform  this  task.  To 
this  end  a  complicated  machinery  has  been  set  up  which  amounts  to  a  form  of 
multilateral  surveillance  of  the  way  in  which  Member  States  carry  out  their  duties. 
Any  loss  in  the  collection  of  TOR  in  a  Member  State  must  be  made  up  by  a 
corresponding  increase  in the  GNP resource  called.  As  a result,  the negligence  of a 
Member  State  has  financial  consequences  for  all  the  others.  For  this  reason,  the 
results  of the control  activities  of the  Commission  are made  available  to  all  Member 
States9 and all important decisions on the non recovery or remission of customs duties 
as  well  as  on  the  write-off  of  amounts  impossible  to  collect  are  taken  with  some 
involvement of all Member States. 

7 
8 

9 

For a discussion of the concept and measurement of budgetary  balances see Annex 3. 
There  are,  in  addition,  over  900  articles  of  the  Regulation  laying  down  the  provisions  for  its 
implementation. 
This provision also applies to the controls on the VAT and GNP resources. 

7-10-98 

10-

These provisions  result  in  a substantial  amount  of administrative  work  which,  as the 
reports  of  the  Court  of  Auditors  show  year  after  year,  always  falls  short  of  what 
would  be  desirable  for  a  better  protection  of  the  financial  interests  of  the  EU. 
In 
addition,  the complexity  of the procedures  for  the recovery  of amounts put  at risk by 
fraud  or  irregularities  appears  to  discourage  most  national  administrations,  which 
often  appear unable or unwilling to recover what is due. 

Under  these  conditions,  Member  States  appear  to  prefer  to  finance  the  EU  budget 
through  GNP instead of through  a more effective  collection of TOR even if this must 
have  implications  for  the  distribution  of  the  financial  burden. 
In  effect,  they  are 
neither  inclined,  for  understandable  reasons,  to  tighten  the  regulatory  framework  of 
the customs  system  nor  do  they  appear  willing  to commit  the necessary  resources  to 
the collection of customs duties. 

Transparency and simplicity 

With  four  Member  States  having  their  VAT base capped  in  1998 (as, probably,  will 
be the case  for  all  the  future  new  Member  States), the VAT resource  is becoming  in 
effect  a GNP  resource.  In  its  1998  report  on  the  functioning  of  the  VAT  and  GNP 
resources,  the  Court  of  Auditors  points  out  that  the  VAT  resource,  despite  being 
formally  a  tax  on  consumption,  has  taken  the  character  of  a  financial  contribution 
from  Member  States  to the  EU budget  with  its  determination  depending  to  a  certain 
extent on statistical calculations (especially for the estimation of the weighted  average 
rate). 

The presence of the UK rebate contributes to obscuring the exact nature of the  system 
and  its consequences.  Not  only,  as  already  indicated  previously,  does  it  reduce  the 
correlation  between  gross  contributions  and  ability  to  pay,  but  its  calculation  and 
financing  arrangements  are  so  complex  as  to  impair  the  transparency  of  this 
mechanism. 

1.3.  Options  for  a new system  of  contributions 

Modifications  of  the  present  system  of  contributions  could  either  make  it  simpler 
through  a  reduction  in  the  number  of  sources  of  financing  or  could  introduce  new 
own  resources  in  addition  to  the  existing  ones  or as a replacement  of  some  of  them. 
The arguments  in favour  of a simplification  of the present  system of contributions  are 
essentially based on the shortcomings of the present own resources system in terms of 
financial  autonomy,  cost  effectiveness  and  transparency  discussed  earlier.  The 
introduction  of  new  own  resources  is  sought  as  a  way  of  improving  financial 
autonomy. 

New  fiscal  own  resources  would  clearly  reduce the share  of the  EU  budget  financed 
through  national  contributions  and  would  ease  the  tensions  arising  from  attempts  to 
measure  net  contributions.  Should  the  budget  be  fully  financed  through  own 
resources, the  link between  changes  in EU expenditure  and corresponding  changes  in 
national  expenditure  would  also  be  broken.  As  well,  if  the  EU  budget  were  to 
become entirely  financed  through  "real" own resources whose rates of call were to be 

7-10-98 

-11 

decided  every  year,  the  budgetary  authority  would  have  full  control  of  the 
expenditure  and  of the revenue  side  of  the budget.  Finally,  proponents  of new  own 
resources  expect them to enhance political  accountability,  transparency  and  visibility 
to  citizens.  However,  because  the  distribution  of the  tax  bases  for  fiscal  resources 
are  not  equal  across  the  Member  States,  introducing  a new  own  resource  and,  thus, 
enhancing  financial  autonomy,  could  be  in  conflict  with  enhancing  equity  in 
contributions. 

1.3.1. 

Simplification of the present  system of contributions 

The yield  from  TOR is low and will decline  further  while their administration  is very 
cumbersome.  The frustration felt with TOR is such that proposals have been made to 
return them to the Member  States.  While admitting that TOR should theoretically  be 
attributed  to  the  central  level,  it  is  sometimes  considered  that  their  relative  share  in 
the  total  financing  of  the  EU  is  so  low  that  returning  them  to  the  Member  States 
would yield practical advantages compensating for the implicit sub-optimality of such 
attribution.  The  distributional  problems  that  are  likely  to  appear  could  be  partly 
reduced  through  measures  aimed  at  encouraging  the  use  of  the  transit  facility  that 
allows  the  payment  of  customs  duties  where  the  goods  are  finally  consumed.  It  is 
clear that  even if customs  duties ceased  to be  own  resources  of the  EU budget,  they 
would continue  to represent  an important  instrument  of the Union's  trade policy  and 
their  effective  collection  would  require  some  form  of control  by the  Commission  on 
behalf of the Member States. 

The  present  VAT-based  own  resource  has  drawbacks  with  respect  to  equity  in 
contributions,  financial  autonomy  and  transparency.  As  the  Court  of  Auditors  has 
recently  underlined  again,  it  is  hardly  an  own  resource  given  the  way  in  which  its 
base is calculated  and the existence of rules which,  for  some Member  States, make it 
effectively  a GNP based  resource. 
In  addition,  its uniform  rate  of call  varies  every 
year according to the size of the UK rebate.  This is due to a provision that calls  for 
the UK  rebate to be notionally  financed  through  VAT  and  therefore  reduces  further, 
by a variable amount, the maximum rate of call. 

If on the occasion  of a future  modification  of the Own Resources Decision  the VAT-
based resource were maintained, it would at least appear necessary to call it at a  fixed 
rate.  This could be achieved  through putting  an end to the presumption  of  financing 
the  UK  rebate  on  the  VAT  resources  accompanied  by  a  corresponding  permanent 
lowering of the maximum rate of call10. 

Own  resources  almost  always  entail  significant  collection  and  control  costs  and  are 
In addition, 
therefore  less cost effective  than straightforward  national  contributions. 
no own resource can be more equitable  - in the sense of being linked to the ability to 
pay - than a contribution  based on GNP which  constitutes the best available proxy  of 
such  ability  to pay.  Indeed,  some  proposals  for  new  own  resources  include  parallel 

10  On  average,  over  recent  years  this  provision  has  lowered  the  rate  of  call  of  VAT  by  0.12 

percentage points - see Annex 4. 

7-10-98 

12-

corrections  in  the  form  of  an  equalisation  mechanism  intended  to  align  gross 
contributions to GNP shares. 

A  further  consideration  in  this  context  is  that  taxes  influence  the  allocation  of 
resources  and  there  is  some  merit  in  having  a  system  of  national  contributions  and 
leaving  it to the Member  States to decide on the best  way  to raise the  corresponding 
financial  resources. 
the 
replacement  of  the  present  system  of  own  resources  with  a  system  based  solely  on 
GNP contributions, which would provide no financial  autonomy whatsoever, but that 
would be equitable, transparent and cost  effective. 

These  considerations  have  prompted  proposals  for 

Whatever  the  future  of such  a proposal,  it must  be underlined  that  the present  GNP-
based  contributions  suffer  from  the  unwillingness  of  Member  States  to  use  the  best 
available  data  for  the reference  aggregate.  Estimating  the total  value  of the  national 
income of a country is a difficult  task.  In particular, the methods used must evolve in 
line with the transformations  of the economies to take into account the changes in the 
goods  and  services  produced  and  delivered.  To  this  end,  the  national  statistical 
offices  of the European  Union have recently developed  a new common  methodology 
to estimate GNP11  and new decisions  are taken periodically  to update  and refine  it (a 
recent  important  one was  taken  at the  end  of  1997  and  concerned  the  imputation  of 
financial  services  indirectly  measured).  However,  Member  States  have  sought  to 
delay  the  use  of  these  new  measures  in  the  EU  budget12  thus  leading  to  the  co 
existence of two statistical  series for GNP:  one, of better quality, for  general use and 
another, less reliable, used  for the assessment of the GNP contributions.  If GNP will 
continue  to  play  a  role  in  the  system  of  own  resources,  this  situation  must  be 
corrected  with  any  GNP  contributions  based  on  the  most  recent  and  most  reliable 
definitions. 

1.3.2. 

Criteria for  new own resources 

A set of criteria, some of which derive from  economic rules regarding the  assignment 
of  policy  instruments  to  different  levels  of jurisdiction  (Member  State  or  EU)  while 
others  are  more  specific  to  the  EU,  can  be  used  to  select  candidates  for  new  own 
resources13.  Economic  theory  predicts  that  tax  instruments  belong  optimally  to  a 

11 

12 

13 

European System of Accounts  (ESA)  1995, Council  Regulation  2223/96 of June 25, 1996, Official 
Journal of the European Communities L310, November  30,1996. 

The  use  of  the  figures  resulting  from the  new  system  of  national  accounts  will  have  to  wait  until 
the  adoption  of  a  new  Own  Resources  Decision  while  those  taking  into  account  the  indirectly 
measured financial services will need an ad hoc decision by the Council. 

For  a  review  of  these  issues  see  Commission  of  the  European  Communities  (1993):  "Stable 
Money  -  Sound  Finances  Community  Public  Finance  in  the  Perspective  of  EMU",  European 
Economy no. 53, especially  ch. 7;  see also Annex 2. These criteria obviously  do  not apply  in the 
case of a tax  introduced throughout  the  EU as instrument for the  implementation of  a  Community 
policy. 
In  this  case,  the  rationale  for  the  introduction  of  the  tax  would  derive  from  the  specific 
policy  in question  and the  attribution of  its yield to the  EU  budget would only  have to  respect the 
criterion of cost effectiveness. 

7-10-98 

13 

higher  level  of  authority  when  there  are cross-border  externalities  and/or when  it  is 
difficult  to attribute specific revenues to specific Member States. 

In the case  of the EU, additional  specific  criteria are appropriate.  A  very important 
one  is  that  contributions  ought  to respect  horizontal equity  so  that  among  Member 
States  of  equal  ability  to  contribute  all  do  indeed  contribute  an  identical  amount. 
However, given that the level of real income is not equal among the Member States, it 
is  sometimes  felt  desirable  that  vertical  equity  be  satisfied  as  well,  so  that 
contributions  to  the  EU  budget  are  a  function  of  the  Member  States*  differential 
ability to pay.  Recently  Spain, supported by Greece and Portugal, has proposed the 
introduction of a significant  element of progressivity into the contributions to the EU 
budget. 

It is also necessary that new own resources be consistent with other EU policies so as 
not to offset  their effects.  Their visibility  for the EU citizens is also desirable while, 
on a more technical level, their base must present a sufficient  degree of harmonisation 
and their collection should be possible without too high administrative costs.  Finally, 
their yield must be high enough to finance a substantial amount of EU spending. 

1.3.3. 

Possible future  own resources 

The search for new own resources has so far proved elusive.  This has been partly due 
to  the  generally  good  performance  of  the  present  system,  which  has  blunted 
incentives  for  finding  new  resources,  but  principally  to  the  difficulties  involved  in 
establishing new own resources and also to differing  political priorities.  Since  1992, 
however,  interest  in establishing  new own resources has incr~<ised, in part  reflecting 
institutional  initiatives  and  in  part  related  to  emerging  new  possibilities14.  The 
publication of a report by the European Parliament on new own resources, advocating 
a modulated VAT-based system15, is important in this context. 

A  modified  VAT  resource  offers  the  potential  of  becoming  an  important  own 
resource in the future.  Such a tax would be highly visible to taxpayers and would be 
consistent  with  the  establishment  of  EU-wide  minimum  tax  rules  and  would  also 
generate  sufficient  revenues  for the budget.  However, 'VAT is  levied  on  a national 
tax base and it is difficult  to see its revenues as belonging  to the EU, and also it may 
entail considerable administration costs. 

A  European  Parliament  (1994)  report16  advocated  a new  own  resource  based  on a 
common VAT call  rate across the Member States, differentiated  across  commodities 
according  to two rates, a lower  one  and a higher one,  of  say  1.5  per cent  and 3 per 
cent.  The tax would be levied on a harmonised base through declarations  explicitly 
recording  that  it  is  an EU  tax.  Total  VAT revenues  would  be divided  between the 

14 
15 

16 

Annex 2 reviews in detail eight specific proposals for new own resources. 
See  European  Parliament  (1994):  "Draft  Report  on  a  New  System  of  Own  Resources  for  the 
European Union", Rapporteur Horst Langes, Committee of Budgets, A3-0000/94. 
See European Parliament (1994):  op. cit., footnote 15. 

7-10-98 

14 

national  budget  and  the  EU,  and  national  parliaments  would  determine  the  part  for 
domestic  budgetary  purposes  while the EU budgetary  authority  would  determine  the 
part to be attributed to the Community budget. 

It would  clearly involve a number of  technical 
The proposal  could be implemented. 
problems,  but  these  could  be  overcome  if  there  was  the political  will  to  proceed  in 
this direction. 
It is questionable, however,  if such a system  should be  accompanied, 
as  in the European  Parliament  proposal, by  an equalisation  mechanism  ensuring  that 
national  contributions  would  be  proportional  to  each  Member  State's  share  in  the 
GNP  of  the  Union17. 
If the  idea  is  to  tax  the  consumption  of  individuals,  then  the 
concept of national contributions should not enter into the equation. 

Other possible  own  resources -  a form  of withholding  tax,  a C02/energy  tax,  excise 
taxes, seigniorage, corporate  and personal  income taxes, new communication  taxes  -
are discussed  in the Annex  "Review of possible  new own resources for  the  European 
Union" (Annex 2).  At this stage, it is important  to note that, despite proposals  made 
for new own resources, there is little consensus about which one(s) would be the most 
appropriate.  This  is  a  reflection  of  differences  of  views  regarding  the  future 
orientation of European  integration. 

1.3.4. 

Progressivity  in  contributions 

A proposal  to  introduce  progressivity  in the system  of own resources  has been  made 
by  Spain.  The proposal, which  is  supported  by  Greece  and  Portugal,  is  founded  on 
the  P; otocol  on  Economic  and  Social  Cohesion,  in  particular,  on  the  declaration  of 
intent  of  the  high  contracting  parties  to  take  "greater  account  of  the  contributive 
capacity  of  individual  Member  States  in  the  system  of  own  resources,  and  of 
examining  means  of  correcting, for  the  less prosperous  Member  States,  regressive 
elements existing  in the present  own resources system ".  It should be  stressed  at  this 
stage that, during the  1992 discussions of the  1993-1999 Financial Perspective, equity 
was  understood  to  mean  proportionality  with  GNP  and,  as  noted  in  section  1.2, 
measures  have  already  been  taken  to  address  the  regressive  elements  of  the  own 
resources  system.  The  proposal  recognises  that  improvements,  related  to  the 
increasing  importance  of  the  GNP  resource,  have  been  made  but  it  also  underlines 
that  progressivity  in  contributions  continues  to  be  absent  from  the  own  resources 
system. 

Greater  progressivity  in  contributions  could  be  achieved,  according  to  the  proposal, 
by  adjusting  the base  of the  GNP  resource  through  the use  of  coefficients  reflecting 
each Member  State's  relative  prosperity.  The  adjustment  can be complete  (applying 
to  the  GNP  resource)  or partial  (applying  to only  part  of  the  GNP  resource),  and  in 
the  latter  case  progressivity  would  also  be  partial.  Member  States  could  also  be 
grouped  into classes of relative prosperity  (for  example, Member  States with  income 
per capita less than 90 per cent of the EU average, those between 90 per cent and  100 

17  See Annex  2 for a more detailed discussion of this proposal. 

7-10-98 

-15 

to  each  class. 
per  cent,  etc)  with  specific  adjustment  coefficients  assigned 
Contributions  to  the  EU  budget  would  then  be  determined  according  to  the  new 
bases.  The new resource could ultimately, it is argued, replace the VAT resource. 

Table 4 

Modifications  of total national contributions  relative to the present  system 
Progressivity  proposal  applied to the GNP  resource 

(adaptation of the GNP base using the ECU index of GNP per head; 
the percentages indicate changes relative to present total contributions) 

1996 

Ecu million 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 
FIN (1) 

S 
U K( 1) 

Total 

75.9 

134.9 

1105.6 

-155.4 

-551.1 

311.0 

-45.4 

-404.0 

38.2 

55.3 

102,3 

-152.2 

-6.7 

67.9 

-576.2 

0.0 

% 

2.7 

9.6 

5.2 

-13.8 

-11.9 

2.5 

-6.5 

-4.4 

23.5 

1.2 

5.4 

-17.6 

-0.7 

3.4 

-6.8 

1997 

Ecu million 

70.0 

178.6 

1043.4 

-204.1 

-803.9 

259.1 

-45.4 

-466.4 

47.9 

44.5 

102.0 

-199.3 

1.3 

71.1 

-98.9 

0.0 

% 

2.3 

11.6 

4.8 

-17.1 

-14.8 

1.9 

-6.4 

-5.3 

27.7 

0.9 

4.8 

-18.2 

0.1 

3.0 

-1.1 

1)  The technicalities of the proposal result in these countries marginally benefiting from the operation of the 
progressivity mechanism even if their index of GNP per head is slightly above 100 (see Annex 7) 

It should be noted  at the outset that  the proposal  does not entail  the introduction  of a 
new own resource as such but it provides  for a significant  modification  of an existing 
resource  (GNP).  A  simulation  of  the  impact  of  the  proposal  on  the  budget 
contributions in  1996 and  1997 is presented in table 4. 

The proposal  is prima facie  appealing  since progressivity  is found  in virtually  all the 
Member  States'  national  tax  systems.  However,  the  proposal  has  an  important 
drawback  in that  it does not  acknowledge  the  nature  of  solidarity  and  its practice  in 
the  Community.  There  are  two  main  reasons  for  the  current  EU  choice  of 
implementing solidarity through the expenditure side of the budget18. 

18  The arguments are developed in greater detail in Annex  7. 

7-10-98 

16 

First,  solidarity  in the  EU  is  mainly  expressed  in  the  form  of  improving  real 
convergence by directing funds mainly to eligible regions in any Member State 
rather than to a Member State as a whole. 

Second,  achieving real convergence has a higher probability under expenditure-
based progressivity  than under progressivity  in contributions.  The reason  for 
this  is  that progressivity  in contributions,  by  lowering  the  financing  shares  of 
the less prosperous Member States, would leave it up to them to use the  funds 
as they  see  appropriate.  It is plausible  to expect  that, in this case,  investment 
activity  would  not  be  strengthened  as  much  as  under  expenditure-based 
progressivity. 

7-10-98 

- 17 

2. 

THE  ISSUE OF BUDGETARY IMBALANCES 

Budgetary  balances  (also  called  net  balances),  measured  by  the  simple  difference 
between  contributions  to  and  receipts  from  the  EU budget,  represent  only  a  narrow 
view  of,  and  fail' to  fully  account  for,  the  benefits  accruing  to  Member  States  from 
participating in the EU19. 

Recorded  budgetary  flows  fail  to  account  for  positive  externalities  arising  from  EU 
policies.  For  example,  CAP,  structural  operations  and  external  expenditure  benefit 
not only the immediate recipients but also give rise to spill-over  effects  transcending 
national borders20.  It is clear that their consideration would modify  the assessment of 
the  accounting  imbalances  even  if  it  is  not  possible  to  quantify  the  importance  of 
these spill-overs. 

Graph 4a 

Total allocated expenditure, VAT and GNP contributions (before 
UK correction) and total payments to the EU budget 
(percent of GNP; average 1995-1997; the data for "allocated expenditure" 
include administrative expenditure) 

L 

IRL  GR  P 

E 

B  DK  FIN  F 

I  NL  A  UK  S 

D 

There  are  also  difficulties  associated  with  the  identification  of  the  ultimate 
beneficiaries  of EU expenditure policies;  for instance, CAP export restitutions do not 
necessarily  benefit  the residents of the country where they  are paid.  In addition,  EU 
budget  expenditure is heterogeneous  and comparisons of total  amounts received  have 
often  limited meaning  in appreciating  the "benefit"  resulting from such payments:  a 
given  amount  spent  in  purchasing  goods  and  services  does  not  bring  the  same 
advantages  of  the  transfer  of  a  grant  of  an  equivalent  amount.  Similar  problems 

19  See Annex 3 for a discussion. 

20 

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

7-10-98 

18 

appear  on  the  revenue  side:  the  country  where  customs  duties  are  collected  is  not 
necessarily  the  one  of  residence  of  the  economic  agents  ultimately  bearing  their 
burden. 

The  definition  of budgetary  balances  is  also fraught with  significant  conceptual  and 
accounting  problems.  To  compute  budgetary  balances  it  is  necessary  to  make 
numerous choices on the items to be included in the receipts and expenditure  flows  as 
well as on the reference  periods (e.g. cash vs. accrual figures, surpluses from previous 
years,  etc.).  Depending  on  the  choices  made,  it  is  possible  to  obtain  numerous, 
equally  valid,  definitions  of  budgetary  balances  which  sometimes  produce 
significantly  different  results21. 

Graph 4b 

EU expenditure  (excluding  administration), VAT and  GNP  contribution 
(before  UK correction)  and  total  payments  to  the  EU  budget 

(percent of GNP; average  1995-1997) 

'total expenditure excluding administration", 
{payments Jfcoro the-EU budget} —  1. 

total payments to the EU budget 

IRL  GR  P  E  DK  FIN  F  B 

I  NL  A  UK  S  D 

Nevertheless,  the  size  of  some  of  these  imbalances  has  been  at  the  centfe  of 
discussions  for  many  years22.  In  response,  a compromise  was  struck  in  1984  at  the 

21 

22 

See Annex  3 and  Commission  of  the  European  Communities  (1997):  "Budget  Contributions,  EU 
Expenditure, Budgetary  Balances and Relative Prosperity of the Member States", paper  presented 
by  President  Santer to the  Ecofin Council, October  13.  The two definitions  used in this  report  are 
the  UK  rebate  definition  (concept  used  in  the  calculation  of  the  UK  rebate)  and  the  operational 
definition  (difference  between  all  moneys  paid  to  and  all  moneys  received  from  the  budget 
excluding administrative expenditure and expenditure related to other EU institutions). 

The  largest  imbalances, although  substantial in absolute terms, measured as a percentage of the 
GNP,  are  much  smaller  than  the  regional  budgetary  positions  existing  within  Member  States.  A 
recent  study  conducted  under  contract  for  DG  XIX  indicates  that,  using  a  definition  of  regional 
budgetary  positions  comparable  to  that  commonly  used  in  the  relationships  between  Member 
States and the  EU budget, the average negative budgetary  position of a region of northern  Italy is 
equal  to  almost  4  per  cent  of  its  GDP, while  the  average  positive  balance  of  a  southern  Italian 

7-10-98 

19 

Fontainebleau  meeting  of  the  European  Council.  According  to  the  conclusions  of 
that meeting, 

"Expenditure  policy  is  ultimately  the  essential  means  of  resolving  the  question  of 
budgetary  imbalances. 

However,  it  has  been  decided  that  any  Member  State  sustaining  a  budgetary 
burden which  is  excessive  in  relation  to  its  relative  prosperity  may  benefit  from  a 
correction at the appropriate  time."23 

The reference  to expenditure policy  as the means  of correcting budgetary  imbalances 
reflects  the prominent role that expenditure decisions have in their determination  (see 
graphs  4a  and  4b).  Correcting  budgetary  imbalances  through  ad  hoc  mechanisms 
essentially amounts to a refusal  to act directly on the sources of the imbalances. 

Graph 5 

Negative balances of some Member States 
("UK rebate" definition; percentages of GNP; United Kingdom before correction) 

0.7 

Germany 

Netherlands 

Austria 

Sweden  United  Kingdom 

^ 1 9 95  E31997 

ffl1999 

In  the  present  part  of  the  report,  the  first  section  reviews  the  performance  of  the 
correction  mechanism  in  favour  of  the  United  Kingdom  set  up  following  these 
In March  1998, four  Member  States,  namely  Germany,  the  Netherlands, 
decisions. 
Austria and Sweden have stated their belief that their negative balances are to be seen 
as  excessive  in  relation  to  their  prosperity  under  the  terms  of  the  Fontainebleau 
agreement. 
The  second  section  of  the  report  examines  the  development  of  the 
balances of these Member States. 

region is equal to around 7 per cent;  see G. Pola (1998):  "The Regional Incidence of a Central 
Budget -  The Italian Case". 

23  See  Fontainebleau  European Council, Conclusions  of the  Presidency, Bulletin of the European 

Communities 6-1984. 

7-10-98 

-20-

The  third  section  provides  some  indications  of  the  possible  effects  of  the  Agenda 
2000  reforms  on  the  budgetary  imbalances  of  the  five  countries  examined  in  the 
previous  two sections.  Finally, the fourth  section reviews  some of the main  options 
available  in  relation  to  the  issue  of  budgetary  imbalances:  phasing  out  of  the 
correction mechanism  for the United Kingdom, corrections on the expenditure side of 
the  budget  and  application  of  a  correction  mechanism  to  all  Member  States 
experiencing  large imbalances. 

2.1.  The UK budgetary  imbalance24 

The  budgetary  imbalance  of  the  United  Kingdom  was  at  the  centre  of  the  political 
debate  for  about  a  decade  (1974-1984)  provoking  frequently  stalemates  in  the  EU 
decision-making  process.  The  question  was  finally  settled  at  the  Fontainebleau 
European  Council  of  1984 and the resulting rebate mechanism  constitutes  an integral 
part of the Own Resources Decisions taken subsequently.  The rebate was reviewed in 
1988 and  1992 and on both occasions the European  Council decided that it should  be 
continued. 

Graph 6 

Share  of  the  United  Kingdom  in  (VAT  and  GNP) 
payments  and  in  EU  (allocated)  expenditure 

(percentage  of  totals;  accruals  figures; 
1 9 9 5 - 9 7:  provisional  figures;  1998:  forecasts) 

25 

87 

68 

89 

90 

91 

92 

93 

94 

95 

96 

97 

98 

The size of the budgetary  imbalance of the United Kingdom - and therefore  that of its 
compensation  - has fluctuated  substantially since  1985 around half a point of GNP  for 
the  imbalance  and  0.3  per  cent  of  GNP  for  the  rebate25. 
Graph  6  shows 
developments  in the shares of the United Kingdom  in payments to the EU budget  and 
in EU expenditure over the period  1987-1998. 

24 

25 

For more details on the functioning of the UK rebate, see Annex 4. 

See Annex  4 for  a more detailed analysis of the evolution of the UK rebate and an explanation of 
its variability. 

7-10-98 

21 

Graph  7  shows  that  the  mechanism  has  been  effective  in  reducing  substantially  the 
negative balance of the United  Kingdom.  However,  even after  the rebate the  United 
Kingdom remains a larger net contributor to the EU budget than Member States with 
a higher capacity to pay. 

Graph 7 

Budgetary balance of the United Kingdom 

(UK rebate definition percentages of GNP; actual data, see table 7, Annex 8 and Annex 4;1998: forecast ) 

-0.7 

1985  1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 

• before compensations  ; : v 

Some of the conditions  that prevailed  at the time the mechanism  was decided  do not 
apply any more: 

i)  Changes  in the composition  of  EU  spending  have  modified  the  rationale  of  the 
compensation.  Whereas in  1984, it had essentially  the nature of a correction  for 
the  specific  agricultural  problem  (CAP  represented  about  70  per  cent  of  total 
allocated  expenditure), it has now lost to a great extent this characteristic  since it 
corrects  equally  the  agricultural  problem  as  well  as  the  United  Kingdom's 
contribution  to  the  solidarity  effort  of  the  EU  and  to  its  other  policies. 
If  a 
correction  on the  expenditure  side of the type presented  in  section  2.4.2  (partial 
reimbursement  of  CAP  direct  aids)  were  to  be  introduced,  this  consideration 
would become even more relevant. 

ii)  The budgetary  imbalance of the United Kingdom  is no longer unique. 

In  1984, 
the  imbalance  of the United  Kingdom,  before  correction,  was  the  largest  of  the 
Community.  In recent years, four more countries have budgetary  imbalances as 
large as  the United Kingdom's (see graph 8). 

iii)  The gap in relative prosperity between the United Kingdom and some other large 
contributors to the EU budget has narrowed.  The United Kingdom has a relative 

7-10-98 

22-

prosperity (and a corresponding relative capacity to pay) around the EU average 
and will  certainly  be  above  this  mark  after  the  forthcoming  enlargement  of the 
EU26. 

The  mechanism  also  has  some  technical  drawbacks  and  a  more  fundamental, 
systemic,  characteristic  which,  although  not  new  or  unexpected,  ought  to  be 
underlined. 

With respect to the technical drawbacks, 

• 

• 

• 

the existence of the rebate leads  to budget contribution by the United  Kingdom 
representing  a  lower  proportion  of  its  income  than  those  paid  by  the  other 
Member States and therefore creates a distortion in the system of contributions; 

the  definition  of  the  EU  expenditure  to  be  used  in  the  calculation  of  the 
compensation ("allocated  expenditure") includes also administrative  expenditure 
whose nature is substantially  different  from the rest of EU spending  and whose 
inclusion  in  any  calculation  of  the  budgetary  imbalances  has  often  been 
questioned27;  and 

allocated expenditure is defined  in a way which may provoke a small, but quite 
unjustified, increase in the rebate at the time of enlargement.  With enlargement, 
some expenditure flows directed to the new Member States (e.g. PHARE), which 
are currently  considered  "external  expenditure" and therefore  do  not  enter  into 
the calculation of the rebate, will be replaced by payments under internal policies 
which enter into the calculation. 

The  systemic  characteristic  of  the  rebate  mechanism,  on  the  other  hand,  is  its 
function as a shock absorber for all changes in the imbalance of the United Kingdom; 
this would  place  this  country  in  a unique position  in respect to common budgetary 
decisions.  This not only risks insulating the United Kingdom from the implications 
of budgetary decision-making  but would have significant  adverse effects  at the time 
of enlargement.  The accession  of  a large number of new Member States with very 
low  standards  of  living  is  expected  to  have  a  negative  effect  on  the  budgetary 
positions  of  the  current  Member  States.  But  the  United  Kingdom  will  see  its 
budgetary position deteriorate by only one third of what would have happened in the 

26 

International  comparisons  of  income  are  made  by  comparing  the  levels  of  GNP  per  head  of 
different  countries.  These  comparisons  need  a  common  numeraire  which  is  usually  arrived  at 
through  the  use  of  current  exchange  rates  or  especially  computed  conversions  rates  -  the  so 
called  "purchasing  power  parities"  (PPP)  -  which  take  into  account  the  differences  in  the  price 
levels.  Data  based  on  current  exchange  rates  provide  a  measure  of  actual  income  and  are 
therefore  the  best  proxy  for  the  ability  to  pay.  Data  based  on. PPP estimates  measure  the  real 
income  of  the  average  citizen  of  a  country  when  he/she  spends  it  in  his  country. 
The 
Fontainebleau  agreement  does  not  specify  the  measure  to  be  used. 
The  EU  uses  both 
measures.  PPP  data  are  used  in  identifying  "objective  1" regions  and  the  beneficiaries  of  the 
Cohesion  Fund;  current  exchange  rates  are  used  in the  calculations  of  budgetary  contributions 
and  in the  identification  of  the  countries  benefiting  from  the  lower  level  of  capping  of  their  VAT 
bases. 

27 

For this and other difficulties in defining budgetary imbalances see Annex 3. 

7-10-98 

23 

absence  of  the  correction  mechanism,  which  would  put  into  question  an  equitable 
sharing out of the burden resulting from enlargement. 

The provisions  for the calculation  and for  the financing  of the rebate are extremely 
In any case, it 
complicated  and inhibit budgetary transparency and accountability. 
would be necessary to at least simplify  the financing  provisions and ensure that the 
VAT rate of call will not depend  any more on the size of the rebate (see paragraph 
1.3.1). 

2.2.  The  budgetary  imbalances  of  Germany,  the  Netherlands,  Austria  and 

Sweden 

Germany,  the  Netherlands,  Austria,  and  Sweden  have  recently  indicated  that  they 
consider their negative budgetary positions as excessive "relative to their prosperity" 
and, therefore, as candidates for a correction under the Fontainebleau agreement.  In 
addition,  these  countries  underlined  their  dissatisfaction  with  the  present  situation 
where other Member States of similar capacity to contribute to the EU budget show 
much smaller negative balances or even positive ones.  Graph 8 confirms  that these 
four countries do indeed record significant budgetary imbalances. 

Graph  8 

Budgetary balances of the UK, Germany, 
the Netherlands, Austria and Sweden 

(UK rebate definition ; before UK rebate ; percentages of GNP) 

United Kingdom 

1985  1986  1987  1988  1989  1990  1991  1992  1993  1994  1995  1996  1997 

The Fontainebleau agreement established that to benefit from a correction mechanism 
a  Member  State's  budgetary  burden  must  be  excessive  in  relation  to  its  relative 
prosperity28.  Relative prosperity is used to determine how well off are the citizens of 
a country or of a region compared to the EU average and is expressed in Purchasing 
Power  Standards  (PPS)  data.  Subsequently,  the  Protocol  on  Economic  and  Social 

28  See footnote 26 and Annex 4. 

7-10-98 

24 

Cohesion  established  that  the  proper  way  to  take  greater  account  of  the  Member 
States'  relative prosperity in the system of  own resources  is  by  considering  their 
contributive capacity.  A  Member  State's  contributive capacity can  be  used  to 
determine  its  (citizens')  capacity  to  contribute  to  a given  international  expenditure 
and  is  measured  by  converting  nominal  incomes  into  a  common  numeraire  using 
current  exchange  rates,  since  the  latter  constitute  the  terms  in  which  a  country's 
income  purchases 
including  EU  budget 
contributions29. 

international  goods  and  services, 

Over the last decade, substantial changes in the relative position of the four Member 
States, measured by either concept, have taken place and these have been particularly 
pronounced in the cases of Germany and Sweden (see table 5, and tables 8 and 9 of 
the Statistical Annex 8). 

Table  5 

C a p a c i ty  to  p ay  a nd  r e l a t i ve  p r o s p e r i ty 

Gross  national  product at current  market prices  per head of population  in Ecu and in  PPS 
(until 1990: D and EUR-15 exclude East Germany;  from 1991:  D and EUR-15 include the new Lander ) 

ECU 

P P S1) 

1984 

1990 

1991 

1995 

1997 

1984 

1990 

1991 

1995 

1997 

101.0 

104.0 

106.0 

121.5 

112.8 

106.-6 

105.3 

109.2 

115.7 

131.1 

127.8 

124.3 

140.2 

137.4 

106.7 

100.6 

102.4 

110.8 

129.9 

127.3 

114.6 

130.9 

118.6 

119.0 

117.8 

107.3 

110.4 

53.5 

52.3 

44.0 

66.7 

46.6 

71.4 

49.2 

63.4 

53.3 

62.6 

62.8 

69.0 

59.3 

74.2 

62.3 

79.4 

66.5 

76.8 

115.7 

111.4 

110.3 

116.4 

109.9 

111.7 

109.7 

113.0 

106.7 

61.9 

92.7 

61.3 

62.4 

101.1 

105.3 

69.1 

83.2 

79.9 

92.2 

59.6 

64.3 

68.7 

80.5 

101.9 

101.9 

105.5 

103.7 

171.4 

184.0 

192.3 

201.8 

186.4 

173.5 

185.2 

196.6 

181.6 

112.0 

100.7 

101.2 

113.7 

108.1 

102.7 

101.3 

102.3 

106.8 

109.3 

109.2 

111.8 

127.6 

118.8 

106.1 

105.8 

108.8 

111.1 

26.2 

35.8 

41.5 

46.8 

46.7 

130.1 

139.5 

123.3 

105.9 

104.9 

49.4 

99.1 

58.9 

99.9 

64.5 

91.1 

144.5 

137.8 

142.4 

111.7 

114.2 

111.8 

104.5 

102.4 

98.6 

89.1 

91.2 

83.8 

101.8 

99.6 

99.5 

96.3 

70.0 

93.6 

97.3 

96.4 

115.3 

112.5 

109.4 

69.0 

77.7 

104.3 

82.4 

102.6 

176.2 

106.0 

112.6 

69.6 

96.4 

93.7 

100.3 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

EUR-15 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

1) PPS = Purchasing Power Standards 

29 

See  footnote  26. 

7-10-98 

25 

The  origins  of  the  imbalances  of  these  four  countries,  however,  are  different. 
Germany  has had  a large negative budgetary position  for  many years.  As  a wealthy 
country with  a relatively  small  agricultural  sector  it  attracts  low  shares  of  Structural 
Funds and CAP spending.  The German negative balance deteriorated further  between 
1990 and  1995 for various reasons.  In  1990 and  1991, the country experienced  a rate 
of economic growth much higher than those of the other Member  States which  led to 
an increase in its relative share in GNP and in the financing  of the Community.  After 
unification  the  country  started  receiving  significant  payments  in  favour  of  the  new 
Lander  under  the  Structural  Funds,  but  this  was  more  than  compensated  by  the 
progressive  increase in  Structural  Funds spending decided  in Edinburgh  in  1992  and 
by their concentration in the so called  "cohesion" countries.  Since 1995, the negative 
budgetary position of Germany has remained essentially stable.  These  developments 
have  been  largely  consistent  with  the  projections  made  at  the  time  the  1988  Own 
Resources Decision was modified.  In fact, had EU expenditure increased by as much 
as  the  current  Financial  Perspective  would  have  allowed  the  negative  budgetary 
balance of Germany would have been larger30. 

Table 6 

Budgetary  balances  of  some  Member  States  in  1999  and 
w o r st  and  best  performance  in  the  1995-97  period 

(percentage of GNP; UK before correction) 

Germany 

Netherlands 

Austria 

Sweden 

UK 

worst 

best 

1999 

worst 

best 

1999 

-0.72 
-0.58 

-0.59 

-0.66 
-0.62 

-0.54 

More data can be found in Annex 8. 

Operational  balances 

-0.49 
-0.12 

-0.49 

-0.59 
-0.35 

-0.61 

UK correction definition 

-0.50 
-0.20 

-0.46 

-0.62 
-0.35 

-0.54 

-0.76 
-0.65 

-0.79 

-0.46 
-0.23 

-0.45 

• 

-0.73 
-0.38 

-0.68 

-0.57 
-0.27 

-0.58 

The case of the Netherlands  is different.  The definitions  of budgetary  balance  used 
in  graph  8 and  in  table  6  do  not  take  into  account  the  effect  known  as  the  "reverse 
gateway  effect",  i.e. the  fact  that  export restitutions paid where the port  facilities  are 
located,  often  do  not  go  in  favour  of  nationals  of  that  country.  The  figures  for  the 
Netherlands  are  influenced  by  this  effect.  As  long  as  export  restitutions  played  a 

30 

A  study  of  the  Bundesbank  published  in  November  1993  (Die  Finanzbeziehungen  der 
Bundesrepublik  Deutschland  zu  den  Europâischen  Gemeinschaften  seit  dem  Jahr  1988, 
Monatsbericht,  November  1993) had forecast  a negative  budgetary  position for Germany  in  1997 
30 per cent higher than the one effectively recorded. 

7-10-98 

26 

significant  role  in  the  Common  Agricultural  Policy  (together  with  measures  for 
storing  surpluses  temporarily  withdrawn  from  the  markets)  the  country  was  a 
significant  recipient  of  this  type  of  expenditure  to  the  point  of  appearing  for  many 
years as a large net beneficiary.  The reforms  of the CAP have gradually altered  this 
situation  and  the  Netherlands  has  gradually  become  a  net  contributor  to  the  EU 
budget  as  it  receives  low  returns  from  both  the  Structural  Funds  and  on  direct  aids 
from agricultural  expenditure. 

However, the position of this country  also depends to a large extent on the  definition 
of budgetary  balance  used  and,  in particular,  on the treatment  of customs  duties. 
If 
balances  are  calculated  according  to  the  provisions  of  the  correction  mechanism 
decided  in  Fontainebleau,  which  would  neutralise  the  impact  of  traditional  own 
resources  in  the  measure31,  the  negative  balance  of  the  Netherlands  is  currently 
somewhat smaller than that of the other countries. 

Both  Sweden  and  Austria  were  expected  to  have  negative  balances.  The  shares  in 
Agricultural and Structural Funds spending that these countries can expect up to  1999 
are  low. 
In  1997 these  two  countries  were  contributing  3.1  and  2.8  per  cent  of  the 
EU financing,  respectively.  Their shares in CAP spending were  1.8 and 2.1 per cent, 
while  their  shares  in  the  Structural  Funds  were  0.9  and  1.4  per  cent.  A  significant 
amount  of  spending  foreseen  for  these  two  countries  in  1995 was paid  only  in  1996 
and  this  explains  the  apparent  improvement  of their  position  in  1996. 
In  1997, the 
two  countries  received  Ecu  76 and  Ecu  71 millions, respectively,  as the  penultimate 
instalment of the temporary compensations decided in the accession treaties. 

It has often  been  underlined  that  in  1997 Germany's budgetary  balance  amounted  to 
This  estimate,  however,  was 
more  than  60  per  cent  of  all  negative  balances. 
influenced  by  the  strong  fluctuations  of  the  UK  rebate. 
In  1999,  the  budgetary 
balance  of  Germany  should  represent  slightly  less  than  50  per  cent  of  all  negative 
balances. 
In  coming  years  this  percentage  is  expected  to  come  down  further  as, 
following  enlargement,  more  Member  States  are  likely  to record  negative  budgetary 
balances;  it is likely that by 2006 Germany's  share in all negative budgetary  balances 
will have decreased to around 40 per cent. 

2.3.  The impact of Agenda 2000 on the most important budgetary  imbalances 

To understand the impact  of the Agenda 2000 programme on budgetary imbalances it 
is  necessary  to  consider  the  effects  of  both  enlargement  and  the  proposed  policy 
reforms. 

The  countries  which  will  join  the  Union  on  the  occasion  of  the  next  enlargement 
have  a  level  of  prosperity  well  below  that  of  all  the  current  members  and  will 
therefore become large net beneficiaries.  This implies that the budgetary positions of 
the  present  15  Member  States  will  have  to  undergo  a  corresponding  deterioration 

31  See Annex 3 for a discussion of these issues. 

7-10-98 

27 

which, on the basis of the approach that the Commission outlined in its Agenda 2000 
communication32,  can be  estimated  at around  0.15  per  cent  of their  GNP by 2006. 
As the Commission has indicated in Agenda 2000, this development  "cannot come as 
a surprise and should not give rise to claims for compensation ". 

