III. The Financing Arrangements

Over the period covered by the next financial perspective, it is possible to face the challenges posed by the necessary reforms of some of the most important Community policies and those deriving from a first wave of accessions without exceeding the existing own resources ceiling (1.27% of GNP). As a result, there are no technical or legal reasons which impose a modification of the decision at the basis of the financing arrangements. The current own resources decision will remain in force as long as it is not modified by a new one.

The question of the opportunity of proposing a modification of the current financing arrangements rests therefore on an assessment of their current and expected performance. This assessment will have to take into account the fact that a modification of the own resources decision would require unanimity among the Member States and ratification by national parliaments.

1. The functioning of the system

As demanded by Article 10 of the own resources decision, the Commission will present in the course of 1998 a full report on the functioning of the own resources system covering also the mechanism used to reduce the contribution of the United Kingdom and the possibility to introduce a new own resource. It is, however, already possible, even at this stage, to draw some broad conclusions.

The current arrangements have provided the Union with an adequate amount of financial resources and look likely to do so for the period covered by the next financial perspective. The margin available under the own resources ceiling has never been fully utilised. This has been due to various factors such as systematic underspending, e.g. in the agricultural area, and delays in carrying out commitments, e.g. in structural spending. Since 1997 the reduction in the increase in expenditure, measured as a percentage of GNP, has been the result of cautious budgetary decisions, in line with the budgetary consolidation efforts of the Member States,. These trends, combined with the increases in the own resource ceiling for the years 1997-99, are creating a margin which will help to accommodate a first wave of accessions.

The last modification of the own resources decision, whose effect has started being felt from 1995 onwards, has made the system more equitable by bringing national contributions more in line with the shares in GNP. The weight of the VAT resource, whose yield is poorly correlated with contributive capacity, is being reduced. Whereas in 1992 the VAT resource still represented 61.6 % of the total resources put at the disposal of the Union, in 1996 this share was down to 51 % and is expected to drop to about 33 % by 1999. The increase in the relative share of the GNP contribution, however, has been less rapid than anticipated as actual Union spending (and contributions) is increasing less than what is allowed by the own resources ceiling and less than what had been anticipated in 1992. While some improvement in the "fairness" of the financing system has already taken place, the largest part is still to come.

The share of the Community budget financed by the so called "traditional own resources" (custom duties and agricultural levies) has also continued to decline. In 1992 these resources still represented 22 % of total receipts, but in 1999 they are expected to drop below 15 %.

2. The introduction of a new own resource?

The trend described in the previous paragraph often prompts the demand for the introduction of a new own resource to increase the percentage of tax-based own resources. The VAT and GNP contributions are perceived by Member States as transfers from the national exchequers and not as real own resources of the Community.

However, the introduction of new own resources still presents technical and, above all, institutional obstacles. One important consideration is that the fiscal autonomy of the Union would not be significantly enhanced by an increase in the share of financing provided by tax-based own resources. As long as the residual financing of the budget is covered by a "complementary" resource activating transfers from the national exchequers, any increase in Community spending would still translate in a corresponding increase in own resources payments. A real modification would be brought about only by the passage to a situation where the whole of the Community budget would be financed by autonomous fiscal resources. However, this would represent a significant institutional development that would have little chance of being countenanced by all Member States in the present phase of the integration process.

In addition, the introduction of any new resource is likely to make the system less equitable as the yield pattern of the new resource by Member State is unlikely to correspond to the GNP shares and require the introduction of an equalisation mechanism that would adjust national contributions to make them correspond to the GNP shares. While this mechanism would make the system more equitable, it would also raise the question of whether it would not be more cost-effective to switch to a system entirely based on GNP contributions.

Indeed, a strong case could be made for replacing the VAT resource. Its weak link with contributive capacity has already led to the decision to reduce its importance. Furthermore, in the countries where the harmonised base is capped, the resource is already effectively a GNP resource since its base is a conventional "50% of GNP". A good case could also be made for replacing traditional own resources with GNP contributions. As the importance of traditional own resources for the financing of the Community budget decreases, the balance between their advantages and disadvantages as a source of Community finance shifts towards the latter. In particular, their collection and recovery procedures are very complicated, exposed to fraud and very costly in terms of controls. This would not mean that the Union could ignore the effective collection of customs duties by Member States since these duties constitute an instrument of Union trade policy, but would modify substantially the perspective of its involvement in this complex area.

On the whole, the considerations presented in this section do not suggest the existence of a strong case for a rapid modification of the present arrangements.