The  reform  of  the  Common Agricultural  Policy  is  not  expected  to  affect 
significantly  the budgetary balances of the five countries examined in this section of 
the  report.  However,  this must be qualified  since  the  proposals  presented  by the 
Commission  in  March  of  1998  contain  numerous  provisions  which  may  affect 
payments in the individual Member States.  As a result, the eventual precise  effects 
on the budgetary positions of the Member States will depend on the outcome of the 
current negotiations. 

In general terms, the proposed reform aims at reducing the level of guaranteed prices 
while partially compensating the resulting income losses through increases in direct 
aids..  This may have an effect on the budgetary balances of the Member States which 
is  largely  of  a purely  accounting  nature  and  underscores  the fragile nature  of  the 
budgetary balances calculations.  The most notable example of this is in the case of 
the Netherlands. At present the Union  intervenes  in  the Netherlands  to  support  the 
price  of  produce  for  which  a  common  market  organisation  exists  through  exports 
restitutions.  The expenditure carried  out  in this country will benefit  the producers 
which  may  well  be  situated  in  other  countries;  say,  in  neighbouring  Belgium  or 
Germany.  As CAP spending moves  from  market  support  towards direct  aids, the 
producers in these two countries will be receiving in direct aids some of the support 
which they were previously deriving from the market  intervention measures carried 
out in the Netherlands.  As a result of this change, the recorded budgetary balance of 
the  Netherlands  will  deteriorate  correspondingly  while  those  of  Belgium  and 
Germany will improve without any fundamental  change in the underlying  situation. 
This  consideration  must  be kept  in  mind  when  examining  the  impact  of  the  CAP 
reform  on the budgetary imbalances of the Member States since it explains some of 
the expected changes. 

In global terms, the reform is expected to lead to an initial increase in CAP spending 
(until  2003/2004)  followed  by  a  stabilisation  as  implementation  of  the  reform  is 
completed.  The overall amount of spending plays also an important role considering 
that  for  most  countries  there  is  a  significant  difference  between  their  share  in the 
marginal financing of EU expenditure (i.e. their share in EU GNP) and their share in 
CAP expenditure which is not expected to change dramatically because of the reform. 

The main sectors affected  by the reform are arable crops, beef and the dairy products. 
Considering the parameters of the reform  and the importance of these sectors in the 
agricultural  sector  of  the  five  countries  examined  in  the  previous  sections,  it  is 
possible to predict that, if the Commission's proposals  were to be confirmed  by the 

32 

Commission  of  the  European  Communities  (1997):  Agenda  2000  For  a  Stronger  and  Wider 
Union, COM (97) 2000 and Bulletin of the European Union, Supplement 5/97. 

7-10-98 

-28 

negotiations,  the  reform  of  the  CAP  should  not  have  a  significant  effect  on  their 
budgetary imbalances. 

Once the reform  of the CAP will have reached  its full  effect  (i.e. towards the end  of 
the  period  covered  by  the  next  Financial  Perspective),  the  budgetary  balances  of 
Germany,  Sweden  and  of  the  United  Kingdom,  measured  as  a  percentage  of  their 
GNP,  should  hardly  change  compared  to  their  pre-reform  levels.  The  expected 
increases  in  CAP  spending  received  by  these  countries  should  be  offset  by  the 
increases in their contributions to the EU budget provoked by the change in total CAP 
spending.  The  budgetary  imbalance  of  the  Netherlands  could  record  a  small 
deterioration  although this may be largely an accounting effect  of the type mentioned 
at  the  beginning  of  the  section. 
The  budgetary  imbalance  of  Austria  could 
experience  an  improvement  although  this  essentially  would  be  the  result  of  the 
proposed 
transfer  of  rural  development  measures  from  structural  spending 
("heading  2" of the Financial Perspective) to agricultural expenditure ("heading  1"). 

More  uncertain  are  the  effects  of  the  reform  of  Structural  spending. 
The 
Commission  has  proposed  to  maintain  the  overall  EU  effort  in  the  structural  area 
constant  as a percent  of  GNP  at the  level of 0.46  per  cent  of the  GNP  of the  Union. 
This  effort,  however,  will  have  to cover  also  the  structural  part  of  the  pre-accession 
strategy and the aid to the new Member States.  For the current  15 Member States the 
proposed  reform  implies  some decline of total  spending  measured  as a percentage  of 
GNP between  1999 and 2006. 

The  precise  effects  of  the  reform  on  the  individual  budgetary  imbalances  are  still 
uncertain  and will depend  on the eligibility  decisions  to be made  on  the basis  of  the 
latest available data and on the outcome of the current negotiations.  The general aim 
of the proposals  presented  by the Commission  is to focus  resources  on the areas  and 
sectors  in  greatest  need.  This  is  to  be  achieved  through  a  stricter  geographical 
concentration  and  through  a  rationalisation  of  the  modes  of  intervention. 
In 
particular,  it is proposed  to reduce the number  of regions receiving the highest  levels 
of aid through  a strict respect of the conditions  for  eligibility  as "objective  1" regions 
(i.  e.  GDP  per  head  in  purchasing  power  parities  lower  than  75  per  cent  of  the  EU 
average).  A  greater  geographical  concentration  is  also  sought  for  the  so  called 
"objective 2" regions. 

Additional  elements  which  may  affect  the  distribution  of  Structural  Funds  spending 
amongst  Member  States  are the criteria  which  should be  used  to  determine the  level 
of per head  aid in the eligible regions.  These criteria  include the  gap between  GDP 
in  the  region  and  the  EU  average,  the  relative  prosperity  of  the  country  and  the 
relative level of unemployment. 

However  uncertain  these  elements  may  be,  it  is  possible  to  venture  some  broad 
considerations  which  can  contribute  to  a  better  assessment  of  the  trend  of  the 
budgetary  imbalances  being  discussed  here.  Austria,  Germany,  the  Netherlands, 
Sweden  and  the United  Kingdom  all contribute  to the  EU budget  with  shares  which 
are  substantially  higher  than  their  shares  in  structural  spending  and  are  therefore 

7-10-98 

- 2 9-

likely to see some  improvement  in their budgetary balances due to the lower  overall 
expenditure resulting from the reform,  even if this will be concentrated  in the regions 
characterized  by  the  greatest  need.  This  improvement  may  be  greater  in  the  case  of 
Germany.  A  strict  respect  of  the  75  per  cent  benchmark  for  the  choice  of  the 
In  addition, 
"objective  1" regions  will  not  affect  this  country  (except  East  Berlin). 
the overall  effect  of the criteria for the determination of the aid per head may  also  be 
to the advantage of the new Lander. 

As  a result  of  the whole Agenda  2000 package,  of the five Member  States  examined 
in this section, only the Netherlands is expected to experience between  1999 and 2006 
a deterioration  of its net balance of the same order of magnitude as that mentioned  at 
the  beginning  of  this  section  as  the  average  impact  of  enlargement  (about  0.15  per 
cent of GNP).  This result, however, is strongly  influenced  by the mechanical  effect 
of  the  shift  away  from  CAP  market  support  measures  to  direct  aids  payments  and 
should  not  correspond  to a parallel  deterioration  in the benefits  derived  by the  Dutch 
economy.  The  reform  of  the  Structural  Funds,  on  the  other  hand,  should  have  a 
small positive effect  on the budgetary balance of this country. 

The budgetary  balances  of Austria,  Germany  and Sweden  are expected  to  deteriorate 
somewhat  less than the impact of enlargement. In the case of Austria, the transfer  of 
rural  development  measures  from  the  structural  funds  to  the  CAP  should  provoke  a 
less  favourable  result  of  the  reform  of  the  structural  funds  matched  by  a 
corresponding better outcome of the CAP reform. 

Very  different  is  the  position  of  the  United  Kingdom  whose  budgetary  position 
(measured  as a percentage of its GNP) could remain broadly stable between  1999 and 
The  reforms  of  the  CAP  and  of  the  Structural  Funds  would  not  affect 
2006. 
negatively  the  budgetary  balance  of 
this  country.  Furthermore,  unless  the  UK 
correction  is modified,  the negative impact  of enlargement  on the budgetary  position 
of  the  United  Kingdom  would  be  reduced  by  the  operation  of  the  compensation 
mechanism. 

2.4.  Options for  reform 

If a broad agreement on the need to address the issue of budgetary imbalances were to 
emerge,  some  key  options  could  be  contemplated.  These  options,  which  are 
discussed  below,  obey  a certain  logic.  First,  on  the  financing  side,  it  is  possible  to 
consider that an orthodox  and transparent  system should be put in place.  This would, 
imply  that  the  UK  rebate  is  progressively  eliminated.  Secondly,  it  is  possible  to 
consider, in recognition of the fact that the principal cause of budgetary imbalances is 
the expenditure side of the EU budget, the possibility of implementing reforms  on EU 
spending with the view to reducing these imbalances.  And, third, ad hoc solutions on 
the  revenue  side  of  the  budget,  aimed  at  redressing  the  imbalances,  can  also  be 
contemplated.  The present section considers these possibilities  sequentially. 

7-10-98 

30 

2.4.1.  Return to a more straightforward  system 

It could be envisaged  progressively  to phase out or to reduce the correction  presently 
granted to the United  Kingdom  .  This could  find  a justification  in the fact  that  after 
enlargement, the relative prosperity  of the United  Kingdom,  which  is already  around 
the  EU  average  today,  would  almost  certainly  be  above  the  EU  average,  thus 
weakening  one  of  the  conditions  for  the  initial  granting  of  the  rebate.  In  addition, 
with  five  countries  experiencing  negative  budgetary  positions  of  a  similar  order  of 
magnitude, the maintenance  of  a special  treatment  for just  one of them  could  appear 
unjustified.  The  change  in  the nature  of  the mechanism  mentioned  in  section  2.1  -
from  correction of a specific  structural  agricultural problem to a reduction in the cost 
of all expenditure decisions - is also a strong argument. 

Furthermore,  it  is  conceivable  that  other  changes  to  the present  arrangements  might 
make the maintenance of the rebate superfluous  or, at least, less justified.  This could, 
for  instance,  be  the  case  of  the  introduction  of  a correction  on the  expenditure  side 
along  the  lines  indicated  in  the  next  section.  But  ending  the  UK  rebate  by  itself 
would not remove the current imbalances between the contributor Member States. 

Table 7 

Cost of the UK correction for Germany, the Netherlands, Austria and Sweden 

(percentage of GNP, 1995-1997 cash data, 1999 Preliminary Draft Budget) 

Germany 

Netherlands 

Austria 

Sweden 

19-5 
1996 
1997 
1999 

0.02 
0.03 
0.03 
0.04 

0.03 
0.05 
0.05 
0.07 

0.03 
0.05 
0.05 
0.07 

0.03 
0.05 
0.05 
0.07 

It  is  also  important  to  mention  that  there  exist  additional  possibilities  that  could 
contribute  towards  the  development  of  a more  straightforward  financing  system  for 
the  EU.  One  possibility  would  be  to  substitute  the  GNP  resource  for  the  VAT 
resource.  Clearly, as noted  earlier, the equity of the system  would  improve  since  the 
regressive  elements  associated  with  VAT  would  be  removed.  Table  3b  (in  section 
1.2.2) offers  an  indication,  for  the  year  1997,  of  the  effects,  per  Member  State,  of 
substituting  the VAT  resource  with  a theoretical  GNP  resource.  Another  possibility 
would  be  to  substitute  all  other  own  resources  (including  traditional  own  resources) 
with the GNP resource (the results for each Member State are also shown in table 3b). 

It  is  clear  that  there  is  a  trade-off  between  financial  autonomy  and  simplicity.  To 
replace  fiscal  resources  with  direct  contribution  from  Member  States may render  the 
system  more  intelligible  and  cost  effective,  but  it  certainly  reduces  further  financial 
autonomy  and, in the case of TOR, would  constitute  a significant  departure  from  EU 
orthodoxy. 

7-10-98 

-31  -

2.4.2. 

Correction on the expenditure side 

A  correction  on  the  expenditure  side,  which  would  not  require  modification  of  the 
Own  Resources  Decision,  would  be  consistent  with  the  Fontainebleau  conclusions 
and  would  address  the  fundamental  cause  of  budgetary  imbalances.  The  current 
It 
imbalances  result  essentially  from  Structural  Funds  and  agricultural  spending. 
would  not  appear  logical  to  correct  the  imbalances  resulting  from  structural 
interventions  as these have an explicit  redistributive  aim. 
It is however  conceivable 
to  modify  agricultural  spending.  Given  the  integrated  nature  of  the  Common 
Agricultural  Policy,  it is not  possible  to modify  spending  by Member  State, but  it is 
possible  to reduce the overall  amount  of spending which  is allocated  through  the EU 
budget. 

Table  8 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

Ô 

P 

SF 

S 

UK 

New 6 

Total 

Implications of a partial reimbursement (75%)1 of CAP direct aids 
(Year  2006, in  Euro  million  and  in  percent  of  GNP,  at current  prices) 

Change  in  budgetary  balance 

(before UK correction) 

Change  in  budgetary  balance 
(after UK correction) 

Euro million 

Percent of GNP 

Euro million 

Percent of GNP 

110.7 

-100.6 

678.2 

-451.7 

- 528.2 

-648.5 

-195.8 

134.5 

11.6 

168.8 

43.8 

-23.9 

22.8 

62.3 

429.6 

286.4 

0.0 

0.03 

-0.05 

0.03 

-0.30 

-0.07 

-0.04 

-0.23 

0.01 

0.05 

0.03 

0.02 

-0.02 

0.01 

0.02 

0.03 

0.07 

121.9 

-93.2 

733.5 

-446.3 

-503.4 

-585.2 

-192.8 

186.6 

12.4 

1.85.7 

53.2 

-19.2 

28.1 

72.6 

146.1 

300.0 

0.0 

0.04 

-0.04 

0.03 

-0.29 

-0.07 

-0.03 

-0.22 

0.01 

0.05 

0.04 

0.02 

-0.01 

0.02 

0.02 

0.01 

0.08 

1 )  A rate of reimbursement of 75% of CAP direct aids is equivalent to a reduction of agricultural expenditure spent 

out of the EU budget of about Euro 9 145 million or  17% of total CAP payments in 2006.. 

In  particular,  it  is  possible  to  imagine  that,  while  market  support  expenditure  will 
continue to be integrally reimbursed to Member States, that part of expenditure which 

7-10-98 

-32 

goes  directly  to  individual  beneficiaries  could  be  reimbursed  only  partially.  The 
scope for this type of action would increase as the proposed reform  of the CAP aims 
at reducing the weight of market support measures, while the relative weight of direct 
aids  would  increase  correspondingly  (from  65  per  cent  in  2000  to  75  per  cent  in 
2006).  The essential idea is to take advantage of the fact that all the Member States 
that record large budgetary imbalances have a share in the financing of the EU budget 
much higher than that in EU agricultural spending, and that a reduction in the overall 
amount of spending would improve their budgetary balances.  Moreover, the original 
rationale  for  100%  financing  of  the  CAP  market  support  expenditure  (i.  e.,  that 
market  support  benefits  farmers  throughout  the  Community,  not just  those  in  the 
Member States where the expenditure occurs) is no longer valid  for the income aid 
component. 

If  implemented,  this  option  would  be  consistent  with  and  would  represent  a 
generalisation  of  the  principles  currently  governing  most  EU  expenditure  and 
especially that under the Structural Funds.  At the same time, it should not be seen as 
a  dismantling  of  the  CAP  or  a  move  towards  its  re-nationalisation.  Neither  the 
degree  of  integration,  nor  the  level  of  decision  making  or  the  overall  amount  of 
financial  resources  available to pursue  its objectives  would  be modified.  Farmers 
would receive the same support as currently since CAP expenditure by Member State 
is compulsory  once determined  by the relevant  legal provisions.  The level  and the 
conditions  attached  to  the  payment  of  these  direct  aids  would  continue  to  be  an 
integral  part  of  the  CAP  and  would  result  only  from  EU  decisions.  The  overall 
amount of spending available would remain the same, but would be shared between 
the EU budget and the national exchequers. 

The fact that a lower share of financial  resources would need to be allocated through 
the  EU  budget  suggests  that 
the  agricultural  guideline  should  be  reduced  if  this 
constraint  is to maintain  its  effectiveness.  A corresponding  reduction  in  the Own 
Resources ceiling might also be appropriate.  This could be done on the occasion of 
the first modification  of the Own Resources Decision33 and, in the meantime, should 
be replaced by some form of strong engagement not to use the whole ceiling. 

Table 8 presents the impact of a 75 per cent partial reimbursement of CAP direct aids. 
The overall reduction of EU spending in 2006 amounts in this example to Euro 9 145 
million.  More details on this simulation are presented in Annex 5.  The table also 
shows the negative effects  that the introduction of a measure of this type would have 
on the budgetary balances of some Member States. 

33  On the occasion of the first modification of the Own Resources Decision the reference will have to 
change from the GNP based on the 2nd edition of the European System of Accounts to the new 
If the level of the GNP of the EU according to the new system of accounts were to be 
ESA 95. 
different, this would justify a corresponding adaptation of the ceiling so as maintain the stability of 
the financial resources put at the disposal of the EU budget. 

7-10-98 

33 

2.4.3.  A generalised correction mechanism 

Germany,  the  Netherlands,  Austria  and  Sweden  have  asked  to  benefit  from  a 
transformation  of; the  present  correction  mechanism  applying  to  the  UK  into  a 
capping model.  A simple transposition  of the present  mechanism  is not possible. 
Applying  the  present  mechanism  to  all  countries  that  have  a  negative  budgetary 
balance or simply extending to the four countries that have made the request would 
result  in a three to  fourfold  increase of cost of the mechanism  (see table  9 and the 
report by the European Court of Auditors (1998)34). 
In addition, depending on the 
assumptions  made,  this  burden  would  have  to  be  borne  by  a  group  of  countries 
representing less than a fifth  of the GNP of the European Union. 

The four countries that have made the request, aware of this difficulty,  have asked for 
a  modified  version  of  the  mechanism.  They,  correctly,  point  out  that  the  present 
mechanism contains various implicit parameters that may be modified.  In particular, 
they point out that whereas the current mechanism corrects 66 per cent of the entirety 
of the  negative balance of the  United Kingdom, it is conceivable that Member States 
be asked to accept a negative balance up to a given percentage of GNP -  say 0.3 or 
0.4 per cent of GNP  T  and be granted a compensation only for the part exceeding this 
threshold. 
It is 
also possible to introduce modifications  in the items included in the contributions to 
the  EU'budget  (e.g. traditional  own resources  could be  excluded  or  re-apportioned 
according  to  different  keys)  and  in  those  included  in  expenditure  (e.g.  to  exclude 
administrative  expenditure  or  expenditure  in  the  new  Member  States  or  Structural 
Funds and so on). 

In addition, the benchmark  of 66  per cent may also be modified. 

Table 9 

Overall  redistribution  induced  by the UK correction  mechanism 
for  19961 under different  assumptions 
(Ecu million) 

Mechanism applied to the 
i ini+aH Kinn^m 
United Kingdom 
(present situation) 

M e c h a n i sm  aPPl i ed to  a»t he 
countries with a negative 
b u d g e t a ry  b a | a n ce 
(UK D NL A S F I) 

Mechanism applied to 5 

^ « ML 
countries 
(UK'  D' N L'A*  S) 

2  856 

12  384 

1 1 1 38 

On the assumption that the beneficiaries are excluded from the financing, the burden would be spread 
over a number of countries representing the following percentages of EU GNP 

86.5% 

17.0% 

48.9% 

1) 

The simulation has been prepared on the basis of 1996 data to make the results comparable to those 
reported by the European Court of Auditors (1998):  op. cit., footnote 38. 

34 

European Court of Auditors  (1998):  Special report no  6/98 on the system of own resources  based 
on  VAT and  GNP. Official Journal of the European Communities  C 241, July  31,1998. 

7-10-98 

- 3 4-

TablelO 

Changes  in the budgetary  balances  induced  by compensation 
mechanisms  based on different  parameters 
(Euro million: data based on projections for 1999^) 

Sum of all net 
rebates 

Germany 

Netherlands 

Austria 

Sweden 

UK 

Present mechanism 
(Threshold 0.0 per cent of GNP;  rate of reimbursement 66 per cent) 

4  952 

-1  008 

311 

-173 

-189 

+ 4 952 

Unconstrained generalised  correction mechanism 
(Threshold 0.0 per cent of GNP;  rate of reimbursement 66 per cent) 

7 601 

+ 4110 

+ 112 

+ 68 

+ 185 

+ 3 126 

Difference relative to the present situation 

2 649 

+ 5118 

+ 423 

+ 241 

+ 374 

1  826 

Constrained generalised  correction mechanism 
(Threshold 0.3 per cent of GNP;  rate of reimbursement 66 per cent) 

3 538 

+ 1  669 

123 

54 

+ 50 

+ 1  819 

Difference relative to the present situation 

-1 414 

+ 2 677 

+  188 

+ 119 

+ 239 

3 133 

1)  The results are shown for 1999 only  because  the data for other  years  are not appropriate.  1996  is  not 
representative  for Sweden  and Austria;  1997 and 1998 are unrepresentative  for the United  Kingdom 
because of the exceptionally  high variability  of the rebate in these years -  see  graph 7;  the data in  the 
first  column  under  the various  extensions  of  the correction  mechanism  correspond  to the sum of all 
improvements  (financed, equivalently, by the sum of all deteriorations) in budgetary  balances reported in 
column (6) of tables  1 and 3 of Annex 6. 

An additional  important modification  could concern the financing of the rebates.  In 
the  present  system  the  United  Kingdom  does  not  finance  its  own  rebate.  A 
generalisation could be seen as implying that the Member States benefiting from the 
system  should  not finance  it.  However  this  solution  is not only  very  costly  in a 
situation where many Member States benefit from the system, but is also fraught with 
risks. 
In  particular,  a "threshold  effect"  could  appear  whereby  a country  with a 
negative balance just  above the threshold would receive a minimal rebate but would 
be  exempted  from  the burden  of  financing  whereas  if  it had been just  below the 
threshold  it would  have  had to contribute  to the financing  of all other  rebates for 
It  seems  logical  therefore  to  assume  that  a Member  State 
substantial  amounts. 

7-10-98 

35 

should  not  finance  its  own  rebate,  but  that  it  should  finance  all  the  others35  (as 
assumed in the simulations presented in table 10). 

Modifying  these  parameters  provides  the  system  with  a  substantial  degree  of 
flexibility,  albeit at the cost of significantly  reducing transparency and increasing the 
complexity  of  the  calculations.  However,  this  flexibility  yields  mechanisms  with 
different overall costs and different  effects  for the individual Member States. 

Annex 6 discusses some simulations and some key results are reproduced in table 10. 
The simulations show that any system based on the same parameters for all Member 
States,  and  under  the  assumption  that  its  overall  cost  is  to  be  maintained  within 
reasonable  limits,  would  lead  to  substantial  reduction  in  the  size  of  the  rebate 
currently enjoyed by the United Kingdom. 

35 

See Annex 6 for a discussion of this model and in particular for the opportunity to ignore second 
round  effects,  i.e.  the  case where  a  country  is just  below  the  threshold  at  the  beginning  of the 
exercise,  but  where  it will  exceed  it once  the  cost  of  financing  the  other  rebates  is  taken  into 
account. 

7-10-98 

- 3 6-

3. 

FINAL  COMMENTS 

The  proposals  presented  by  the  Commission  in  Agenda  2000  indicate  that  it  is 
possible to face the challenges resulting from  enlargement  and from  the reform  of the 
major  EU policies within the own resources ceiling  set, for  an unlimited  time, by the 
current  Own  Resources  Decision.  To  achieve  this  it  is essential  that  the  budgetary 
rigour pursued by the Member  States in the framework  of EMU characterises also the 
EU budget. 

The  shortcomings  of  the  system  discussed  in  the  first  part  of  the  report  do  not  by 
themselves  provide  grounds  to justify  an  urgent  modification  of  the  Own  Resources 
Decision. 
If and  when this Decision  were to be modified  so as to allow an  in depth 
reform  of  the  Own  Resources  system,  these  shortcomings  could  be  corrected  either 
through  a simplification  of the system of contributions  or through the  introduction  of 
new own resources.  The proposed  introduction  of an element  of progressivity  could 
also be discussed  in this context. 

Currently,  the  most  pressing  source  of  dissatisfaction  with  the  present  arrangements 
appears  to  be  linked  to  the  issue  of  budgetary  imbalances  of  Germany,  the 
Netherlands,  Austria  and  Sweden. 
It is not possible,  at this  stage, to  determine with 
precision  how  these  imbalances  will  evolve  over  the  next  few  years  as  some 
important  policy  parameters  have yet to be fully  articulated.  However,  it  is  possible 
to predict  that the  imbalances  of these  large net  contributors  as a percentage  of  GNP 
should  deteriorate  somewhat,  more for  the Netherlands  than  for  the others,  but  most 
likely  less than  the  average  deterioration  due  to  enlargement.  This  outcome  would 
be  due  to  the  proposed  containment  of  spending  in  the  present  Member  States  over 
the period  covered  by the  next  Financial  Perspective  and  to  some  specific  provisions 
of the proposed  reforms. 

Establishing  correction  mechanisms  to  ameliorate budgetary  imbalances  is a  difficult 
task  since,  for  a  given  size  of  the  EU  budget,  an  improvement  in  the  budgetary 
position  of some Member  States invariably  involves  a corresponding  deterioration  in 
If  a  consensus  were  to  emerge  on  the  need  to 
the  budgetary  position  of  others. 
address the issue of budgetary  imbalances, a decision would  have to be taken on how 
to achieve this result and on the timing of the changes. 

The report indicates three, mutually compatible, options. 

• 

• 

• 

on  the financing  side:  a simplification  of the financing  structure  in  favour  of a 
system  more, or even totally, based on GNP contributions;  such a  simplification 
could also include the phasing out of the existing correction  mechanism; 

on  the  expenditure  side:  the  introduction  of a  system  of  partial  reimbursement 
of CAP spending aimed at directly supporting incomes; 

on  the  balances:  the  application  of  a  generalized  correction  mechanism  to  all 
Member  States experiencing large imbalances. 

7-10-98 

- 3 7-

None of the options discussed in the report provides an ideal  solution.  Technical and 
conceptual  weaknesses  can  be  found  in  all  of  them.  The  shifts  in  the  burden  of 
financing  that  results  from  some  of  these  options  present  regressive  elements  that 
might need a redress in the context of an overall solution. 

The timing of any changes would  depend  on whether it will be necessary to  modify 
the  Own Resources  Decision  or not.  A  modification  would  entail  long  ratification 
delays  and would  suggest  a process  allowing  the  new  financing  system  to  become 
effective  at  the  time  of  the  accession  of  the  first  group  of  new  Member  States. 
Enlargement would indeed represent such a significant  change of circumstances as to 
warrant a structural modification of this type. 

The significant methodological  and conceptual  reserves that the Commission  has on 
the issue of budgetary imbalances have prompted it to limit this report to a review  of 
options for their correction.  If a broad agreement towards a solution of the problem 
were to appear within the European Council, the Commission would put forward the 
appropriate detailed proposals. 

7-10-98 

ANNEX 1 

The evolution of the EU financing system 

During  the  period  1958-1970  the  Community  budget  was  financed  exclusively  by 
contributions  from  the  Member  States.  The  Luxembourg  European Council of  21-22 
April  1970  introduced  for  the  first  time  a  system  of  own  resources  for  the  general 
budget  of  the  Community  taking  effect  in  1971.  One  objective  was  to  gradually 
enhance the Community's  financial  independence  from  Member States' transfers.  The 
own  resources  introduced  were  customs  duties  and  agricultural  levies  (which  were  to 
become known as the Traditional Own Resources, TOR) and one based on a harmonised 
VAT base.  While traditional  own resources became effectively  own resources over the 
period  1971-1975,  difficulties  with  establishing  a  common  VAT  system  across  the 
Member States and with defining  the base for VAT assessment delayed the  introduction 
of VAT as an own resource until  1979. 

In the period  1975-1987 revenue growth on the own resources account was eroded by a 
diminishing yield from TORs while revenues  from  VAT were adversely affected  by the 
generally  weak  economic  growth  prevailing  during  this  period.  At the  same  time,  the 
strengthening  of  existing  and  the  launching  of  new  policies,  the  inability  to  contain 
spending on the Common Agricultural Policy (CAP) and expenditure growth  associated 
with  the  two  enlargements2  led  to  pronounced  resource  inadequacy. 
Persistent 
complaints  on  the  part  of  the  UK  concerning  its  financial  contribution  also  became  a 
feature of the budgetary disputes that were prominent during this period. 

A  temporary  resolution  of  the  budget  difficulties  was  secured  at  the  Fontainebleau 
European  Council.  The  Fontainebleau  Council  of  June  25-26,  1984  increased  the 
maximum rate of call  for  the VAT resource to  1.4  per cent  and established  a correction 
mechanism  for budgetary imbalances which has since applied only to the UK3. 

The  modifications  to  the  financing  system  introduced  by  the  Fontainebleau  Council 
proved  almost  immediately  insufficient.  They  failed  to  generate  sufficient  revenues 
owing  to  the  continuing  decline  in  revenues  from  TORs  and  to  the  slow  growth  in 
revenues  from  the  VAT  resource.  In  addition,  some  dissatisfaction  started  to  appear 
with the VAT based resource which, being based  on consumption, was  felt  to contain a 
significant  regressive  element.  The  problem  of  revenue  inadequacy  and  inequity  was 
compounded  by rising, and incompletely  anticipated,  expenditure commitments.  These 

1 

For  a  detailed  review  of  the  history  as well  as  an  assessment  of  the  EU  financial  arrangements  up  to  the  early 
years of the Edinburgh agreement see Commission of the European Communities  (1995):  European Union Public 
Finance,  Luxembourg;  see  also  the  discussion  in  Commission  of  the  European  Communities  (1997):  "Budget 
Contributions,  EU  Expenditure,  Budgetary  Balances  and  Relative  Prosperity  of  the  Member  States",  paper 
prepared by DG-XIX and forwarded to the Ecofin Ministers by President Santer for their October  13 meeting. 

^  Greece joined the Community in  1981 followed by Spain and Portugal in 1986. 
3 

See  Fontainebleau  European  Council, Conclusions  of  the  Presidency,  Bulletin  of  the  European  Communities  6-
1984. 

7-10-1998 

- 2-

ANNEX 1 

were related  to difficulties  in controlling  spending  on  the  Common  Agricultural  Policy 
(CAP), especially  following  the accession of Portugal and Spain, the dollar  depreciation 
after  the spring  1985 and the fall  in international commodity prices, factors which added 
considerably to the financing  of export restitutions. 

Fundamental  reforms,  which  determined  the  character  of  the  present  own  resources 
system,  were  adopted  in  June  19884.  Among  the  principal  reforms  of  the  Brussels 
European  Council  was  the  introduction  of  a  new  own  resource  based  on  the  Member 
States' GNP (intended to match contributions closer to the ability to pay), and that of an 
overall  ceiling  to  the  total  amount  of  own  resources  which  could  be  called  to  finance 
Community  spending.  This  payments  ceiling  was  set  at  1.15  per  cent  in  1988  with 
progressive  yearly  increases  which  were  to  bring  it  to  1.20  per  cent  by  1992.  The 
Council also limited the role of the VAT resource by introducing a capping of its base at 
55 per cent of GNP, a measure intended to reduce the effects  of the regressive  character 
of the resource. 

The  consolidation  of the  1988 reforms  and  ultimately  of  the  Community  finances  took 
place  within  a  context  where  the  Community's  ambitions,  expressed  in  the  Treaty  on 
European  Union,  grew  significantly.  The  Edinburgh  agreement  of  December  1992, 
which  adopted  the  financial  perspective  for  the years  1993-1999,  increased  the  overall 
ceiling  of  own  resources  from  1.20  to  1.27  per cent.  In  addition,  it  introduced  steps to 
decrease further  the importance of VAT in the financing  of the budget. 

However, the system of own resources decided in Edinburgh could only enter into  force 
on January  1,  1995. 
In the meantime, significant  difficulties  were  experienced  during 
the recession years of the early  1990s when initial budget  estimates turned  out to be too 
optimistic.  Successive  downward  revisions  in  economic  growth  during  1992-1994 
resulted  in  corresponding  revisions  to  budget  revenues.  Nevertheless,  despite  the 
adverse climate, it was possible to respect the constraints  imposed by the own  resources 
ceiling without undermining  financial  discipline. 

In  subsequent  years  budgetary  arrangements  have  proved  generally  successful. 
In 
addition,  from  1997  cautious  annual  budgetary  decisions  have  lead  to  spending  levels 
significantly  lower  to  those  foreseen  in  the  Financial  Perspective.  As  a  result,  the 
European Union approaches the challenges resulting from enlargement to Cyprus and to 
the countries of central and eastern Europe and from  the reform  of its main policies with 
substantial margins under the own resources ceiling. 

V  %*  %* 

See  Council  Decision  88/376/EEC,  Euratom  of  June  24,  1988,  On  the  System  of  the  Communities*  Own 
Resources,  Official Journal of the European Communities, L 185, July  15.1988. 

7-10-1998 

A review of possible own  resources for the European 
Union 

ANNEX 2 

1. 

INTRODUCTION 

The  issue of the financial  autonomy  of the EU is central  to the debate  about  new own 
resources.  The  Luxembourg  agreement  of  21-22 % April  1970  provided  that  the 
replacement  of Member  States contributions by own resources was meant to finance the 
complete  budget.  However,  this  financial  autonomy  has proved  elusive.  A  dominant 
part  of  the EU budget  is  currently  financed  by block  grants  in the  form  of VAT and 
GNP contributions from the treasuries of the Member  States.  To remedy this  situation, 
proposals  for different  categories  of new  own resources  have on occasion  been  made1. 
The purpose of this annex is to provide a critical review of some of the most  important 
of these proposals. 

There are three sections in the Annex following  the introduction.  Section 2 presents the 
criteria  against  which  the  suitability  of  proposed  own  resources  can  be  evaluated; 
section 3 examines eight specific proposals in detail;  and section 4 concludes. 

2. 

CRITERIA  FOR OWN  RESOURCES 

The  theory  of  fiscal  federalism  predicts  that  the  assignment  of  tax  competencies  at 
different  levels of authority rests on two important  economic considerations and also on 
several subsidiary criteria.  The former, which are the primary criteria, are: 

> 

> 

the presence of externalities which transcend national borders;  and 

the regional arbitrariness of the tax base/of the tax revenue2. 

• 

If the tax in question  has external  effects  which  go beyond  the locality where  it is 
levied, then it ought to be optimally assigned to the higher  level of authority.  Two 
broad  cases  can  be  considered  here.  First,  taxation  that  affects  the  prices  of 

For the general  principle in favor of own resources, see for example, European  Parliament (1990). 
The  report  "Insists  that  the  Community  budget  must  be  financed  from  the  Community's  own 
resources";  Part A, para.  10.  Some of these  issues  have  also  been  considered  in Commission of 
the  European  Communities  (1992).  The quest  for  new own  resources  dates  back  to the  1970s; 
see, for example, the MacDougall (1977) report, vol. II, ch. 16, p. 479-504. 

For a discussion of these criteria as they apply to the case of the European Union see Commission 
of the European Communities (1993a), ch. 7,  Begg et. al.  (1997) and Keen (1995), section 2, p. 9-
39.  See also  Bureau and Champsaur  (1992), Commission of the European  Communities  (1992c), 
section  IV.3,  European  Parliament  (1994),  p.  3,  and  Commission  of  the  European  Communities 
(1993a), Table 30, p. 84 for a (somewhat dated) summary of the assignment of tax competencies in 
selected federal states in 1988. 

7-10-1998 

ANNEX 2 

internationally  traded  goods  or  factors  of  production  in  imperfectly  competitive 
markets;  this can lead to distortion of competition between national fiscal systems, 
an important factor  at the background of the process of indirect tax harmonisation 
undertaken in the EU.  And, second, taxation levied on mobile tax bases.  A parallel 
version of the criterion states that if the benefit  from a particular service transcends 
national borders, then the financing of the service ought to be assigned to a higher 
level of government.  Clearly, in the presence of externalities subsidiarity, despite 
its importance, becomes a secondary issue since economic efficiency  predicts that 
the tax should be assigned not to a national but to a supranational level3. 

• 

Regional arbitrariness refers to the impossibility to reasonably define the base of 
the  tax  or,  alternatively,  to  the  arbitrary  distribution  of  the  revenue  in  the  case 
where  the  tax  is  levied  locally.  Revenues  from  the  common  external  tariff 
constitute a clear example of the latter.  Here, especially  as a consequence  of the 
internal  market,  it  is  difficult  to  determine  with  accuracy  the  national  base  that 
ultimately bears the tariff.  Should the tariff be levied in, say, the port of Genoa, the 
revenues  from  the  tariff  only  partly  belong  to  the  citizens  of  Italy  since  such 
imports,  once  in  the  EU,  are  consumed  widely  by  all  European  consumers. 
Revenues  from  customs  and  agricultural  levies  are currently  assigned  to  the EU 
level  (with the Member  States simply collecting  the levies) because they comply 
with the criterion of regional arbitrariness 4. 

Several  secondary  criteria  for  assigning  tax  instruments  to  a  supranational  level  of 
government ought also to be considered.  First, in order to ensure horizontal equity5  in 

Leaving  aside  externalities  or  revenue  arbitrariness,  subsidiarity  is  a  crucial  issue  here;  see,  for 
example, the importance accorded to it in the motion for a resolution in European Parliament  (1994). 
It is possible to argue that full  respect of the subsidiarity  principle would  be consistent  with  Member 
States  contributing  to  the  EU  budget  a  specified  amount,  however  defined,  but  themselves  alone 
having the responsibility to decide on the sources of financing and the tax instruments to be used, in 
order  to  respect  their  EU  financing  obligation.  However,  Bureau  and  Champsaur  (1992),  p.  89, 
caution  that  "budgetary  intervention  at  the  Community  level  ought  to  be  admitted  only  in  the 
presence of cross-border externalities or economies of scale, which cannot be properly  alleviated by 
a simple coordination between concerned national governments". 

Despite  the  presumption,  there  is  very  little  concrete  evidence  on  the  quantitative  importance  of 
regional  arbitrariness  in  the  case  of  traditional  own  resources.  Nevertheless,  according  to  recent 
estimates  27  per  cent of  the  total  amount  of  customs  duties  levied  in the  Netherlands,  and  31  per 
cent  of  the  import  duties  levied  in  Antwerp,  are  related  to  final  consumption  of  goods  in  other 
Member States.  Taking account of this alters considerably the unadjusted shares of  Belgium and of 
the Netherlands in traditional own resources.  For example, instead of amounting to 7.4  per cent and 
12.2 per cent of total traditional own resources contributions in 1997, respectively, adjusting the data 
for the presence of the gateway  effect would  reduce the share of  Belgium to 5.1  per cent and of the 
Netherlands  to  8.9  per  cent  For  the  details  of  the  estimates  see  Verbeke  et.  al.  (1998a)  and 
Verbeke et. al. (1998b). 

Horizontal  equity  refers  to  the  concept  of  individuals  (or  nations)  in  identical  circumstances  are 
treated  identically  in their  tax  liability;  vertical  equity, on the other  hand, refers  to  the  notion  where 
individuals  (or  nations)  in  different  circumstances  are  accordingly  differentiated  in  their  tax  liability. 
Clearly,  it  is  not  straightforward  to  extend  the  application  of  these  principles  from  individual 

7-10-1998 

ANNEX 2 

contributions across Member States, a definition  of equal treatment for tax purposes is 
important (the need for vertical equity, or solidarity to use a term commonly employed 
in the context of the EU, is addressed through the EU's expenditure policies).  Here, the 
proportionality of the relationship between gross contributions and GNP is the basis on 
which horizontal equity can evaluated6. 

The  second  criterion,  visibility  to  EU  citizens,  has  an  important  accountability 
dimension.  Given the complex nature of EU finances, comprehension  and monitoring 
of the present system on the part of citizens is virtually absent.  For example, from the 
point of view of EU citizens, the GNP contributions are clearly invisible, but also the 
relationship  between  VAT  taxes  paid  and  collected  by  the  Member  States  and  their 
contributions  on  the  VAT  resource  is  not  easily  comprehensible7.  Moreover,  while 
Member  States  themselves  perform  this  monitoring  function,  the  lack  of  a  direct 
relationship  between  citizen  and  budget  is  another  manifestation  of  the  "democratic 
deficit"8.  Changes  through  the  introduction  of new  own resources  ought  to  improve 
transparency by conveying information about EU financial relationships9. 

A  third  criterion  concerns  links  to  common  policies  and  requires  that  new  own 
resources ought to be those which  are consistent  with the other EU policy  objectives. 
Financing  the  EU  budget  through  taxes  that,  at  the  same  time,  advance  common 
objectives on, say, transport policy or environmental standards would be consistent with 
this criterion. 

To  avoid  distortions  and  to  enhance  acceptability  the  tax  ought  to  be  levied  on  a 
harmonised  base.  Few  existing  taxes  enjoy  at  present  a  sufficient  degree  of 
harmonisation  in  their  base.  VAT  and  excise  taxes  come  closest  to  the  necessary 
standard. 

A further  set of criteria concerning sufficiency, efficiency and cost-effectiveness  refer 
to administrative aspects of new own resources.  The revenue from new own resources 
ought to be sufficient  to finance a dominant  part, if not  all the resource needs, of the 

taxpayers within a nation to regions within a federation or to the  Member States in their  relationship 
with the EU budget. 

This was discussed already  in Commission of the  European  Communities  (1997a).  Note, however, 
that suggestions  have on occasion  been  made for  a  more  progressive  resource as, for example,  in 
Padoa-Schioppa  (1987), p.  136;  in  recent  years, Spain  has also  insisted on the establishment  of  a 
progressive resource. 

' 
8 

9 

See European Communities Court of Auditors  (1998) for a criticism related to this point. 

The  "democratic  deficit"  is  usually  meant  to  suggest  lack  of  full  parliamentary  scrutiny  by  and 
accountability to the European  Parliament;  presently, the term is used to indicate a manifestation  of 
this in the form of the incomplete  monitoring and control of the budget by the citizen. 

The  European  Parliament  (1990)  report  emphasizes  that  "the  development  of  a genuine  system  of 
own  resources  to  replace  the  contributions  from  the  Member  States  could take the form  of  a  direct 
link between the Community  and the taxpayer";  see European Parliament (1990), Part A, para. 15. 

7-10-1998 

- 4-

ANNEX 2 

budget; 
fluctuations  nor to a trend decline. 

it  should  also  be  stable  and  predictable  and  subject  neither  to  unforeseen 

The manner in which this revenue is collected ought to be efficient  in the sense of being 
assigned  to the  level of government where tax  losses and  fraud  are minimised.  The tax 
ought  to be  consistent  with  improving  economic  efficiency  as well,  in  that  it ought  not 
to discriminate  against activities promoted by national or EU policies. 

Cost-effectiveness  as a criterion refers to tax administration  arrangements that  maximise 
the  revenue/cost  ratio.  Assigning  an  EU  tax  to  a  higher  level  of  government  could 
contribute to reducing duplication  of tax administration  services, and it could  also make 
possible  the  exploitation  of  economies  of  scale  in  tax  collection.  At  the  same  time, 
however,  legal, institutional  and language differences  among  the Member  States do not 
necessarily  favour  assigning  the  EU  tax  to  a  higher  level  of  government;  on  the 
contrary,  it  may  be  less  costly  to  permit  a  lower  level  of  tax  authority  to  implement 
collection,  an  arrangement  which  could  be  particularly  effective  if  combined  with 
incentives  to  Member  States  to  act  efficiently.  A  clear  example  is  the  collection  of 
revenues from  traditional own resources by Member States on behalf of the EU. 

3. 

PROPOSALS  FOR  NEW OWN  RESOURCES 

taxes  on 

The  present  section  examines  eight  resources  that  have  been  proposed  on  various 
occasions  as new own resources.  These are, a C02/Energy tax;  a modulated  VAT tax; 
excise 
tax; 
communications  taxes;  personal  income tax;  withholding  tax  on  interest  income;  and 
ECB  seigniorage.  The  review  takes  the  form  of  commentary  and,  for  a  convenient 
summary, of a tabular presentation of the principal  issues at the end of the discussion of 
each resource. 

tobacco,  alcohol  and  mineral  oil; 

corporate 

income 

3.1.  C02/Energy  tax 

This  tax  was  proposed  by  the  Commission  in  October  1991, reflecting  the  increasing 
awareness of potential environmental  degradation due to high carbon dioxide emissions. 
The  Commission  set  the  objective  of  stabilising  C02  emissions  by  2000  at  their  1990 
level.  The proposal, which foresaw  an increase m the tax to USD  10 per barrel of oil by 
the end of the century, was virtually abandoned  following  considerable opposition in the 
Council. 
In order  to overcome this opposition,  a revised  proposal  was put  forward  in 
May  1995 which  introduced  the concept  of a transitional  stage whereby  Member  States 
would  agree  the  scope  and  structure  of  a  common  tax  but  would  be  free  to  decide 
product  by product,  whether to introduce  a positive rate of tax  and  the level of tax they 
wished  to  apply.  However,  discussions  on  this  revised  proposal  broke  down  on  the 
question of what was to happen at the end of the transitional period.  Following this, the 
Ecofin  Council  of March  11,  1996 called  on the  Commission  to prepare  new  proposals 
for  the  taxation  of  energy  products  by  expanding  the  Community  excise  duty  rules  on 
The  European 
mineral  oils  into  a  new  taxation  scheme  for  all  energy  products. 

7-10-1998 

- 5-

ANNEX 2 

Parliament  and the Economic  and  Social  Committee have also argued  in favour  of such 
an approach. 

The  Commission  has  prepared  new  proposals  intended  to  strengthen  the  deepening  of 
the  internal  market  and  at  the  same  time  to  permit  the  introduction  of  energy  taxation 
according  to  national  preferences  including  the  granting  of tax  exemptions  for  energy-
intensive  industries.  Furthermore,  environmental  protection,  the  development  of  a 
sustainable  transport  policy  and  the  support  of  EU competitiveness  are  also  objectives 
of the proposals10.  The aim of the proposals is to establish minimum  levels  of taxation 
for  an enlarged  group  of energy products.  It  is clear, however,  that  the proposals  have 
not been prepared with the view to facilitating  the establishment of new own resources. 

• 

The  C02/energy  tax  meets  the  externality  criterion  since  pollution  transcends 
national  frontiers.  The  tax  as  such  could  be  seen  as  a  means  to  internalise  the 
negative externalities  associated with pollution.  However, given the disparate  level 
of  development  and  of  energy  use  across  the  Member  States,  such  a  tax  would 
undoubtedly  not  perform  well  on  grounds  of  equity11.  Furthermore,  since  it  is 
possible,  as  envisaged  in  the  initial  Commission  proposal,  to  exempt  certain 
firms/sectors  from  the  tax  on  grounds  of  undertaking  energy-saving  innovations 
this  would  also  effect  equity  adversely.  Failing  the  equity  criterion,  however,  is 
secondary  since  the  primary  objective  of  such  taxation  is,  inevitably,  to  penalise 
polluters. 

•  Base harmonisation  is non-existent  although under the Commission's proposals  for 
taxation  of  energy  products  considerable  harmonisation  could  be 

minimum 
achieved  in the  future. 

•  On the  criterion  of visibility,  while  it is possible to design  the taxation  in  question 
in a transparent  manner  for the benefit  of EU citizens, the possibility of taxing both 
intermediate  and final products  will  likely  attenuate  the visibility  link  between  the 
revenues and the financing  of the EU budget. 

•  Regarding  links  to  common  policies,  a  C02/Energy  tax  scores  high  since  it  is 
consistent  with the EU's  environmental  objectives.  Moreover,  it is consistent  with 
the Commission's proposals  for establishing minimum  levels of taxation  for  energy 
products  across  the  Single  Market.  The  Commission  has  also  suggested  using 

10 

11 

See  Commission  of  the  European  Communities  (1997b)  and  Commission  of  the  European 
Communities  (1997c). 

Estimates  by the Commission suggest that with a USD 10 per barrel the lax would amount to as little 
as 0.79  per  cent of  GDP  in  France  and  as  much  as 3.08  per cent of  GDP  in  Luxembourg;  Greece 
would  contribute  the  equivalent  of  2.45  per cent of  GDP,  Ireland  1.93  per cent  of  GDP  and the  UK 
1.53 per cent of GDP;  see Commission of the European Communities  (1993a), Table 33. 

7-10-1998 

- 6-

ANNEX 2 

environmental  taxes  as  a  means  to  reduce  the  burden  of  taxation  on  labour  and 
foster  employment growth without endangering budget restraint12. 

• 

It  is  uncertain  whether  the  tax  would  yield  sufficient  and  predictable  revenues. 
According  to  Commission  estimates,  a  USD  10  per  barrel  would  yield  the 
equivalent  of  about  one  percent  of  EU  GNP,  clearly  sufficient  to  finance  a  large 
part of current  and projected  EU expenditure.  However, revenue from this tax will 
undoubtedly  be  unpredictable  since  it  will  be  levied  on  cyclically  prone  sectors 
exhibiting  large  variability  with  respect  to  economic  fluctuations.  Moreover,  it  is 
possible  that  energy  substitution  will  take  place  on  a  scale  sufficiently  large  to/ 
undermine  revenues  from  this source and  its  suitability  as an own  resource  for  the 
EU. 

•  On  grounds  of  efficiency  and  cost-effectiveness  it  is  difficult  to  evaluate  the  C02 
tax.  It is possible  to  levy the tax  at the stage of primary production,  at the  import 
stage  and  at  the  stage  of  final  consumption/use.  The  optimal  stage,  from  the 
perspective of the criterion, is that of primary production and imports;  however, in 
this  case  it  would  not  be  possible  to  exclude  preferred  sectors.  Until  explicit 
proposals  have  been  defined  at  a  practical  level,  it  is  difficult  to  determine  the 
administrative costs/advantages, although it is likely that under some circumstances 
the tax would be administered  effectively. 

• 

Several  Member  States  have  objected  to  this  tax  for  reasons  of  protecting  their 
international  competitiveness.  An  additional  consideration  may  have  been  the 
desire  to  keep  their  carbon  taxes  low  in  order  to  protect  some  energy-intensive 
domestic producers.  A co-ordinated  implementation  of carbon taxes with EU wide 
tax  exemptions  would  be  necessary  to  internalise  these  externalities  and  also  to 
reduce environmental damage. 

As  they  are  predominantly  allocative  taxes,  energy  taxes  should  be  expected  to  and, 
indeed,  fare  poorly  in terms  of  equity  and tend  to be regressive  across Member  States. 
This  is  a  lesser  concern  given  the  primary  objective  of  the  tax.  At  the  same  time, 
however,  if  it  were  possible  to  reach  a  Council  agreement  on  the  complex  and 
fundamental  issues  involved,  which  until  now  has  proved  impossible,  this  tax  would 
probably be one of the most serious candidates for a genuine EU resource. 

12 

See  Commission  of  the  European  Communities  (1994a),  p.  156, for  a  discussion,  and  also  Drèze 
If  revenue  for  the  EU  is  indeed  raised  through  a  C02/energy  tax,  GNP 
and  Malinvaud  (1994b). 
contributions  would  decrease  correspondingly  and  Member  States  could  pass  this  on  to  their 
economies through lower taxes on labour. 

7-10-1998 

Bqx1 

7-

CO^Energy 

tax 

ANNEX 2 

Criteria 

Performance 

Equity 

Equity  would  not  be  served  well  since  the  tax  would  be  paid 
proportionately more by  those Member States dependent  on older and 
more  pollution-intensive  technology;  however,  this  is  an  inevitable 
consequence  of such taxation.  Should it be possible to exempt certain 
firms/sectors for the tax,  adverse distributional consequences  would also 
follow.  Negative  pollution-related externalities could  be internalised 
through a tax assigned to the EU. 

Base harmonisation 

Currently non-existent. 

Visibility to taxpayers 

. . .. 
Link to common policies 

... 

r 

R 

„.  . 

rr-  . 
Ht 

/ 

.. 

' 

The  link  between  the  tax  and  EU  policies  could  be  made visible. 
However, with the tax applying to both final and intermediate  products 
visibility may not be as transparent as desired. 

Clearly  linked  to  Community  environmental and  tax harmonisation 
. .. 
policies. 

J 

A tax of USD 10 per barrel could raise revenues  equivalent to about  1% 
of EU GNP. However,  it is possible that substitution away from pollution-

intensive  activities  could  ultimately  lead  to  diminishing revenues. 

Moreover,  revenues may be too sensitive to business  cycle  movements 
undermining sufficiency at  a  time of  an  economic  downturn.  The  tax 
could be administered efficiently and effectively. 

3.2.  Modulated VAT tax 

The present  VAT-based  resource constitutes  a significant  source of financing  in the EU 
budget.  Although  reforms  implemented  following  the  1988  and  the  1994  Own 
Resources Decisions have improved on undesirable characteristics of this tax  significant 
difficulties  remain to be addressed.  Nevertheless,  support  for  a tax based  on VAT as a 
new own resource continues  to remain buoyant.  In recent  years, the principal  advocate 
for  establishing  a new  own  resource  on  VAT  has been  the  European  Parliament  which 
has developed extensively the case in a  1994 report13. 

The  report  favours  the  replacement  of  the  third  and  fourth  resource  by  a  new  third 
resource based  on  VAT, and  taking  the  form  of  a specific  percentage  of VAT  imposed 
for  the  benefit  of  the  EU  and  levied  together  with  the  national  VAT  taxation.  There 
would,  therefore,  be  a combined  VAT  rate  consisting  of  the  national  and  the  EU rate. 
The  report  also  argues  in  favour  of  a  common  rate  across  the  Member  States 
differentiated  across commodities.  To contribute to equity across individuals within the 
Member States, the report proposes that there would be two VAT rates, a lower one and 

13  See  European  Parliament  (1994).  It should be stressed, however, that there are reservations  in the 
European  Parliament  itself  regarding  VAT  as  an  own  resource.  The  European  Parliament  (1990) 
report  notes "that VAT, which  has  become the  main source  of  revenue, while  having the  advantage 
of  being  applied to a tax which  is almost  harmonized, has the  grave  disadvantage  of  inter-personal 
and spatial  regressivity, and should therefore  not occupy  in future the pre-eminent  position  it enjoys 
at the moment";  see European  Parliament  (1990), Part A, para. 16. 

7-10-1998 

ANNEX 2 

a higher  one, for  example, the  former  at  1.5  per cent  and the latter at 3.0 per cent.  The 
report  argues  that  the  tax  would  be  imposed  on  a  harmonised  VAT  base  through 
declarations  stating  clearly  on  each  invoice  that  it  is  an  EU  tax.  Thus,  both  national 
parliaments  and the EU would be granted  the power to determine  separately which  rate 
would  be  imposed  for  purposes  of  the  national  budget  and  which  for  the  EU  budget, 
respectively.  The amounts collected would therefore have a direct link to the EU budget 
in the eyes of citizens/taxpayers. 

Given  the  possibility  of  inequities  in gross  contributions  resulting  from  such  a system, 
the  report  favours  an  equalisation  mechanism14  based  on  GNP.  The  proposed 
mechanism would be based on establishment of all EU budget resources in a given year 
in terms of a fixed share in EU GNP.  If a Member State's  total contributions  at the end 
of the year as percent  of its GNP was lower (higher) than the predetermined  benchmark 
then  the  Member  State would  make additional  payments  (receive  refunds)  equal  to  the 
difference  between  the  two  shares. 
In  this  manner,  the  proposed  system  could 
accommodate  country-specific  characteristics  (regional  development  etc)  and  fine  tune 
the own resources system in order to ensure improved equity in gross contributions. 

• 

Taxation  in  the  form  of  VAT  is  generally  regressive  with  relatively  less  well  off 
Member  States contributing  proportionately  more  as  a result  of the  lower  share  of 
savings  in  national  income  (the  criterion  of  vertical  equity  is  not  satisfied). 
Recognition  of this aspect has led to the capping of the VAT base as well  as to the 
reduction  of  the  VAT  call  rate  and,  as  a result,  the  share  of  VAT  in  total  budget 
resources has diminished. 

It  is  difficult  to  see VAT payments  as deriving  from  a common  EU source.  VAT 
revenues  are nation-specific  and, therefore,  the criterion  of regional  arbitrariness  is 
likely not  satisfied. 

The  implementation  of  this  tax  as  proposed  in  the  European  Parliament  (1994) 
report  could  conflict  with  national  tax  setting  and  especially  national  budgetary 
priorities  unless  close  co-ordination  of  tax  decisions  at  the  two  levels  of 
government  is put in place.  In particular, there may 1?e difficulties  in integrating an 
EU VAT tax within the national VAT taxation, especially in light of proposals for a 
minimum  VAT taxation  in the EU.  However,  Keen  (1995) suggests  that  although 
it  is  possible  that  the  combined  (national  and  EU)  VAT  rate may  be  set  too  high, 
this remains an empirical question that cannot be resolved a priori. 

14 

An  equalization  mechanism  had  already  been  proposed,  also  by  the  European  Parliament,  in  the 
early  1980s;  see European  Parliament (1984), article 73. 

7-10-1998 

- 9-

ANNEX 2 

•  VAT  base  harmonisation  is  advanced.  Following  the  Sixth  VAT  Directive15,  and 
barring  the  possibility  of  changing  the  basket  of  goods  and  services  subject  to 
minimum VAT taxation, base harmonisation  is now substantial. 

• 

• 

• 

In  the  form  of  two  separate  tax  rates,  a  national  and  an  EU  one,  the  tax  will 
undoubtedly  be highly  visible to taxpayers/citizens  and  is certain  to be  understood 
as a contribution to the EU budget, thus improving on the democratic  deficit. 

It  is  likely  that  the  tax  will  yield  sufficient  revenues  for  the  purposes  of  the  EU 
budget.  Nevertheless,  private  consumption,  which  would  be  the  principal 
component  of  the  VAT  tax  base,  has  pronounced  cyclical  characteristics. 
Fluctuations  in  private  consumption  are  a  leading  cause  of business  cycles.  The 
replacement  of  the  current  3rd and  4th  resources  with  a  VAT  resource  of  the  type 
proposed  would  undoubtedly  raise  the  variability  of  EU  budget  revenues. 
It  is 
worth  recalling  that  the recession  of the  early  1990s had  significant  effects  on  EU 
revenues during that period. 

The co-occupancy  of the  same base by national  and  EU authorities  will  contribute 
to  reducing  compliance  and  monitoring  costs  (compared  to  introducing  an 
independent  a  new  tax)  and  to  also  limiting  the  extent  of  tax  fraud,  evasion  and 
avoidance.  With  the  national  VAT  rate  exceeding  significantly  the  EU  one 
Member States should have sufficiently  strong incentives to monitor compliance on 
the  part  of  taxpayers.  Nevertheless,  the  present  experience  with  VAT  revenue 
performance  since  the  recession  indicates  that  problems  of  compliance  may  be 
important. 

In  order  to  ensure  that  fiscal  obstacles  to  the  completion  of  the  Single  Market  are 
abolished  the  Sixth  VAT  Directive  provided  that  a definitive  VAT  system  ought  to  be 
based  on taxation  in the Member  State where the goods or services are supplied16.  The 
Commission  has  put  forward  ideas  for  minimum  VAT  taxation  which  are  consistent 
with  the  origin-based  system17  and  which  are  likely  to  ease  some  of  the  drawbacks 
currently characterising VAT as an own resource. 

With  an  origin-based  VAT  system  for  the  EU,  VAT  might  present  itself  as  a  good 
candidate  for  a  genuine  own  resource. 
It  has  considerable  attractions  in  terms  of 
visibility,  adequacy  and  buoyancy  although  some  key  reservations  cannot  be  ignored. 
However,  a principal  difficulty  relates  to the regressive  nature  of the tax.  Should  it  be 
in  the  form  of  a  GNP-related  equalisation 
necessary 

to  introduce  corrections 

15  •  See Council  Directive 91/680/EEC. 
16 
17 

See Council  Directive 91/680/EEC. 

See  Commission  of  the  European  Communities  (1996),  and  Commission  of  the  European 
Communities  (1997d). 

7-10-1998 

10-

ANNEX 2 

mechanism,  some of the attractions  of this resource  (for  example, the  link  with  the tax 
actually paid by taxpayers and its transparency) would  disappear. 

Box  2 

Criteria 

Performance 

Modulated  VAT  tax 

F 
q 

.. 
y 

Despite modifications  VAT continues  to be a regressive  tax for the  EU. 
No cross-border externalities  although moving to an origin-based  VAT 
goes in the directions of making VAT an EU tax.  Not entirely consistent 
with national tax objectives. 

Base harmonisation 

Substantial,  following the Sixth VAT Directive. 

\/-o>>•/•*  *  * 
visiDinty to taxpayers 

3 

Highly visible,  especially if recorded on each transaction along with  the 
national VAT,  and familiar to taxpayers. 

,. ..T- 

.,  . 

... 

. t 

,. 

Link to common policies 

Consistent with the establishment of EU-wide minimum tax rules. 

Re  enu 
efTc'e 

ff  ' 
d 

„ 

.. 

t 
' 

Likely sufficient resources will become available, although they  could 
exhibit  high  variability; 
it  is  possible  to  administer  the  system 
effectively although administrative costs  will  certainly be  higher  than 
under the present system. 

3.3.  Excise duties on tobacco, alcohol and mineral oil 

Excise  duties  are taxes  levied  on  the production  or  consumption  of  specific  goods.  In 
the  EU  excise  duties  apply  to  a narrow  group  of  goods,  tobacco,  alcohol  and  mineral 
oils.  One  attraction  of  excise  taxes  is  the  perceived  ease  of  introduction  and  the 
sufficiency  of revenues.  Currently  all  Member  States  impose  such  taxes  but  there  are 
enormous  differences  between  the rates applied.  Although  tobacco  and  alcohol  excises 
in  particular  are  regarded  as  important  instruments  of  national  social  policy  it  is 
conceivable that part of their yield could be assigned to the EU level. 

Currently,  excises  rates  are  subject  to minimum  rules  in  the EU but  the  levels  are very 
low  and,  as  a  result,  they  permit  wide  differences  among  Member  States  that  have 
chosen  to  levy  excises  at  often  significantly  higher  rates.  Excises  are  often  employed 
for reasons of public health and, as a result, they reflect  to a considerable extent national 
socio-political  priorities.  The  European  Parliament  (1994)  report, by  referring  to them 
as  "educational  taxes",  considered  such  excises  in  a  similar  light  too.  The  report  also 
acknowledged  that on equity grounds they would  be  inappropriate  as new resources  for 
the budget. 

The  share  of  the  bases  of  the  excises  in  GNP  differs  substantially  across  the  Member 
States.  Consequently,  if  it  were  that  Member  States  contribute  on  the  basis  of  a 
common rate levied on the actual bases of excise duties, the proportions in contributions 
by Member  State would differ  widely.  This would  not be consistent  with  equity  across 
the  Member  States  while,  at  the  same  time,  such  taxes  are  also  regressive  across 
consumers  (smoking  is  a  clear  case).  Nevertheless,  such  regressivity  is  a  part  of  the 
design  and  policy  objectives  of  excise  duties  and  should  not  necessarily  be  considered 
as a drawback  in the present context. 

7-10-1998 

-11 -

ANNEX 2 

Beyond revenue considerations, taxing demerit  goods is increasingly  seen as promoting 
allocative objectives.  Consumption  of such goods can be a serious hazard  to health  and 
imposes considerable costs in containment and treatment of diseases.  Moreover,  excises 
on  mineral  oils  can  be  regarded  as  serving  environmental  objectives.  The  tax  base, 
especially for tobacco and alcohol excises, is narrow.  Revenues from demerit goods are 
characterised  by  low  elasticities  with  respect  to  GNP  but  they  display  high  elasticities 
with respect  to changes  in the excise tax rates  since the goods on which they  are  levied 
tend  to  be  price-inelastic18.  Despite  their  "educational  nature"  it  is  of  course 
questionable  whether  it  is  appropriate  to  base  the  financing  of  the  EU  budget  on 
dissuasive  taxation,  especially  since  in  the  long-run  consumption  of these  goods  could 
perhaps follow  a diminishing trend. 

The  EU's  involvement  in  the  area  of  excise  taxation  is  based  on  the  requirement  to 
ensure  unrestricted  mobility  of goods subject  to these duties within  the internal  market. 
Presently, several directives govern excise rates and structures in the EU19.  They  define 
minimum  excise rates  for  each product  type and determine  the product  types  subject  to 
excise  levies  and  explain  the  method  of  implementing  the duties  as well  as  the  criteria 
for  exemptions  or preferential  treatment  as the case may be.  As a result  of these  steps, 
In the  case 
considerable  if yet  still  incomplete  base harmonisation  has been  achieved. 
of mineral  oils  in particular,  exemptions  continue  to be numerous20.  The  Commission 
has  proposed,  in  the  context  of  the  Single  Market,  extending  the  scope  of  taxation  to 
cover  all  energy  products,  especially  taking  into  account  the  wish  of  several  Member 
States  to pursue  environmental  objectives  under  the  umbrella  of  EU  initiatives21.  The 
Commission  considers  the  removal  of  indirect  tax  obstacles  to  the  completion  of  the 
Single Market as a policy priority22. 

• 

18 
19 

Excise  taxes,  particularly  those  on  demerit  goods,  are  regressive  both  across 
Member  States  and  across individuals.  Equity concerns would, therefore,  arise but 
this  is  not  a  decisive  drawback  being  an  inevitable  consequence  of  such  taxation. 
Moreover,  the differences  in shares across the Member  States reflect  differences  in 
the  rates  of  national  tax  systems.  Taxation  of  mineral  oil  also  creates  equity 
problems as mentioned previously under heading 3.3. 

SeeBegget.  al.  (1997), p.40. 

The earliest dates  back to original Single  Market program and the latest concerns the  harmonization 
of  excises  on  mineral  oil,  Commission  of  the  European  Communities  (1997b).  There  are  in  total 
seven Directives on excise rates and structures currently  in force. 

20  While  EU  legislation  governing  excises  on  mineral  oils  requires  a single  rate  per  product,  Member 
States  can  request  to  maintain  or  introduce  reduced  rates  or  exemptions  on  grounds  of  specific 
policy considerations  under  Article 8(4), Directive 92/81/EEC. 

21 
22 

See Commission of the European Communities  (1995). 

See Commission of the European Communities  (1997d), p. 5-7, 16 and 26 for a discussion. 

7-10-1998 

-  12-

ANNEX 2 

The assignment of part of the excise taxation to the EU level would be  favoured  in 
the  circumstances  where  it  is  necessary  to  internalise  trans-border  pollution 
externalities. 

On  the  other  hand,  however,  national  preferences  for  particular  policies  regarding 
demerit  goods may not be  adequately  accounted  for  under  an EU assignment,  thus 
violating  the  subsidiarity  principle.  Respecting  local  preferences  argues  clearly  in 
favour  of assigning these taxes to national parliaments. 

There is only moderate visibility to taxpayers/citizens. 

The main area where there are links with common policies is in the field of mineral 
oils  where  there  is  some  degree  of  interrelation  with  transport,  environmental  and 
energy  policies. 
In  addition,  there  are  some,  albeit  tenuous,  links  with 
health/consumer protection  objectives. 

Low  price  and  income  elasticities  suggest  that  the  revenue  from  these  taxes  is 
stable;  also, consumption  of demerit  goods is not  cyclical.  Excise rates tend  to be 
changed  relatively  frequently 
to  adjust  for  inflation  or  to  obtain  increased 
government  revenue  but  the  revenue  consequences  of  these  changes  are  not 
predictable with a great degree of accuracy. 

• 

Harmonisation  at  the  EU  level  has  not  advanced  as  much  as  in  the  case  of  VAT 
particularly in respect of rate levels. 

Administration  and  collection  costs  will  be  substantially  higher  than  it  is the  case 
for  the  current  own  resources.  Nevertheless,  relying  on  present  administration 
structures could alleviate these costs.  Co-habitation  by national  and EU  authorities 
on the same tax base could also give rise to conflicts  similar to those encountered in 
the case of VAT discussed  previously. 

Box 3 

Excise  duties  on  tobacco,  alcohol  and  mineral  oil 

Criteria 

Performance 

Equity 

The equity of  the yield  of  these  taxes may  be poor, but  given  the 
characteristics of  the  goods  being  taxed  this  may  be  a secondary 
consideration. 

Base harmonisation 

Advanced. 

Visibility to taxpayers 

Moderate/Low. 

Link to common policies 

Tax harmonisation linked to internal market policies. 

Revenue sufficiency, 
efficiency and cost- 
effectiveness 

Although  the  base  is  narrow,  revenue  could  be  substantial.  Low 
income  and  price  elasticities  of  tobacco  and  alcohol  imply  stable 
revenues. A Community tax is unlikely to cause additional compliance 
costs.  Evasion and fraud in the area of excises is significant,  reflecting 
the generally high level of rates levied. 

7-10-1998 

- 1 3-

ANNEX 2 

Excises  suffer  notably  from  equity  concerns.  Despite  finding  favour  for  discouraging 
consumption  of  demerit  goods,  and  for  promoting  environmental  objectives,  Member 
States may not be willing to share important  fiscal  instruments. 

3.4.  Corporate  income  tax 

Using  corporate  income  as  a  tax  base  for  a  new  own  resource  has  been  examined  on 
several occasions23.  At the background  of these proposals  is the evidence that  revenues 
from  corporate taxes are an important component of national budget revenues24 and also 
that  in  federations  corporate  tax  revenues  are  either  shared  between  different  levels  of 
government  or  the  different  levels  of  government  impose  their  own  corporate  taxes. 
Moreover,  the  benefit  taxation  principle  predicts  that  those  benefiting  from  current 
policies  ought  to pay  for  the policies.  In the present  case, corporations  are expected  to 
benefit  substantially  both  from  the  Single  Market  and  from  EMU,  the  former  through 
the expansion of the domestic market  and the latter as a result of price transparency  and 
enhanced  competition. 
In  this  perspective,  corporate  taxation  holds  the  promise  not 
only to provide  sufficient  resources  for  the  EU budget  as well but  also to be  consistent 
with the practice in national tax systems. 

Keen  (1995)  points  to  three  dimensions  of  interest  of  the  corporate  tax  system  in 
Europe.  First,  the  schedule  of  statutory  rates  at  which  the  tax  is  levied;  according  to 
Albi et. al. (1997), in  1996 these ranged from 28 per cent in Finland  and Sweden and 33 
per cent in the UK to 55.9 per cent in Germany and 53.2 per cent in Italy25.  Second,  the 
definition  of the tax base upon which  the tax is levied.  Here, the variety  of  regulations 
and  exemptions  governing  corporate  income,  including  provisions  for  international 
taxation,  constitute  a complex  and  intractable  problem.  And, third,  the extent  to  which 
the corporate  tax  is integrated  with the personal  income tax code so that corporate  taxes 
are  measured  against  personal  tax  liabilities26.  He  concludes  that  there  is  substantial 
variation  across the Member States in terms of the three aspects although, as pointed out 
by  the  Ruding  Report,  there  has  been  a  considerable  amount  of  convergence  in  recent 
years27.  The severest  difficulty  for corporate  taxation to become  an own resource  is the 

23 

24 

25 
26 

27 

See, for example, the report by the European  Parliament  (1990);  for a recent thorough review of the 
issues involved see Albi et. al. (1997). 

According  to  Eurostat,  in  1995 these  amounted  to  as  little  as  1.6  per  cent  of  GDP  in Germany  and 
as  much  as  5.1  per  cent  of  GDP  in  Luxembourg;  for  the  EU-15,  they  were  2.4  per  cent  of  GDP. 
They also ranged from a low of 2.9 per cent of total tax revenues  in Austria to a high of  11.6 per cent 
in Luxembourg, while for  EU-15 they amounted to 5.7 per cent of total tax revenues. 

See Albi et. al.  (1997), chart  1, p. 39. 

See  Keen  (1995),  section  3.8,  p.  64  and  also  Commission  of  the  European  Communities  (1993a), 
ch. 7, p. 87-88. 

See  Commission  of  the  European  Communities  (1992d), especially  ch. 8, p.  153-185.  Bureau  and 
Champsaur  (1992)  attribute  this  convergence  to  the  improved  tax  treatment  accorded  to  capital 

7-10-1998 

- 1 4-

ANNEX 2 

diversity  of the tax base in the EU.  Unlike  similar obstacles  encountered  in the case of 
other potential  candidates, the degree of base diversity  in corporate  taxation  constitutes 
a serious disadvantage28. 

Albi  et.  al.  (1997)  examined  the  possibility  of  responding  to  the  base  diversity  in  the 
context  of  considering  corporate  taxation  as  an  own  resource.  In  reviewing  potential 
indicators  for  measuring  the  corporate  sector's  contributive  capacity  to  the  EU,  they 
concluded  that  the profit  or  loss  account  could  be  a reasonable  base.  However,  it was 
found  to be second best compared  to the definition  of the corporate base in terms of the 
"real" corporate  flow  of funds29.  The  latter,  which  is  the  equivalent  of  an  expenditure 
tax in the area of corporate taxation, was  found  to be appealing from both the economic 
and  the  administrative  perspective.  Spahn  (1993)  is  also  favouring  this  concept30. 
However, even in this case significant  difficulties  would have first to be resolved  before 
serious consideration is given to this candidate. 

•  Assigning  corporate  taxation  to  the  level  of  the  EU  reflects  several  concerns31. 
Because  of  the  lack  of  exact  specificity  of  the  incidence  of  corporate  taxes,  some 
degree  of  centralisation  at  a  higher  level  of  authority  can  be  optimal;  corporate 
taxes  are  invariably  paid  by  consumers  and  producers  whose  residence  does  not 
necessarily  coincide with the jurisdiction  of the tax-imposing  authority resulting  in 
revenues  accruing  to  authorities  different  from  those  of  the  country  where  the 
income originates. 

• 

This  is also  the case  for taxes  imposed  on  shareholders  of corporations  residing  in 
different  countries; 
in  effect,  taxes  on  distributed  corporate  profits  are  paid  by 
residents of nations other than the tax-imposing ones. 

•  Corporate  tax  rates  have  declined  considerably  in  recent  years,  reflecting  both 
international  competition  for  investment  and  supply-side  concerns.  It  is  possible 
that  Member  States  could  benefit  from  an  increase  in  corporate  taxation  even 
though none has incentive to act alone.  A collectively  imposed increase at the level 
of the EU could serve as a vehicle for such a policy. 

income  by  European  governments  made  necessary  following  the  liberalization  and  integration  of 
capital markets in EU. 

For the  diversity  of the corporate  income  tax  provisions  in several, including  some  EU, countries  in 
1994 see Mintz (1996). 
This  is defined  in terms of all sales of  real goods  and  services  including  proceeds from sale of fixed 
assets,  net  of  purchases  of  real  goods  and  services  and  of  wages,  salaries  social  security 
contributions  and related charges. 

See Spahn (1993). 

See  Begg et. al. (1997), p. 26-29. 

28 

29 

30 
31 

7-10-1998 

- 1 5-

ANNEX 2 

• 

There  are  serious  administrative  hurdles  in  operating  the  tax  when  multinational 
firms engage in transfer  pricing or thin capitalisation32 practices.  Despite efforts  to 
control 
the  control  of  national 
administrations. 

such  practices,  much 

remains  beyond 

•  Different  corporate  tax  systems  impair  economic  efficiency  while, with  the  Single 

Market, tax competition could lead to resource misallocation. 

•  With  capital  mobile  and  labour  immobile, corporate  taxes  would  tend  to  be  borne 
predominantly  by the latter, thus pointing also to assigning the tax to a higher level 
of  authority.  Regarding  horizontal  equity  across  the  Member  States,  corporate 
taxation  not  only  reflects  poorly  contributive  capacity  but  also  could  lead  to 
substantial distortions in the presence of transfer pricing. 

•  A corporate tax would not be visible to citizens as consumers but only as owners of 

firms;  as a result, it would not enhance accountability. 

• 

In  terms  of  links  to  other  Community  policies,  clearly  such  a  tax  would  advance 
In addition,  as in the case of the 
integration  in the context  of the Single Market. 
C02/energy tax, it could help shifting  the burden of taxation away from labour, thus 
contributing to better employment  performances. 

•  Revenues  from  corporate  taxation  are  notoriously  highly  cyclical; 

as  an  EU 
resource,  it  would  cause  contributions  to  be  variable.  Potential  revenues  from  a 
corporate  tax  resource  would  undoubtedly  be  sufficient33  and  the  tax  could  be 
administered  through  the  Member  States.  However,  corporate  practices  could 
result in significant  tax evasion and fraud. 

Developing  a  corporate  tax  system  assigned  to  the  EU  would  be  consistent  with  the 
Commission's view that taxes on labour ought to be replaced by taxes on corporations as 
a means  to encouraging  employment  growth.  However,  a principal  drawback  of a new 
own resource  in the  form  of corporate taxation is the absence of a harmonised  base and 

32 

33 

Thin  capitalization  refers  to  the  practice  where,  in  order  to  take  advantage  of  the  differential  tax 
treatment of debt and equity  in different territories, and in view of the fact that interest on debt enjoys 
considerable  tax  relief,  firms  choose  to finance  operations  through  debt  rather  than  equity,  so  that 
they  shift  tax  liabilities  from  the  high  to  low  tax  territories.  A  thinly  capitalized  firm  is  one  whose 
debt/equity  ratio  is  relatively  high.  Given  the  differential  tax  treatment  of  corporate  income  across 
the  Member  States, this  practice  can  lead to significant  resource  misallocation.  The term  is due to 
Devereux  and Pearson (1989). 
According  to  the  European  Parliament  (1990), the  proportion  of  corporate  tax  revenues  accruing  to 
the  highest  level  of  government  in federal  OECD  states  varies  between  varies  from  30  per  cent to 
over  100 per cent.  If the average amount of 64 per cent of corporate tax  revenues were to accrue to 
the  EU  budget  this would  generate  some  Ecu 65  billion  in  revenues  (1988  prices),  roughly  "double 
the level of resources  now available to the Community";  see European Parliament  (1990), part C, p. 
21. 

7-10-1998 

-16 

ANNEX 2 

the difficulties  involved in developing  fully  such a base.  Should the harmonised base be 
defined  differently  from  the  national  ones,  this  could  raise  administrative,  compliance 
and monitoring costs.  The integration of the corporate and the personal tax schedules in 
some  Member  States  would  also  make  it  politically  unattractive,  although  this  would 
not  be  a  concern  if  the  Albi  et.  al.  (1997)/Spahn  (1993)  proposal  were  to  be 
implemented.  Overall,  corporate  taxation  does  not  perform  well  when judged  against 
key criteria for own resources. 

Box  4 

Corporate 

income 

tax 

Criteria 

Performance 

Equity 

Corporate  taxes levied on profits are generally consistent with equity, 
although  trans-border input purchases  and output sales, together  with 
transfer-pricing  practices, make allocation  of  firms' profits  to  a single 
Member State  difficult.  To the  extent that  production is becoming 
globalised there is justification for levying  corporate taxes at EU level. 
With an increasing number of firms operating in more than one Member 
State harmonisation at  a  higher level  of  the  corporate tax  code  is 
appropriate. Multiple corporate tax arrangements are an obstacle to full 
implementation of the Single Market. 

Base harmonisation 

Virtually non-existent. 

Visibility to taxpayers 

Limited visibility,  not to consumers  but only to firms.  The tax could be 
presented as a contribution  on the part of firms for benefits they enjoy 
as a result of the completion of the internal market. 

Link to common policies 

Linked to complementing the Single Market. 

lfr 

,-. 
. 
Revenue sufficiency,  efficiency 
and cast eff  cte 

~  . 

ss 

Corporate taxes  account  for  a  considerable share  of  revenues  in 
national budgets and,  thus, they are likely to yield sufficient resources. 

_ 

. 

." 

,• 

,  ~ 

,• 

_/  a- • 

Corporate taxes are  very cyclical.  Compliance  and efficiency costs, 
which will depend on the definition of the EU and the national tax base, 
are likely to be substantial. 

3.5.  Communications  taxation 

The proposal  to use taxation  of communications  services  as a source of revenue  for  the 
EU  budget  was  made  by  Begg  et.  al.  (1997)34  in  the  context  of  taking  advantage  of 
opportunities developing within the internal market.  On the one hand, closer  integration 
and market  liberalisation  have given rise to an increasing volume of activities related  to 
communications;  on the other, the presence of externalities  favours  assigning new taxes 
to  the  EU  level  and,  indeed,  regulation  is  shifting  in  this  direction.  Arguing  also  in 
favour  of  such  taxes  is  the  development  of  EU  policies  to  improve  links  among  the 
Member  States.  The  bases  for  communications  taxes  are  road  and  air  transport  and 
rapidly 
telecommunications  services 
expanding economic activities. 

including  possibly  broadcasting,  areas  of 

34  See Begg et. al. (1997), p. 43-46. 

7-10-1998 

-  17-

ANNEX 2 

Begg  et.  al. (1997)  suggest  three  bases  for  communications  taxation.  First,  telephones 
and mobile telephone  services;  secondly, road transport, an area already suffering  from 
congestion;  and,  third,  air  transport,  an  area  where  deregulation  will  boost  further 
growth. 

•  Road  and  air  traffic  congestion  suggest  the  need  to  price  these  activities  more  in 
accordance  with  environmental  objectives.  Increasing  integration,  following  the 
completion  of the internal  market,  and the expansion  of air travel  indicate that  it is 
not  immediately  possible  to  determine  the  ultimate  base  of the  tax.  Although  the 
tax  would  belong  to  a  higher  level  of  authority,  it  would  not  be  possible  to 
determine  how  each  Member  State  contributes.  At  the  same  time,  assuming  that 
income  is  positively  correlated  with  air  travel  tax,  then  it  would  be  progressive 
across individuals. 

• 

• 

• 

• 

Telecommunications  services are highly correlated  with GNP and, as a result,  they 
are not inconsistent with equity considerations. 

The taxes  would  not  be  visible  in the  case  of transport, but  more so in the case  of 
air travel;  they would be clearly visible in the case of telecommunications. 

The  taxes  are  linked  to  common  policies  mainly  through  transport  directives  and 
through  initiatives  to  foster  EU  competitiveness  by  modernising  transport  and 
telecommunications  infrastructure. 

Communications  and  transport  services  are  already  subject  to  VAT  and/or  excise 
duties. 

The base is well  defined  and harmonisation  is already  de facto  advanced  or can be 
easily  accomplished. 

•  Despite  the  projected  high  growth  of  communications  services,  it  is  certain  that 
revenues  from  this  source will  be  adequate  to  finance  only part  of the  EU  budget. 
Begg  et.  al.  (1997)  estimate  that  an  airport  departure  tax  of  Ecu  15  would  yield 
around  10 per  cent  of  the  EU  budget,  while  an  annual  average  tax  per  telephone 
line of Ecu 40 could finance  another  10 per cent of the budget. 

• 

The  administrative  costs  involved  in  the  collection  of  these  taxes  would  be 
substantially  higher  than  under  the present  system; the taxation  of  communication 
would involve setting up a family of new own resources and not just one. 

It  is  possible  that  communications  taxes  will  ultimately  militate  against  long-term 
progress  in  competitiveness.  A  further  possible  disadvantage  is  the  need  to  introduce 
new taxes as well as to change the rates currently charged by Member States.  Although 
politically  costly,  such  measures  may  encounter  objections  only  during  the  initial 
introductory  period.  There is little to be done on base harmonisation  in the case of road 
transport  and  air  travel  but  in  the  case  of  telecommunications  it  will  be  necessary  to 
attain some harmonisation. 

7-10-1998 

ANNEX 2 

Begg  et.  al. (1997) propose  that  the communications  tax  becomes  part of  a broader  set 
of  own  resources  over  the  next  Financial  Perspective,  substituting  gradually  for  the 
diminishing  share  of  traditional  own  resources  in  the  EU  budget.  Over  the  medium 
term, they see continuing use of these taxes provided  that once introduced they prove to 
function  well35. 

Box  5 

Criteria 

Performance 

Communications 

taxes 

Equity 

Uncertain  whether equity is well served:  yes, if road and air transport 
and telecommunications services are correlated with income; no, if the 
former are relatively more important in poorer regions. By internalising 
congestion  costs transport taxes could said to belong  to the EU level. 
Moreover,  closer trade integration  makes it difficult to determine  which 
Member State  would  be  paying  the  tax  on  road  and  air transport 
activities.  Taxes would be paid by both consumers and producers 

Base harmonisation 

Already advanced or can be accomplished rather easily. 

For transport taxes,  likely limited;  for air travel and telecommunications 
, 
taxes highly visible. 

.  ... 

. . \\ 

J 

Consistent  with 
.... 
competitiveness through the TEN initiatives. 

.  r_  _,_,...  ...  .. 

,, 

transport  directives  and  with  strengthening 

" 

Given the growth potential of communications services,  revenue growth 
could be  buoyant but  sufficiency is  certainly not assured since only 

20% of the EU budget could be  expected to be financed  through  this 

source.  There  is  also  an  important  cyclical  component in  such 
activities.  Revenues  could  be  collected  easily  through existing 
structures,  scope for evasion and fraud rather limited. 

......... 
.  . 
Visibility to taxpayers 
. 

^  J 

. . .. 
Link to common policies 

..  . 

Revenue sufficiency,  efficiency 
and cost-effectiveness 

3.6.  Personal  income tax 

Personal taxes constitute the most direct  and visible link between taxpayers/citizens  and 
elected  authorities.  The  attraction  of  imposing  surcharges  on  personal  income  as  the 
EU's  own resources partly rests on the opportunity  to exploit  this direct  link in order to 
enhance  accountability  and  to  contribute  towards  mitigating  the  importance  of  the 
"democratic  deficit".  Personal  tax  constitutes  a  buoyant  source  of  revenues  but  its 
towards 
importance  differs  significantly  across 
harmonisation  of  indirect  taxation  at  the  EU  level  leave  only personal  income  taxation 

the  Member  States36. 

Steps 

35 

36 

See Begg et. al. (1997), p. 68-71 for a discussion of these issues. 