3. Main trends to 2006

A first wave of accessions will affect the budgetary positions of all the present Member States, reducing the positive balances of net beneficiaries and increasing the negative ones of the others. The applicant countries have levels of prosperity significantly below those of the Union and will have therefore a strong claim to substantial amounts of Structural Fund payments. In addition, the experience of the enlargement to Spain and Portugal suggests that long transition periods for the "own resources" payments of the applicant countries might be introduced.

Future expenditure flows in the Union will also be influenced by the necessary reforms of the main policies. The common agricultural policy will be modified along the lines of the previous reform and the changes will affect essentially the same products. The new reform will therefore affect the budgetary positions of the Member States along the pattern of the previous one. However, its effects on the budgetary positions might be smaller as income losses will only be partially offset by increases in direct aids.

tructural Fund spending in the new Member States will be financed through a combination of greater concentration of spending in the present Member States (which may supply about one third of the amounts needed) and of use of the margins created by economic growth (the other two thirds). However, the regions which will remain classified as "objective 1" and which experience high rates of unemployment will benefit from higher per capita transfers.

Internal policies will focus more on some key themes such as research and development efforts and the support of the completion of the trans-European networks. This concentration will be accompanied by stronger emphasis on selection criteria such as excellency and Community interest. This should lead to a more balanced distribution of expenditure among Member States.

Whereas the future budgetary trends for the United Kingdom are no more difficult to forecast than those for the other Member States, a considerable amount of uncertainty surrounds its future position in terms of relative prosperity, which is one of the factors at the base of the rebate granted to this country. Producing a projection of the relative prosperity of the United Kingdom to the year 2006 depends on forecasting, over a period of nine years, the rates of economic growth and of inflation of all Member States and the relative trend of the pound sterling if the United Kingdom decided not to join EMU. In a Union of 15 members, it is likely that in 2006 the relative prosperity of the United Kingdom would still be below the average of the Union. The accession of four or five of the applicant countries, however, might change this tentative conclusion.

At the time of the enlargement, it will be necessary to adapt the definition of the expenditure on which the calculation of the rebate is based to avoid an unjustified increase in its amount due to purely statistical changes. This is made necessary by the fact that with enlargement some expenditure flows directed to the new Member States, which are now considered "external expenditure" and therefore do not enter into the calculation, will be replaced by payments under internal policies, which enter into the calculation.

4. The future financing system

National contributions to the Union budget have become more proportional to GNP shares, thus improving the degree of fairness of the current financing system. Community expenditure has been increasingly directed at achieving cohesion goals, which has implied a substantial amount of redistribution. Even if relative positions have developed in line with what had been expected at the time of the negotiation of the present own resources decision, in some cases the combination of these trends and of low returns from agricultural expenditure has resulted in budgetary positions which are perceived as excessive net financial burdens.

The next enlargement, which will take place during the period covered by the next financial perspective, will inevitably provoke a deterioration in the budgetary positions of all the current Member States. This cannot come as a surprise and should not give rise to claims for compensation.

However, over the same period, the maintenance of the current financing arrangements and the effects of the reform of the main Community policies are not expected to lead to major changes in the relative budgetary positions of the Member States.

The uncertainties surrounding the future relative prosperity situation of the United Kingdom, however, lead the Commission to propose postponing a re-examination of the rebate mechanism until immediately after the first enlargement.

At that moment, it will be possible to proceed to an assessment of the situation on the basis of more reliable data. If the relative prosperity of this country were to be above the Union’s average, it would be appropriate to review the current arrangements and to foresee a gradual reduction of the current rebate.

The review might be extended to the financing of the budgetary rebate. If the data were to show that the effects of the reform of the common agricultural policy were significantly different from those expected and that they were leading to unjustifiable budgetary positions it might be conceivable to adjust its financing key. A first step in this direction was taken already in Fontainebleau when it was decided that Germany would pay two thirds of the amount resulting from the standard GNP key.

If and when the Union were to require an increase in its financial resources beyond the present 1.27% of GNP ceiling, a more fundamental reform might be considered. In such a case, it might become possible to re-examine the whole structure of the system of own resources. If, in addition, the budgetary positions were to be significantly affected by the increase in expenditure or by the reform of the structure of financing, it could be appropriate to envisage the introduction of a generalised system of corrections, which would also address the problems of the United Kingdom, aimed at smoothing further deteriorations of the largest budgetary imbalances.