According  to  Eurostat  data,  taxes  on  personal  income  amounted  to  23.4  per  cent  of  total  tax 
revenues  in  1995, ranging  from  16.4  per  cent  in  France  to  47.7  per  cent  in  Denmark.  In terms  of 
GDP, revenues from taxation of personal income represented 9.7  per cent in  1995, ranging from  7.3 
per cent in France to 24.5 per cent in Denmark. 

7-10-1998 

- 1 9-

ANNEX 2 

to represent  the  limited  discretionary  room  for  Member  States  to  exercise  stabilisation, 
budgetary and social policy37. 

• 

• 

• 

• 

• 

• 

• 

There  are  no  externalities  favouring  assignment  of  personal  taxation  to  a  higher 
level  of  authority.  The conventional  argument  for  efficient  taxation  of mobile  tax 
bases  does  not  apply  to  EU  income  earners  who  are  currently  a  highly  immobile 
labour  force. 

Income  tax  rules  differ  widely  between  the  Member  States  and  the  complexity  of 
the income tax schedule in terms of thresholds, personal and family exemptions and 
allowances  poses  significant  problems  for  base  harmonisation; 
it  is  certain  that 
horizontal  equity, across individual and Member States, will not be respected  under 
present  rules.  Moreover,  militating  against  base  harmonisation  is the very  limited 
mobility  of  labour  in  the  EU,  as  a  result  of  which  pressures  for  convergence  in 
income tax rules are very weak. 

There  is  political  opposition  to  base  harmonisation.  Moreover,  differences  in  tax 
and  overall  economic  policies  would  make  it  impossible  to  achieve  consensus  on 
these  issues.  On at least these grounds, personal  taxation ought  to remain  assigned 
at the national level. 

The  visibility  of  the  tax  would  be particularly  high,  as would  be  the  link  between 
the  financing  of  the  EU  and  the  husbandry  of  resources  made  available  to  the 
budget;  it is certain that accountability would be enhanced. 

There is no direct link between such a tax and other EU policies. 

It is possible that the co-occupancy of the same tax base by national authorities and 
the  EU  could  complicate  the  management  of  national  economic  and  budgetary 
priorities.  As noted previously, the ability to influence  stabilisation policy  through 
interventions  in  the  personal  tax  code  would  be  reduced.  Moreover,  the  balance 
between direct and other taxes in national tax structure may be adversely  affected. 

The  tax,  depending  on  its  design,  can  potentially  yield  sufficient  revenues  to 
finance  completely  the EU budget.  However, personal  income  is highly  correlated 
with the business cycle and revenues could exhibit  considerable  co-variability  with 
the  business  cycle  although  the  small  share  of  the  EU  budget  in  EU  GNP  would 
tend to mitigate the importance of this  effect. 

37 

For  references  to  the  several  proposals  for  an  income  tax-based  EU  resource  see  Begg  et.  al. 
(1997). 

7-10-1998 

20 

ANNEX 2 

•  There are no major obstacles to revenue collection on the basis of current practices; 
however,  evasion  and  under-reporting  of  income  for  tax  purposes  is  a common 
problem in several Member States and will remain so in the case of an EU tax. 

Begg et.  al.  (1997)  discuss  some proposals  for  designing  a new  own resource  on the 
basis of personal income tax.  A key conclusion is that, with progressivity as a central 
objective  and assuming that 50 per cent of budget expenditure is financed  through the 
progressive  resource,  the  resulting  degree  of  progressivity  in  the  context  of Agenda 
2000 may be too sharply pronounced to be politically comfortable38. 

wnTimrnimrinirMm~i-~rrmrrrnrmmr^—^^ 
Box  6 

— — • — — — — — - — — . — — . — — . —— 

•••  ——^— 

, 

—— 

Criteria 

Performance 

Personal 

income 

tax 

- 
.. 
qu,y 

Differential  taxation of various  sources of income and interventions  in 
the  form  of  personal  and  other  allowances have  led  to significant 
differences in the tax base which,  should this become an own resource, 
would  lead  to  horizontal  (across  individuals  and  Member States) 
inequities. Given the immobility of EU taxpayers/workers,  conventional 
arguments in favour of centralisation of income tax do not apply. 

Base harmonisation 

Non-existent. 

Visibility to taxpayers 

Highly visible tax. 

Link to common policies 

No direct links. 

Re  e 

effete 

fTc'encv 
°  ndcost- 
' 

i  i  n  y a 
e  ec  lv 

Sufficient,  generally  stable,  albeit  variable,  and  likely  substantial 
revenues.  Few  additional  costs  in  administering the  system  and 
collecting tax revenues. Depending on the exact design of the system, 
it is oossible that compliance and avoidance costs would increase. 

3.7.  Withholding tax on interest income 

Differences  in residence  and the location of economic activities gives rise to potential 
avoidance of taxation of income, a case particularly pronounced in flows of interest and 
dividend  income.  In  practice,  differences  in  the tax  treatment  of  savings  and  capital 
income  has  the  potential  of  allocating  capital  towards  the  lowest  tax  jurisdiction,  a 
possibility  that  could  cause harmful  tax competition  and could  cause  serious  resource 
misallocation;  taxing at a higher level of authority would limit such resource allocation 
costs. 

38  See  Begg et. al.  (1997), p. 23-24;  they  estimate that on the  basis of an EU budget of  1.27  per  cent 
of  EU-15  GNP  and  with  50  per  cent  of  expenditure  financed  through  the  progressive  resource, 
Portugal  would  contribute  as  little  as 0.47  per  cent  of  GNP  and  Luxembourg  as  much  as  2.07  per 
cent  of  GNP  and  the  contribution  of  the  remaining  Member  States  would  fall  in  between  these 
shares. 

7-10-1998 

- 2 1-

ANNEX 2 

In the EU, Luxembourg  the Netherlands  and Denmark  are exceptions  in that  they  have 
no  withholding  tax.  All  other  Member  States  - except  Belgium,  Austria,  Finland  and 
Sweden - levy no withholding  tax on non-residents.  As a result,  following  the  removal 
of  exchange  controls,  it  is  possible  for  foreigners  to  avoid  taxes  altogether  by  using 
Member States where no withholding tax exists to channel their earnings. 

Following  an  invitation  from  the  Council,  the  Commission  presented  a proposal  for  a 
Directive  to  ensure  a minimum  of  effective  taxation  of  savings  income  in  the  form  of 
interest  payments  within  the  Community  on  20  May  199839.  The  Commission's 
proposal  aims  at  ensuring  a  minimum  taxation  on  interest  income  paid  in  a  Member 
State to a beneficiary  in another Member State.  The proposed minimum rate is set at 20 
per cent  and  Member  States  can  choose  to  levy  a higher  rate  if they  so wish.  Member 
States can choose to either  apply this withholding  tax rate or to provide  information  on 
income  earned  to  all  other  Member  States  where  the  beneficiary  has  his  residency  (in 
the  commentary  on  the  proposal,  this  is  called  the  "coexistence  model").  As  will  be 
seen below, the proposal  does not form  a promising base for the establishment  of a new 
EU own resource. 

• 

• 

Economic efficiency  would argue in favour of assigning the tax to a higher  level of 
authority. 

It  is  unclear  what  the  equity  implications  of  this  tax  would  be,  and  there  are  no 
immediately  available  data  to  evaluate  this  aspect  properly. 
In  principle,  the 
imposition  of  the  tax  would  not  offend  the  equity  criterion  given  that  the  level  of 
savings, and wealth, are likely highly correlated with the level of income. 

• 

The tax would be greatly visible to (perhaps a narrow group of) taxpayers. 

•  Base  harmonisation  is  inadequate. 

In  some  cases  withholding  taxes  may  be 
imposed on interest and dividend income earned from  investments abroad, in others 
on  income  earned  from  investments  abroad  and  at  home,  and  yet  in  other  cases 
withholding  taxes  may  be  levied  on  interest  but  not  on  dividend  income,  and  vice 
versa, while the tax treatment of capital gains can be also diverse. 

• 

• 

39 
40 

The  Commission's  proposal  for  a minimum  withholding  tax,  while  it  defines  the 
overall base on which  the tax will be levied40, opens, at the same time, through  the 
"coexistence model", the possibility of shifts between the individual national bases. 

The  Commission's  proposal  for  a  minimum  withholding  tax  has  a  strong  link  to 
common  policies.  Since  the  logic  of  a  withholding  tax  is  directly  linked  to  the 

See Commission of the European Communities (1998). 

See Commission of the European Communities  (1998), Articles 4 and 5. 

7-10-1998 

-22 

ANNEX 2 

liberalisation of capital and financial  markets and the removal of exchange controls 
in  recent  years,  it  clearly  complements  the  liberalisation  policies  by  ensuring  that 
capital  does not  enjoy  undue  advantage  over  the  immobile  factor  labour  in  its  tax 
treatment. 

• 

It  is  not  possible  to  determine  whether  sufficient  revenues  would  flow  from  this 
tax41.  Furthermore, interest  rate and capital  markets  fluctuations  could make  these 
revenues  particularly  variable  and  unpredictable  especially  in  periods  of  rapid 
structural change in the financial  system as has been witnessed  in recent years.  It is 
also  possible  that  financial  institutions  will  develop  new  instruments  to  avoid  the 
tax. 

T T T * TT 

" " "• 

' 

— 

I  M — — -— 

ILJHL 

ll 

J _ J . _ .. 

_•__•• A  . 

- - U I I I . I. 

11.  — 

—T— — — ^ — » — f r y — ^ ^ f ^ —— 

• 

.,. 

I 

.i 

•!  — B B ~J  1M1MR.1 

Box 7 

Withholding  tax  on  interest 

income 

Criteria 

Performance 

P 

.. 
y 

Because of  capital mobility the  tax  is  necessary to  ensure  symmetric 
treatment of  capital and labour for  tax purposes.  Although this would 
suggest assigning the tax to the EU, it is questionable  whether it would 
be consistent with horizontal equity.  The level of savings is positively 
correlated with the level of  income, so  that this tax could be seen as 
progressive.  However, this  at  the moment is  only a  conjecture  since 
there is no data concerning trans-border investment by Member State to 
evaluate this proposition. 

Base harmonisation 

Incomplete,  although progress has been made in this direction. 

Visibility to taxpayers 

Greatly visible. 

l  '  kto  m  n ool'cies 

p 

Revenue sufficiency, 
efficiency and cost- 
effectiveness 

tne 

removal  of  exchange controls  and  the 

Linked to the proposed Directive on a minimum withholding tax.  It would 
also  ^e  comPfementinC 
liberalisation of capital and financial markets in that it ensures that capital 
does not enjoy preferential treatment relative to labour. 
Uncertain revenue,  also variable and unpredictable.  Collection of the tax 
by financial institutions is simple and involves  no additional compliance 
costs.  Establishing  a  common  minimum  tax  would  require  the 
establishment of a corresponding administrative apparatus for monitoring 
and compliance purposes. 

The  purpose  of  the  Commission's  proposal  is  to  prevent  harmful  competition  between 
national tax systems which could be contributing  to the erosion  of the tax base in  some 
Member  States, to remove  tax-induced  distortions  and  to  ensure compatibility  with  the 
internal  market  rules.  Consequently,  the  proposal  has  not  been  made  with  a  view  to 
exploiting  a potential  new  own  resource.  Indeed,  the proposal  offers  little promise  for 
founding  a new  own  resource  on  a withholding  tax  since, first, it  applies  only  to  non 
residents  who  earn  interest  in  a  given  Member  State  and,  secondly,  the  "coexistence 
model" would make it difficult  to quantify  the base on which the tax would be levied. 

41  One  estimate,  put  forward  by  Drèze  and  Malinvaud  (1994),  section  9.2,  p.  98,  places  potential 
revenues  at  1 per  cent  of  EU  GNP  or  more.  This  is  clearly  sufficient  to  meet  a  large  part  of  the 
budgetary  needs.  However,  the  authors  offer  no  indication  of  how  they  have  arrived  at  this 
estimate. 

7-10-1998 

-23-

ANNEX 2 

3.8.  ECB  seigniorage 

the  central  bank's  monopoly  position  as  note  issuer 
Seigniorage  derives  from 
constituting  legal  tender,  the  liabilities  of which  are not  remunerated  or,  in  the  case  of 
compulsory  reserves,  they  are  remunerated  at  below-market  interest  rates.  These 
unremunerated  liabilities  constitute  the  monetary  base,  the  counterpart  of  which 
(holdings  of  government  bonds  and of  other  assets  such  as  foreign  exchange  reserves) 
yields  interest  at market  rates.  The profits  so derived  constitute  the principal  source  of 
central  bank  revenue.  In  practice,  a  tax  on  seigniorage  amounts  to  a  tax  on  ECB  or 
national central bank profits. 

Seigniorage  does  not  accrue  directly  to  the  treasury  but  to  the  central  bank  which,  in 
turn,  transfers  part  of  its  profits  to  the  government.  Seigniorage  was  an  important 
source  of  government  finance  in  several  Member  States  during  years  of  high  inflation 
and  in  countries  where  the  financial  system  was  regulated42.  Since  the  advent  of  the 
convergence  process  and  the  sharp  decline  of  inflation  in  recent  years  seigniorage  has 
become  a  very  small  fraction  of  the  revenue  in  the  budget  of  virtually  all  Member 
States.  Moreover,  with  the establishment  of central bank  independence in virtually  all 
the  Member  States  in  recent  years  there  can be  no  presumption  that  the  profits  of  the 
central  bank  will  automatically  accrue  to  the  government.  Finally,  in  future  years, 
according  to the rules set out in the Treaty on European Union,  seigniorage  will  accrue 
to the European  Central Bank  (ECB)  as a result  of  its note-issuing  monopoly  position. 
This  revenue  will  be  distributed  to  constituent  central  banks  according  to  their  capital 
subscription  in  the  ECB43  and  indirectly  to  the  governments  in  the  Member  States. 
Thus,  to  make  possible  the  transfer  of  seigniorage  to  the  EU  budget  it  would  be 
necessary to tax directly the national central bank profits  associated with this. 

42 

43 

There are many estimates of seigniorage revenues in the literature.  See, for example, the estimates 
reported  in  Commission  of  the  European  Communities  (1993a),  Table  32,  p.  90.  Gros  (1990) 
estimates that in 1982 seigniorage amounted to 5.86  per cent of GDP in Portugal but were only  0.80 
per  cent of  GNP  in  1993;  the  corresponding  data  for  Greece  are  3.39  per  cent  and  0.90  per  cent; 
for  Italy,  1.45  per  cent  and  0.75  per  cent; 
for  Spain  1.87  per  cent  and  0.91  per  cent;  and  for 
Germany,  0.48  per cent  and  0.52  per  cent;  see  Gros  (1990), Table  7.1, p.  165.  See  also  Rovelli 
(1994) for additional and more detailed estimates of the sources and role of seigniorage  in the  public 
finances  of  several  Member  States.  Finally,  Buiter  et.  al.  (1998),  Table  10.1, p.  183,  provide  the 
most  recent  update  concerning  the  role of seigniorage  in the  public  finances  of  the  Member  States 
covering the period 1985 to 1994. 

See  Article  33  of the  Protocol on  the Statute  of  the  European  System  of  Central Banks  and  of the 
European  Central  Bank, Treaty  on  European  Union.  This  article  states  that  "The  net  profit  of  the 
ECB  shall  be transferred  in the following  order:  (a)  an  amount  to  be determined  by the  Governing 
Council,  which  may  not  exceed  20  per  cent  of  the  net  profit,  shall  be  transferred  to  the  general 
reserve fund  subject to a limit equal to  100 per cent of the capital;  (b) the  remaining  net  profit  shall 
be distributed to the shareholders of the ECB in proportion to their paid-up shares". 

7-10-1998 

-24-

ANNEX 2 

Seigniorage  belongs  to  the  EU  level  since  it  derives  from  the  common  monetary 
policy  exercised  by  the  ECB  on  a non-regional  scale.  In this  respect,  seigniorage 
resembles  traditional  own  resources  revenues  deriving  from  the  exercise  of 
commercial policy through  a common external tariff.  The issue of equity does not 
directly arise in the present  case.  If transactions  technology  is less advanced  in the 
poorer  nations,  it  is  possible  that  there  may  be  elements  of  regressivity  since 
seigniorage  is a tax on cash holdings.  This may be of minor importance, however, 
as  the  adoption  of  the  same  transactions  technology  will  be  widespread  under 
EMU. 

The tax base is completely  harmonised,  and  is defined  by the profits  of the  central 
bank. 

The  treatment  of  Member  States  not  participating  in  EMU  poses  a  particular 
problem  for  the  transitional  period.  Moreover,  for  those  not  joining  for  an 
uncertain  period  of  time  a  way  ought  to  be  devised  to  contribute  through  a 
corresponding  tax.  The necessary  arrangements to effectively  exploit  the potential 
of seigniorage as an own resource could in this case be complex. 

Seigniorage is not visible to taxpayers. 

Seigniorage as an own resource would be simple to administer, would involve  little 
administration,  and would not be subject to fraud and avoidance. 

• 

It is also possible that  it may yield considerable revenue  for the EU budget.  In the 
steady state seigniorage can be approximated by the tax on nominal balances, or the 
rate  of  inflation,  and  the  ratio  of  holdings  of  nominal  balances  to  GNP.  If  price 
stability  is  interpreted  to  mean  an  inflation  rate  of  between  0  per  cent  and  2  per 
cent,  and  assuming  that  money  holdings  amount  to  around  10 per  cent  of  GNP, 
seigniorage revenues could amount to between zero and 0.2 per cent of GNP in the 
EU44.  However,  it  is  clear  that  this  can  be  an  unreliable  and  unstable  revenue, 
likely  subject  to  severe  shocks  emanating  from  changes  in  the  transactions 
technology. 

A principal  drawback  of seigniorage  is its  lack of visibility  to taxpayers.  Although  the 
underlying  source  of  revenue,  inflation,  would  be  very  visible,  it  would  convey  no 
information  about  the  costs  of  the  EU  and  its  financing.  Finally,  with  transactions 
technology  making  it  increasingly  possible  to  hold  cash  balances  in  interest  bearing 
assets, the tax base of seigniorage will become very narrow indeed in future years. 

44  As  another  example,  Rovelli  (1994)  uses  a  similar  framework  to  estimate  potential  seigniorage 
revenues  under  different  combinations  of  holdings  of  sight  deposits  and  nominal  interest  rates 
(which stand for inflation);  he shows that these revenues could range from 0.004  per cent of GDP to 
as much as 0.3  per cent of GDP;  see Rovelii (1994), Table 6, p.  41. 

7-10-1998 

25-

ANNEX 2 

i 
Box  8 

I 

II 

• 

= = =i 

i m  m  i 

II 

i z s s as 

=

s

== 

M 

i 

in 

c= = s = =^= 

i 

l  n 

n ^— 

Criteria 

Performance 

Tax  on 

seigniorage 

Equity 

In EMU it will be impossible to allocate seigniorage to Member States. 

Base harmonisation 

Complete; identical in all Member States. 

Visibility to taxpayers 

As an implicit tax, seigniorage is not visible. 

Link to common policies 

Results directly from EMU. 

Revenue sufficiency, 
efficiency and cost- 
effectiveness 

Likely  to  raise  considerable revenue  which  could  be  particularly 
unstable since  it  depends  on  the  demand for  cash  balances, itself 
affected by the business  cycle.  Although price stability in EMU  would 
also  ensure a  stable base  for  seigniorage, shocks  to transactions 
technology as well as real income shocks  could cause the  seigniorage 
tax  base  to  narrow  and  could  make  revenues  unreliable  and 
unpredictable.  Administration  would be  extremely simple. 
involve the smallest number of "taxpayers" (national central banks)  and 
compliance and monitoring costs would be negligible. 

It  would 

4. 

CONCLUDING  COMMENTS 

Economic  theory  provides  criteria  for  the  assignment  of  tax  instruments  by  level  of 
government  in  a  federal  context.  Once  it  is  determined  that  certain  taxes  belong  to  a 
higher  level  of  authority,  additional  secondary  criteria  can  be  used  to  determine  the 
suitability  of the tax instruments  to serve as own resources  for  the  ^nancing of the  EU. 
The  discussion  in  this  Annex  has  shown  that  while  several  taxes  can  be  considered 
consistent  with the economic  criteria, they virtually all fail, to one degree or another,  to 
fully  satisfy  the  secondary  criteria.  Clearly,  some  taxes  perform  better  than  others 
according  to certain  criteria but,  if it were the case to  fully  finance  the EU budget  with 
new own resources, none fulfils  to the necessary degree all criteria. 

This is partly a reflection  of value judgements on the part of the study about the relative 
importance  of  each  criterion  to  be  applied  in  assessing  the  performance  of  each 
candidate  resource.  Table  1  summarises  the  assessment  of  each  candidate  resource 
ranked  according  to  the  criteria  in  the  three  studies  cited  in  the  Table  and  mentioned 
throughout  this Annex. 

The ranking is ordinal;  1 indicates the most preferred  and  8 indicates the least  favoured 
among  the  eight  candidates; 
identical  marks  indicate  that  the  candidates  in  question 
perform  equally  well  under the specific  criterion.  In contrast  to the other  studies  under 
review,  Spahn  (1993)  finds  merits  in  all  proposals  without  ranking  them45.  It  is  clear 
that  if,  a  second-best  choice  had  to  be  made,  possibly  a  VAT  tax  version  of  an  own 

45  See Spahn (1993), especially section 5 (Concluding remarks), p. 580-581. 

7-10-1998 

- 2 6-

ANNEX 2 

this  proposal  is ranked  first  by two of the three  studies 
resource  may be attractive; 
reported  in the Table  and it also has the strong  support  of the European  Parliament in 
the European  Parliament  (1994) report;  as noted  previously, the Commission  has also 
supported a C02/Energy tax.  This lack of consensus is a reflection  of more  fundamental 
difficulties  at the present state of European  integration. 

Table 1 

Ordinal  Ranking of  Candidates  for  New Own Resources  in Three  Studies 

European  Economy121 

Begg  et. al.'3> 

Keen'4' 

C02/Energy tax<1> 

•_  _ 

Modulated VAT 

. 

Excises on tobacco, alcohol and mineral oil 

Corporate income tax 

•Communications taxes 

Personal income tax 

Withholding tax on interest income*1) 

ECB seigniorage 

1 

3 

4 

2/3 

5

4 

2 

| 

| 

6 

2 

_  1  _ 

__ _  1__ 

3 

4 

2 

7 

8 

4 

3/4 

2 

3 

5 

)5 

j 

- not available;  (1) this does not refer to recent  Commission proposals. 
Source:  (2) Commission of the European  Communities  (1993a):  op. cit., Table 31, p. 85, line providing an "overall appreciation"; 
(3) Begg et. al. (1997): op. cit., Table 6.1, p. 51;  (4) Keen (1995):  op. cit.,  Table 3.14, p. 81. 

It is clear that, while possible,  introducing  a new own resource will  require  substantial 
preparation  on  the  part  of  all  actors  involved.  However,  it  is  not  evident  that 
introducing  new own resources  on grounds  of strengthening  financial  autonomy  alone 
would suffice.  If other, possibly wider political considerations, support it then new own 
resources could be introduced as part of more fundamental  and wide-ranging  reforms. 

Finally, the present review  suggests that it is unlikely to find one tax that alone respects 
all the criteria to become an EU own resource.  A more promising  possibility  could be 
that the desirable  features  of more than  one resource will be taken into consideration in 
order to form  the ground  for the development  of new own resources in the future.  This 
could conceivably involve more fundamental  changes in the EU's own resources  system 
of which the introduction of new resources can be only one part. 

One possibility, in the medium term, may be to introduce a modulated VAT system with 
strengthened  visibility,  much  along  the  lines  suggested  in  the  European  Parliament 
(1994)  report.  Over the long  term,  where an important  objective  would  undoubtedly 
be  the  strengthening  of  financial  autonomy,  several  alternatives  present  themselves. 
The ECB seigniorage, some form of withholding tax on interest income, excises and the 
communication  tax could  realistically  become  own resources  provided  additional  steps 
towards the integration of the EU took place.  Less positive are the prospects for a new 
If  developments  in 
own  resource  based  on  either  corporate  or  personal  incomes. 

7-10-1998 

-27-

ANNEX 2 

environment  or  transport  policy  called  for  the  introduction  of  specific  taxes  in these 
areas,  their  yield  could  be  usefully  attributed  to  the  EU  budget  thus  contributing  to 
financial autonomy. 

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Begg,  I., N. Grimwade and  P.  Price  (1997):  "The  Own  Resources  of the  European  Union:  Analysis  and 
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7-10-1998 

-28-

ANNEX 2 

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Union", Rapporteur Horst Langes, Committee of Budgets, A3-0000/94. 

Gros, D. (1990):  "Seigniorage and EMS Discipline", chapter 7 in De Grauwe and Papademos (éd.). 

Keen, M. (1995):  "Objectives and Criteria of the Community's  Fifth Own Resource", study prepared for 

the Commission of the European Communities DG-XIX, Final Report, December. 

MacDougall, D. (1977;.-  Report of the Study Group on the Role of Public Finance in European Integration, 

vol. I and II, Commission of the European Communities, Economic and Financial Series. 

Mintz, J. (1996):  "The Corporation Tax", chapter 4 in M. Devereux (éd., 1996). 

Padoa-Schioppa, T. (1987):  Efficiency,  Stability and Equity A Strategy for the Evolution of the Economic 

System of the European Community,  Report of a Study Group Appointed by the Commission of the 
European Communities, and Presided by T. Padoa-Schioppa, II/49/87. 

7-10-1998 

- 2 9-

ANNEX 2 

Rovelli,  R.  (1994):  "Reserve  Requirements,  Seigniorage  and  the  Financing  of  the  Government  in  an 

Economic and Monetary  Union", in Commission of the European Communities  (1994b). 

Spahn,  B.  (1993):  "The  Consequences  of  Economic  and  Monetary  Union for  Fiscal  Federal  Relations  in 
the  Community  and  the  Financing  of  the  Community  Budget",  in  Commission  of  the  European 
Communities  (1993b). 

Verbeke,  A.,  W.  Winkelmans,  H.  Haralambides,  A.  van  Klink  and  A.  Veenstra  (1998a): 

"Empirical 
Estimation  of the  Final  Destination of Goods  Imported through the  Major  European  Gateways,  Final 
Report  -  Partim  Antwerp",  study  prepared  for  the  Commission  of  the  European  Communities  DG-
XIX,  March  11. 

Verbeke, A., W. Winkelmans,  H.  Haralambides, A. van  Klink  and A. Veenstra  (1998b):  "A  Calculation  of 
the Rotterdam  Effect", ", study  prepared for the Commission of the  European Communities  DG-XIX, 
February. 

Wildasin,  D.  (1990):  "Budgetary  Pressures  in  the  EEC:  A  Fiscal  Federalism  Perspective",  American 

Economic Review, Papers and Proceedings, May. 

V 

V 

V 

7-10-1998 

ANNEX 3 

The concept and measurement of the 
budgetary balance 

1. 

INTRODUCTION 

Budgetary balances1, i.e. the difference  between  payments made by  a Member  State to 
the EU budget and expenditure made by the EU in that Member State, are often  seen as 
a  simple way  of capturing  through  a  single  figure  the net  financial  benefits  of  being  a 
member of the European Union.  The Commission has repeatedly warned  against  such 
a simple and misleading approach that fails to capture the real balance of the advantages 
and disadvantages of belonging to the Union2. 

The present Annex addresses briefly  the methodological  issues raised by the calculation 
of budgetary balances.  Section 2 examines difficulties  associated with the measurement 
and  interpretation  of  budgetary  balances;  section  3  discusses  alternative  measures  of 
budgetary balances based on various definitions  of the expenditure and the contributions 
side;  and  section 4  explains  the  two  principal  definitions  -  operational  balance  and 
balance à la UK rebate -  used in the report. 

2.  PROBLEMS WITH THE CONCEPT OF BUDGETARY BALANCE3 

Budgetary  balances, while  appealing  in  their  simplicity,  either  invariably  misrepresent 
or are inadequate measures of the benefits from membership in the EU. 

Budgetary  flows  do  not  capture  all  the  benefits  from  membership  in  the  EU.  EU 
membership,  which  gives  rise  to  financial  and  non-financial  advantages  as  well  as 
obligations,  has  a  non-budgetary  dimension  the  importance  of  which  dwarfs  the 
budgetary one.  For example, the benefits  from  the pursuit  of common objectives,  such 
as trade liberalisation  and European  economic  integration, cannot be evaluated  in terms 
of budgetary  flows  alone.  Moreover,  flows  from  the EU budget  invariably  benefit  not 
only  recipients but  other  Member  States  in  the  form  of return  flows;  typical  examples 
are  structural  funds  and  external  expenditure,  where  the  implementation  of  projects 
often  gives rise to purchases of goods and services from  other Member States. 

Budgetary  balances are often referred to as  net  balances.  The term budgetary balances used  in  this  report, in 
preference to net balances, is more appealing because, first, the concept of a balance is by itself indicative of a 
difference and, secondly, it is redundant to characterize budgetary positions as net or gross.  What the concept is 
specifically meant to indicate is the difference between contributions to and receipts from the EU budget. 

These issues were reviewed in detail in Commission of the European Communities (1997):  "Budget Contributions, 
EU  Expenditure,  Budgetary  Balances  and  Relative  Prosperity  of  the  Member  States"  paper  presented  by 
President Santer to the Ecofin Council, October 13. 

This section is based substantially on the arguments put forward in a  1997 Ecofin paper;  see Commission of the 
European Communities (1997): op. cit., footnote 2, part 4, p. 7-9. 

7-10-1998 

ANNEX 3 

Conventionally measured budgetary balances fail to adequately represent the benefits  of 
EU membership for at least three reasons: 

• 

• 

• 

first, 

recorded  budgetary  flows  fail  to  account  for  positive  externalities  arising 
from  EU  policies; 
for  example,  CAP,  structural  operations  and  external 
expenditure  benefit  not  only  the  immediate  recipients  but  also  give  rise  to  spill 
over effects  transcending national borders; 

secondly,  there  are  often  difficulties  associated  with  the  identification  of  the 
ultimate  beneficiaries  of  EU  expenditure  policies.  CAP  spending  on  export 
restitution  is  an  example  where  expenditure  may  be  recorded  as  allocated  to  the 
Member  State  from  which  goods  are  exported  when  in  fact  the  ultimate 
beneficiaries  are  the  producers  in  other  Member  States;  research  expenditure, 
where multinational  consortia  ask  for EU payments to be made to one member of 
the  consortium  or  to  a  bank  account  opened  in  Belgium  or  Luxembourg,  also 
gives rise to similar difficulties;  and, 

thirdly,  EU  budget  expenditure  is  heterogeneous  and  comparisons  of  total 
amounts  received  have  often  limited  meaning  in  appreciating  the  "benefit" 
resulting  from  such payments.  Transfers  under  the  structural  operations  increase 
the resources  available  in recipient  countries by the exact  amount  of the recorded 
payment (although significant  spillovers may result from the ultimate spending of 
these moneys);  on the other hand, payments  made  for the purchase  of goods and 
services  (a  large  part  of  administrative  expenditure)  increase  the  resources 
available  in  the  recipient  country  only  for  a part  of  their  total  amount  (the  value 
added  generated  in  the  country).  Between  these  two  extremes  lie  different 
categories of expenditure with different  degrees  of "benefit"  for  the recipient  that 
make it difficult  to either exclude some items of expenditure or to regroup them in 
meaningful  categories. 

3. 

PROBLEMS  OF  MEASUREMENT  AND 

INTERPRETATION: 

ALTERNATIVE 

DEFINITIONS  OF  BUDGETARY  BALANCES 

The  present  section  discusses  some  important  definitional  problems  that  qualify  and 
often  undermine the reliability of simple measures of budgetary balances. 

To  calculate  budgetary  balances  it  is  necessary  to  make  assumptions  about  four  main 
issues: 

i) 

ii) 

the  items  to  be  included  in the  calculation  of  the  payments  made  by  the  Member 
States to the EU budget; 
the  items  to  be  included  in  the  calculation  of  the  expenditure  made  by  the  EU  in 
each Member State; 

iii)  the  use  of  cash  versus  accrual  data  (with  the  problem  of  how  to  account  for  the 

carry over of the unspent balances from previous years); and 

7-10-1998 

- 3-

ANNEX 3 

iv) 

the possibility  of adjusting  the resulting  set of budgetary balances so that they sum 
to zero. 

On payments  to  the  EU  budget  an  assumption  must  be  made  concerning  the  most 
appropriate  treatment  of  customs  and  agricultural  duties  (traditional  own  resources, 
TOR).  There  are  certainly  good  arguments  for  excluding  them  altogether  from  the 
calculations  as  these  contributions  result  from  common  policies  and  they  typically 
belong to a higher level of government rather than to the region or the state that collects 
them.  While  this  may  be  formally  correct,  it  is  often  preferred  to  find  a  way  of 
including  them  so  as to mirror the reality  of a balanced  budget.  The  inclusion  may  be 
done  either  on  the  basis  of  the  actual  cash  flows  or  by  reallocating  the  total  yield  of 
TOR  to  each  Member  State  according  to  a  given  key  (e.g.  according  to  shares  in  EU 
GNP). 

Of  interest  is  the  treatment  of  TOR  in  the  UK  rebate  mechanism.  Given  that  the 
calculation of the rebate takes as a starting point the share of the United Kingdom  in the 
combined  VAT and GNP payments4, the mechanism  implicitly takes TOR into  account 
but  reallocates  them  among  Member  States  in  proportion  to  their  combined  VAT  and 
GNP payments (which, as it shown elsewhere in the report, is not very different  from re 
allocating them according to a straightforward  GNP key). 

Expenditure  made by the European  Union in the Member States  must, by  definition, 
be lower than total EU expenditure.  The expenditure made by the EU in third countries 
has  certainly  important  spill  over  effects  for  the  Member  States  and  is  often  paid 
directly to EU nationals.  However,  it would be illogical -  as well as nearly  impossible 
from  a practical point  of view -  to  attribute  it  explicitly  to  any  specific  Member  State. 
In  addition,  there  are  some  minor  items  which,  for  practical  considerations,  are  also 
almost  impossible  to allocate to individual  Member  States (e.g. transfers  relative to the 
Union's  share  in  the  European  Investment  Fund  capital,  mission  expenditure  by  EU 
officials).  The  remaining  expenditure  is  usually  referred  to  as allocated  expenditure5 
and represents around 94 per cent of total expenditure. 

Whereas there is a broad consensus on the exclusion of the items just  mentioned,  views 
differ  on  the  need  to  make  other  adjustments.  The  most  contentious  issue  is  the 
inclusion  of  administrative  expenditure.  The  arguments  for  its  exclusion  rest  on  the 
non  homogeneity  of  EU expenditure  mentioned  at  the beginning  of  this  Annex.  The 
subset  of  allocated  expenditure  which  excludes  administrative  expenditure  is  called  in 

Through  the  tortuous  way  of  initially  calculating  the  share  on  the  pre-1988  VAT  mechanism  and  subsequently 
adding or deducting the change with respect to the present mechanism  (the so called "advantage  to the UK of the 
new system";  see Annex 4). 

The  definition  of  allocated  expenditure  for  the  UK  rebate  is  established  in  "Method  of  Calculation,  Financing, 
Payment and  Entry  in the  Budget of the Correction  of  Budgetary  Imbalances  in Accordance with Articles  4 and  5 
of  the  Council  Decision  on  the  System  of  the  Communities'  Own  Resources",  Council  of  the  European  Union, 
5455/94, March 9, 1994. chapter IV.2. 

7-10-1998 

ANNEX 3 

the EU terminology  operational allocated expenditure 6  and  is computed  excluding  the 
items  found  in  Part  A  of  the  EU  budget  and  spending  of  other  EU  Institutions.  The 
definition  of budgetary  balance  measured  by this  concept  of  expenditure  is  called  here 
operational  budgetary balance. 

Some  Member  States  calculate  and  publish  budgetary  balance  estimates  based  on  an 
even narrower  definition  of expenditure that takes into account only the  financial  flows 
which  transit  through  the  national  treasuries  (and  which  are  easily  identifiable  by  the 
Finance  ministries).  This  definition  of  expenditure  excludes  not  only  administrative 
expenditure  but  also all the payments that the EU institutions make directly to the  final 
beneficiaries  (e.g.  research  contracts,  grants  and  subsidies  under  various  so  called 
"internal*1 policies, etc.). 

Cash and accruals data are sometimes significantly  different. 
In particular, the need to 
adjust  the VAT and GNP contributions of all Member States and the figures  for the UK 
rebate on the basis of reliable statistical data which become available with  a long delay 
implies  that  non  negligible  payments  -  in  both  directions  -  can  be  made  outside  the 
reference  year.  However,  the  most  important  distortion  results  from  the  existence  of 
unspent balances from the previous years which show a high variability  over time.  For 
instance, in  1995 there was an exceptionally  large surplus at the end of the year (Ecu 9.2 
billion)  which  turned  out  to be more than the double  the  unspent  surplus  at  the  end  of 
1996  (Ecu  4.4  billion).  As  a result,  on  the basis  of  cash  figures,  the  1996  budgetary 
balances of all Member States were higher by a total amount  of about  Ecu  5 billion due 
to the fluctuation  in the size of the unspent surplus.  Such an effect  can seriously distort 
the comparison of the budgetary balance data of different  years. 

The definition  of budgetary balance used in the calculation  of the UK rebate  eliminates 
the problem  of the unspent  surpluses.  Since the calculation  of the balance  is based  on 
the difference  between  the share in contributions  to the EU budget  and  the share in EU 
expenditure multiplied by the total amount of EU expenditure, the calculation  implicitly 
assumes  that  every  year  the  sum  of  all  payments  to  the  EU  budget  is  identical  to  the 
amount of EU expenditure. 

Constraining  the  sum  of  budgetary  balances  to  add  up  to  zero  is  often  proposed  as  a 
way  of  focusing  the debate  on  the intra-EU  distributional  issue:  what  is  "paid"  net  by 
one country  must be  "received" net by another.  Unadjusted  figures,  however,  will not 
add  up  to  zero.  They  should  add  up  to  a  negative  figure  equal  to  the  non-allocated 
expenditure (essentially expenditure made outside the EU).  This, it is argued, results in 
Member  States  claiming  to  have  transferred  to  other  partners  financial  resources  that 
have left  the EU. 

Operating expenditure  is defined  in Article  19.1 of the  Financial  Regulation of 21  December  1977  (OJ  n°  L 356 of 
31.12.1997) as the expenditure for policies by the Commission contained in part B of the Budget. 

7-10-1998 

ANNEX 3 

Adjusting  budgetary balances to add up to zero can be done in a number of ways  which 
inevitably  introduce  other  distortions  and  complicate  the  comparisons  of  budgetary 
balances  from  year  to  year.  The  two  most  widely  used  methods  consist  of  either 
reducing  contributions  to  the  EU  budget  to  the  level  of  allocated  expenditure  (while 
maintaining  the relative  shares  of  each  Member  State constant)  or  increasing  allocated 
expenditure to match the actual level of payments.  The first method implicitly  assumes 
that non allocated expenditure is shared out among Member States in proportion to  their 
contributions  to  the  EU  budget;  the  second  assumes  that  non  allocated  expenditure  is 
shared  out  in the same proportion  as allocated  expenditure. 
In addition,  both  methods 
reduce  the overall  size  of  each  of the budgetary  balances  (and  the  sum  of  the  absolute 
value of all balances). 

The  method  underlying  the  calculations  for  the  UK  rebate  - based  on  the  differences 
between  shares in contributions  and shares  in expenditure  - provides  a set of  budgetary 
balances which  add up to zero.  Implicitly  it assumes that non allocated  expenditure  is 
shared out in the same proportions as allocated expenditure. 

4. 

THE DEFINITIONS USED IN THE REPORT 

Combining only the two or three most important assumptions which can be made on the 
four  issues discussed  in the previous  section produces no  fewer  than  30 to 40  perfectly 
defensible  definitions  of  budgetary  balances.  While  the  estimates  that  emerge  from 
these different  definitions  do not change substantially the picture for the larger  Member 
States, the use of different  definitions  can produce substantially  different  results  for  the 
smaller ones and may distort significantly  the comparisons from year to year. 

In this report  the Commission  has used two definitions  called the  UK rebate  budgetary 
balance  and  the  operational  budgetary  balance.  The  first  is  the  only  one  that  has  a 
degree  of  formal  recognition,  being  based  on the Fontainebleau  agreement  and  also  in 
the  determination  of  the UK  rebate;  the  second  is consistent  with  the  information  the 
Commission  has been  supplying  to the Member  States annually  since  1995, albeit  on a 
confidential  basis. 

4.1.  The UK rebate balance 

This  definition  uses  cash  data,  i.e.  all  payments  made  in  a  year  to  or  from  the  EU 
budget7.  Its most important implications are: 

For  the  sake  of  simplicity  the  calculations  have  been  performed  without  taking  into  account  the  so  called 
"advantage to the UK of the new system" and using cash instead of accruals data. 

7-10-1998 

- 6 -

ANNEX 3 

• 

• 

• 

• 

TOR  payments  are  implicitly  reallocated  among  Member  States  in  proportion  to 
their VAT and GNP payments; 

the  estimates  are  restricted  to  sum  to  zero  and  the  overall  absolute  size  of  the 
balances  is  reduced  by  exclusion  of  those  ifems  of  expenditure  that  cannot  be 
allocated (i. e. by about 5 to 6 per cent); 

the  data  are  influenced  by  the  adjustments  to  contributions  relating  to  previous 
years  but  insulated  from  the  fluctuation  of  the  size  of  the  unspent  surplus  of  the 
current year. 

the  expenditure  flows  taken  into  consideration  are those of the so-called allocated 
This  means  that  about  6  per  cent  of  expenditure  is  excluded 
expenditure. 
(essentially expenditure made outside the Union plus some very small items which, 
for  technical  or conceptual  reasons,  are  too  difficult  to  allocate).  Included  also  is 
administrative expenditure and expenditure in favour of the other EU institutions. 

4.2.  The operational balance 

This definition  also  uses cash  data.  The  most  important  implications  of this  definition 
are: 

•  The  concept  of  EU expenditure  used  is  operational  allocated expenditure, that  is, 
allocated  expenditure  excluding  administrative  expenditure  referred  to in part  A of 
the  EU  budget  and  expenditure  relating  to  the  European  Parliament,  the  Council, 
the  Court  of  Justice,  the  Court  of  Auditors,  the  Economic  and  Social  Committee 
and the Committee of the Regions8; 

• 

• 

• 

• 

TOR  payments  are  considered  as  paid  wholly  by  the  Member  State  that  transfers 
them to the EU budget; 

the estimates are not restricted to sum to zero; 

the  estimates  show  significant  variability  because  of  adjustments  relating  to 
previous  years  and,  above  all,  because  of  the  carry  over  of  the  unspent  balances 
from  previous years. 

no  corrections  are  made  to  the  expenditure  flows  which  are  integrally  taken  into 
account. 

Ideally, these estimates ought to be presented  in a table including a 16th line for the Rest 
of the World  and  a  17th line which  would  correspond  to payments to the surplus  of the 
current  year  and  the  drawing  from  the  previous  year's  surplus  (with  corresponding 
adjustments  to the  15 lines for the Member  States) as well as the amount of expenditure 
corresponding to part A of the budget. 

8  See footnote 6. 

7-10-1998 

ANNEX 4 

The budgetary compensation for the United Kingdom 

1. 

INTRODUCTION 

This  annex  reviews  the performance  of the  compensation  mechanism  for the United 
Kingdom set up with the  1984 Fontainebleau agreement.  It starts by recalling the steps 
which led to this decision and its contents.  Subsequently it reviews the past trend of the 
budgetary imbalance of the United Kingdom and discusses its possible  future  evolution 
in the light of the reform proposals presented by the Commission (Agenda  2000).  The 
third section assesses the operation of the mechanism and discusses some issues it raises. 
The final section examines its consequences for the rate of call of the VAT resource and 
analyses the possibility of permanently fixing this rate. 

Graph 1 

Budgetary  imbalance  of the  UK and compensation 

("operational"  balance before and after  compensation; percentage of the GNP of the UK) 

: compensation 

before compensation 

after compensation 

0.8 

0.6 

0.4 

0.2 

1985  1986  1987  1988  1989  1990  1991  1992  1993  1994  1995  1996 1997 

2.  ORIGIN OF THE MECHANISM 

The question of the budgetary imbalance of the United Kingdom appeared immediately 
after the accession of the country to the European Community.  The large imbalance was 
essentially due to two factors: 

i) 

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

7-10-98 

2-

ANNEX 4 

ii)  a proportionally larger contribution to the financing  of the Community budget due to 
the  fact  that  the  United  Kingdom  has  a  relatively  higher  share  in  the  harmonised 
VAT base than in the total GNP of the Community. 

A  first  mechanism  aimed  at  addressing  the  issue  of  the  budgetary  imbalance  of  the 
United Kingdom  was agreed in March  1975 in Dublin.  This mechanism -  known as the 
"dynamic brakes" -  aimed  at preventing  the size of the United  Kingdom  contribution  to 
the  EU  budget  from  becoming  too  large.  The  contribution  would  be  capped  if  three 
conditions  were  met  simultaneously  (GDP  per  capita  lower  than  85  per  cent  of  the 
Community  average, rate of  economic  growth  less than  120 per  cent  of the  Community 

Graph 2 

Budgetary balance of the United  Kingdom 

(UK rebate definition, percentages of GNP; actual data, see table 7, Annex 8 and this Annex;1998: forecast) 

0 

after compensation 

before compensation 

-0.7 

1985  1986  1987  1988  1989  1990  1991  1992  1993  1994  1995  1996  1997  1998 

average,  share  in  own  resource  payment  more  than  10 per  cent  higher  than  the  share in 
GDP). The three conditions never  applied  for  any Member  State and the mechanism was 
never triggered. 

A second  arrangement  was introduced  at another Dublin Council in November  1979.  It 
provided  for  a compensation  on the expenditure side in the form  of specific  measures  for 
the United  Kingdom. 

The  current  mechanism  was  decided  in  Fontainebleau  in  June  1984  and  given  effect  by 
the  Decision  of  May  7,  1985.  This  decision  contained  a  transitional  arrangement  -  a 
reduction  of one billion Ecu  in the VAT contribution  of the United  Kingdom  for  1985  -
and the rules governing the calculation of future rebates, i.e., 

7-10-98 

- 3-

ANNEX 4 

• 

• 

the contribution  of the United  Kingdom  tô the Community  budget  is reduced  by  an 
amount  equal  to  66  per  cent  of  its  budgetary  imbalance. 
This  imbalance  is 
calculated by multiplying the difference  between the UK's percentage  share in  VAT 
payments  to  the  Community  budget  and  its  share  in  allocated  expenditure  times 
allocated  expenditure  (see  below).  Given  that  some  expenditure  (e.g.  external 
expenditure)  cannot  be  considered  to  have  been  made  for  the  benefit  of  any 
particular  Member  States, in the calculation  of the share of the  United  Kingdom  in 
the  payments  made  by  the  Community  and  in  that  of  the  overall  imbalance,  total 
Community payments  are replaced by the total of all payments that can be  allocated 
to  an  individual  country  (usually  referred  to  as  "allocated  expenditure"  -  see 
footnote  5 of Annex 3). 
the  shortfall  in  financing  is  made  up  by  all  the  Member  states  in  accordance  with 
their  respective  percentage  shares  of  VAT  payments  (with  the  exception  of 
Germany, which pays only two thirds of its normal share, the balance being  divided 
up between the other Member States). 

The  Own  Resource  Decision  of  1988  modified  substantially  the  system  of  Own 
Resources through the introduction of a new resource based on GNP and the reduction  in 
the importance of the one based on VAT.  These changes, which went in the direction of 
reducing  the  causes  of  the  budgetary  imbalance  of  the  United  Kingdom,  necessitated 
some adjustments  in the compensation mechanism.  These were: 

i)  The calculation  of the amount of the refund  as if the budget were still  fully  financed 

ii) 

by non-capped VAT (pre-1988 system); 
the  reduction  of  the  resulting  amount  of  the  rebate  by  the  "savings"1  in  its 
contribution  that  the United  Kingdom  derives from the modifications  introduced  in 
1988 (the so called  "UK advantage from the new system "); 

iii)  the  financing  of  the  UK  correction  by  the  other  Member  States  according  to  their 
shares  in  the  GNP  of  the  Community.  The  one-third  reduction  for  Germany  was 
maintained. 

3.  DEVELOPMENTS  IN THE  UK  REBATE SINCE  ITS INCEPTION 

There  is  no  clear  trend  characterizing  either  the  budgetary  imbalance  of  the  United 
Kingdom or the rebate (see graph 1). 

All  budgetary  balances  show  a  high  degree  of  variability  for  the  reasons  indicated  in 
Annex  3  (underlying  expenditure  trends,  different  rates  of  economic  growth,  exchange 

These  savings  are  equal  to  the  difference  between  the  amount  the  United  Kingdom  pays  on  the  basis  of  the 
(capped) VAT  and  GNP  resources  under  the  1988 system, and what the  United  Kingdom would  have  paid  under 
the pre-1988 system (only uncapped VAT). 

7-10-98 

-4 

ANNEX  4 

UK  compensation 

(percentage  of  GNP; accruals  figures; 
1995-97:  provisional  figures;  1998:  forecasts) 

Graph  3 

0.5 

0.4 

0.3 

0.2 

0.1 

87 

88 

89 

90 

91 

92 

93 

94 

95 

96 

97 

98 

rate  fluctuations,  carry  over  of  unspent  surpluses  from  previous  years,  adjustments  for 
previous years, etc.).  The budgetary balance of the United Kingdom, however,  shows an 
even greater variability because of the operation of the correction mechanism itself which 
foresees  the  payment  of  the  compensation  with  a  one  year  lag  (an  exceptionally  large 
imbalance in one year leads to a large compensation which  is paid  in the following  year, 
thus reducing further  what may have been a normal imbalance, and so on).  Furthermore, 
budgeting  rules  require  that  in the  budget  of  year  t under  the  heading  "UK  correction", 
the  provisional  correction  for  year  t-1 and  the 
two  different  corrections  are  recorded: 
definitive  correction  for  year  t-4.  Clearly,  the  sum  of  the  two  corrections  has  no 
economic  meaning.  Table  7  of  Annex  8  shows  in  column  (5)  the  UK  correction  as 
reported in the budget in year / (that  is, the sum of the UK correction  for year t-4 plus the 
provisional  correction  for  year  t-1)  and,  in  column  (2)  the  definitive  UK  correction  for 
year t-4. 

Budgetary  rules  also  require  that,  in  order  to  calculate  the  definitive  UK  correction  for 
year  t-4,  to  construct  a  UK  imbalance  on  the  basis  of  the  GNP,  VAT  and  allocated 
expenditure outturns for year t (that is, four years later).  These data permit the estimation 
of the  UK  imbalance  for  year  t-4 shown  in  column  (1) of Table  7, Annex  8.  Note  also 
that  the  imbalance  of  the  UK  measured  in  this  manner  differs  from  the  imbalances 
reported  in Tables  6a and  6b  of  Annex  8;  the  latter  are  estimated  on the basis  of  GNP, 
VAT and  allocated  expenditure  outturns  as they  are known  one year  after  the  budgetary 
year.  The use of the definition  implicit  in the rebate mechanism  (graph 2) itself provides 
a more stable picture  as this  definition  is not  influenced  by the carry over of the  unspent 
surpluses (see Annex 3). 

Beyond  short-term  fluctuations,  the  budgetary  imbalance  of  the  United  Kingdom  since 
1985 has been relatively  stable with the imbalance before  correction averaging  about  half 

7-10-98 

ANNEX 4 

a  point  of  the  country's  GNP. 
remained relatively stable. 

Correspondingly,  the  amount  of  the  rebate  has  also 

Various  factors  have been  at work, which  appear to have broadly  offset  each  other.  As 
already  indicated,  the origin  of the budgetary  imbalance  of the United  Kingdom  is to be 
found  in two  factors:  its relative  high  share of the combined  VAT  and  GNP base on the 
revenue side, and the low agricultural returns on the expenditure side. 

Graph 4 

Share  of the  United  Kingdom  in (VAT  and  GNP) 
payments  and  in  EU (allocated)  expenditure 

(percentage of totals; accruals figures; 
1995-97: provisional figures; 1998: forecasts) 

25 

87 

88 

89 

90 

91 

92 

93 

94 

95 

96 

97 

98 

The reduction  in the relative weight  of the VAT resource brought  about by the decisions 
of  1988  and  1992  should  have  contributed  to  a  reduction  in  the  imbalance  and  in  the 
rebate.  However, the effect  on the rebate was explicitly excluded by the provision which 
imposed  the continuation  of  its computation  on the basis  of the pre-1988  system  and  of 
the reduction  of the result by an amount  corresponding  to the so-called  "advantage"  that 
the  United  Kingdom  was  obtaining  from  the  new  system.  The  calculations  of  this 
"advantage"  done  every  year  show  that  until  now  the  effect  of  the  changes  on  the 
imbalance have been very small.  They may have become more significant  over the last 
two  or  three  years  in  correspondence  with  the  effective  reduction  of  the  weight  of  the 
VAT resource, but even so their order of magnitude is not large enough to be discernible 
in the overall trend. 

More  fundamental  changes  have  taken  place  on  the  expenditure  side  of  the  EU  budget. 
Agricultural  spending,  which  in  1984  represented  about  70  per  cent  of  allocated 
expenditure,  is  now  down  to  about  50  per  cent. 
Per  se,  this  change  should  have 
contributed  to reducing the imbalance  of the United  Kingdom.  However, over the same 

7-10-98 

ANNEX 4 

period,  the  component  of  expenditure  that  grew  most  rapidly  was  the  Structural  Funds. 
Given  the  explicit  redistributive  nature  of this type  of  spending  and  of  its  concentration 
on  the  so  called  "cohesion  countries",  the  share  of  the  United  Kingdom  in  total  EU 
spending could not increase.  In fact, since  1992 the redistributive component in total EU 
spending has become stronger. 

The  factors  which  have played  the greatest  role  in determining  the trend  of the rebate  -
and  especially  its  fluctuations  from  year  to year -  have  been  the  difference  between  the 
rate  of  growth  of  the  economy  of  the  United  Kingdom  and  that  of  the  other  Member 
States  and  the  instability  of  exchange  rates.  Since  the  end  of the  1980s, the  economic 
cycle  of  the  United  Kingdom  has  been  markedly  different  from  that  of  the  rest  of  the 
In  addition,  the  pound  sterling  has  fluctuated  significantly  vis-à-vis  the  other 
Union. 
European currencies between  1992 and  1997. 

Underlying  expenditure  trends  have  also  played  a  significant  role,  although  in 
quantitative  terms  they  have  been  less  important  and  have  been  overshadowed  by 
macroeconomic  developments  just  mentioned. 
For  instance,  in  1994  the  United 
Kingdom was very successful  in drawing on structural  funds  spending and in  1997-98 the 
BSE crisis led to increased agricultural spending in the country. 

Over  the  next  years  the  imbalance  of  the  United  Kingdom  (and  its  compensation)  are 
expected to increase somewhat.  This will be essentially the result of the enlargement of 
the Union to a number of countries that will certainly be net  beneficiaries. 

4.  ASSESSMENT  OF THE PERFORMANCE OF THE  MECHANISM 

The  rebate  mechanism  has  been  effective  in  achieving  its  intended  goal:  a  significant 
reduction  in the United Kingdom's budgetary  imbalance.  As graph  1 shows, over recent 
years  the  negative  budgetary  balance  of  this  country,  after  correction,  has  averaged 
around 0.2-0.3 per cent of GNP. 

However,  some  of the conditions  that  prevailed  at  the  time  the  mechanism  was  decided 
do not apply any more: 

i)  The  changes  in the composition  of EU  spending  have  modified  the rationale  of the 
compensation.  Whereas in  1984, it had  essentially  the nature of a correction  for  the 
specific  agricultural  problem  (CAP  represented  about  70 per  cent  of total  allocated 
expenditure),  it  has  now  lost  to  a  great  extent  this  characteristic  since  it  corrects 
equally  the  persistent  agricultural  problem  as  well  as  the  United  Kingdom's 
contribution to the solidarity effort  of the EU and to its other policies. 

ii)  The  budgetary  imbalance  of  the  United  Kingdom  is  not  unique  any  longer. 

In 
recent  years,  as  graph  5  shows,  the  imbalance  of  the  United  Kingdom,  before 

7-10-98 

7-

ANNEX 4 

correction,  was  the  largest  of  the  Community. 
budgetary imbalances as large as or even larger than the United Kingdom's. 

In  1997, four  more  countries  have 

iii)  The  gap  in  relative  prosperity  between  the  United  Kingdom  and  the  other  largest, 
contributors  to the EU budget  has  narrowed.  Depending  on the measure  used,  the 
United Kingdom has a relative prosperity or a relative capacity to pay around the EU 
average  and  will  certainly  be above  this mark  after  the  forthcoming  enlargement  of 
the EU. 

The  mechanism  has  also  some  drawbacks,  which  although  not  new  or  unexpected,  are 
worth recalling at this stage. 

• 

The  existence  of  the  rebate  leads  to  the  contribution  paid  by  the  United  Kingdom 
representing  a lower proportion  of its income than those paid by  the other  Member 
States.  This  situation  contrasts  with  the  principle  of  horizontal  equity.  At  the 
national  level,  this  would  be  analogous  to  granting  tax  relief  to  individuals  who 
cannot use some public services or who are not recipients of public assistance. 

Graph  5 

Budgetary balances of the UK, 
Germany, and the Netherlands 

(UK rebate definition ; before UK rebate ; percentages of GNP) 

United Kingdom 

1985  1986  1987  1988  1989  1990  1991  1992  1993  1994  1995  1996  1997 

The  compensation  mechanism  works  as  a  shock  absorber  for  all  changes  in  the 
imbalance of the United Kingdom  and places this country  in a unique position  with 
respect  to  common  budgetary  decisions.  For  example,  a  budgetary  decision  that 
would  have  a net  cost  of  Ecu  100 to  a Member  State  in  fact  costs  the  UK  Ecu 33. 
Conversely,  a measure  that  would  improve  the balance  of  another  country  by  100, 
improves the balance of the United Kingdom again by only one third of this amount. 

7-10-98 

ANNEX 4 

This  situation,  not  only  risks  decoupling  the  UK  from  budgetary  decision  making, 
but  will  also  have  significant  adverse  effects  at  the  time  of  enlargement.  The 
accession of a large number of new Member States with very low standards of living 
is  expected  to  have  a  negative  effect  on  the  budgetary  balances  of  the  current 
Member States.  But the United Kingdom will see its budgetary balance deteriorate 
by  only  one  third  of  what  would  have  happened  in  the  absence  of  the  correction 
mechanism.  This puts  into question  a fair  sharing out of the burden resulting from 
enlargement. 

Also  in  this  context,  it  will  be  necessary  to  adapt  the  definition  of  allocated 
expenditure  to prevent  the  United  Kingdom  from  benefiting  from  purely  statistical 
factors. 
In effect,  at the time of accession of the new Member States some items of 
present  expenditure  in  these  countries  (e.g.  PHARE)  will  be  replaced  by  full 
participation  in EU policies.  This would  lead to their reclassification  from  external 
expenditure  (excluded  from  the  calculation  of  the  rebate)  to  internal  expenditure 
(included  in  the calculation)  leading to  a mechanical  increase  in the size of the UK 
rebate. 

The  Commission  indicated  that  it  would  take  into  consideration,  on  the  re 
examination of the correction system, the opposition of Belgium and Luxembourg to 
current  procedures  governing  the  entry  in  the  accounts  and  the  allocation  of 
administrative expenditure.  The position of the Commission was that administrative 
expenditure  could  not  be  treated  differently  from  other  expenditure  and  that  it  is, 
therefore,  appropriate  to  include  it  in the  determination  of  allocated  expenditure  to 
any given country.  This position was based on the consideration that if it is true that 
administrative expenditure is, in economic terms, very different from the unrequited 
transfers  typical of the structural  funds, there exist various other items of expenditure 
whose  economic  nature  lays between  these  two  extremes.  It would  be  arbitrary  to 
make  a  distinction  only  for  administrative  expenditure  when,  for  instance,  some 
items of research spending have a very similar nature. 

5.  THE IMPACT OF THE UK REBATE MECHANISM ON THE RATE OF CALL OF VAT 

The  rules  determining  the  calculation  of  the  UK  rebate  and  of  its  financing  contain 
provisions that affect  the rate of call of the VAT resource.  In  1984, when the mechanism 
was  established,  the VAT resource played  the role  of the  complementary resource  to  be 
It  was 
called  up  on  the  occasion  needed  to  finance  the  budget  of  the  Community. 
therefore  logical that the rebate be financed  according to the share of each country in this 
resource (with the exception of Germany that was granted a reduction). 

The  1988  Own  Resources  Decision  provided  for  a  reduction  in  the  role  of  the  VAT 
resource  and  for  the  introduction  of  a new  one based  on  GNP.  As a result,  the role  of 
complementary  resource  was  assigned  to  GNP  and  it  was  decided  that  the  UK  rebate 

7-10-98 

- 9-

ANNEX 4 

would be  financed  according  to the  share of  each  country  in this  new,  more  equitable, 
resource. 

However, the shares of the Member States in the VAT and GNP bases are not equal and 
the  introduction  of  the  GNP resource  favoured  some  countries  relative  to others.  The 
countries which desired to reduce further the role of the VAT resource, failing to obtain a 
reduction  in  its maximum  call  rate, obtained  some  reduction  indirectly  through the UK 
It  was,  in  effect,  decided  to  calculate  the  amount  of  VAT 
rebate  mechanism. 
theoretically  necessary to finance  the UK rebate and not to call  a corresponding  amount 
ofVAT2. 

The  provisions  of  the  Mode  de  Calcul3  determine  an  amount  (called  the  "gross 
equivalent" and which is actually larger than the UK rebate) that must be left aside for the 
notional  financing  of  the  UK  rebate.  The  percentage  of  the  total  EU  VAT  base 
necessary  to  generate  this  amount  (called  the  "frozen rate")  is  deducted  from  the 
maximum  rate foreseen  in the Own Resources  decision  to obtain the yearly rate of call. 
This rate of call  changes every year depending  on the size  of,  and shows the same high 
variability as, the UK rebate. 

This situation generates additional complications every time the amount of the UK rebate 
is revised4.  An upward or a downward revision of the UK rebate provokes a change in 
the opposite direction of the rate of call  of VAT and in the amount to be called (or that 
should have been called).  Given that the size of the budget to be financed  remains the 
same, a change  in the amount of  VAT called  must be  compensated  by  a corresponding 
Since  Member  States  have 
change  of  opposite  sign  in  the  amount  of  GNP  called. 
different  shares  in  the  bases  of  the  two  resources,  these  changes  are  not  neutral  (this 
effect  of  the rebate on the VAT and GNP contributions  of the Member states is usually 
called the  "indirect effect,r).  If the amount of the UK rebate must be revised, it becomes 
necessary to compensate  Member States  for the incorrect  amount of the VAT  and GNP 
contributions  that  have  been  called.  This  calls  for  complicated  calculations  for  each 
revision  of  the  UK  rebate  and  its  budgeting  in  two  different  chapters  (Chapter  15 and 
chapter  35)  which  produces  the  somewhat  surprising  result  that  the  United  Kingdom 
appears to participate in the financing (albeit for very small amounts) of its own rebate. 

In  1992,  the  Commission  argued  forcefully  that  the  same  reduction  in  the  role  of  the 
VAT  resource  could  be  obtained  through  a straightforward  reduction  in  the  maximum 
call rate equal to the average frozen rate of the last years.  The maximum rate of call was 
indeed reduced from 1.4  in  1994 to  1.00  per cent  in  1999, but the notional  financing  of 

See  Article  5  of  the  Council  Decision  88/376/EEC,  Euratom  on  the  system  of  the  Communities'  own  resources, 
June 24,1988;  Official Journal of the European Communities L 185, July  15,1988. 

See "Method of Calculation, Financing, Payment and Entry in the Budget of the Correction of Budgetary  Imbalances 
in Accordance  with Articles  4 and  5 of  the Council  Decision  on  the  System  of  the  Communities'  Own  Resources", 
Council of the European Union, 5455/94, March 9,1994. 

This  is  done  at  least  twice  during  the  budgetary  process, once  in  the  first  supplementary  amending  budget  of  the 
year in which the rebate is paid and three years later when the final calculations are made. 

7-10-98 

- 1 0-

ANNEX 4 

the  rebate through  VAT  (with  its  "gross equivalent",  "frozen rate",  "indirect financing" 
and two budgetary chapters) has remained. 

The Commission hopes that on the occasion of a revision of the Own Resources Decision 
it  will  be  possible  to  suppress  these  unnecessary  complications.  Over  recent  years  the 
amount  frozen  for  the notional  financing  of the rebate has averaged  0.12  per cent  of  the 
total EU VAT base. 

• *• 

• *• 

• *• 

7-10-98 

The effects of a partial reimbursement of 
CAP direct aids 

ANNEX 5 

1. 

INTRODUCTION 

The budgetary imbalances which have emerged in recent years are fundamentally  due to 
the  structure  of  the  expenditure  rather  than  to  the  revenue  side  of  the  EU  budget  (see 
Graph  1  and  table  1).  As  underlined  on  several  occasions  in  the  report,  gross 
contributions  to the EU budget  are broadly equitable, and are expected  to become more 
so  in  coming  years  as  the  weight  of  GNP  resource  increases  and  that  of  the  VAT 
resource  diminishes.  The principal  source  of  imbalances  is the expenditure  side  of  the 
EU  budget.  Graph  1  shows  that  while  VAT  and  GNP  contributions  respect  a 
proportional  relationship  with  the  Member  States'  GNP,  EU  expenditure  bears  no 
relations to GNP. 

Graph  1 

7,0%  T— 

Allocated  operating  expenditure, 
VAT and GNP own resources  payments  (before UK correction) and 
total own resources  payments,  1997 (as percent  of national GNPs) 

•  Allocated operating  expenditure 

—  -  VAT  and  GNP own  resources 

Total own  resources 

Allocated 
Operating 
Expenditure 

6,0% 

5,0% 

4,0% 

3,0% 

2,0%  — 

1,0% 

0,0% 

*? 

* 

Ar &  # 

* 

" 

*  & 

# 

V 

* 

"v  ^ 

#* 

The  uneven  distribution  of  EU  spending  across  the  Member  States  is  the  result  of 
deliberate  policy  decisions.  Some  85% of  EU  spending  is  concentrated  in  two  main 
categories  of  expenditure:  Common  Agricultural  Policy  (CAP)  and  Structural 
expenditure.  While  it  is  clearly  incoherent  to  interfere  with  the  budgetary  outcomes 
resulting  from  Structural  expenditure,  it  is conceivable  to intervene  in the  area  of  CAP 

7-10-1998 

2-

ANNEX  5 

spending.  Section  2  of  this  annex  examines  a possibility  which  has  been  put  forward 
recently of modifying  the financing  of direct aids to farmers, and section 3 illustrates the 
effect  of  such  a  modification  on  the  budgetary  balances  of  the  Member  States  on  the 
basis of results from a representative  simulation. 

Table  1 

Member  States'  shares  in  EU financing  and  in  spending 
under  the  CAP  and  structural  operations,  1997 
(percentage shares in EU total, cash data) 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Fin 

ancin 

g 

Total 

3.9 

2.0 

28.2 

1.6 

7.1 

17.5 

0.9 

11.5 

0.2 

6.4 

2.8 

1.4 

1.4 

3.1 

11.9 

>  VAT/GNP 

3.1 

2.0 

29.1 

1.7 

7.7 

19.0 

0.8 

12.3 

0.2 

5.1 

3.0 

1.5 

15 

3.2 

9.6 

>  TOR 

7.4 

2.0 

24.2 

1.1 

4.5 

10.9 

1.6 

7.9 

0.2 

12.2 

1.8 

1.1 

1.0 

2.6 

21.5 

Sp( 

;ndin< 
3 

Total <1> 

>  CAP 

>  Structural 

Operations 

2.5 

2.2 

14.2 

7.8 

15.8 

17.1 

4.7 

11.8 

0.2 

3.5 

1.9 

5.3 

1.5 

1.7 

9.9 

2.4 

3.0 

14.2 

6.7 

11.3 

22.5 

5.0 

12.5 

0.1 

4.3 

2.1 

1.6 

1.4 

1.8 

10.8 

1.4 

0.7 

14.0 

10.2 

24.5 

9.4 

4.7 

11.1 

0.1 

1.6 

1.4 

11.3 

1.5 

0.9 

7.4 

(1 ) Total operational expenditure (net of administrative expenditure). 

2.  A  PARTIAL REIMBURSEMENT OF C AP  DIRECT AIDS TO FARMERS 

CAP spending consists  essentially of expenditure to support market prices and of direct 
aids to farmers.  Market expenditure, which is allocative in nature, aims at redistributing 
income  from  consumers  towards  the  farm  economy.  Direct  aids  to  farmers  are 
intrinsically  a redistributive  policy  that  transfers  income  to  farmers  from  the  taxpayers 
at large1.  It is has been proposed that this last type of expenditure be partly financed  by 
the Member States concerned.  Member States would continue to pay direct aids on the 
basis  of  Community  legislation  as  at  present,  but  instead  of  receiving  a  100  per  cent 
reimbursement  from  the  EU  budget  they  would  receive  only  a  partial  one. 
The 
rationale  for  the  partial  reimbursement  would  be  that  direct  aids  to  farmers  constitute 
strict interpersonal  redistribution, with no allocative  aim.  According  to the  subsidiarity 
principle,  interpersonal  redistribution  is  better  implemented  at  the  level  of  Member 
States rather than at the level of the EU. 

If  implemented, 
this  option  would  be  consistent  with  and  would  represent  a 
generalisation  of  the  principles  currently  governing  Structural  Funds  expenditure.  In 
this  area,  there  is  already  a  system  for  sharing  the  financial  burden  between  the 

The overall redistribution  induced by the CAP is greater than the  reported  budget  costs.  According to the OECD, 
in  1990  the  transfers  to farmers  associated with  the  CAP were  equivalent  to  Ecu  64  billion  consisting  of  Ecu  50 
billion  from  consumers  and  Ecu  14  billion  from  European  taxpayers;  see  OECD  (1990):  Agricultural  Policies, 
Markets  and  Trade  Monitoring and Outlook,  Paris. 

7-10-1998 

ANNEX 5 

Community  and  national  exchequers  since  Member  States  are  required  to  match  EU 
spending. 
Proponents of such a modification  of current CAP arrangements stress that it should not 
be seen as a dismantling of the CAP or a move towards its re-nationalisation.  Farmers 
would receive the same support since CAP expenditure by Member State is compulsory. 
The  level  and  the  conditions  attached  to  the  payments  of  these  direct  aids  would 
continue  to  be  an  integral  part  of  the  Common  Agricultural  Policy  and  would  be 
determined  only  through  EU  decisions.  The  overall  amount  of  financial  resources 
available would also remain the same, but would be shared between the EU budget  and 
the national exchequers. 

A partial  reimbursement  of  direct  aids  along  these  lines while not  reducing  the  overall 
amount of spending would reduce the amount of financial  resources channelled  through 
the EU budget.  For instance, if such a measure were introduced from next year and the 
level  of  partial  reimbursement  was  set  at  75  per  cent,  the  level  of  payments 
appropriations of the EU budget  in  1999 could be automatically reduced by about  8 per 
cent.  Given  that  the  shares  of  individual  Member  States  in  the  financing  of  the  EU 
budget  and  in  direct  aids  spending  are  very  different,  a  reduction  in  the  part  of  this 
expenditure  to  be  financed  through  the  common  budget  will  influence  their  budgetary 
balances.  Table  2 presents  the  relevant  figures:  the  shares  of  each  Member  States  in 
total  GNP, which  is equal  to  its share  in the marginal  financing  of the EU budget,  and 
the  shares  in  spending  for  direct  aids.  Given  the importance of the current  reform  for 
the amount of direct aids the table presents also figures  for 2006; these are calculated  on 
the  assumption  of  full  implementation  of the proposals  that  the  Commission  presented 
on  18 March  1998. 

Table  2 

Member States 

' shares in total GNP and in direct aids spending 
Dercentage shares in the EU-15 total) 
( 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

G N P' 

1999/2 

006 <1> 

3.0 

2.0 

25.3 

1.4 

6.7 

17.0 

0.8 

14.0 

0.2 

4.5 

2-5 

1.3 

1.4 

2.8 

17.1 

1.1 

|  2.9 

|  15.2  |  7.9 

|  14.3  J  23.9  |  2.3 

|  12.6  |  0.1 

|  1.3 

|  1.7 

|  1.5 

|  1.0 

|  1.9 

|  12.3 

Spending for direct aids in 1999 

1.7 

|  3.0 

|  17.4  |  6.3 

|  12.3  |  23.7  |  2.9 

|  12.2  |  0.1 

|  2.6 

|  2.0 

|  1.5 

|  1.2 

|  2.0 

|  11.0 

(1) based on the assumption that all Member States will experience the same rate of growth and the same rate of inflation. 

Spending for direct aids in 2006 

All the Member  States presenting  large budgetary  imbalances have a share in  financing 
higher than the share in direct  aids receipts  and would therefore  see a reduction  in  their 
For  this  reason,  a  partial 
imbalance  if  such  a  measure  were  implemented. 
reimbursement  of  CAP  direct  aids  can  be  seen  as  a  way  of  defusing  the  issue  of  the 
budgetary imbalances; moreover, this policy would be consistent with the Fontainebleau 

7-10-1998 

ANNEX 5 

principles  which  stressed  that  the  preferred  way  to  address  any  budgetary  imbalances 
was through the expenditure side of the budget. 

From  the administrative  point  of view,  the option  of  a partial  reimbursement  would  be 
In  addition,  the  decision  could  be 
very  simple  and  would  entail  no  additional  costs. 
taken under the same voting procedures used to modify  the CAP and would therefore  be 
easier  to  put  into  practice  than  any  solution  requiring  a  modification  of  the  Own 
Resources decision.  Should  a measure of this type be adopted, it would be  appropriate 
It 
to  lower  correspondingly  the  agricultural  guideline  to  maintain  its  effectiveness. 
would  also be  necessary  to  lower the own  resources  ceiling. 
If a revision  of the  Own 
Resources decision were not possible, it would be necessary to find a sufficiently  strong 
form of engagement not to use the margins liberated by the reduction in CAP spending. 

3. 

EFFECTS  OF A REIMBURSEMENT  LIMITED TO 75  PER CENT OF  EXPENDITURE 

To give an idea of the quantitative impact of the introduction of a partial  reimbursement 
this  section  presents  the  results  of  a  simulation  based  on  the  assumption  that  Member 
States would  receive  a reimbursement  equal to 75 per cent  of the expenditure  incurred. 
In  1999,  agricultural  expenditure  under  Heading  1  of  the  Financial  Perspective, 
excluding the monetary reserve, should  amount to Euro 40.4 billion (at current prices)2 
of  which  27.9  would  be  due  to  direct  aids.  Under  the  assumption  of  75  per  cent 
reimbursement, Member States would have to finance  directly about Euro 7 billion  and 
the size of the EU budget would be reduced correspondingly.  However, if the proposal 
of the  Commission  for  the  reform  of  the  CAP  were  implemented,  by  2006  direct  aids 
spending  would  reach  Euro  36.6  billion  (current  prices)  and, 
the  partial 
reimbursement  option  were  implemented,  Member  States  would  have  to  finance  Euro 
9.15 billion. 

if 

Tables  3 (data  for  1999) and  4 (data  for  2006)  illustrate  the  financial  consequences  on 
the budgetary  balances  of  each  Member  State  of  such  a measure3.  To  allow  a  correct 
appreciation  of  the  impact  of  the  modification,  the  data  are  presented  before  the 
application of the UK correction mechanism.  The first  two columns of the tables show 
the amounts of direct  aids spending that Member  States would have to finance  directly. 
These  amounts  would  have  to be  entered  into  the national  budgets  and  would  increase 
correspondingly  national  spending.  At  the  same  time,  however,  the  national 
contributions  to the EU budget  would  be reduced by the  amounts  indicated  in  columns 
(3) and (4).  The overall net effects  of the measure are shown in columns (5) and (6).  A 
positive  (negative)  figure  indicates  an  improvement  (deterioration)  in  the  budgetary 
balance relative to the current situation.  The same results are presented in Graphs 2 and 

2 
3 

Preliminary  Draft Budget of the European Union for the financial year  1999, COM (98) 300. 

The simulation is based on the assumption  of a linear  partial  reimbursement,  i.e. irrespective of the product.  All 
other  CAP  rules  would  remain  unchanged.  This  means  that  market  support  expenditure  would  continue  to  be 
integrally  reimbursed  to  Member  States.  Export  refunds,  market  intervention  expenditure,  storage  costs, 
promotion  measures and other minor items, such as monitoring and preventative  measures would not be covered 
by this  proposal, as they  do  not  constitute  expenditure  paid directly  to farmers.  Finally, those  type of  agricultural 
expenditure  which  are  already  co-financed, such  as  rural  and  accompanying  measures  and  some  other  income 
supports, are also excluded from this proposal, as they would lead to supplementary  national co-financing beyond 
the level which is agreed upon for structural operations. 

7-10-1998 

5-

ANNEX 5 

3  where  the  Member  States  are  ranked  from  that  with  the  largest  improvement  in  the 
budgetary balance  to that with the largest deterioration, in absolute terms (Graph 2) and 
as a percentage of GNP (Graph 3). 

Table 3 

Implications of a partial reimbursement (75%) of CAP direct aids 
(Year 1999, in Euro million and in percent of GNP, at current prices, before UK correction) 

National  financing 
Share  in  CAP  direct  aid 
p a y m e n t s '1' 

EU  budget  financing 
Share  in  the  GNP  resource  (2) 

Difference 

Euro million 
(D 
77.8 

201.3 

1 057.8 

551.5 

993.5 

1 663.0 

163.0 

877.3 

3.8 

90.3 

120.5 

106.5 

72.0 

134.8 

854.0 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 
0 

P 

SF 

S 

UK 

Total 

6 966.8 

Percent of GNP 
(2) 

0.03 

0.13 

0.05 

0.50 

0.19 

0.13 

0.26 

0.08 

0.02 

0.03 

0.06 

0.11 

0.06 

0.06 

0.06 

0.09 

Euro million 
(3) 
208.6 

138.5 

1 762.0 

99.2 

463.7 

1  184.5 

56.4 

972.7 

14.8 

315.9 

175.6 

87.8 

100.5 

191.7 

1  194.8 

6 966.8 

Percent of GNP 
(4) 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

0.09 

Euro million 
(5) 
130.9 

•62.8 

704.3 

• 452.3 

• 529.8 

• 478.5 

-106.6 

95.4 

11.1 

225.6 

55.1 

-18.7 

28.5 

56.9 

340.8 

0.0 

Percent of GNP 
(6) 

0.06 

- 0.04 

0.04 

-0.41 

-0.10 

•0.04 

-0.17 

0.01 

0.07 

0.06 

0.03 

•0.02 

0.03 

0.03 

0.03 

0.00 

(1) Determined  according  to the  projected  CAP  refunds  for each Member  State  in  1999;  (2) determined  according  to the share of 
each Member State in EU GNP (Preliminary Draft Budget  1999). 

The results presented  in tables  3 and 4  are not  surprising  and correspond  to what could 
have been derived  from  a simple inspection  of the figures  of table 2: the relatively large 
beneficiaries  of CAP spending  see a deterioration  of their budgetary balances while the 
five Member States with the largest imbalances would experience an improvement. 

Two  elements  need  be  underlined.  The  first  is  that  the  operation  of  the  correction 
mechanism will reduce by two thirds the gains of the United Kingdom that appear in the 
tables  with  corresponding  small  improvements  for  the  other  Member  States  (in  most 
cases small enough not to change the  figures  expressed  as a percentage of GNP).  The 
second  is that  in 2006 the new  Member  States would  see  a significant  improvement  in 
their budgetary  imbalance  since they would  see a reduction  in their contributions  made 
possible  by  the  lower  amount  of  CAP  spending  which  would  not  be  offset  by  any 
increase  in  spending  at  the  national  level  (direct  aids  are  not  foreseen  for  these 
countries). 

The  results  of  this  simulation  are  proportional  to  the  initial  assumption  and  can  be 
extrapolated to different  assumptions about the rate of partial reimbursement (e. g. a rate 

7-10-1998 

of  national  co-financing  fifty  per cent  higher  would  give  changes  in the budgetary 
balances which would also be fifty per cent larger). 

ANNEX 5 

Table 4 

Implications of a partial reimbursement (75%) of CAP direct aids 
(Year 2006, in Euro million and in percent of GNP, at current prices, before UK correction) 

National  financing 
Share  in CAP direct aid 
p a y m e n t s( ,) 

EU budget  financing 
Share  in the GNP resource( 2) 

Difference 

Euro million 
(1) 
157.4 

278.7 

1 586.6 

579.5 

1  123.7 

2 169.7 

268.4 

1  115.2 

7.5 

237.2 

181.9 

136.6 

106.3 

185.9 

1 010.7 

0.0 

9  145.3 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 
ô 

P 

SF 

S 

UK 

New 6 

Total 

Percent of GNP 
(2) 

0.05 

0.13 

0.06 

0.38 

0.16 

0.12 

0.31 

0.07 

0.03 

0.05 

0.07 

0.10 

0.07 

0.06 

0.06 

0.00 

0.08 

Euro million 
(3) 
268.1 

178.1 

2 264.8 

127.8 

595.5 

1 521.2 

72.6 

1 249.7 

19.1 

406.0 

225.7 

112.8 

129.1 

248.2 

1440.3 

286.4 

9 145.3 

Percent of GNP 
(4) 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

0.08 

Euro million 
(5) 
110.7 

-100.6 

678.2 

-451.7 

- 528.2 

-648.5 

• 195.8 

134.5 

11.6 

168.8 

43.8 

-23.9 

22.8 

62.3 

429.6 

286.4 

0.0 

Percent of GNP 
(6) 

0.03 

-0.05 

0.03 

• 0.30 

-0.07 

- 0.04 

-0.23 

0.01 

0.05 

0.03 

0.02 

-0.02 

0.01 

0.02 

0.03 

0.07 

0.00 

(1) Determined  according to the projected CAP refunds for each  Member  State  in 1999;  (2) determined  according to the share of 
each  Member  State  in  EU GNP; the  underlying  macro-economic  assumptions  are  those  in  European  Commission  (1998), 
(C0M(1998)164 final, p.2). 

7-10-1998 

- 7-
- 7-

ANNEX 5 
ANNEX 5 

7-10-1998 
7-10-1998 

A generalised budgetary compensation mechanism: 
Evidence from simulations 

ANNEX 6 

1. 

INTRODUCTION 

The  emergence  of  what  some  Member  States  consider  as  large  negative  budgetary 
balances  in recent  years  has  led  Ministers  of Finance  from  Germany,  the  Netherlands, 
Austria  and  Sweden  to  write  to  the  President  of  the  Commission  putting  forward 
proposals  for  granting  budgetary  corrections,  in  a  non-discriminatory  manner,  to  all 
Member States that  qualify1. 

This  Annex  reviews  the  generic  proposal  made  by  these  four  countries  and  provides 
estimates of its implications  for  the EU budget  and  for  the distribution  of the  financing 
burden  across  the  Member  States.  Section  2  of  the  Annex  presents  the  proposal; 
section 3  examines  an  unconstrained  scenario  where  a  simple  extension  of- the  UK 
rebate is granted to other Member States;  section 4 reviews a scenario where a modified 
version  of  the  generalisation  of  the  UK  rebate  along  the  line  proposed  by  these  four 
Member  States  is  assumed  to  be  applied; 
this  scenario  involves  essentially  a  partial 
compensation  of  the excess  of the measured  negative  budgetary  balances  above  a pre 
determined  threshold;  and,  finally,  section  5  presents  a  graphical  summary  of  the 
results. 

2.  A  PROPOSAL  TO GENERALIZE  THE UK  CORRECTION  MECHANISM 

Minister  Waigel  submitted  to  the  President  of  the  European  Commission  on  March  5, 
1998 a proposal with  the view to correcting the perceived  large budgetary  imbalance  of 
In  subsequent  days,  the  Austrian,  the  Dutch  and  the  Swedish  Finance 
Germany. 
Minister  also wrote to President  Santer with  virtually  identical  proposals  favouring  the 
introduction of such a correction  mechanism. 

Minister  Waigel's proposal  is based  on the Conclusions  of the Fontainebleau  European 
Council  of  June  1984, according  to  which  "any Member  State sustaining  a  budgetary 
burden  which  is  excessive  in  relation  to  its  relative  prosperity  may  benefit from  a 
correction  at  the  appropriate  time'"2.  The  Minister  argues  that  while  initially  this 
principle  benefited  only  the  UK,  it  should  now  form  the  basis  for  introducing  a 
generalised  correction  mechanism  to  benefit 
those  Member  States  experiencing 
disproportionate budgetary imbalances.  Accordingly, the proposal is intended 

• 

to be non-discriminatory, by being available to all eligible Member States; 

See the discussion  in part 2 of the report. 
See  Fontainebleau  European  Council,  Conclusions  of  the  Presidency,  Bulletin  of  the  European  Communities  6-
1984. 

7-10-1998 

- 2-

ANNEX 6 

• 

• 

• 

• 

to take into account each Member State's capacity to pay3; 

to  correct  not  all but  only  those  budgetary  imbalances  considered  as  excessive 
(in order to respect the fundamental  policy decisions  on the expenditure  side  of 
the budget); 

to foster budgetary discipline for both net contributors and net beneficiaries; 

to be sufficiently  flexible to facilitate the achievement of fair solutions. 

The precise framework  of the proposed correction mechanism  is defined  as follows: 

Amount  of compensation = (Net burden -  threshold) * coefficient of compensation 

Three parameters  determine the amount of compensation.  First, the budgetary  position 
or net burden,  secondly,  the threshold beyond  which  compensation  applies  and,  third, 
the  coefficient  of compensation.  The  first  two  variables  are measured  in  current  Ecu, 
and the third in percentage points. 

It  is  suggested  that  the budgetary  balance,  or  net  burden,  be  calculated  in  accordance 
with the UK correction  mechanism4. 

The  threshold  beyond  which  compensation  applies  is  a  measure  of  the  maximum 
solidarity  among the Member  States and can be determined  as a function  of the relative 
prosperity of the Member State in question.  In the proposal under review, only a part of 
the budgetary  imbalance will  be corrected,  that  is, the excess  of the budgetary  position 
above  a pre-determined threshold  value.  In the case  of the UK rebate this threshold  is 
zero, that  is, the total  of the budgetary  imbalance  is used  as the base  for  the  estimation 
of the  compensation.  In the most  general  form  of the proposal,  the threshold  can  vary 
from  one case to another. 

Finally,  the amount  of compensation  is determined  by the coefficient of  compensation. 
The  coefficient  will  be  bound  in  the  range  between  greater  than  zero  and  less  than  or 
equal  to  one.  In  the  case  of  the  UK  rebate,  the  coefficient  is  0.66.  In  the  proposed 
scheme,  alternative  values  of  this  coefficient  are  also  conceivable.  The  threshold  and 
the coefficient  constitute the flexible parameters of the proposed  mechanism5. 

The  proposal  does  not  specifically  deal  with  the  issue  of  the financing  of  the  rebates 
that  are  granted.  In  the  present  system,  the  UK  does  not  finance  its  own  rebate.  A 

3 
4 

5 

In the original:  "Leistungsfâhigkeit". 

The  Commission  has  argued  on  several  occasions  that  there  is  no  single  best  definition  of  the  concept  of  net 
burden and Annex  3 of the present report deals specifically  with this point.  Clearly, if the proposed  mechanism  is 
to  be  a generalisation  of  the  current  UK  correction, it seems  logical  to apply  the same  procedure  and  to  use  the 
same concept of net burden that has been used in the last  15 years for the calculation of the UK correction. 

In sections  3 and 4 of  the Annex  two  simulations,  that  differ  according  to  the  threshold  used  but  have  the  same 
coefficient  of  compensation  (0.66),  have  been  prepared.  The  threshold  determines  which  Member  States  are 
eligible  for  the  rebate  and which are not, while  the  coefficient  of compensation  is a simple arithmetic factor  which 
scales  the  magnitude  of  the  results  (e.g.  using  a  coefficient  of  compensation  equal  to  0.33  one  would  obtain 
results which are half of those obtained by using 0.66). 

7-10-1998 

ANNEX 6 

straightforward  extension  of  the  present  model  could  be  seen  as  implying  that  the 
Member  States  benefiting  from  the  system  should  not  finance  their  own  rebates. 
However,  this  solution  would  not  only  be  very  costly  in  a  situation  where  many 
Member  States  benefit  from  the  system, but  is also fraught with  risks.  In particular,  a 
threshold  effect could  appear whereby a country with  a negative balance just  exceeding 
the threshold would receive a (small) rebâte, but would be exempted from the burden of 
financing  the  rebate  of  others.  A  small  difference  between  the  net  burden  of  two 
Member  States  before  application  of  the  mechanism  could  be  converted  into  a  much 
larger  once  the  correction  has  been  applied.  It  appears  coherent,  therefore,  to  assume 
that  a Member  State should  not finance  its own rebate, but that  it should  finance  all the 
others.  This would eliminate any unwanted "threshold  effect". 

Eliminating  the  threshold  effect  also  helps  to  reduce  (but  not  to  eliminate)  the second 
round  problem.  This  refers  to  Member  States  that  are  below  the  solidarity  threshold 
before  the  mechanism  is  applied  but  find  themselves  above  after  the  mechanism  as  a 
result  of  their  participation  in  the  financing  of the  other  Member  States'  rebates.  The 
simulations in the following  sections are calculated without taking into account  possible 
second  round  effects  which  -  while  eliminating  possible  inequities  arising  from  the 
mechanism  -  would  lead  to  an  additional  increase  in  complexity  and  a  further 
diminishing of transparency in the EU budgetary relationships. 

As in the UK rebate, it is proposed that the compensation  should be  financed  according 
to the respective share of each Member State in EU GNP6. 

3.  AN  UNCONSTRAINED GENERALIZED CORRECTION MECHANISM  7 

This  section  examines  the  cost  and  financing  implications  of  a  generalisation  of  the 
current  UK rebate system  to all Member States presenting negative budgetary  balances. 
In  this  case,  the  threshold  is  set  to  zero  and  the  coefficient  of  compensation  to  0.66. 
Member  States  participate  in the  financing  of all rebates  except  their  own  according  to 
their share in EU GNP. 

The definition  of the net burden is an important element in the exercise since the cost of 
the  mechanism  depends  on  how  the  budgetary  balance  is  defined.  For  purposes  of 
illustration the concept used here is the same as in the UK correction  mechanism8. 

In these simulations, a reduction of Germany's share in the financing of the UK correction, as laid down in Article 5 
of  the  Own  Resources  Decision,  is  ignored.  Therefore,  it  is  assumed  that  Germany  would  participate  in  the 
financing  of  the  rebates  of all other  Member  States  eligible  for compensation, according  to  its  actual share  in  EU 
GNP. 

The  Court  of Auditors  in its recent special  report on the own resources  system  has  presented  some evidence, for 
the year  1996 on the implications  of an unconstrained generalized  correction  mechanism.  See European Court of 
Auditors  (1998):  Rapport  spécial  no.  6/98 relatif  au bilan  du  système  des  ressources  fondées  sur  la  TVA et  le 
PNB,  June  and  Official  Journal  of  the  European  Communities  C  241, July  31,  1998.  The  Court's  evidence  is 
mentioned  in section  3.27  of the  report.  The present Annex  extends and qualifies  the  Court's  results for  1999.  It 
is  clear  that  an  unconstrained  generalized  correction  mechanism  is  not  the  system  proposed  by  the  ministers  of 
Finance of Germany, Austria, the Netherlands and Sweden. 

7-10-1998 

4-

ANNEX 6 

Table 1 

Implications for  budgetary  balances of an unconstrained  generalised 
correction  mechanism 
Projections  for  1999; "UK  rebate" balance  1 (data  in Euro  million  and  in % of  GNP) 

Budgetary  balance  "à la 
UK  correction" 
(before  UK  correction) 

MS  eligible 
for  a  rebate 

Amount  of 
compensation 

Financing 

Total 
redistributive 
effect 
(4)  +  (5) 

New  budgetary  balance 

Euro  million 

% of GNP 

Threshold 
0,0%  or GNP 

Coefficient 
0,66 

GNP share 

Gains/losses from 
the mechanism 

Euro  million 
(1)  +  (6) 

% or GNP 

(5) 

(6) 

(7) 

(8) 

(D-

2131,7 

188,8 

(2) 

0,92 

0,12 

(3) 

0,0 

0,0 

(4) 

0,0 

0,0 

-9 804,8 

-0,50 

•9 804,8 

6 471,2 

•2361,1 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK<2> 

5 221,0 

8 006,8 

-516,8 

2 570,4 

-649,5 

717,8 

-1342,0 

• 770,2 

3  173,1 

-124,9 

•1 001,6 

•7 799,8 

4,71 

1,55 

-0,04 

4,08 

-0,06 

4,33 

•0,38 

•0,39 

3,24 

•0.11 

•0,47 

-0,58 

0,0 

0,0 

-516,8 

0,0 

-649,5 

0,0 

•1342,0 

• 770,2 

0,0 

-124,9 

0,0 

0,0 

341,1 

0.0 

428,6 

0,0 

885,7 

508,4 

0,0 

82,4 

-1 001,6 

661,1 

- 538,9 

-357,7 

- 256,4 

- 538,9 

-357,7 

4110,1 

- 256,4 

1 592,7 

-168,9 

-5694,7 

4 964,6 

6 808,9 

-1 197,8 

-1 197,8 

-2 990,1 

-2 649,1 

-3 165,8 

-145,7 

-145,7. 

2 424,6 

-2 443,1 

-2 014,5 

-2 664,0 

-38,3 

- 773,9 

•440,5 

-226,7 

- 258,4 

•476,5 

- 38,3 

111,8 

67,9 

- 226,7 

-176,0 

184,6 

679,5 

•1230,2 

• 702,3 

2 946,4 

-300,9 

-8f7,f 

0,68 

-0,11 

•0,29 

4,48 

1,32 

-0,24 

3,85 

-0,25 

4,10 

•0,35 

•0,36 

3,01 

-0,27 

•0,38 

-0,35 

0,00 

TOTAL 

0,0 

0,00 

-22009,6 

14 526,3 

-14 526,3 

0,0 

0,0 

-7 799,8 

5 147,9 

-2 021,0 

3 126,9 

-4 672,9 

(1 ).  In order  to avoid  distortions  due  to fluctuations  in the  size  of  the  UK  rebate  . the  projected  amount  of the  UK  correction  for  1999, 
instead  of the  one  of  1998,  has  been chosen  for comparison  purposes  (in  principle  the  financing  is lagged  one  year); 

(2)  the  UK  correction  for  1999  is estimated  at  Euro  4  952  million;  the  difference  between  this  amount  and  Column  (4)  is due  to  the 
procedure  foreseen  in Article  4,  paragraph  2  d)  of  the  Own  Resources  Decision  which  takes  into  account  the  so-called  "advantage" 
that  the  UK  enjoys  due  to the  changeover  to a  capped VAT  own  resource  and  the  introduction  of the  GNP-based  own  resource. 

The  results  reported  in  Tables  1  and  2  refer  to  19999,  the  last  year  of  the  current 
Financial Perspective.  The final results are presented in terms of the difference  relative 
to  the present  system;  that  is, the  results  show  the  improvement  (deterioration)  of the 
budgetary balance of each Member State relative to the current regime. 

The  budgetary  balance  à  la  UK  correction  is  a  cash  concept  defined  by  the  difference  between  the  share  in 
financing  and  the  share  in  allocated  operational  expenditure; 
traditional  own  resources  (TOR)  are  reallocated 
among  Member  States  according  to their  VAT  and  GNP shares, while  the  sum  of all  balances  is  restricted  to be 
zero.  See Annex  3 for a discussion of the definitions of the budgetary  balance used in this report. 

Data  based  on  the  Preliminary  Draft  Budget  of  the  European  Union  for  the  financial  year  1999,  COM  (98)  300. 
The  concept  of  EU  expenditure  used  in  the  simulations  is  allocated  expenditure  including  administrative 
expenditure; 
if  the  estimates  were  prepared  on  the  basis  of  operating  expenditure,  excluding  administrative 
expenditure, the order of magnitude  by which the  rebates and their financing would  be modified  is somewhat  less 
than 5 per cent. 

7-10-1998 

5-

ANNEX 6 

Table 2 
Implications  for  budgetary  balances by applying an unconstrained  generalised 
correction  mechanism 

(data for  1999 in Euro million and in percent of GNP) 

Budgetary  balance  à la UK.correction 

"Operational"  budgetary  balance 

Redistributive  effects 
of the  mechanism 

Difference to the 
current system 

Redistributive effects 
of the mechanism 

Difference  to the 
current  system 

Euro mio. 

% of GNP 

Euro mio. 

% of GNP 

Euro mio. 

% of GNP 

Euro mio. 

% of GNP 

B 

DK 

0 

GR 

E 

F 

IRL 

I. 

L 

NL 
A 

P 

FIN 

S 

UK 

- 538.9 

- 357.7 

4110.1 

- 256.4 

-1  197.8 

-2 649.1 

-  145.7 

-2 014.5 

-38.3 

111.8 

67.9 

-  226.7 

-  176.0 

184.6 

3 126.9 

-0.23 

-0.23 

0.21 

-0.23 

-0.23 

-0.20 

-0.23 

-0.19 

-0.23 

0.03 

0.03 

-0.23 

-0.16 

0.09 

0.23 

-333.7 

-221.5 

5117.9 

-158.8 

-741.8 

-1 483.9 

-  90.2 

-1 057.8 

-23.7 

422.5 

240.6 

-140.4 

-  77.2 

373.1 

-1  825.2 

-0.14 

-0.14 

0.26 

-0.14 

-0.14 

-0.11 

-0.14 

-0.10 

-0.14 

0.12 

0.12 

-0.14 

-0.07 

0.17 

-0.13 

237 

-440 

3 980 

-318 

-1502 

-3 235 

-184 

-2 510 

38 

760 

-6 

-281 

-230 

174 

3 517 

0.10 

-0.29 

0.20 

-0.29 

-0.29 

-0.24 

-0.29 

-0.23 

0.23 

0.22 

0.00 

-0.29 

-0.20 

0.08 

0.27 

400 

-332 

4 780 

-241 

-1139 

-2 310 

-140 

-1750 

49 

1007 

131 

-212 

-151 

324 

-414 

0.17 

-0.22 

0.24 

-0.22 

-0.22 

-0.17 

-0.22 

-0.16 

0.30 

0.29 

0.07 

-0.22 

-0.13 

0.15 

-0.03 

The  parameters of the correction mechanism are:  Threshold  = 0.0% of GNP;  coefficient oi  compensation  = 0.66;  the 
definition of the budgetary balance as "a la UK correction" and as "operational" is provided in Annex 3. 

Graph 1 
Implications of an unconstrained generalized correction  mechanism 
("UK  rebate" balance)  Projections for 1999 in percent of GNP 

0,30% 

0,20% 

0,10% 

Differences  from present  UK 
system  (changes in 
- budgetary balances) 

Redistributive  effects 
of the mechanism 

B 

DK  GR 

E 

IRL 

L 

P 

D 

A 

NL  FIN 

I 

F 

UK 

B 

DK  GR 

E 

IRL 

L 

P 

7-10-1998 

- 6-

ANNEX 6 

The budgetary balance of the Member  States  for  1999 (calculated  "à la UK  correction") 
appears  in  column  1, the  gross  amounts  of  the  rebates  to  the  eligible  Member  States 
appear  in  column  4,  the  financing  of  the  rebates  in  column  5,  and  the  amount  net  of 
financing  in column 6.  Columns 7 and  8 give in absolute value and in percentage terms 
the  new  budgetary  balances.  The  changes  in  the  budgetary  balance  of  each  Member 
State in  1999, both in Euro and  in percent  of GNP, are presented  in Table 2 where  also 
data  with  respect  to  the  current  regime  are  shown.  The  last  two  columns  in  Table  2, 
which cannot be reconstructed  from  the data in Table  1, give the difference  with respect 
to the present  system  (which  includes  the  UK  correction).  In particular,  the  difference 
relative  to  the  present  system,  for  each  Member  State,  is  equal  to  the  new  budgetary 
balance resulting from the application  of the proposed  mechanism  (column (7) of Table 
1) minus the sum of the budgetary balance  reported  in column  (1) of Table  1 (which  is 
reported before the UK correction) and the financing of the UK correction. 

Whereas the application of the present correction mechanism would redistribute in  1999 
Euro  4.9  billion  towards  the  United  Kingdom  alone,  the  unconstrained  correction 
mechanism  would  redistribute  Euro  7.6  billion  towards  five  countries  (Germany,  the 
Netherlands,  Austria,  Sweden  and  the United  Kingdom).  This  amount  would  have  to 
be  financed  by the other  10 Member  States  that  would  pay  Euro  4.3  billion  more  than 
under  the  present  correction  mechanism  (Euro  3.3  billion).  The  United  Kingdom 
would  be  worse  off  by  Euro  1.8  billion. 
The  new  beneficiaries  of  the  system 
(Germany,  the Netherlands,  Austria,  and  Sweden)  would  therefore  see an  improvement 
in their aggregate budgetary balance by Euro 6.1 billion (5.1 billion for Germany alone). 

Graph  1 helps  to visualise  the  redistribution  induced  by  this  unconstrained  generalised 
mechanism.  The  shaded  area  corresponds  to  the  difference  between  the  unconstrained 
mechanism  and the present  system  and  includes  all  financing  effects  for the UK rebate; 
the  bars  refer  only  to  the  redistribution  (corresponding  to  column  (6)  of  Table  1) 
induced by the new unconstrained  system.  The Member States are ranked from  the one 
with  the  greatest  improvement  in  the  budgetary  balance  to  that  with  the  greatest 
deterioration. 

Those  Member  States  that  are  currently  recording  a  positive  budgetary  balance 
(Belgium,  Denmark,  Greece,  Spain,  Ireland,  Luxembourg  and  Portugal)  would  not 
receive  any rebate but would  only participate  in the  financing  of the mechanism.  They 
will  all  witness  an  equal  deterioration  in  their  budgetary  balance  in  terms  of  national 
GNP. 

Those  Member  States  who  are  net  payers  would,  on  the  contrary,  receive  a rebate  for 
their budgetary  imbalance.  In  some cases  this rebate would  more  than compensate  the 
financing  of others' rebate, in other cases not.  This obviously depends on the size of the 
initial budgetary imbalance. 

The  case  of  the  United  Kingdom  is  somewhat  more  complex.  The  UK  would  be 
entitled to the same rebate as under the current rebate mechanism but it would also have 
to  contribute  its  share  in  the  financing  of  the  unconstrained  generalised  mechanism. 

7-10-1998 

7-

ANNEX 6 

Thus,  relative  to  the  present  system,  the  UK  finds  its  budgetary  balance  deteriorating 
due to the  financing  of the others'  rebate;  in the new system, as shown by the bars, the 
UK would be as big a beneficiary  as Germany (as a percentage of GNP). 

4.  A  CONSTRAINED GENERALIZED CORRECTION MECHANISM 

As  discussed  in  section  2,  a  constrained  generalised  correction  mechanism  has  been 
explicitly  proposed  by  Germany,  Austria,  Sweden  and  the  Netherlands.  This  section 
examines the implications of this proposal.  The constraint  in the mechanism is given by 
the threshold;  budgetary  imbalances  exceeding  the threshold  ought  to be corrected.  In 
the proposal, a threshold of 0.30 per cent or 0.40 per cent of GNP has been  suggested. 

Table 3 

Implications for  budgetary  balances of  a constrained  generalised 
correction  mechanism 

P r o j e c t i o ns  f or  the  year  1999;  " UK  r e b a t e"  b a l a n ce  1  (data  in  E u ro  m i l l i on  a nd  in  %  of  GNP) 

Budgetary  balance  "à  la 
UK  correction" 
(before  UK  correction) 

MS  eligible  for 
a  rebate 

A m o u nt  of 
compensation 

Financing 

Total 
redistributive 
effect 
(4)  +  (5) 

New  budgetary  balance 

Euro  million 

%  of GNP 

Threshold 
0,3  %  or GNP 

Coefficient 
0,66 

GNP share 

Gains/losses from 
the mechanism 

Euro million 
(1)  +  (6) 

%  of GNP 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

(1) 

2  131,7 

188,8 

(2) 

0,92 

0,12 

(3) 

0,0 

0,0 

(4) 

0,0 

0,0 

(5) 

(6) 

(7) 

- 2 1 0 ,8 

- 1 3 9 ,9 

- 2 1 0 ,8 

- 1 3 9 ,9 

1  920,9 

48,9 

-9  804,8 

-0,50 

•3  903,8 

2  576,5 

-  907,9 

1  668,6 

•8  136,2 

5  221,0 

8  006,8 

- 5 1 6 ,8 

2  570,4 

-  649,5 

717,8 

•1  342,0 

•  770,2 

3  173,1 

- 1 2 4 ,9 

•1  001,6 

-7  799,8 

4,71 

1,55 

-0,04 

4,08 

-0,06 

4,33 

•0,38 

•0,39 

3,24 

-0,11 

-0,47 

-0,58 

0,00 

0,0 

. 

0,0 

0,0 

0,0 

0,0 

0,0 

-  284,2 

-182,2 

0,0 

0,0 

0,0 

0,0 

0,0 

0,0 

0,0 

0,0 

187,6 

120,2 

0,0 

0,0 

-  359,6 

237.4 

- 1 0 0 ,3 

- 1 0 0 ,3 

5  120,7 

-  468,5 

-  468,5 

7  538,3 

-1  196,7 

-1  196,7 

-1  713,5 

-  57,0 

-  57,0 

2  513,4 

-  982,7 

-  982,7 

-1  632,1 

- 1 5 ,0 

- 1 5 ,0 

702,9 

-  310,2 

-  f 2 2 ,6 

-1  464,7 

-174,3 

-  88,7 

- 1 0 1 ,5 

-1 8 7 ,0 

-  54,0 

- 8 8 ,7 

- 1 0 1 ,5 

50,4 

-  824,3 

3  084,5 

-  226,4 

-  951,2 

-3  798,3 

2  506,9 

-  688,2 

1  818,7 

-5  981,1 

-8  528,1 

5  628,5 

•5  628,5 

0,0 

0,0 

TOTAL 

0,0 

(8) 

0,82 

0,03 

-0,4f 

4,62 

1,46 

-0,13 

3,99 

-0,15 

4,24 

•0,42 

•0,42 

3,15 

-0,20 

-0,44 

-0,45 

0,00 

(1 ) See footnote (1 ) of Table  1. 

Table 3 shows the results of a simulation  for the year  1999 of the constrained  correction 
mechanism.  The net  burden  is calculated  as in the UK  rebate,  and  a threshold  of  0.30 
per  cent  of  GNP  and  a coefficient  of  compensation  of  0.66  have  been  assumed.  The 
principal  effects  of  the  mechanism,  both  in  terms  of  the  redistributive  impact  and  in 
terms of differences  with respect to the current regime, are summarised in Table 4. 

7-10-1998 

ANNEX 6 

Table 4 

Implications for budgetary  balances by applying a constrained 
generalised correction  mechanism 
(data  for 1999 in Euro  million  and in percent  of  GNP) 

Budgetary  balance  à la UK  correction 

"Operational" 

budgetary 

balance 

Redistributive 

effects 

of  the  mechanism 

Difference 
to.the 
current  system 

Redistributive 

effects 

of  the  mechanism 

Difference 
to the 
current  system 

Euro mio. 

% of GNP 

Euro mio. 

% of GNP 

Euro mio. 

% of GNP 

Euro mio. 

% of GNP 

-210.8 

-0.091 

-5.6 

-0.002 

114 

0.05 

277 

0.12  . 

-139.9 

-0.091 

-3.7 

-0.002 

-209 

-0.14 

-101 

-0.07 

1  668.6 

0.085 

2 676.4 

0.136 

1727 

0.09 

2 527 

0.13 

-100.3 

- 0.091 

-2.6 

- 0.002 

-151  . 

-0.14 

-468.5 

-0.091 

-12.4 

-0.002 

-1 196.7 

-0.091 

-  31.6 

- 0.002 

-57.0 

-0.091 

-1.5 

-0.002 

-714 

-1827 

-88 

-0.14 

-0.14 

-0.14 

-982.7 

•  -0.091 

-25.9 

-0.002 

-1504 

-0.14 

-  15.0 

-0.091 

-  0.4 

-0.002 

-122.6 

- 0.035 

188.0 

0.053 

30 

563 

0.18 

0.16 

• 54.0 

• 0.028 

118.7 

0.061 

•108 

•0.05 

-88.7 

-0.091 

-2.3 

-0:002 

-134 

-0.14 

-101.5 

-0.091 

-2.7 

-0.002 

-156 

-0.14 

50.4 

0.024 

239.0 

0.112 

63 

1  818.7 

0.136 

-3133.4 

-0.235 

2 393 

0.03 

0.18 

-74 

-352 

-902 

-43 

-744 

42 

809 

29 

-65 

-77 

213 

-0.07 

-0.07 

-0.07 

-0.07 

-0.07 

0.25 

0.23 

0.01 

-0.07 

-0.07 

0.10 

-1538 

-0.12 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

The  parameters  of the correction  mechanism  are:  Threshold  = 0.30% of  GNP;  coefficient  of compensation  = 0.66; the 
definition  of the  budgetary  balance  as "à la UK correction"  and as "operational"  is provided  in Annex  3. 

The  results  show  that  the constrained  version  of the  correction  mechanism  entails a 
significantly  lower  redistribution  of budgetary  resources.  Only  three  countries  would 
benefit  from  the system  (Germany,  Sweden  and the United  Kingdom)  since in the case 
of the Netherlands  and Austria, the benefit from the capping of their budgetary  balances 
would be smaller than their contributions to the financing  of the system.  On the whole, 
the  12 Member  States  financing  the rebates  would be paying  Euro  3.5 billion  which is 
0.2  billion  less  than  what  they  would  have  paid  to  finance  the current  UK rebate 
mechanism.  The United Kingdom, on the other hand, would be worse off by Euro 3.1 
billion. 
This  amount  would  be  divided  between  the  12  Member  States  already 
mentioned  (Euro  0.2  billion),  Sweden,  (Euro  0.2  billion)  and Germany  (Euro 2.7 
billion). 

The  results  of Table  4 are also  shown  in Graph  2.  Here,  the shaded  area  shows the 
differences  in the Member  States'  budgetary  balances  between  the present  system, 
which  includes  the UK correction,  and the  system  of  the  constrained  generalised 
mechanism.  In the Graph, the  Member  States are  again  ranked  from  the one with the 
greatest  improvement  in the budgetary  balance  to that  with  the greatest  deterioration. 
The changes in the budgetary balances are identical for all the financing  Member  States 
that are not eligible for the rebate.  Their budgetary balance is projected  to deteriorate by 
some 0.002 per cent of GNP in 1999. 

7-10-1998 

9-

ANNEX 6 

Graph 2 
Implications of a constrained generalized correction mechanism: 

(Threshold: 0,3% of GNP, "UK rebate" balance) 
Projections for 1999, in percent of GNP 

Difference  from  present 
system 

UK 

Difference  from  present 
system  (changes in 
budgetary  balances) 

NL 

B  DK  GR  E 

F 

IRL 

I 

FIN  UK 

0,20%  v 

0,10% 

0,00% 

-0,10%  -

-0,20%  * 

-0,30% 

D 

The  UK,  on  the  contrary,  will  find  itself  substantially  worse  off. 
Under  the 
unconstrained  version  of  the  mechanism  the UK rebate  was  determined  in  a  manner 
identical  to the current  system  and, therefore,  the UK saw a deterioration  only  because 
of  its  participation  in  the  financing  of  the  rebate  of  the  others. 
In  the  present, 
constrained,  simulation  the  UK  rebate  is  restricted  to  the  excess  of  its  negative 
budgetary  balance  above  the 0.30 per cent  of GNP  threshold.  As a consequence, the 
budgetary  imbalance  of the UK,  as measured  by  the "UK rebate"  budgetary  balance, 
would worsen by some 0.24 per cent of GNP in  1999. 

5.  A  GRAPHICAL  REPRESENTATION  OF THE  RESULTS 

Budgetary  correction  mechanisms  similar  to  the  current  one  in  favour  of  the  United 
Kingdom  are imperfect  and, since they operate on the revenue side of the budget, do not 
affect  the  fundamental  source  of imbalances,  the expenditure  side.  Moreover,  beyond 
the  conceptual  and  practical  difficulties  involved,  they  require  an  agreed  definition  of 
budgetary  imbalance.  Notwithstanding  these  imperfections,  an  explicit  proposal  has 
been made by Germany, the Netherlands, Austria and Sweden to address concerns  about 
excessive budgetary  imbalances. 

The  analysis  in  this  Annex  reviewed  two  versions  of  a  correction  mechanism:  an 
unconstrained  correction  mechanism  and a constrained  one.  It  is clear  that,  given the 
complexity  and  lack  of  transparency  of  the  present  system  involving  only  the  UK 
rebate, extending it to other Member States would inhibit  further  the comprehension and 
clarity of EU budgetary  relationships. 

7-10-1998 

10-

ANNEX 6 

Graph  3 

Redistributive effects of the two correction mechanisms under review 

(Projections  for 1999, budgetary balances  defined as  in the UK 
rebate, percentages  of GNP) 

% of GNP 

0.3 

Constrained (threshold  0.3%) 

-0.3 

UK 

D 

S 

A 

NL 

FIN 

I 

F 

DK 

B 

GR 

E 

IRL 

L 

Applying the present mechanism  to all Member  States that record  a negative  budgetary 
balance,  or  simply  extending  to  the  four  countries  that  have  made  the  request,  would 
increase  the  sum  of  all  rebates  by  about  50  per  cent  compared  to  the  present  system 
involving only the UK rebate.  A constrained  mechanism would involve a lesser  amount 
of resources to be. 

Graph  4 

Changes in budgetary balances with respect to the current regime 
due to the two correction mechanisms under review 

(Projections  for 1999, budgetary balances  defined as  in the UK 
rebate, percentages  of GNP) 

% of GNP 

0.3 

-0.3 

A 

NL 

FIN 

I 

F 

DK  UK 

B 

GR 

E 

IRL 

L 

7-10-1998 

-11  -

ANNEX 6 

The  results  of  the  various  simulations  are  summarised  in  Graphs  3  and  4.  Graph  3 
shows  the  redistributive  effect  of  the  introduction  of  the  generalised  correction 
mechanisms  (this corresponds  to the bars of Graphs  1 and 2) and Graph 4 compares  the 
changes that either of the two correction systems would entail with respect to the current 
situation  (this  corresponds  to  the  shaded  area  of  Graphs  1 and  2).  The  imposition  of 
constraints  limits  the  resources  to  be  redistributed  as  well  as  the  number  of  Member 
States benefiting from these dwindling resources. 

•  • 

•  • 

•  • 

7-10-1998 

ANNEX 7 

Progressivity in budget contributions 

1. 

INTRODUCTION 

On  July  1,  1998  Mr  Rodrigo  Rato,  Spain's  Economics  Minister  and  second  Deputy 
Prime  Minister,  and  Mr  Abel  Matutes,  Foreign  Minister  wrote  a  joint  letter  to  the 
Commission  President  proposing  the  introduction  of  a  new  own  resource  based  on 
progressivity and requesting the Commission to examine this proposal in the  framework 
of the Own Resources Report.  The Spanish delegation reiterated the proposal during the 
EcoFin  meeting  of July 6, while Portugal  and  Greece voiced  their  support.  Some days 
later, the Portuguese and the Greek authorities  also wrote to President  Santer to express 
their support for the Spanish proposal. 

As  in  the  case  of  the  suggestion  of  the  four  Finance  Ministers  (of  Germany,  the 
Netherlands,  Austria  and  Sweden)  who  have  asked  for  an  extension  of  the 
Fontainebleau  rebate  to  their  countries,  the  Spanish  authorities  do  not  propose  one 
specific  course of action, but indicate a number of ways - all based on the GNP resource 
- in which the objective of progressivity in contributions could be achieved. 

The Spanish authorities base their initiative on the text of the Protocol on Economic and 
Social  Cohesion  where  the  high  contracting  parties  "declare their  intention  of taking 
greater  account of the contributive capacity  of  individual Member States  in the system 
of  own  resources,  and  of  examining  means  of  correcting,  for  the  less  prosperous 
Member States, regressive elements existing in the present  own resources system". 

Ministers  Matutes  and  Rato  acknowledge  that  the  introduction  of  the  GNP  resource 
represents a marked improvement with respect to the previous situation.  However, they 
regret that proportionality  of contributions  to income, characterizing  the present  system, 
does not take into account  sufficiently  the contributive  capacity of Member States.  The 
Ministers  state  clearly  that  a  fair  system  of  contributions  ought  to  be  based  on 
progressivity  as are the  fiscal  systems  of  all  the  Member  States.  They  believe  that  the 
phase  of  integration  reached  by  the  European  Union  with  the  signature  of  the 
Amsterdam Treaty clearly warrants a move towards a financing  system based on "equity 
and progressivity ". 

The present Annex, which together with the introduction, includes five sections, reviews 
the proposal  and its implications.  Section 2 presents the proposal;  section  3 provides a 
brief  review  of  the  history  of  the  concept  of  progressivity; 
section  4  examines 
progressivity  in relation to economic  and social  cohesion;  and section  5 provides  some 
final remarks. 

7-10-1998 

ANNEX 7 

2.  T HE  PROPOSAL  CONCERNING  PROGRESSIVITY AND SOME  IMPLICATIONS 

Spain  proposes  to  achieve  progressivity  by  applying  "modulation  coefficients"  (to 
reflect  "relative  wealth"  and  "relative  prosperity",  two  terms  used  interchangeably)  to 
the actual GNP bases so as to derive new GNP bases to be used in the calculation  of the 
GNP  resource  contributions.  No  clear  mention  is  made  of  which  "modulation 
coefficients"  are to be used, but it is said that the measure of "relative wealth" should be 
GNP per capita in ECU. 

The proposal  involves  a fundamental  adjustment  to be applied  in  either  of  two  ways  in 
order to achieve  progressivity. 

A) 

B) 

C) 

To  use  as  coefficient  for  the  construction  of  the  new  GNP  bases  an  index  of 
GNP per  capita  in ECU (with EU=  100, in  1996 this was  124.9% for  Germany, 
64.5% for  Spain, 85.8% for the U.K. and  114.2% for France etc.). 

To apply  the correction coefficients  only to a part of the GNP bases  (e.g. 50 per 
cent)  leaving the remaining unaffected.  In this case, the GNP resource would be 
disaggregated  into  a proportional  and  into  a progressive  component,  each  with 
its own uniform  contributions rate. 

To  group  countries  on  the  basis  of  GNP  per  capita  and  to  apply  the  same 
coefficients  for  all  the  countries  in  the  same  group;  no  indication  is  given  of 
what these coefficients  should be and how they should be calculated. 

Finally, it is suggested that the current VAT resource could be replaced by this  modified 
GNP  resource.  The  proposal  amounts  to  substituting  the  actual  GNP  keys  with  keys 
more  favourable  to poorer  Member  States, and to apply the new keys either to less than 
40% of contributions to the EU budget1  (version B), or to about 40% of them (version B 
and possibly  C), or even to more than  80 per cent of the total, if the VAT resource were 
to be  suppressed. 

It  is clear  that,  in  terms  of redistributing  the burden  of the  financing  of the  EU  budget, 
the  proposal  would  make  those  countries  whose  GNP  per  capita  in  ECU  is  higher 
(lower) than the average pay more (less) than under the current rule.  This is because the 
proposal  amplifies  (reduces)  the  GNP  base  of  the  Member  States  with  a  GNP  higher 
(lower) than the average. 

Under  either  option  Belgium,  Denmark,  Germany,  France,  Luxembourg, 
the 
Netherlands,  Austria  and  Sweden,  would  be  expected  to  contribute  significantly  more 
than under the present  system.  Table  1  presents results (in Ecu million and in percent of 
total  contributions)  of  the  application  to  the  data  of  1996  and  1997  of  the  idea  of 
modifying  the  GNP  bases  according  the  ECU  index  of  GNP  per  head  (option  A). 
According  to  the  results,  in  1997  Belgium  would  have  paid  Ecu  70  million  more, 

1  Which is the current importance of the GNP resource in the EU budget. 

7-10-1998 

ANNEX 7 

Denmark  Ecu  180  million,  Germany  Ecu  1043  million,  France  Ecu  260  million, 
Luxembourg  Ecu 48 million,  the Netherlands  Ecu 45 million, Austria Ecu  102 million, 
and  Sweden Ecu  70 million.  Greece would  have  seen its contributions  fall  by  Ecu  204 
million, Spain by Ecu 803 million, Ireland by Ecu 45 million,  Italy by Ecu 465 million, 
Portugal  by  Ecu  200 million  and  the  UK  by  Ecu  100 million.  Finland's  contributions 
would have been largely unchanged. 

Table  1 

Modifications  of  the  national  c o n t r i b u t i o ns  relative  to  the  present  s y s t em 
Proposal  applied  to  the  total  of  the  GNP  resource 
(adaptation of the GNP bases using the ECU index of GNP per head, in Ecu million and in per cent of 
total contributions) 

1 9 96 

Ecu million 

75.9 

134.9 

1105.6 

-155.4 

-551.1 

311.0 

-45.4 

-404.0 

38.2 

55.3 

102.3 

-152.2 

-6.7 

67.9 

-576.2 

0.0 

% 

2.7 

9.6 

5.2 

-13.8 

-11.9 

2.5 

-6.5 

-4.4 

23.5 

1.2 

5.4 

-17.6 

-0.7 

3.4 

-6.8 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1997 

Ecu million 

70.0 

178.6 

1043.4 

-204.1 

-803.9 

259.1 

-45.4 

-466.4 

47.9 

44.5 

102.0 

-199.3 

1.3 

71.1 

-98.9 

0.0 

% 
2.3 

11.6 

4.8 

-17.1 

-14.8 

1.9 

-6.4 

-5.3 

27.7 

0.9 

4.8 

-18.2 

0.1 

3.0 

-1.1 

1) The technicalities of the proposal result in these countries marginally benefiting from the operation of the 
progressivity mechanism even if their index of GNP per head is slightly above 100 (see section 4 of this Annex) 

Option B would clearly give the same results as option A but scaled in proportion to the 
part of the GNP base to which the "modulation coefficients"  are to apply. 

Table 2 presents results of the application  of the same adjustment  to the GNP base  after 
suppressing the VAT resource.  In this case, the suppression of the VAT resource and its 
replacement  by the progressive  GNP resource  results  in  larger differences  compared  to 
both  the  previous  simulation  and,  clearly,  to  the  present  system.  Finally,  it  is  not 
possible  to  simulate  the  third  option  since  it  would  be  necessary  to  determine  the 
"modulation coefficients"  for  each group  of Member  States.  Nevertheless, it  should  be 
clear  that  with  plausible  values  the  simulation  would  give  quantitative  results  not 
differing  substantially from those shown in Tables  1  and 2. 

7-10-1998 

- 4-

ANNEX 7 

The  implications  of  the  proposal  for  contributions  are  consistent  with  what  could  be 
predicted  a priori.  However, the fact  that under progressivity  there will be a  significant 
redistribution  of  the  burden  of  financing  EU  expenditure,  from  the  more  wealthy  in 
favour  to the  less wealthy  Member  States, cannot  constitute  a criticism  of the  proposal 
since,  indeed,  this  redistribution  is  its  fundamental  purpose.  The  proposal,  with  its 
prima  facie  appeal,  ought  to  be  examined  principally  in  terms  of  its  consistency  in 
relation to the predictions of economic theory as well as against its consistency with the 
practice of implementing progressivity in the EU through expenditure policies. 

Table  2 

Modifications  of  the  national  c o n t r i b u t i o ns  relative  to  the  present  system 
Proposal  applied  to  the  GNP  resource, VAT  resource  suppressed 

(adaptation of the GNP bases using the ECU index of GNP per head, in Ecu million and in per cent of 
total contributions) 

1996 

Ecu million 

31.0.4 

450.5 

2 034.4 

-445.2 

-1 396.9 

821.9 

-137.3 

-234.5 

89.4 

128.6 

263.8 

-432.9 

35.3 

323.7 

-1811.2 

0.0 

% 

10.9 

32.2 

9.6 

-39.7 

-30.2 

6.53 

-19.5 

--2.57 

55.0 

2.8 

13.9 

-49.9 

3.6 

16.1 

-21.3 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1997 

Ecu million 

% 

303.0 

493.7 

1 396.0 

-471.3 

-1 758.9 

504.3 

-117.6 

11.8' 

98.6 

115.3 

184.9 

-475.5 

39.5 

259.8 

-583.8 

0.0 

9.8 

32.1 

6.5 

-39.4 

-32.4 

3.8 

-16.5 

0.1 

56.9 

2.3 

8.6 

-43.4 

3.7 

11 

-6.3 

These  considerations  are  examined  in  the  next  two  sections.  Section  3  reviews  the 
argument  for the adoption of progressivity  for personal taxation, while section 4 reviews 
the argument  for the transposition of the concept of progressivity  from  personal  taxation 
to  the  Member  States'  contributions  to  the  EU  budget;  and  the  closing  section  5 
presents some final remarks. 

3.  A BRIEF REVIEW OF THE CONCEPT OF PROGRESSIVITY  IN PERSONAL TAXATION 

It  is 
The  concept  of  progressivity  is  well  known  in  the  optimal  taxation  literature. 
closely linked with the concept of equity.  The debate on equity in taxation has revolved 
around  two  doctrines,  the  benefit  doctrine  (taxes  should  be  paid  according  to  one's 
interests  in the public  estate)  and  the  ability  to pay  doctrine  (one  should  pay  according 

7-10-1998 

-  5 -

ANNEX 7 

to  her/his  means)2.  One  of  the  desirable  characteristics  of  the  tax  system,  argued  by 
Adam  Smith,  is  that  some  progressivity  is  desirable  (especially  for  income  from 
capital).  However, this was not subscribed to unanimously by benefit  theorists. 

The  ability  to  pay  doctrine  can  be  said  to  originate  with  John  Stuart  Mill3  and  his 
concept  of  "equality  of  sacrifice".  Mill,  concerned  about  the  disincentive  effect  of 
progressive  taxation,  argued  for  a proportional  taxation  of  income.  Having  stated  the 
equity  issue  in  terms  of  equal  sacrifice,. Mill  initiated  the  debate  concerning  equal 
absolute  and equal marginal sacrifice,  the  former  calling  for proportional  and the  latter 
for progressive taxation. 

Both  the  benefit  doctrine  and  the  ability  to  pay  doctrine  need  an  index  to  define 
inequality  among  individuals.  Since Adam  Smith,  the  emphasis  has traditionally  been 
on  the  income  and  wealth  base  (with  higher  taxation  concentrated  on  the  latter), but  a 
comprehensive  and  global  income  tax,  as  the  current  used  in  most  Member  States4, 
emerged only in this century.  However, a consumption base for taxation was also in the 
mind of several theorists beginning with Adam  Smith. 

Mirrlees'  (1971)  seminal  contribution  extended  further  the  analysis  of  these  issues5. 
Here, to ensure that vertical equity is respected,  a constraint is imposed so that the order 
of  the  gross  income  cannot  be  different  from  the  order  of  the  net  income.  The 
government  is  choosing  the  tax  schedule  that  maximises  social  welfare  subject  to  an 
exogenous state revenue requirement and the constraint.  Mirrlees concluded that, 

a  First,  "an  approximately  linear  income-tax  schedule,  with  all  the  administrative 
advantages  it would bring, is desirable"6.  This corresponds to proportional  taxation 
across  individuals.  This  is  not  contrary  to  the  desirability  of  progressivity. 
Progressivity  should  be  related  to  the  average  tax,  and  it  is  attained  as  long  as  the 

Curiously enough, Adam Smith, the father of the laissez-faire  doctrine, deserves credit for linking taxation to ability 
to  pay  (or,  in  our  context,  contributive  capacity)  but  tempering  it  by  a  benefit  principle.  The  importance  he 
attached  to  proportionality  is also worth  noting.  His  first  "maxim"  (The  Wealth of  Nations, G.  P.  Putnam's  Sons, 
New York,  1904, Vol. II, p. 310) reads: T he  subject of every  State  ought  to contribute  towards  the support  of  the 
government,  as  nearly  as  possible  in proportion  to  their  respective  abilities;  that  is  in  proportion  to  the  revenue 
which  they  respectively  enjoy under the protection  of the state. The  expense  of the  Government  to the  individuals 
of a great  nation, is like the expense  of  management  to the joint  tenants  of a great  estate, who  are  all obliged  to 
contribute  in  proportion  to  their  respective  interests  in  the  estate. 
In  the  observation  or  neglect  of  this  maxim 
consists  what  is  called  equality  or  inequality  of  taxation"  (italics  added).  Whether  this  is  more  supportive  of  the 
benefit principle or of the ability to pay principle is not easy to answer. 

See John Stuart Mill, Principles of Political Economy,  Collier and Son, New York, 1900. 

Scandinavian  countries  that  have  adopted  the  so-called  Dual  Income  Tax  are  a  notable  exception.  The  Dual 
Income  Tax  levies  more taxes on labour  income  than  capital  income  on  simple  efficiency  grounds  (labour  is  less 
mobile  than  capital).  For a discussion  of the  Dual  Income Tax  see  S.  Cnossen  (1998): Taxing  Capital  Income  in 
the  European  Union,  the  Case  for  Adopting  the  Dual  Income  Tax",  mimeo  presented  at  a  conference  on  Tax 
Competition  and Co-ordination of Tax  Policy  in the  European  Union" organised  by the Austrian  Federal  Ministry of 
Finance  in co-operation with the Austrian Institute of Economic  Research, Vienna, July 13-14. 

See  J.  A.  Mirrlees  (1971):  "An  Exploration  in  the  Theory  of  Optimum  Income  Taxation",  Review  of  Economic 
Studies, vol. 38, p. 175-208. 

Mirrlees  (1971):  op. cit., p. 208. 

7-10-1998 

ANNEX 7 

marginal  tax  rate  exceeds  the  average  one.  It  is, however,  clear  that  there  are  few 
arguments  in favour  of a strong progressivity of the tax system  in terms of a steeply 
increasing marginal tax rate78. 

a  Second, "the  income  tax  is a much  less effective  tool  for  reducing  inequalities  than 

has often  been thought"9. 

a  Third,  marginal  tax  rates  are  quite  low,  which  implies  a  reduced  use  of 

progressivity10. 

The  idea  that  relative  (among  individuals)  prosperity  must  be  an  element  in  the 
determination  of  the  tax  burden  is,  therefore,  confirmed  and  while  progressivity  is 
accepted, its "optimal" magnitude is lower than initially thought. 

The evolution of most European tax systems since the beginning of the  1970s appears to 
suggest  that  most  of  Mirrlees'  points  have  been  very  well  understood  and  widely 
adopted  in  public  policy.  Marginal  rates  on  personal  taxation  have  been  reduced 
dramatically  across  Europe  accompanied  by  a  widening  of  the  tax  base. 
Income 
redistribution has been pursued via targeted expenditure policy.  A lesson generally well 
understood  is that the more inelastic the labour supply is, the higher labour can be taxed, 
but  when  the  labour  supply  is  elastic  the  disincentives  contained  in  the  progressive 
income  tax  are  powerful.  Later  studies  in  this  area  have  further  confirmed  the 
robustness of Mirrlees' conclusions. 

4.  PROGRESSIVITY  OF  MEMBER  STATES  CONTRIBUTIONS  AND  ECONOMIC  AND 

SOCIAL COHESION 

When  taxpayers  are Member  States instead  of single  individuals  the  issues  at hand  are 
different.  A transposition  of the optimal taxation rule from the area of personal  taxation 
to  a  national  level  is  not  possible,  essentially  because  it  involves  the  problem  of 
aggregation  across  individuals.  Moreover,  it  is  not  even  clear  that  it  is  meaningful  to 
apply principles of personal taxation to national states as a whole. 

7 

10 

Mirrlees  (1971):  op.cit. obtained three technical results.  1) The marginal tax rate is always between zero and one; 
2) at the top  income  the marginal tax  rate is zero;  3) At the bottom, if the lowest  paid is working, the marginal  tax 
rate  is zero.  For  a thorough discussion  of the optimal non-linear  income  taxation  see  N. Stem  (1984):  "Optimum 
Taxation and Tax  Policy", IMF Staff Papers, Vol. 31,  no.2, June. 

M. Tuomala ("On the Optimal  Income Taxation, Some Further Numerical  Results" Journal  of Public  Economics 23, 
1984)  proved  that zero taxation  at the "top" applies  to an extremely  limited  subset  of  individuals  (much  less  than 
the last centile). Other interesting  numerical  results are also reported  in M. Tuomala  (1990):  Optimal Income Tax 
and Redistribution,  Clarendon  Press, Oxford. 

Mirrlees  (1971): op. cit., p. 208. 

Mirrlees  himself was surprised  by this result.  "I must confess that  I had expected  the  rigorous  analysis  of  income 
taxation in the utilitarian  manner to provide arguments for high tax rates.  It has not done so";  Mirrlees (1971):  op. 
cit., p. 207 

7-10-1998 

-7 

ANNEX 7 

In the EU, steps towards reducing the regressive elements of the own resources  system, 
in  accordance  with  the  Protocol  on  Economic  and  Social  Cohesion,  have  already  been 
put in place. 

This  Protocol  reads  "The  high  contracting  parties...NOTING  the  proposal  to  take 
greater  account  of  the  relative  prosperity  of  Member  States  in  the  system  of  own 
resources...DECLARE  their  intention  to  take  greater  account  of  the  contributive 
capacity of individual Member States in the system of own resources, and of  examining 
means of correcting, for  the less prosperous  Member States regressive elements  existing 
in the present own resource system" {italics added, capital letters in the original). 

The High  Contracting  Parties have, therefore,  established  through  this protocol  that  the 
proper  way  to  take  greater  account  of  the  Member  States'  relative prosperity  in  the 
system of own resources is by considering their contributive capacity and by  eliminating 
any regressive elements for  the less prosperous  Member States. 

Graph  1 

Actual GNP own resources payments in 1996, GNP  payments 
under the progressivity  proposal, index of GNP per head 

Ecus 
pro capita 

200 

150 

100 

50 

Index Of GNP 
per head 

400 

300 

200 

100 

L 

DK 

D 

A 

B 

S 

F 

NL  FIN 

I 

UK 

IRL 

E  GR 

P 

The  Own  Resource  Decision  of  31  October  1994,  which  transposes  into  law  the 
declaration  of  Protocol  15,  has  indeed  taken  greater  account  of  Member  States' 
contributive capacity by reducing progressively the VAT maximum rate (thus increasing 
the weight  of the  GNP resource)  and  has  corrected  the regressive  elements  for  the  less 
prosperous  Member  States  by  immediately  reducing  the maximum  VAT  share  to  50% 
of GNP  for the Cohesion Member  States.  Both measures are aimed  at making  Member 
States' contributions proportional to their GNP. 

7-10-1998 

- 8-

ANNEX 7 

Proportionality  of  contributions  to  Member  States'  GNP  ensures  at  the  same  time 
proportionality  with  GNP  contributions  per  head,  as  Graph  1 shows.  Substituting  for 
the  proportional  GNP  resource  a  progressive  one  means  tilting  payments  around  the 
average, imposing higher charges on those above and lower charges on those below  the 
average.  This raises several problems of technical and conceptual nature. 

>  Progressivity  is generally  achieved  by  differentiating  the tax rates which  taxpayers 
face,  but not by enlarging or restricting the base on which taxes' are levied.  This  is 
due to the need  to avoid  offending  the principle  of horizontal  equity  and to  respect 
the principle of base invariance  which guaranties respect of vertical equity.  On the 
contrary,  the  Spanish  proposal  to  use  Ecu  GNP  per  capita  as  the  coefficient  of 
progressivity  to  be  applied  to  the  GNP  shares,  amounts  to  achieving  progressivity 
by enlarging  or restricting  ones' base11 and leaving the rate (GNP call rate), at least 
in one variants of the proposal, equal  for  all.  Affecting the GNP bases amounts  to 
artificially  widening  the  differences  in  total  income  among  the Member  States. 
Two  Member  States  with  the  same  "true" GNP  base will  appear  to  have  different 
"fictitious" bases.  Clearly, determining contributions by the adjusted bases would 
offend horizontal equity. 

>  The  resulting  adjustment  in  the  base  is  not  without  other,  more  significant, 
consequences.  Since the weights used in the construction of the new GNP bases are 
GNP per head, the weighted sum of the  GNP base on which the  GNP resource  is 
levied  will  not  be  equal,  except  by  coincidence,  to  the  unweighted  sum  of  the 
original  GNP base.  Furthermore, it is inevitable that the adjusted  GNP base will be 
greater than the original one since the richer Member States are invariably the larger 
ones too.  For  example, in  1997 the original  GNP base is estimated  at Ecu  70  202 
million;  the weighted  GNP base becomes  Ecu  73 418 million.  As a result  of this, 
and given the fixed  amount to be financed  through the GNP resource, the  GNP call 
rate  is  lower  than  the  original  one -  in  1997 the  original  one was  0.403  and  the 
one  obtained  from  the  adjusted  base  is  0.385.  The  implicit  reduction  in  the  GNP 
call rate implies that those Member States with an index of GNP per capita less than 
100 (the  EU average)  will  see their  contributions  on the GNP resource  reduced  by 
the  influence  of  two  effects,  first,  the  reduction  in  the  base  as  a  result  of  the 
adjustment  and,  second,  a  reduction  due  to  the  fall  in  the  call  rate.  The  richer 
Member  States  with  per  capita  GNP  higher  than  100, on  the  other  hand,  will  see 
their  increased  contributions  somewhat  compensated  by  the  reduction  in  the  GNP 
call  rate.  One  of  the  clear  difficulties  of  the  proposal  is  those  Member  States 
around  the  EU  average  may  see  their  GNP  contributions  fall,  compared  to  the 
present  regime,  if  the  increase  in  the  GNP  base  is  more  than  compensated  by  a 
reduction in the GNP call rate.  This occurs in the case of Finland and the UK in the 
years reported in Table  1  and in Table 2 below. 

11 

It would be as if the taxable base of the affluent  (poor) taxpayers would be multiplied by a coefficient  higher than 1 
because  of  their  affluence  (poverty)  and  this  would  widen  the differences  between  taxpayers  beyond  reality.  To 
the  best of  our  knowledge, there  are  no significant  examples  of this  type  of  procedure for  income  taxation  in  any 
fiscal code. 

7-10-1998 

- 9-

ANNEX 7 

>  Substituting  proportionality  with  respect  to  the  GNP  resource  with  progressivity 
may not necessarily foster real convergence and economic and social cohesion. 

•  Whether progressivity  in budgetary  contributions  is an efficient  way to achieve 
economic  convergence  is  an  open  question.  Solidarity  and  convergence 
policies  in the  EU take  the  form  of  a common  effort  to  improve  the  structural 
endowment  of the less prosperous  regions, not  of money redistribution.  These 
EU  policies  direct  aid  to  less  wealthy  Member  States  in  areas  where 
development  needs  and  convergence  gaps  are  greatest.  The  EU  contributes 
significantly  through its Structural Funds and through many of its other policies 
to improving the level of infrastructure,  education, and scientific  research in the 
less prosperous  regions  and  Member  States.  This  differs  significantly  in both 
political  and  economic  terms  from  forms  of  financial  redistribution  like,  for 
instance, the  "Finanzausgleich" mechanism  existing  in the Federal Republic  of 
Germany,  which  require  as  political  background  a  much  greater  sense  of 
solidarity and common purpose than currently present in European integration. 

• 

If solidarity were to take the form  of redistributing  moneys, and assuming  that 
present-consumption  and  future  consumption  (investment)  are normal  goods12, 
it is certain that  aid would  be partly  used  to  finance  current  consumption.  By 
implementing  redistribution  on  the  expenditure  side,  this  potential  "waste" is 
minimised.  Policy  financing  rather  than  money  redistribution  is  presumed  to 
be  a  superior  way  to  ensure  that  solidarity  and  real  convergence  are  pursued 
both  consistently  and  efficiently  and  that  money  is  channelled  towards 
investment, rather than consumption, thus increasing the recipients' growth rate 
and reducing development gaps. 

•  Progressivity  could  foster  convergence,  ceteris  paribus,  if  the  funds  made 
available  were  to  supplement  existing,  expenditure  based,  convergence 
expenditure.  However,  it  is  possible  that  those  Member  States,  who  have 
prominently  displayed  what might  be called  "contributions  fatigue"  (Germany, 
the Netherlands, Austria and Sweden) may not  accept a further  deterioration  of 
their budgetary  position, but  instead  they  demand  a corresponding  decrease  of 
expenditure  policy  to  offset  the  money  made  available  to  benefiting  Member 
States  through  progressivity  in  contributions.  Under  these  circumstances,  the 
convergence  process  could  undoubtedly  be  retarded  since  a part  of the  newly 
available funds will be spent on current  consumption. 

>  The  present  system  of  expenditure-based  progressivity  may  be  thought  of  as  a 
rules-based  system  in which  convergence  expenditure  is "tied" to  specific  projects 
and  to  explicit  financial  and  other  procedures  and  parameters.  A  system  of 

12  Normal  goods  are  those  whose  consumption  increases  as  income  increases.  This  means  that  for  a  given  Ax 
increase  in  income  a  proportion  aAx  is  spent  in  good  X  and  the  remaining  (1-a)Ax  is  spent  for  good  Y,  where 
0<a<1. 

7-10-1998 

-  10-

ANNEX 7 

progressive  contributions  would  introduce  a  degree  of  discretion  in  convergence 
policy which structural expenditure has so far not possessed. 

A  prediction  of  economic  theory  is  that  policy  implementation  characterised  by 
discretion  leads to suboptimal  macroeconomic  outcomes  compared  to policy based 
on rules13.  Although this prediction was initially restricted to the study of monetary 
policy,  its applicability  is more general  and  can be readily  applied  to  the  questions 
under  review.  The  sub-optimality  has  much  to  do  with  myopic  behaviour  on  the 
part  of  those  responsible  for  the  policy-making  as  well  as  with  pressures  arising 
from  electoral  cycles  in  democratic  societies;  with  the  possibility  that  under 
discretionary  conditions  policy  makers  may  pursue  objectives  in  addition  to,  or 
even  other  than,  those  consistent  with  maximising  social  welfare;  and  with  the 
possibility  that  they  may  even  make  systematic  errors  in  their  assessment  of  the 
economic  situation  and  in  deciding  the  appropriate  policy.  Rules,  by  contrast, 
introduce  predictability  and  certainty  about  the  future  course  of  policy  and  they 
minimise  the interference  of political  concerns with the optimal policy.  Moreover, 
rules  enforce  time consistency  in policy by  ensuring  that the optimal  policy  over a 
given horizon is not revised halfway  in favour of a sub-optimal policy. 

Pursuing the objective  of real convergence, financed  through the taxes of  European 
citizens,  requires  an  unwavering  commitment 
This 
commitment  cannot  be  ensured  under  a  regime  of  discretionary  spending  for  the 
same  reasons  that  it  cannot  be  guaranteed  (indeed,  the  opposite)  in  a  regime  of 
discretionary monetary or fiscal policy. 

to  dedicated  policies. 

>  An important  component  of expenditure-based  progressivity  as practised  in the EU 
is  the  multilateral  surveillance  and  monitoring  function  performed 
in  a 
framework  where  both  benefiting  Member  States  and  the  EU  through  the 
Commission  agree  on  the  Community  Support  Framework  (CSF)  and  its 
implementation.  One  reason  for  this  framework  is  to  provide  a  surveillance  and 
monitoring  function  ensuring, however successfully,  that convergence  aid  is indeed 
used  as intended.  This provides  a guarantee  to the taxpayers of Europe  concerning 
the  use  of  convergence  aid.  The  involvement  of  recipient  Member  States  is 
intended  to  respect  subsidiarity  in  that  it  acknowledges  that  recipient  Member 
States  are  in the best  position  to propose projects  and to judge  the  appropriateness 
of convergence expenditure.  Under pfogressivity-related  discretionary  expenditure, 
this surveillance and monitoring function  would be lost. 

13  The  debate  about  rules  versus  discretion  in  economic  policy,  which  has  been  particularly  applied  to  monetary 
policy,  was  initiated  by  F.  Kydland  and  E.  Prescott  (1977):  "Rules  rather  than  Discretion:  The  Inconsistency  of 
Optimal  Plans", Journal  of Political Economy, June, p. 473-491;  the  model was further  refined  in  R.  Barro and D. 
Gordon  (1983):  "A  Positive  Theory  of  Monetary  Policy  in  a  Natural-Rate  Model",  Journal  of  Political  Economy, 
August,  p.  589-610.  This  literature  is  now large;  see finally,  as  an example, A. Alesina  and  L.  Summers  (1993): 
"Central  Bank  Independence  and  Macroeconomic  Performance",  Journal  of  Money,  Credit  and  Banking,  vol. 25, 
no. 2, May. 

7-10-1998 

- 1 1-

ANNEX 7 

>  A  final  issue  relates  to  the  character  of  solidarity  in  the  EU.  The  objective  of 
solidarity  and real  convergence  has  a horizontal  dimension  and  is pursued  through 
transfers  to regions, irrespective of whether they are in the more or the less wealthy 
Member  States.  By  contrast,  the proposal  under  review  would  establish  a  vertical 
dimension  in  solidarity  and  convergence  assistance,  directing  it  to  Member  States 
themselves  rather  than  to regions  within  Member  States.  This  is inconsistent  with 
the present acquis in Community practice. 

5.  CONCLUDING  REMARKS 

While  the  proposal  to  establish  progressivity  in  the  EU  contributions  system  is  prima 
facie appealing, it has nevertheless some significant  drawbacks. 

First,  it  does  not  respect  horizontal  equity.  This  arises  from  the  fact  that,  instead  of 
calculating  contributions  according  to  the  true  GNP  bases,  it  proposes  to  establish 
contributions  on  different  bases,  which  correspond  to  an  artificial  expansion  or 
reduction  of  the  true  GNP  bases.  No  tax  system  in  the  world  knows  this  procedure. 
Progressivity  in  national  tax  systems  is  pursued  through  differential  tax  parameters 
without  affecting  the  tax  base.  Furthermore,  in  the  case  of  financing  the  EU  the  base 
adjustment  can have  other unwarranted  effects  for those Member  States  around  the  EU 
average in GNP per capita terms. 

Second, the proposal  disregards the importance and the virtue of practising  solidarity  in 
the  Community through  the  expenditure  side of the EU budget  rather  than  through  the 
equivalent  of  simple  cash  transfers.  Expenditure-based  progressivity  enhances  the 
probability  of  allocating  expenditure  for  the  purpose  of  real  convergence,  as  intended, 
rather  than  for  the  purpose  of  present,  and  possibly  future,  consumption.  Thus,  the 
present, rules-based,  system produces, in principle, superior convergence outcomes  than 
the proposed  alternative. 

Third, the  present  system  provides  ex  ante  assurance  to  the  taxpayers  of  the  EU  who 
finance  convergence  expenditure  that  the  funds  are  indeed  used  for  the  intended 
purpose. 

Finally,  the  proposal  implies  higher  gross budgetary  contributions  from  those  Member 
States already  voicing  concerns  about  their budgetary  burden  under the present  system. 
One possible  outcome would  be that the proposal  could be acceptable  to these  Member 
States  if  there  is  a  corresponding  and  offsetting  reduction  in  structural  expenditure. 
Under  these  circumstances,  this  will  inhibit  progress  in  cohesion  and  solidarity  in  the 
short run  and  in the long run  it reduce  the real  convergence  prospects  of the  benefiting 
Member States. 

• 

7-10-1998 

ANNEX 8 

Statistical Annex 

Table 1a 

EU expenditure  in the  Member States: FEOGA Guarantee1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

1 374.2 

1 168.0 

% 
4.3 

3.6 

Mecus 

1 286.5 

1 318.3 

4 817.6 

15.0 

4 901.9 

2 237.4 

3 668.3 

6 924.7 

7.0 

2 710,2 

11.4 

21.6 

4 172.7 

8 072.6 

B 

DK 

D 

GR 

E 

F 

IRL 

1 435.6 

4.5 

1 635.8 

5151.4 

16.1 

4 825.4 

1.0 

2 380.6 

0.0 

7.4 

7.3 

2 324.8 

% 
3.7 

3.8 

14.2 

7.9 

12.1 

23.4 

4.7 

14.0 

0.0 

6,7 

Mecus 
1174.4 

1 287.9 

% 
3.5 

3.8 

Mecus 
1 623,4 

1 403.6 

5 271.6 

15.7 

5 385.1 

2 723.5 

4 426.9 

8 048.8 

1  527.1 

8.1 

2 425.5 

13.2 

24.0 

4.5 

4 575.0 

8 423.3 

1  419.7 

3 481.4 

10.4 

3 390.7 

12.7 

1 935.9 

0.0 

5.8 

14.4 

1 944.6 

476.0 

1.5 

478.1 

1.4 

713.3 

2.1 

2 459.4 
32 094.1 

7.7 
100.0 

2 762.8 
34 496.4 

8.0 
100.0 

3 001.9 
33 605.3 

8.9 
100.0 

87.5 

708.1 

63.3 

76.5 

2 955.9 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

% 
4.7 

4.1 

15.6 

7.0 

13.3 

24.4 

4.1 

9.8 

0.0 

5.6 

0.3 

2.1 

0.2 

0.2 

8.6 

Mecus 

1 152.8 

1 358.4 

% 
2.9 

3.5 

Mecus 
983.4 

1 235.7 

% 
2.4 

3.0 

6050.3 

15.5 

5 778.4 

14.2 

2 801.6 

7.2 

2 730.8 

4 054.6 

9 572.3 

10.4 

24.5 

4 605.6 

9 149.0 

1 700.0 

4.4 

2 034.0 

4 231.3 

10.8 

5 090.8 

20.0 

1 536.2 

1  214,1 

646.0 

649.2 

624.1 

3 470.0 

0.1 

3.9 

3.1 

1.7 

1.7 

1.6 

8.9 

22.8 

1 757.3 

861.3 

656.9 

570.6 

747.0 

6.7 

11.3 

22.5 

5.0 

12.5 

0.1 

4.3 

2.1 

1.6 

1.4 

1.8 

4 399.7 

10.8 

34496.6 

100.0 

39 080.9 

100.0 

40 623.2 

100.0 

1) Heading  1 of the Financial Perspective  (Subsection B1 of the Community Budget). 

Table 1b 

EU expenditure  in the  Member States: Structural  Operations1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

236,1 

66:6 

2 096,6 

1811.3 

3 704.9 

1 664.7 

1 075.2 

% 
1.4 

0.4 

12.5 

10.8 

22.1 

9.9 

6.4 

2  196.9 

13.1 

13,4 

136.3 

0.1 

0,8 

Mecus 
236.0 

119.2 

1 939.4 

2 261.7 

3 743.8 

1891.0 

1 255.2 

3 585.9 

15,8 

223.7 

% 
1.2 

0.6 

10.0 

11.7 

19.4 

9.8 

6.5 

Mecus 
266.0 

127.3 

2 041.8 

2 034.0 

3 221.8 

1  413.6 

794.5 

18.6 

1 494.4 

0.1 

1.2 

13.9 

274.6 

% 
1.7 

0.8 

13.0 

13.0 

20.6 

9.0 

5.1 

9.5 

0.1 

1.8 

2 316.0 

13.8 

2711.4 

14.0 

2 252.2 

14.4 

1 462.7 
16 780.8 

8.7 
100.0 

1 325.7 
19 308.8 

6.9 
100.0 

1728,0 
15 661.9 

11.0 
100.0 

Mecus 

236.1 

120.4 

2130.1 

1  969.1 

6101.7 

1 283.3 

1  069.1 

% 
1.2 

0.6 

11.1 

10.3 

31.9 

6.7 

5.6 

Mecus 

437.0 

103.7 

% 
1.8 

0.4 

Mecus 

357.9 

169.6 

3 423.9 

14.0 

3 636.0 

2 221.9 

9.1 

2 643,7 

6 304.8 

25.8 

6 376.8 

1 958.7 

1 189,3 

8.0 

4.9 

2 460.3 

1211.2 

% 
1.4 

0.7 

14.0 

10.2 

24.5 

9.4 

4.7 

1 926.9 

10.1 

3 037.1 

12.4 

2 895.0 

11.1 

16.9 

231.8 

175.1 

0.1 

1.2 

0.9 

15.2 

262.4 

270,6 

0.1 

1.1 

1.1 

19.9 

421.3 

364.0 

0.1 

1.6 

1.4 

2 485.4 

13.0 

2 941.3 

12.0 

2 941.5 

11.3 

173.8 

125.6 

1 103.6 

0.9 

0.7 

5.8 

155.9 

132.7 

1 963.9 

0.6 

0.5 

8.0 

379.9 

230.6 

1 928.9 

1.5 

0.9 

7.4 

19 149.0 

100.0 

24 418.4 

100.0 

26 036.7 

100.0 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 
s 
UK 

Total 

1) Heading 2 of the Financial  Perspective. 

7-10-1998 

2-

ANNEX 8 

Table  1c 

EU expenditure  in the  Member  States: Internal  policies1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 
348.6 

75.3 

437.7 

260.5 

139.8 

% 
10.5 

2.3 

13.1 

7.8 

4.2 

510.6 

15.3 

58.6 

1.8 

654.0 

19.6 

38.7 

173.0 

1.2 

5.2 

Mecus 
414.1 

101.6 

475.3 

124.7 

271.1 

466.9 

63.7 

656.3 

51.5 

187.7 

% 
11.8 

2.9 

13.6 

3.6 

7.7 

13.3 

1.8 

18.8 

1.5 

5.4 

Mecus 
458.8 

89.4 

512.9 

97.6 

216.3 

520.3 

76.4 

364.6 

69.9 

248.0 

% 
14.0 

2.7 

15.6 

3.0 

6.6 

15.8 

2.3 

11.1 

2.1 

7.5 

159.0 

4.8 

162.4 

4.6 

84.2 

2.6 

478.6 
3 334.3 

14.4 
100.0 

524.4 
3 499.8 

15.0 
100.0 

547.5 
3 285.8 

16.7 
100.0 

Mecus 
439.4 

82.9 

% 
13.5 

2.5 

Mecus 

524.8 

122.7 

% 
12.6 

2.9 

493.7 

15.2 

614.6 

14.8 

106.4 

195.0 

3.3 

6.0 

152.0 

275.6 

3.7 

6.6 

486.5 

15.0 

579.8 

13.9 

78.3 

2.4 

96.9 

2.3 

344.7 

10.6 

496.6 

11.9 

75.5 

210.4 

53.7 

99.6 

37.7 

67.3 

480.7 

2.3 

6.5 

1.7 

3.1 

1.2 

.2.1 

14.8 

88.2 

265.8 

58.7 

103.0 

69.9 

108.0 

2.1 

6.4 

1.4 

2.5 

1.7 

2.6 

606.9 

14.6 

Mecus 

492.5 

137.2 

726.7 

163.7 

296.2 

604.9 

105.7 

528.1 

75.6 

341.9 

78.2 

190.2 

88.7 

127.7 

716.8 

% 
10.5 

2.9 

15.5 

3.5 

6.3 

12.9 

2.3 

11.3 

1.6 

7.3 

1.7 

4.1 

1.9 

2.7 

15.3 

3 251.9 

100.0 

4163.4 

100.0 

4 674.0 

100.0 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1) Heading 3 of the Financial Perspective. 

Table  1d 

Operational  expenditure  in the  Member  States1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 
1958.9 

1 309.8 

% 
3.8 

2.5 

Mecus 
1 936.6 

1  539.1 

% 
3.4 

2.7 

Mecus 
1 899.2 

1 504.5 

% 
3.6 

2.9 

Mecus 
2 298.9 

1 606.9 

% 
3.9 

2.7 

Mecus 
2114.5 

1 584.8 

% 
3.1 

2.3 

Mecus 
1 833.8 

1 542.4 

7 351.9 

14.1 

7 316.7 

12.8 

7 826.3 

14.9 

8 008.9 

13.7 

10 088.8 

14.8 

10141.1 

4 309.2 

8.3 

5 096.7 

9.2 

4 501.0 

7 513.1 

9 100.0 

2 569.4 

8 002.3 

53.1 

2 689.9 

14.4 

17.4 

4.9 

15.3 

0.1 

5.2 

8187.6 

10 430.5 

8.9 

14.3 

18.2 

4 855.0 

7 865.0 

9 982.7 

2 954.7 

5.2 

2 398.0 

9 067.6 

15.8 

5 340.4 

74.6 

2 736.2 

0.1 

4.8 

96.5 

2 458.4 

15.0 

19.0 

4.6 

10.2 

0.2 

4.7 

2 951.0 

5.7 

3 351.9 

5.8 

3 049.6 

5.8 

4 400.6 
52 209.2 

8.4 
100.0 

4 612.9 

57 305.0 

8.0 
100.0 

5 277.4 
10.0 
52 553.1  100.0 

10 871.7 

10193.2 

2 567.1 

5 662.3 

106.8 

2 386.9 

899.3 

3 293.0 

750.8 

757.5 

4 540.1 

7.7 

18.6 

17.4 

5175.5 

7.6 

5 538.2 

10 635.0 

15.6 

11278.6 

12110.8 

17.7 

12 214.2 

4.4 

9.7 

0.2 

4.1 

1.5 

5.6 

1.3 

1.3 

7.8 

2 986.2 

7 765.0 

123.4 

2 064.3 

1 649.4 

3 690.3 

1038.0 

1296.8 

6 040.8 

4.4 

11.4 

0.2 

3.0 

2.4 

5.4 

1.5 

1.9 

8.8 

3 350.9 

8 514.0 

11.9 

118.3 

2 520.4 

1 374.6 

3 788.6 

1 104.2 

1 181.3 

7 045.4 

0.2 

3.5 

1.9 

5.3 

1.5 

1.7 

9.8 

58 444.5 

100.0 

68 363.7 

100.0 

71 545.9 

100.0 

1)Table 1d equals the sum of tables 1a, 1b, 1c plus the budgetary compensation for the new Member States 

7-10-1998 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

% 
2.6 

2.2 

14.2 

7.7 

15.8 

17.1 

4.7 

3-

ANNEX 8 

Table  1e 

EU expenditure  in the Member  States: Administrative  expenditure1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 
1 504.4 

% 
58.9 

20.4 

84.0 

7.7 

23.0 

74.0 

12.8 

45.9 

0,8 

3.3 

0.3 

0.9 

2.9 

0.5 

1.8 

696.6 

25.5 

27,3 

1.0 

Mecus 
1791.4 

24.3 

100.0 

9.1 

27.4 

88.1 

15.2 

54.7 

% 
58.9 

Mecus 

2 062.6 

% 
65.6 

Mecus 
2 099.4 

0.8 

3.3 

0.3 

0.9 

2.9 

0.5 

1.8 

28.3 

74.4 

11.1 

24.7 

102.9 

8.8 

53.2 

0.9 

2.4 

0.4 

0.8 

3.3 

0.3 

1.7 

33.5 

116.9 

12.3 

26.7 

143.5 

11.2 

78.7 

% 
61.5 

1.0 

3.4 

0.4 

0.8 

4.2 

0.3 

2.3 

Mecus 

2 052.2 

% 
58.5 

Mecus 
2 217.1 

% 
60.4 

31.9 

125.6 

11.5 

26.5 

174.9 

11.4 

87.2 

0.9 

3.6 

0.3 

0.8 

5.0 

0.3 

2.5 

31.9 

132.7 

12.0 

25.0 

190.6 

12.8 

91.8 

0.9 

3.6 

0.3 

0.7 

5.2 

0.3 

2.5 

829.4 

27.3 

676.4 

21.5 

754.9 

22.1 

825.0 

23.5 

777.8 

21.2 

30.4 

1.0 

24.6 

0.8 

12.8 

0.5 

15.2 

0.5 

10.9 

0.3 

45.7 
2 552.4 

1.8 
100.0 

54.4 

3 039.3 

1.8 
100.0 

66.0 
3143.8 

2.1 
100.0 

41.5 

3.0 

13.0 

2.6 

3.1 

72.3 

1.2 

0.1 

0.4 

0.1 

0.1 

2.1 

39.4 

11.1 

11.2 

14.0 

15.7 

71.6 

1.1 

0.3 

0.3 

0.4 

0.4 

2.0 

41.0 

12.2 

11.0 

13.8 

15.3 

83.9 

1.1 

0.3 

0.3 

0.4 

0.4 

2,3 

3 412.6 

100.0 

3 509.0 

100.0 

3 669.1 

100.0 

1) Heading 5 of the Financial Perspective. 

Table  1f 

1992 

1993 

Total  EU expenditure1 
1995 

1994 

1996 

1997 

Mecus 
3 463.3 

1 330.3 

% 
5.9 

2.3 

Mecus 

3 728.0 

1 563.4 

% 
5.8 

2.4 

Mecus 
3 961.8 

1 532.8 

% 
6.6 

2.5 

Mecus 
4 398.3 

1 640.4 

% 
6.6 

2.5 

Mecus 
4166.8 

1  616.7 

% 
5.4 

2,1 

Mecus 

4 050.9 

1 574.4 

7 435.9 

12.7 

7 416.7 

11.6 

7 900.6 

13.1 

8 125.7 

12.1 

10 214.4 

13.3 

10273.8 

4 316.9 

7 536.0 

9 174.1 

2 582.2 

7.4 

12,9 

15.6 

4.4 

5 105.8 

8.0 

4 866.2 

8.1 

4 513.4 

8 215,0 

12.8 

7 889.7 

10518.7 

16.4 

10 085.6 

13.1 

16.7 

10 898.4 

10 336.7 

2 969,9 

4.6 

2 406.8 

8 048.2 

13,7 

9  122.3 

14.2 

5 393.5 

749.7 

2 715.4 

1.3 

4.6 

904.0 

2 766.6 

1.4 

4.3 

772.9 

2 483.1 

4.0 

8.9 

1.3 

4.1 

2 963.8 

5.1 

3 367.1 

5.2 

3 060.5 

5.1 

4 446.4 
54 761.7 

7.6 
93.4 

4 667.3 

60 344.3 

7.3 
94.1 

5 343.4 
55 696.9 

8.9 
92.4 

6,7 

16.3 

15.5 

3.9 

8.6 

1.3 

3.6 

1.3 

4.9 

1.1 

1,1 

6.9 

5 187.0 

6.7 

5 550.2 

10 661.5 

12 285.7 

2 997.7 

13.9 

16.0 

3.9 

11303.6 

12 404.8 

3 363.7 

7 852.2 

10.2 

8 605.8 

948.4 

2103.7 

1 660.5 

3 701.4 

1 052.0 

1312,5 

6112.4 

1.2 

2.7 

2.2 

4.8 

1.4 

1.7 

8.0 

896.1 

2 561.4 

1 386.8 

3 799.6 

1118.0 

1  196.6 

7 129.3 

2 578.3 

5 741.0 

861.7 

2 428.3 

902.3 

3 306.0 

753.4 

760,7 

4 612.4 

61  857.1 

92.5 

71 872.7 

93.5 

75 214.9 

93.7 

Non-EU2 

3 864.7 

6.6 

3 807.5 

5.9 

4 607.8 

7.6 

5 043.9 

7.5 

4 993.9 

6.5 

5 021.5 

6.3 

Total 

58 626.4 

100.0 

64152.2 

100.0 

60 304.8 

100.0 

66 901.0 

100.0 

76 866.6 

100.0 

80 236.4 

100.0 

1) Heading  1 -  Heading 7 of the Financial Perspective  (the flows taken into account are those which actually took 
place during the year, i.e. appropriations  used in a given financial year  and those carried over from year n-1), 
not included is the cash balance at the end of a period. 2) Expenditure  made outside the EU, guarantees and 
reserves  plus some minor amounts which cannot be allocated. 

7-10-1998 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 
s 
UK 

Total 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Tot.  EU 

% 
5.0 

2.0 

12.8 

6.9 

14.1 

15.5 

4.2 

10.7 

1.1 

3.2 

1.7 

4.7 

1.4 

1.5 

8.9 

4-

ANNEX 8 

Table 2a 

Payments to the EU budget: Traditional own resources1 

1992 

1993 

1994 

1995 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

1996 

Mecus 

887.1 

272.9 

6.7 

2.1 

873.7 

260.5 

6.7 

2.0 

958.5 

275.7 

7.2 

2.1 

1003.5 

286.4 

6.9 

2.0 

985.9 

265.6 

1997 

19982 

% 

7.3 

2.0 

Mecus 

1048.9 

288.6 

Mecus 

1 079.6 

293.9 

7.4 

2.0 

19992 

Meuros 

I  % 

7.9 

2.1 

1128.6 

287.4 

8.2 

2.1 

3928.9 

29.6 

3894.0 

30.0 

3872.7 

29.2 

3 879.9 

26.8 

3500.2 

25.8 

3432.5 

24.2 

3280.8 

23.9 

3216.2 

23.3 

173.4 

775.1 

1.3 

5.8 

176.5 

597.7 

1.4 

4.6 

150.3 

592.7 

1.1 

4.5 

152.2 

727.1 

1.1 

5.0 

149.8 

622.6 

1.1 

4.6 

163.7 

631.7 

1.1 

4.5 

167.5 

1.2 

695.4 

5.1 

161.4 

709.5 

1.2 

5.1 

1680.4 

12.7 

1 695.2 

13.1 

1683.0 

12.7 

1711.4 

11.8 

1542.6 

11.4 

1550.8 

10.9 

1566.5 

11.4 

1546.8 

11.2 

156.2 

1  318.1 

15.2 

1.2 

9.9 

0.1 

186.0 

1134.4 

15.2 

1.4 

8.7 

0.1 

219.0 

1155.2 

18.1 

1.7 

8.7 

0.1 

228.1 

1 186.0 

19.9 

1.6 

8.2 

0.1 

206.7 

1-5. 

224.7 

1.6 

220.2 

1047.5 

18.3 

7.7 

0.1 

1120.4 

22.0 

7.9 

0.2 

1 103.8 

20.8 

1.6 

8.0 

0.2 

214.9 

1 205.6 

19.9 

1.6 

8.7 

0.1 

1  455.1 

11.0 

1 470.8 

11.3 

1546.9 

11.7 

1663.7 

11.5 

1609.3 

11.8 

1 728.5 

12.2 

1 597.4 

11.6 

1589.3 

11.5 

209.4 

1.6 

188.2 

1.5 

202.8 

1.5 

221.9 

205.8 

137.1 

351.3 

1.5 

1.4 

0.9 

2.4 

263.8 

135.6 

151.8 

1.9 

1.0 

1.1 

254.4 

155.1 

144.3 

1.8 

1.1 

1.0 

257.2 

160.2 

1.9 

1.2 

138.8 

1.0 

383.5 

2.8 

362.9 

2.6 

365.9 

2.7 

273.2 

167.7 

128.8 

381.5 

2.0 

1.2 

0.9 

2.8 

2408.3 

18.1 

2493.2 

19.2 

2 577.2 

19.5 

2678.8 

18.5 

2700.2 

19.9 

3043.9 

21.5 

2 795.1 

20.3 

2 784.2 

20.2 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

13 280.2  100.0 

12985.5  I  100.0  I  13 252.2  I  100.0 

14453.2  100.0 

13 583.6  100.0 

14172.3  100.0 

13 743.2  100.0 

13 814.9  100.0 

1) Customs duties, agricultural duties and sugar levies after deduction of the collection fees. 

2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 

7-10-1998 

- 5-

ANNEX 8 

Table 2b 

Payments to the EU budget: VAT own resource  1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

19982 

Mecus 

19992 

Meuros 

I  % 

982.8 

2.8 

910.0 

2.6 

1121.6 

3.4 

1 143.4 

2.9 

951.5 

2.6 

537.0 

1.5 

558.9 

1.6 

580.3 

1.8 

691.7 

1.8 

619.3 

1.7 

907.0 

616.3 

2.6 

1.8 

851.3 

2.6 

569.7 

1.7 

782.5 

529.9 

2.6 

1.7 

10 329.2 

29.7 

9 897.4 

28.5 

11419.9 

34.4 

12 862.1 

32.9 

10 885.4 

29.8 

10 009.9 

29.1 

8 786.0 

26.8 

8 079.0 

26.6 

431.1 

3082.5 

1.2 

8.9 

568.8 

1.6 

535.2 

1.6 

584.4 

1.5 

556.1 

1.5 

552.3 

2 965.1 

8.5 

2 469.6 

7.4 

2 058.9 

5.3 

2 327.5 

6.4 

2 576.3 

1.6 

7.5 

541.8 

1.7 

467.6 

2 226.4 

6.8 

2 082.3 

1.5 

6.9 

6585.6 

18.9 

6 018.9 

17.4 

6 633.4 

20.0 

7 216.5 

18.4 

6452.3 

17.7 

6282.3 

18.3 

5 663.6 

17.3 

5 192.7 

17.1 

233.9 

0.7 

258.8 

0.7 

277.1 

0.8 

321.0 

4 857.1 

14.0 

5 593.8 

16.1 

3 725.7 

11.2 

3 377.2 

83.9 

1 553.7 

0.2 

4.5 

106.3 

1 624.7 

0.3 

4.7 

95.6 

1 648.5 

0.3 

5.0 

487.5 

1.4 

477.1 

1.4 

689.5 

2.1 

109.0 

1 887.3 

1 105.6 

488.2 

529.2 

891.3 

0.8 

8.6 

0.3 

4.8 

2.8 

1.3 

1.4 

2.3 

315.1 

0.9 

250.8 

0.7 

279.5 

0.9 

265.8 

0.9 

4450.0 

12.2 

3 447.6 

10.0 

3 661.2 

11.2 

3 390.0 

11.2 

89.7 

1 663.5 

947.2 

465.7 

444.8 

900.6 

0.2 

4.6 

2.6 

1.3 

1.2 

2.5 

82.5 

1  681.2 

1 035.6 

530.3 

469.5 

1 084.7 

0.2 

4.9 

3.0 

1.5 

1.4 

3.2 

75.8 

1549.1 

894.3 

431.9 

421.9 

0.2 

4.7 

2.7 

1.3 

1.3 

70.0 

1 439.8 

825.3 

413.5 

389.4 

0.2 

4.7 

2.7 

1.4 

1.3 

861.8 

2.6 

816.2 

2.7 

5 938.6 

18.1 

5 630.2 

18.5 

5598.7 

16.1 

5 709.4 

16.5 

4 021.4 

12.1 

5 861.6 

15.0 

5466.5 

15.0 

4 825.3 

14.0 

34763.2  100.0 

34689.3  100.0 

33 217.9  100.0 

39127.3  100.0 

36 535.0  100.0 

343515  100.0 

32 752.8  100.0 

30 374.2  100.0 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1)  VAT own resources payments at the uniform rate (excluding the UK correction); balances of VAT own resources 

for previous years are included. 

2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 

7-10-1998 

ANNEX 8 

Table 2c 

Payments to the EU budget: GNP own resource  1 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

255.5 

3.1 

154.0 

1.9 

484.7 

306.0 

3.0 

1.9 

636.8 

374.7 

3.6 

2.1 

467.4 

275.9 

3.3 

1.9 

693.2 

3.3 

408.5 

1.9 

917.9 

538.2 

3.4 

2.0 

1998 

Mecus 

1090.6 

714.2 

19992 

Meuros 

I  % 

3.0 

2.0 

1 243.6 

825.4 

3.0 

2.0 

2 188.1 

26.8 

4 617.2 

28.1 

5 537.3 

31.4 

4 243.9 

29.9 

5 745.3 

27.3 

7 281.3 

27.1 

9 208.4 

25.6 

10503.8 

25.3 

82.2 

1.0 

217.9 

671.4 

8.2 

1 290.2 

1.3 

7.9 

267.0 

1.5 

1 392.6 

7.9 

221.4 

723.9 

1.6 

5.1 

345.8 

1.6 

416.4 

1.5 

555.7 

1.5 

591.6 

1.4 

1 350.7 

6.4 

1 940.0 

7.2 

2381.2 

6.6 

2 764.1 

6.7 

1 543.4 

18.9 

3037.4 

18.5 

3600.8 

20.4 

2569.9 

18.1 

3741.9 

17.8 

4 793.1 

17.8 

50.8 

0.6 

99.0 

0.6 

123.4 

0.7 

102.5 

0.7 

133.2 

0.6 

190.3 

0.7 

1 469.8 

18.0 

2 800.8 

17.1 

2 370.1 

13.4 

1 586.6 

11.2 

2959.8 

14.0 

3 666.2 

13.6 

17.5 

367.1 

0.2 

4.5 

37.5 

746.3 

0.2 

4.5 

44.8 

898.0 

0.3 

5.1 

99.7 

1.2 

193.5 

1.2 

279.2 

1.6 

34.2 

704.1 

378.8 

145.5 

192.4 

0.2 

5.0 

2.7 

1.0 

1.4 

44.5 

990.1 

559.5 

202.3 

312.5 

0.2 

4.7 

2.7 

1.0 

1.5 

59.5 

1  283.1 

738.0 

353.0 

402.8 

0.2 

4.8 

2.7 

1.3 

1.5 

361.9 

2.6 

582.5 

2.8 

793.0 

2.9 

1 268.8 

15.5 

2 584.0 

15.7 

2132.1 

12.1 

2 179.3 

15.4 

2997.2 

14.2 

3 517.8 

13.1 

6 159.4 

17.1 

7 061.2 

17.0 

286.6 

0.8 

336.3 

0.8 

5 058.4 

14.1 

5 798.3 

14.0 

76.2 

1 635.5 

910.5 

442.9 

519.3 

0.2 

4.5 

2.5 

1.2 

1.4 

88.5 

0.2 

1 883.0 

4.5, 

1 046.7 

2.5 

523.1 

599.2 

1.3 

1.4 

974.8 

2.7 

1 142.8 

2.8 

5 971.4 

16.6 

7 122.8 

17.2 

8168.2  100.0 

16414.4  100.0 

17 657.0  100.0 

14187.7  100.0 

21 067.1  100.0 

26 890.6  100.0 

35 985.2  100.0 

41 530.4  100.0 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1) including "reserves" and balances of GNP own resources for previous years 

2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 

7-10-1998 

- 7-

ANNEX 8 

Table 2d 

Payments to the  EU budget: Correction  of budgetary  imbalances1 

1992 

Mecus 

113.7 

71.0 

551.2 

41.9 

299.0 

683.9 

21.5 

634.8 

6.9 

158.0 

% 
4.4 

2.8 

21.4 

1.6 

11.6 

26.6 

0.8 

24.7 

0.3 

6.1 

1993 

Mecus 

126.5 

81.1 

667.9 

47.9 

339.6 

794.0 

23.6 

736.1 

8.0 

188.8 

1994 

Mecus 

105.2 

65.5 

536.4 

39.7 

263.2 

633.6 

19.5 

508.6 

6.9 

152.5 

% 
4.5 

2.8 

23.2 

1.7 

11.4 

27.4 

0.8 

22.0 

0.3 

6.6 

% 
4.0 

2.6 

21.1 

1.5 

10.7 

25.1 

0.7 

23.3 

0.3 

6.0 

41.5 

1.6 

50.6 

1.6 

44.1 

1.9 

1995 

Mecus 

65.8 

41.4 

% 
4.5 

2.8 

1996 

Mecus 

120.4 

75.5 

% 
4.1 

2.6 

1997 

Mecus 

19984 

Mecus 

19994 

Meuros 

97.7 

62.7 

4.0 

2.5 

134.7 

88.2 

4.2 

2.7 

162.9 

108.1 

% 
4.1 

2.8 

338.1 

23.0 

611.7 

20.8 

493.6 

20.1 

660.8 

20.5 

800.1 

20.4 

27.1 

135.3 

378.9 

13.2 

263.9 

4.6 

94.5 

56.6 

25.4 

28.8 

53.8 

1.8 

9.2 

25.8 

0.9 

18.0 

0.3 

6.4 

3.9 

1.7 

2.0 

3.7 

54.2 

246.4 

1.8 

8.4 

686.5 

23.3 

26.5 

0.9 

547.3 

18.6 

8.1 

172.6 

103.5 

48.2 

55.0 

102.4 

0.3 

5.9 

3.5 

1.6 

1.9 

3.5 

46.0 

219.6 

559.7 

21.2 

432.8 

6.7 

144.9 

82.4 

39.4 

45.3 

85.4 

1.9 

8.9 

22.8 

0.9 

17.6 

0.3 

5.9 

3.4 

1.6 

1.8 

3.5 

68.6 

294.1 

2.1 

9.1 

77.5 

362.1 

2.0 

9.2 

760.8 

23.5 

924.9 

23.5 

35.4 

1.1 

44.1 

1.1 

624.8 

19.3 

759.5 

19.3 

9.4 

202.0 

112.5 

54.7 

64.1 

120.4 

0.3 

6.3 

3.5 

1.7 

2.0 

3.7 

11.6 

246.6 

137.1 

68.5 

78.5 

149.7 

0.3 

6.3 

3.5 

1.7 

2.0 

3.8 

-2 573.3 
50.1 

-100.0 
1.9 

-3160.0 
•  96.0 

-100.0 
-  3.0 

-  2 313.3 
61.8 

-100.0 
2.7 

-1 468.1 

-100.0 

- 2 945.3 

-100.0 

- 2 458.8 

-100.0 

-3 230.6 

-100.0 

-3 931.2 

-100.0 

59.4 

4.0 

-  87.0 

-  3.0 

-  121.4 

-  4.9 

0.0 

0.0 

0.0 

0.0 

B 

DK 

D2 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total5 

1 ) The figures include the financing of the UK correction for the previous year as well as the adjustment of that for the year  n-4 . 
2) The share of Germany in financing the UK rebate is restricted to two-thirds of its normal share. 
3) Variations in exchange rates, "reserves" and balances of GNP own resources from previous years explain the non-zero sum in the total in certain years. 

4) Figures entered into the draft SAB for  1998 and the draft budget for  1999. 

7-10-1998 

Table 2e 

Own resources: National contributions1 

ANNEX 8 

1992 

1993 

1994 

1995 

1996 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

Mecus 

I  % 

1 352.0 

762.0 

3.1 

1.8 

1  521.3 

3.0 

1 863.6 

946.0 

1.9 

1 020.5 

3.7 

2.0 

1 676.6 

1009.0 

3.1 

1.9 

1 765.1 

1103.3 

3.1 

1.9 

1997 

Mecus 
1 922.5 

3.1 

1  217.2 

2.0 

19982 

Mecus 

2076.7 

1 372.2 

19992 

Meuros 

I  % 

3.0 

2.0 

2189.1 

1 463.4 

3.0 

2.0 

13068.5 

30.4 

15182.4 

29.8 

17 493.7 

34.3 

17 444.1 

32.7 

17 242.4 

30.0 

17 784.7 

29.1 

555.3 

4 052.9 

1.3 

9.4 

834.6 

4 594.9 

1.6 

9.0 

842.0 

4 125.4 

1.7 

8.1 

833.0 

2 918.1 

1.6 

5.5 

956.1 

3 924.6 

1.7 

6.8 

1  014.7 

4 736.0 

1.7 

7.7 

8813.0 

20.5 

9850.3 

19.3 

10 867.9 

21.3 

10165.4 

19.0 

10880.7 

18.9 

11635.1 

19.0 

18 655.2 

27.1 

19 382.9 

27.0 

1 166.1 

4 901.7 

1.7 

7.1 

1 136.7 

•1.6 

5 208.5 

7.2 

12 583.7 

18.3 

13178.9 

18.3 

306.1 

0.7 

381.4 

0.7 

419.9 

0.8 

436.7 

6961.8 

16.2 

9  130.6 

17.9 

6 604.4 

13.0 

5 227.7 

474.8 

0.8 

462.3 

0.8 

601.5 

0.9 

646.2 

0.9 

7 957.1 

13.8 

7 546.7 

12.3 

9 344.5 

13.6 

9 947.8 

13.8 

108.3 

2078.8 

0.0 

628.7 

0.0 

0.0 

0.3 

4.8 

0.0 

1.5 

0.0 

0.0 

151.8 

2 559.9 

0.0 

721.3 

0.0 

0.0 

0.3 

5.0 

0.0 

1.4 

0.0 

0.0 

147.3 

2 699.0 

0.0 

1 012.8 

0.0 

0.0 

4 294.1 

10.0 

5  133.4 

10.1 

3 840.2 

0.3 

5.3 

0.0 

2.0 

0.0 

0.0 

7.5 

0.8 

9.8 

0.3 

5.0 

2.9 

1.2 

147.7 

2 685.9 

1541.0 

659.1 

142.3 

2826.2 

0.2 

4.9 

148.7 

3109.2 

1  610.2 

2.8 

1 856.0 

716.1 

812.2 

750.3 

1.4 

1 307.0 

2.4 

1 585.6 

6 572.8 

12.3 

5 518.3 

1.2 

1.4 

2.8 

9.6 

922.7 

917.6 

1963.1 

5 884.2 

0.2 

5.1 

3.0 

1.5 

1.5 

3.2 

9.6 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

42 981.5  100.0 

51  007.7  100.0 

50 936.7 

100.0 

53 374.4  100.0 

57 515.1  100.0 

61120.7  100.0 

1) Sum of tables 2b, 2c and 2d including "reserves" and balances of GNP own resources for previous years 

2) Figures entered into the draft SAB for 1998 and the draft budget for 1999 

161.4 

3 386.6 

1 917.2 

929.5 

1 005.3 

0.2 

4.9 

2.8 

1.4 

1.5 

170.0 

3 569.4 

2009.1 

1005.2 

1 067.0 

1 957.0 

2.8 

2 108.7 

0.2 

5.0 

2.8 

1.4 

1.5 

2.9 

8 679.4 

12.6 

8 821.7 

12.3 

68 738.0  100.0 

71 904.6  100.0 

7-10-1998 

9-

ANNEX 8 

Table 2f 

Total own resources1 

1992 

Mecus 
2 239.1 

1034.8 

I  % 

4.0 

1.8 

Mecus 
2 394.9 

1 206.5 

1993 

1994 

1995 

1996 

1997 

I  % 

Mecus 

I  % 

Mecus 

I  % 

3.7 

1.9 

2 822.1 

1 296.2 

4.4 

2.0 

2 680.1 

4.0 

1295.4 

1.9 

1 368.9 

Mecus 
2750.9 

I  % 

Mecus 

3.9 

1.9 

2 971.4 

1505.8 

3.9 

2.0 

16997.5 

30.2 

19076.4 

29.8 

21  366.3 

33.3 

21  324.1 

31.4 

20742.6 

29.2 

21  217.3 

28.2 

728.6 

4 828.0 

1.3 

8.6 

1011.2 

5 192.6 

1.6 

8.1 

992.3 

4 718.1 

1.5 

7.4 

985.2 

1.5 

1106.0 

3645.2 

5.4 

4 547.2 

1.6 

6.4 

1  178.4 

5 367.6 

1.6 

7.1 

10 493.4 

18.7 

11545.5 

18.0 

12 550.9 

19.5 

11876.8 

17.5 

12423.3 

17.5 

13 185.9 

17.5 

462.3 

0.8 

567.4 

0.9 

638.9 

1.0 

664.8 

1.0 

681.5 

1.0 

687.0 

0.9 

19982 

Mecus 

3 156.3 

1 666.0 

19992 

Meuros 

I  % 

3.8 

2.0 

3 317.7 

1 750.8 

3.9 

2.0 

21 935.9 

26.6 

22 599.1 

26.4 

1 333.5 

5597.1 

1.6 

6.8 

1  298.1 

5 918.0 

1.5 

6.9 

14150.3 

17.2 

14 725.7 

17.2 

821.7 

1.0 

861.1 

1.0 

9004.7 

12.7 

8 667.1 

11.5 

10448.2 

12.7 

11  153.5 

13.0 

8 279.9 

14.7 

10 265.0 

16.0 

7 759.6 

12.1 

6413.7 

123.5 

3534.0 

0.2 

6.3 

167.0 

4 030.6 

0.3 

6.3 

165.4 

4 245.9 

0.3 

6.6 

838.1 

1.5 

909.4 

1.4 

1  215.6 

1.9 

167.6 

4 349.6 

1 762.9 

864.9 

887.4 

1 658.3 

9.5 

0.3 

6.4 

2.6 

1.3 

1.3 

2.4 

160.7 

4435.5 

1 874.0 

851.7 

964.0 

1969.0 

0.2 

6.2 

2.6 

1.2 

1.4 

2.8 

170.7 

4 837.6 

2110.4 

0.2 

6.4 

2.8 

1 077.8 

1.4 

1061.9 

2 326.0 

1.4 

3.1 

6 702.4 

11.9 

7 626.6 

11.9 

6417.4 

10.0 

9 251.6 

13.6 

8 218.6 

11.6 

8928.1 

11.9 

182.2 

4 984.0 

2174.4 

0.2 

6.0 

2.6 

189.9 

5 158.7 

2 282.2 

0.2 

6.0 

2.7 

1 089.7 

1.3 

1  172.8 

1.4 

1  144.1 

1.4 

1  195.8 

1.4 

2 323.0 

2.8 

2490.2 

2.9 

11474.5 

13.9 

11605.9 

13.5 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

56 261.7  100.0 

63 993.2  100.0 

64188.8  100.0 

67 827.6  100.0 

71 098.7  100.0 

75 293.0  100.0 

82481.1  100.0 

85 719.5  100.0 

1 ) Sum of tables 2a, 2b, 2c and 

2d including "reserves" and balances of GNP own resources for previous years 

2) Figures entered into the draft 

SAB for 1998 and the draft budget for 1999 

7-10-1998 

Table 3a 

EAGGF 
guarantee 

External expenditure 

Administrative 
expenditure 

Compensations to MS 

10 

ANNEX 8 

Structure of EU expenditure 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

% 

Mecus 

% 

Mecus 

% 

Mecus 

% 

Mecus 

% 

Mecus 

-  % 

31  234.3 

53.3 

34 423.3 

53.7 

33605.3 

55.7* 

34497.7 

51.6 

39080.9 

50.8 

40623.2 

Structural Funds 

17748.8 

30.3 

20084.8 

31.3 

15 767.0 

26.2 

19292.0 

28.8 

24426.8 

31.8 

26059.2 

Internal policies 

4 008.3 

6.8 

3618.0 

5.6 

3907.1 

6.5 

4 004.5 

6.0 

4 544.4 

5.9 

4 934.7 

1 857.5 

3.2 

2718.1 

4.2 

3459.7 

5.7 

3700.2 

5.5 

4 040.1 

5.3 

4 278.0 

2900.9 

5.0 

3 308.0 

5.2 

3565.6 

5.9 

3859.7 

5.8 

4 073.3 

5.3 

4 129.2 

50.6 

32.5 

6.2 

5.3 

5.1 

876.8 

1.5 

0.0 

0.0 

0.0 

0.0 

1  547.0 

2.3 

701.0 

0.9 

212.0 

0.3 

Total 

58 626.6 

100.0 

64152.2 

100.0 

60 304.8 

100.0 

66 901.0 

100.0 

76 866.6 

100.0 

80 236.4 

100.0 

Rate of increase 

+  8.6 % 

+  9.4 % 

-  6.0 % 

+ 10.9% 

+ 14.9% 

+ 4.4% 

7-10-1998 

-11 

ANNEX 8 

Table 3b 

TOR 

VAT 

GNP 

Structure  of payments to the EU budget 

199, 
2 

199 
3 

i 
199-

1995 

1996 

1997 

19982 

19992 

Mecus 

% 

Mecus 

% 

Mecus 

% 

Mecus 

% 

Mecus 

% 

Mecus 

Mecus 

Meuros 

% 

13 280.2 

23.6 

12 985.5 

20.3 

13 252.2 

20.6 

14 453.2 

21.3 

13 583.6 

19.1 

14  172.3 

18.8 

13 743.2 

16.7 

13 814.9 

16.1 

34 763.2 

61.8 

34 689.3 

54.2 

33 217.9 

51.8 

39 127.3 

57.7 

36 535.0 

51.4 

34 351.5 

45.6 

32 752.8 

39.7 

30 374.2 

35.4 

8168.2 

14.5 

16414.4 

25.7 

17 657.0 

27.5 

14 187.7 

20.9 

21  067.1 

29.6 

26890.6 

35.7 

35985.2 

43.6 

41 530.4 

48.4 

UK rebate 

50.1 

0.1 

-96.0 

-0.2 

61.8 

0.1 

59.4 

0.1 

-87.0 

-0.1 

-121.4 

-0.2 

0.0 

0.0 

0.0 

0.0 

Total OR 

56 261.7 

100.0 

63 993.2 

100.0 

64188.8 

100.0 

67 827.6  100.0 

71098.7  100.0 

75293.0  100.0 

82481.1 

100.0 

85 719.5 

100.0 

%increase 

+  6.5 

% 

+ 13.7 

% 

+  0.3°/ 
'o 

+  5.7% 

+  4.8% 

+  5.9% 

+9.5% 

+3.9% 

Other 
Revenue1 

3450.1 

— 

1 679.5 

— 

1  813.3 

— 

7249.5 

— 

10176.4 

— 

5254.7 

— 

1 628.0 

— 

630.9 

— 

Total 

59 711.8 

— 

65 672.7 

— 

66 002.1 

-

75 077.1 

— 

81  275.1 

— 

80 547.7 

— 

84109.1 

— 

86 350.4 

-~ 

1)  Other  miscellaneous  revenues,  such  as  surpluses  from  previous  years,  interests  on  late  payments,  fines,  taxes  on  salaries  of  the  employees  of  European  Institutions, 

proceeds from borrowing and lending operations, etc. 

2)  Figures entered into the draft SAB for  1998 and the draft budget for 1999 

7-10-1998 

- 1 2-

ANNEX 8 

Table 3c 

Member States shares in EU financing and in EU-15 GNP 
(in  percent  of total, data for  1997) 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Financing share 

3.9 

2.0 

28.2 

1.6 

7.1 

17.5 

0.9 

11.5 

0.2 

6.4 

2.8 

1.4 

1.4 

3.1 

11.9 

OTOR 

7.4 

2.0 

24.2 

1.2 

4.5 

10.9 

1.6 

7.9 

0.2 

72.2 

1.8 

1.1 

1.0 

2.6 

21.5 

S  VAT/GNP 

3.1 

2.0 

29.1 

1.7 

7.8 

19.0 

0.8 

12.4 

0.2 

5.1 

3.0 

1.5 

1.5 

3.2 

9.6 

GNP share 

3.1 

1.9 

26.0 

1.5 

6.6 

17.2 

0.8 

14.2 

0.2 

4.5 

2.6 

1.2 

1.4 

2.7 

16.1 

Table  4 

Accounting budgetary balances(1): "Table 1f  less "Table  2f 

1992 

1993 

Mecus 

1 224.2 

% 
GNP 
0.71 

Mecus 

1 333.1 

% 
GNP 
0.72 

1994 
% 
GNP 
0.58 

Mecus 

1139.6 

1995 

Mecus 

1  718.2 

% 
GNP 
0.81 

1996 
% 
GNP 
0.66 

1  415.8 

Mecus 

295.4 

0.29 

356.9 

0.33 

236.6 

0.20 

345.1 

0.27 

247.8 

0.19 

1997 

Mecus 

1 079.5 

68.6 

% 
GNP 

0.50 

0.05 

-9561.6 

-0.62 

-11 659.7 

-0.71 

-13465.7 

-0.78 

-13198.3 

-0.72 

-10528.3 

-0.57 

-10943.5 

-0.60 

3 588.2 

2 708.1 

4.66 

0.61 

4 094.7 

3022.4 

5.17 

0.74 

3873.9 

3171.6 

4.62 

0.79 

3 528.5 

7 253.2 

3.99 

1.70 

4 081.0 

4.20 

4 371.8 

4.13 

6114.3 

1.34 

5936.0 

1.28 

-1319.3 

-0.13 

-1 026.9 

-0.10 

-2465.3 

-0.22 

-1 540.1 

-0.13 

-  137.6 

-0.01 

-  781.1 

-0.06 

2119.8 

5.88 

2402.5 

6.58 

1 767.9 

4.45 

1  913.7 

4.48 

2 316.1 

4.86 

2 676.7 

4.84 

-  231.7 

-0.03 

-1 142.8 

-0.14 

-2366.0 

-0.28 

-  672.7 

-0.08 

-1152.5 

-0.12 

- 

61.3 

-0.01 

626.2 

5.24 

737.0 

5.91 

607.6 

4.55 

694.1 

4.88 

787.8 

5.49 

725.4 

4.89 

-  818.6 

-0.33 

-1 263.9 

-0.48 

-1 762.9 

-0.62 

-1921.2 

-0.64 

-2 331.8 

-0.75 

-2 276.2 

-0.71 

2 124.4 

2.93 

2457.7 

3.44 

1 844.9 

2.50 

-2256.1 
-1 501.2 

-0.28 
-0.03 

-2959.3 
•3 648.6 

-0.37 
• 0.07 

-1 074.0 
•8491.9 

-0.13 
•0.15 

-  860.5 

-0.49 

-  213.5 

-0.12 

-  723.6 

-0.40 

2441.1 

3.08 

2849.7 

-  133.9 

-0.14 

88.0 

3.41 

0.09 

2721.8 

56.1 

3.12 

0.06 

-  897.7 

-0.53 

-  656.6 

-0.35 

-1129.5 

-0.59 

-4639.1 

-0.55 

-2106.1 

-0.23 

-1 798.8 

-0.16 

•5969.7 

-0.09 

774.0 

0.01 

•  78.0 

-0.00 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

(1) For an explanation of the concepts see Annex 3. 

7-10-1998 

- 1 3-

ANNEX 8 

Table 5 

Operational budgetary balances{1): "Table 1d" less "Table 2f' 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

% 
GNP 

Mecus 

% 
GNP 

-280.2 

-0.16 

-458.3 

-0.25 

275.0 

0.27 

332.7 

0.30 

Mecus 

-922.9 

208.3 

% 
GNP 
-0.47 

0.18 

Mecus 

% 
GNP 

Mecus 

% 
GNP 

Mecus 

% 
GNP 

-381.2 

-0.18 

-636.4 

-0.30 

-1137.6 

•0.52 

311.5 

0.25 

215.9 

0.16 

36.6 

0.03 

-9645.6 

-0.62 

-11759.7 

-0.72 

-13540.0 

-0.78 

-13315.2 

-0.72 

-10 653.8 

-0.58 

-11076.2 

-0.60 

3580.6 

2 685.1 

4.65 

0.60 

4 085.5 

2 995.0 

5.16 

0.73 

3862.7 

3 146.9 

4.61 

0.78 

3515.8 

7 226.5 

3.98 

1.69 

4 069.6 

6 087.8 

4.19 

1.34 

4 359.8 

5 911.0 

4.12 

1.27 

-1 393.4 

-0.14 

-1  115.0 

-0.11 

-2 568.2 

-0.23 

-1 683.6 

-0.14 

-312.5 

-0.03 

-971.7 

-0.08 

B 

OK 

D 

GR 

E 

F 

IRL 

2 107.1 

5.84 

2 387.3 

6.54 

1 759.1 

-277.6 

-0.03 

-1  197.4 

-0.14 

-2419.2 

-70.4 

-0.59 

-92.4 

-0.74 

-68.9 

-844.1 

-0.34 

-1 294.4 

-0.49 

-1 787.5 

4.42 

-0.29 

-0.52 

-0.63 

2112.9 

2.91 

2442.4 

3.42 

1834.0 

2.48 

-2 301.8 
-4052.5 

-0.29 
-0.07 

-3 013.7 
-6 688.2 

-0.38 
-0.12 

-1140.0 
-11 635.7 

-0.13 
-0.20 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1902.3 

4.45 

2304.7 

4.84 

2 663.9 

4.82 

-751.4 

-0.09 

-1 239.7 

-60.8 

-1 962.7 

-863.6 

2428.1 

-136.6 

-900.8 

4711.5 

-0.43 

-0.65 

-0.49 

3.06 

-0.15 

-0.53 

-0.56 

-37.3 

-2 371.2 

-224.6 

2838.6 

74.0 

-672.2 

-2 177.8 

-0.13 

-0.26 

-0.76 

-0.12 

3.40 

0.08 

-0.35 

-0.24 

-153.1 

-0.02 

-52.4 

-2 317.2 

-735.8 

2 710.8 

42.3 

-1 144.7 

-1 882.7 

-0.35 

-0.73 

-0.41 

3.11 

0.04 

-0.59 

-0.17 

-9 383.1 

-0.15 

-2 735.0 

-0.04 

-3 747.1 

-0.05 

(1) For an explanation of the concepts see Annex 3. 

Table 6a 

"UK rebate" budgetary balance (before UK correction)*1* 

1992 

Mecus 

1 884.9 

% 
GNP 
1.09 

448.8 

0.43 

1993 

Mecus 

2 078.9 

540.3 

% 
GNP 

1.13 

0.49 

1994 

Mecus 

2037.5 

488.6 

% 
GNP 

1.03 

0.42 

1995 

Mecus 

2 530.5 

518.2 

% 
GNP 

1.20 

0.41 

1996 

Mecus 

2113.4 

333.0 

% 
GNP 

0.99 

0.25 

1997 

Mecus 

1 809.7 

156.5 

% 
GNP 

0.83 

0.11 

-8 515.9 

-0.55 

-9 762.2 

-0.60 

-10643.8 

-0.62 

-11704.5 

-0.64 

-10 559.3 

-0.57 

-10 962.5 

-0.60 

3 665.2 

2 759.5 

4.76 

0.62 

4 176.6 

3 207.7 

5.27 

0.79 

3 990.2 

3 665.6 

4.76 

0.91 

3 580.3 

7 674.3 

4.05 

1.80 

4 058.8 

6 067.1 

4.18 

1.33 

4 360.5 

5 756.9 

4.12 

1.24 

-1194.6 

-0.12 

-  201.2 

-0.02 

-1104.7 

-0.10 

-1 009.0 

-0.09 

-  448.8 

-0.04" 

-1  197.6 

-0.10 

B 

DK 

D 

GR 

E 

F 

IRL 

2 219.4 

6.15 

0.00 

5.19 

2548.7 

6.98 

1 969.0 

4.95 

2087.9 

-  784.4 

-0.09 

-1 274.2 

-0.15 

733.9 

5.88 

619.3 

4.64 

6.0 

695.7 

4.88 

0.00 

4.90 

2436.5 

5.11 

2822.0 

5.11 

-1 440.4 

-0.15 

-  131.2 

-0.01 

780.8 

5.44 

721.7 

4.87 

0.11 

- 

40.5 

-0.02 

-  301.7 

-0.11 

-  576.4 

-0.19 

-1 209.5 

-0.39 

-1 079.1 

-0.34 

3.1 

620.4 

267.0 

2 214.2 

3.05 

2 576.9 

3.61 

2001.4 

2.71 

-4 371.7 
0.0 

-0.54 
-

- 5 074.4 

0.0 

-0.63 _ 

-1 447.1 
0.0 

-0.17 
— 

-  818.8 

-0.46 

-  220.9 

-0.12 

-  791.5 

-0.44 

2 571.7 

3.24 

2 866.7 

- 

83.2 

-0.09 

107.2 

3.43 

0.11 

2 714.8 

46.7 

3.12 

0.05 

-  691.0 

-0.41 

-  543.3 

-0.29 

-1109.6 

-0.58 

-4 781.7 

-0.57 

0.0 

-~ 

-4341.2 
0.0 

-0.48 

-3117.3 

-0.27 

--

0.0 

— 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1) Simplified calculation, see Annex  3, point  4.1. 

7-10-1998 

- 1 4-

ANNEX 8 

Table 6b 

"UK rebate" budgetary balance (after UK correction)*1* 

1992 

1993 

1994 

1995 

1996 

1997 

Mecus 

1 740.8 

359.5 

% 
GNP 

1.00 

0.35 

Mecus 

1 928.4 

444.3 

% 
GNP 

1.05 

0.41 

Mecus 

1 924.0 

% 
GNP 
0.97 

417.0 

0.36 

Mecus 

2455.2 

471.1 

% 
GNP 

1.16 

0.37 

Mecus 

% 
GNP 

Mecus 

1  961.1 

0.91 

1 712.0 

238.0 

0.18 

93.8 

% 
GNP 

0.79 

0.07 

-9 214.4 

-0.59 

-10544.8 

-0.64 

-11227.9 

-0.65 

-12090.9 

-0.66 

-11332.3 

-0.62 

-11456.1 

-0.62 

3609.4 

2372.4 

4.69 

0.53 

4118.4 

2 779.0 

5.20 

0.68 

3945.5 

3 378.8 

4.71 

0.84 

3 548.2 

7 516.4 

4.02 

1.76 

3992.2 

5 757.2 

4.11 

1.26 

4 314.5 

5 537.2 

4.07 

1.19 

-2054.3 

-0.20 

-1134.7 

-0.11 

-1 798.0 

-0.16 

-1 444.3 

-0.12 

-1311.2 

-0.11 

-1 757.2 

-0.14 

2192.1 

6.08 

2 518.6 

6.90 

1 947.6 

4.90 

2072.3 

4.85 

2 404.3 

5.05 

2 800.8 

5.07 

-  821.6 

-0.09 

-1 679.7 

-0.20 

-1 828.1 

-0.22 

-  317.6 

-0.04 

-2 091.3 

-0.22 

-  564.0 

-0.06 

611.7 

5.12 

724.4 

5.81 

611.9 

4.58 

690.5 

4.86 

770.6 

5.37 

715.0 

4.82 

66.8 

0.03 

-  261.7 

-0.10 

-  468.2 

-0.17 

-  684.5 

-0.23 

-1 428.1 

-0.46 

-1 224.0 

-0.38 

2162.7 

2.98 

2513.8 

3.52 

1  953.1 

2.64 

-1 024.7 
0.0 

-0.13 
— 

-1 405.8 
0.0 

-0.18 
— 

1144.4 
0.0 

0.13 
— 

-  883.5 

-0.50 

-  351.6 

-0.20 

-  873.9 

-0.48 

2542.2 

3.21 

2806.6 

-  116.0 

-0.12 

37.1 

3.36 

0.04 

2 675.4 

1.4 

3.07 

0.00 

-  754.1 

-0.44 

-  668.9 

-0.35 

-1  195.0 

-0.62 

-3005.1 

-0.36 

-  783.5 

-0.09 

-  658.5 

-0.06 

0.0 

--

0.0 

-~ 

0.0 

— 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

Total 

1) Simplified calculation, see Annex 3, point 4.1. 

Table 7 

Size of the UK rebate 

Imbalance 

Correction 

Imbalance less 
correction 

Other factors 

2 

Budgeted 
correction 

(1) 

(2) 

(3}=(1)-(2) 

(4) 

(5) = (2) H4) 

Mecus 

%GNP 

Mecus 

%GNP 

Mecus 

%GNP 

Mecus 

%GNP 

Mecus 

%GNP 

1985 

1986 

1987 

1988 

1989 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

2847.0 

2 748.0 

3 310.1 

3 943.0 

4 272.3 

3 833.8 

4 331.1 

4 164.7 

4 706.6 

3575.8 

4 686.3 

4 570.6 

3 442.7 

6 945.0 

0.50 

0.46 

0.50 

0.57 

0.57 

0.51 

0.54 

0.52 

0.59 

0.42 

0.55 

0.50 

0.30 

0.56 

1 879.0 

1 813.7 

2 194.7 

2150.6 

2 516.6 

2 452.4 

2  787.0 

2 659.7 

2 940.3 

2276.5 

3079.1 

2856.5 

1 977.5 

3 931.2 

0.33 

0.30 

0.33 

0.31 

0.34 

0.32 

0.34 

0.33 

0.37 

0.27 

0.36 

0.31 

0.17 

0.32 

968.0 

934.3 

1 115.4 

1 792.4 

1 755.7 

1  381.4 

1 544.1 

1  505.1 

1 766.3 

1 299.3 

1 607.2 

1 714.1 

1 465.2 

3013.8 

0.17 

0.16 

0.17 

0.26 

0.24 

0.18 

0.19 

0.19 

0.22 

0.15 

0.19 

0.19 

0.13 

0.24 

-897.6 

-0.16 

57.4 

0.01 

-381.0 

-0.06 

44.0 

-324.8 

41.3 

773.5 

-86.4 

219.7 

36.8 

-1611.0 

88.8 

481.3 

-700.6 

0.01 

-0.04 

0.01 

0.10 

-0.01 

0.03 

0.00 

-0.19 

0.01 

0.04 

-0.06 

981.4 

1871.1 

1 813.7 

2194.6 

2191.8 

2 493.7 

3 560.5 

2 573.3 

3 160.0 

2 313.3 

1 468.1 

2 945.3 

2 458.8 

3 230.6 

0.16 

0.33 

0.30 

0.32 

0.29 

0.33 

0.44 

0.32 

0.39 

0.27 

0.17 

0.32 

0.22 

0.26 

1)  The imbalance is calculated as in the "Mode de Calcul", see Annex 4 

2)  Other  factors  include  the  adjustment  for  the  definitive  calculation  of  the  year  "n-4"  and  exchange  rate  effects(see 

Annex 4, page  3-4) 

7-10-1998 

Table  8 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

EUR-15 

15 

ANNEX 8 

Gross national product at current market prices per head of population 

(until  1990: EUR-15 excluding East Germany = 100; 

from1991: EUR-15 including new Lander = 100; 1998-99: forecasts) 

ECU 

1980 

1982 

1984 

1986 

1988 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

121.3 

126.1 

131.9 

52.1 

55.8 

123.8 

57.7 

79.8 

157.8 

120.9 

103.1 

28.5 

105.6 

149.9 

95.2 

100.0 

103.8 

124.6 

126.5 

58.4 

55.5 

101.0 

131.1 

104.0 

139.7 

129.9 

132.4 

53.5 

52.3 

43.1 

53.7 

134.9 

129.2 

42.6 

58.3 

102.9 

104.0 

106.0 

127.8 

124.3 

108.5 

125.7 

115.3 

132.8 

117.9 

134.7 

121.5 

140.2 

127.3 

114.6 

1197 

127.1 

127.8 

130.9 

440 

66.7 

46.6 

714 

46.9 

71.6 

48.1 

65.9 

48.5 

62.2 

49.2 

63.4 

117.4 

138.8 

124.9 

51.6 

64.5 

112.8 

137.4 

118.6 

53.3 

62.6 

111.4 

110.8 

137.6 

116.6 

50.2 

63.0 

138.8 

116.1 

50.2 

63.9 

120.6 

1157 

118.9 

113.2 

111.4 

110.3 

111.0 

115.3 

115.5 

116.4 

114.2 

109.9 

109.1 

108.8 

64.2 

83.8 

61.9 

92.7 

61.4 

95.8 

58.0 

97.1 

61.3 

62.4 

63.8 

101.1 

105.3 

102.4 

64.4 

91.4 

66.9 

88.7 

69.1 

83.2 

73.1 

91.4 

79.9 

92.2 

79.4 

91.5 

82.7 

91.8 

163.1 

171.4 

179.4 

173.3 

1840 

192.3 

191.6 

197.6 

199.5 

201.8 

192.1 

186.4 

186.1 

186.2 

115.8 

112.0 

111.1 

102.9 

100.7 

101.2 

102.1 

1094 

110.7 

113.7 

111.7 

108.1 

108.0 

108.4 

106.1 

109.3 

111.7 

109.5 

109.2 

111.8 

114.5 

122.5 

123.8 

127.6 

124.0 

118.8 

117.6 

117.3 

29.9 

26.2 

29.6 

31.5 

35.8 

41.5 

136.1 

139.5 

123.3 

46.4 

98.2 

45.7 

85.3 

45.3 

937 

46.8 

105.9 

47.0 

467 

46.8 

47.6 

103.6 

104.9 

105.1 

106.1 

139.8 

137.8 

1424 

134.3 

110.4 

110.9 

111.7 

1184 

114.2 

114.3 

115.0 

96.2 

89.1 

91.2 

87.4 

86.9 

88.5 

83.8 

85.8 

101.8 

106.7 

106.2 

122.1 

130.1 

142.1 

102.9 

144.5 

98.6 

126.1 

140.9 

89.5 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

7-10-1998 

16 

ANNEX 8 

Table  9 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

EUR-15 

Gross national product at current market prices per head of population 

(until 1990: EUR-15 excluding East Germany = 100; 

from1991: EUR-15 including new Lander = 100; 1998-99: forecasts) 

PPS 

1980 

1982 

1984 

1986 

1988 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

108.5 

102.9 

107.9 

106.8 

104.1 

104.7 

105.3 

109.2 

111.8 

1167 

116.6 

1157 

115.2 

115.3 

115.3 

115.2 

103.7 

106.7 

109.6 

104.6 

100.6 

102.4 

100.5 

107.0 

108.5 

110.8 

111.6 

112.5 

112.7 

112.9 

117.8 

116.4 

119.0 

118.2 

116.1 

117.8 

107.3 

109.6 

109.1 

110.6 

110.4 

110.5 

1094 

109.1 

108.8 

66.6 

70.0 

112.9 

62.3 

102.1 

146.7 

105.1 

104.9 

53.6 

94.9 

110.9 

97.0 

100.0 

65.2 

69.7 

62.8 

69.0 

614 

69.5 

59.9 

72.1 

59.3 

74.2 

62.3 

79.4 

63.8 

774 

65.3 

78.3 

66.2 

75.7 

66.5 

76.8 

68.1 

77.3 

69.0 

777 

69.1 

78.8 

69.8 

79.8 

115.3 

111.7 

110.1 

109.5 

109.7 

113.0 

110.8 

108.5 

106.8 

106.7 

104.6 

104.3 

1044 

104.3 

62.3 

59.6 

58.0 

58.6 

64.3 

68.7 

71.3 

73.0 

77.3 

80.5 

80.0 

82.4 

84.8 

86.8 

101.9 

101.9 

102.4 

102.9 

101.9 

105.5 

104.8 

102.4 

103.1 

103.7 

103.2 

102.6 

102.5 

102.7 

168.7 

173.5 

181.5 

176.7 

185.2 

196.6 

191.8 

188.2 

183.9 

181.6 

175.8 

176.2 

175.0 

174.9 

102.3 

102.7 

102.7 

98.4 

101.3 

102.3 

101.8 

104.0 

104.6 

106.8 

105.6 

106.0 

106.3 

106.2 

106.5 

106.1 

105.2 

103.5 

105.8 

108.8 

109.0 

112.3 

1120 

111.1 

113.1 

112.6 

112.5 

112.4 

53.1 

98.3 

49.4 

99.1 

52.3 

557 

99.1 

101.3 

58.9 

99.9 

110.3 

111.8 

111.0 

109.1 

104.5 

97.4 

99.6 

101.5 

103.5 

99.5 

64.5 

91.1 

102.4 

96.3 

65.6 

840 

96.7 

98.0 

68.7 

87.5 

95.5 

99.2 

70.3 

87.8 

95.5 

99.0 

70.0 

93.6 

97.3 

964 

68.9 

93.2 

95.2 

69.6 

964 

93.7 

98.8 

100.3 

70.5 

984 

93.8 

99.4 

71.2 

99.4 

93.8 

98.6 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

100.0 

7-10-1998 

- 1 7-

ANNEX 8 

Table  10 

Gross  National  Product at current  market  prices 
(Ecu-Euro millions; 1998-1999: forecasts) 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

173 285 

103 348 

184 518 

109 322 

197 653 

116 203 

211690 

126 018 

214 466 

131  339 

217 025 

137 032 

224 335 

143 815 

1 533 230 

1  636 447 

1 725 209 

1  837 598 

1  839 972 

1837 908 

1892 649 

76 979 

443 957 

79 211 

408476 

83 817 

403 293 

88 328 

427 168 

97 098 

455 245 

105 948 

465 373 

1012148 

1 054 623 

1 108 652 

1163 060 

1 198 541 

1217 015 

36070 

925 235 

11954 

246 411 

144027 

72485 

78 691 

185 075 

806 011 

36 518 

827 616 

12478 

265 427 

155 310 

71422 

68 572 

152 696 

802726 

39 760 

841  397 

13350 

282152 

164 805 

73 913 

79062 

161  400 

856 957 

42 752 

819264 

14 210 

302 185 

176503 

79 271 

93 011 

169 937 

844 401 

47 645 

944 011 

14 356 

311923 

179687 

83476 

95 509 

189 562 

907 294 

104 786 

489 076 

1268 038 

57 871 

55 273 

1 001  758 

1039 694 

14 825 

318 548 

181  492 

87098 

101  827 

192 439 

15662 

334 421 

188 199 

91326 

106 880 

201  625 

1134 509 

1246 095 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

EUR-15 

5 848 906 

5 865 362 

6 147 623 

6 395 397 

6 710125 

7 068 070 

7 404472 

234 203 

152454 

1976 634 

110127 

519 717 

1329 741 

63702 

1 094 776 

16614 

353 054 

197 137 

97 217 

113 306 

212 725 

1 301  867 

7 773 274 

7-10-1998 

-18-

Total population 
(1000) 

ANNEX 8 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

10045 

5171 

80 594 

10322 

39 008 

57 374 

3555 

56 859 

392 

15182 

7 914 

9833 

5 042 

8 668 

10085 

5189 

81179 

10380 

39 086 

57 654 

3 574 

57 049 

398 

15 290 

7 991 

9 840 

5 067 

8 718 

58 006 

367 965 

58191 

369 690 

10116 

5 205 

81422 

10426 

39150 

57 900 

3 586 

57 204 

404 

15 381 

8 030 

9 840 

5 088 

8 782 

58 395 

370 927 

10137 

5 228 

81661 

10454 

39 210 

58138 

3601 

57 301 

410 

15460 

8 047 

9 847 

5108 

8 847 

10157 

5 262 

81895 

10 465 

39 270 

58375 

3 626 

57 403 

416 

15 523 

8 059 

9 866 

5125 

8 901 

10182 

5 278 

82060 

10 518 

39323 

58607 

3661 

57 506 

421 

15 603 

8 084 

9 876 

5140 

8918 

58 606 

58 782 

58 977 

372 054 

373 124 

374153 

10208 

5 298 

82 250 

10570 

39 371 

58 877 

3 696 

57 609 

426 

15692 

8108 

9 886 

5155 

8 936 

59172 

375 254 

10233 

5 316 

82425 

10623 

39371 

59148 

3730 

57 714 

432 

15 761 

8132 

9896 

5170 

8 954 

59 367 

376 272 

Table 11 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

EUR-15 

7-10-1998 

ISSN 0254-1475 

COM(98) 560 final 

DOCUMENTS 

EN 

14  15  03  10 

Catalogue  number  :  CB-CO-98-571-EN-C 

ISBN  92-78-39684-2 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg