142-2011 29 juin 2011

Myths about the EU budget and the Multiannual Financial Framework

The EU budget is often written about, but not always correctly. This Memo sets out a number of commonly held misconceptions and provides the real facts and figures about them.

1. The EU budget is enormous. No, it is not. The EU budget was around 140 billion in 2011, which is very small compared to the sum of national budgets of all 27 EU Member states, which amount to more than 6,300 billion. In other words, total government expenditure by the 27 Member States is almost 50 times bigger than the EU budget! To put this in perspective, the average EU citizen paid only 67 cents on average per day to finance the annual budget in 2010. This is less than half the price for a cup of coffee hardly a large expense given the huge benefits that the EU brings citizens. In fact, the EU budget is smaller than that of the budget of a medium-sized Member State like Austria or Belgium. You can also look at it another way: the EU budget represents around 1% of EU-27 Gross Domestic Product the total value of all goods and services produced in the EU whereas Member States budgets account for 44% of GDP on average. The EU budget is always balanced, which means no single euro is spent on debt. And 94% of what is paid into the EU budget is spent in Member States on policies and programmes that benefit citizens directly.

2. The EU budget is constantly on the rise whereas national governments reduce their spending. Wrong. National budgets are NOT decreasing, they are increasing: Between 2000 and 2010, national budgets in the EU increased by 62 % while EU budget increased by 37% over the same period. In 2011, 23 national budgets out of 27 are increasing. In 2012, 24 national budgets out of 27 are due to increase according to the latest estimations.

3. The bulk of EU expenditure goes on administration. This is absolutely wrong. The EU's administrative expenses amount to less than 6% of the total EU budget, with salaries accounting for around half of that 6%. More than 94% of the European budget goes to citizens, regions, cities, farmers and businesses. The EU budget focuses on bringing growth and jobs, tackling climate change, migration, cross-border crime and other challenges that affect us all. It helps boost prosperity, for example by better interconnecting Europeans through energy, transport and ICT infrastructure, by supporting less well-off regions to create growth and jobs both there and in the rest of the EU, and by pooling our efforts in areas like research. It is also about securing our own food supply. And finally, it is about making the EU's size count in the world just as the US and China make their size count, and pooling our efforts to help the world's poorest people. The salaries are paid to staff delivering and managing valuable EU policies that have a direct positive impact on citizens. Think of air traffic liberalisation, passenger rights or cheaper roaming charges. Or think of the Commission's decisions in antitrust and cartel cases, where consumers have been cheated of millions of euros through illegally inflated prices. In 2010, the estimated customer benefits resulting from the Commission's cartel decisions was at least 7.2 billion. Commission staff are in charge of negotiating trade agreements that help to bring down prices of consumer goods and offer a wider choice of affordable products. They are also involved in helping the EU to draw the right lessons from the financial and economic crisis through better regulation and supervision of financial markets. Administrative costs have been stable for a long time, and over the past five years serious efforts have been made to keep them low. The Commission has conducted a zero growth policy in relation to staff numbers. It has dealt with new competences and priorities through redeployment of existing staff and has asked for no extra staff beyond those resulting from enlargement. The Commission also decided to freeze its administrative expenditure in 2012, a 0% change. Just seven years ago, the European Commission undertook a major reform of its administration. This included lower recruitment salaries, creation of a contract agent category with lower salaries, higher retirement age, lower pension rights and higher pension contributions. This reform has already saved the EU taxpayer 3 billion, and is expected to generate another 5 billion in savings by 2020.

4. The EU budget is riddled with fraud. The European Court of Auditors gives our accounts a clean bill of health and says that they correctly reflect how the EU budget is spent. It is true that is some policy areas, the Court of Auditors still has a problem to sign off our payments. In cohesion policy for example the error rate is still slightly above 5% though this represents a considerable reduction. The Court estimates the Commission error rate at between 2% to 5% in our payments, depending on the policy area, whereas the threshold set by the Court is a 2% error rate. However: A 2% to 5% error rate is not big. It means that a minimum of 95% of our payments are correct. So we are not doing badly at EU level. Errors don't mean fraud. Suspected fraud affects only a very small part of the budget, accounting for 0.2% of the EU budget.

Last May, the Commission proposed steps to improve accountability via the review of the financial regulation, by which the Member States' national paying agencies for regional aid would be required to issue management declarations of assurance on EU funds (as is already the case in agriculture), subject to an independent audit. So far, the reaction from Member States has not been enthusiastic.

5. The EU budget is decided by Eurocrats without any democratic procedures. Wrong. The annual EU budget is decided by elected politicians, in the European Parliament and in the Council that brings together the Member States. The Commission only proposes the budget, and has to respect the ceilings set out for a period of time (currently 2007-2013) by these elected politicians. The Commission proposes the Multiannual Financial Framework. It is then negotiated and adopted according to transparent and democratic procedures, in full respect of national sovereignty and democratic rights. For expenditure, the decision on the regulation defining the new Multiannual Financial Framework (MFF), which will kick in as of 2014, is taken by the European Council acting unanimously, after obtaining the consent of the European Parliament, given by a majority of its members. For own resources that finance the budget, the Council must take a unanimous decision after consulting the European Parliament. This decision enters into force only once all Member States have approved it in accordance with their constitutional requirements. Also for the annual EU budget, EU decision-making follows strict democratic procedures, which are similar to those of most national governments. The initial proposal for the annual budget comes from the Commission. The budget is examined and agreed by the Council and the European Parliament. The final agreement is usually reached in December each year. Every citizen can follow the process of budgetary negotiation. The documents are on our web sites and detailed discussions in the committees of the European Parliament can be watched online.

6. The EU costs too much. Simply not true. A Tax Freedom Day comparison is telling. This is the amount of time during the year that people have to work to pay their total tax burden. In most Member States, citizens have to work well into the spring and summer until they have paid their contribution. In contrast, the average European has to work only four days, until 4 January, to cover his or her contribution to the EU budget.

7. The EU finances silly projects like dog training centres or Elton John concerts. This is another fallacy conveyed by some. In both cases, the relevant authorities had to pay back every single cent that they wrongly claimed. Neither cost a euro to the taxpayer. Generally, the national and regional authorities in Member States select projects which they think are best suited to their needs in line with the strategies and priorities agreed with the Commission. Checks at different levels (project, national, EU) ensure the taxpayers' money is protected to the best possible extent. If a claim is not legitimate, the EU budget does not fund it.

8. The Commission wants to introduce a direct EU tax and increase the tax burden on citizens. This is wrong. The Commission has never floated the idea of a direct EU tax. Member States will remain in control of raising taxes. The Commission is not becoming your taxman. Ideas for new own resources as presented in

the budget review are not about extra money for Brussels. It is not about adding to the tax burden of citizens. It is about changing the mix of resources that finance the EU budget. Every euro that is collected under a reformed system reduces the national contributions of Member States and makes the new budget fairer and more transparent. Did you know that any decision on EU financing requires the unanimous agreement of Member States and subsequent ratification according to their constitutional requirements? Implementing rules require, in addition, the consent of the European Parliament. This means that EU own resources are subject to strong parliamentary control and that Member States' sovereignty and democratic rights are fully assured.

9. Most of the EU budget goes to farmers. Wrong. In 1985, around 70% of the EU budget was spent on agriculture. In 2011, direct aid to farmers and marketrelated expenditure amount to just 30% of the budget, and rural development spending to 11%. This declining path continues. Moreover, this relatively large share is entirely justified. Agriculture is the only policy almost entirely funded from the EU budget. That means that European spending replaces to a large extent national spending, which is why it accounts for a substantial proportion of the EU budget. The EU budget pays what national budgets do not pay anymore since there is a Common Agricultural Policy (CAP). Successive reforms of the Common Agricultural Policy have moved support away from production to direct income support for farmers, provided they respect certain health and environmental standards, and for projects to stimulate economic activity in rural areas. So the CAP is constantly developing. The EU has also seen the accession of 12 new member states, most of which have large agricultural sectors. But there has been no increase in the CAP budget to cover these additional costs.

10. Because food and commodity prices are high, we can scrap our farm subsidies. On the contrary. The rise and fluctuation in food and commodity prices highlights the importance of investing in agriculture in order to better match supply to demand. High prices mean that demand is stronger than supply. Global food demand is predicted to rise by 50% by 2030 as population growth is accompanied by changes in dietary patterns in many emerging economies. The issue therefore is a global one, which underlines the fundamental challenge of food security and the importance that Europe maintains its agricultural production potential in all areas in order not to become over-dependent on food imports. Furthermore, since in Europe there is little room for expanding the production area, productivity growth has to come through innovation and research. The EU's rural development policy can help our farmers embrace new production possibilities and accelerate technology transfer.

11. The Common Agriculture Policy creates food surpluses and hurts farmers in the worlds poorest countries. The days of wine lakes and butter mountains are long gone. We have seen 10 years of reforms to make our agricultural policy more development-friendly. Today, developing countries have excellent market access with low or zero tariffs and market distortions are significantly reduced. Today, around 70% of the EU's agricultural imports originate from developing countries. Furthermore, export subsidies have been reduced drastically: 15 years ago, we spent 10 billion a year on export subsidies. In 2009, we spent no more than 350 million. In the context of the WTO

negotiations, the EU has offered to eliminate all export subsidies by 2013. By 2011, 90% of direct support is non-trade-distorting (not linked to production). Did you know that the average EU farmer receives less than half of what the average US farmer receives in public support? And did you know that the EU is not only the biggest donor of development aid in the world but also the largest trade partner for Africa? Almost 40% of African exports go to the EU. And the value of EU imports of agricultural products from developing countries is 20% higher than the figures for the USA, Canada, Japan, Australia and New Zealand put together.

12. Cohesion policy is expensive charity. Cohesion policy helps poorer regions and countries catch up and connect to the Single Market. It is a future-oriented investment policy that clearly benefits the rest of Europe by creating growth and jobs across the board. For example, intra-EU exports have gone up considerably to regions benefiting from cohesion funds. There is a clear link between cohesion policy and growth in the EU. Studies have shown that GDP in the EU-25 as a whole has been 0.7% higher in 2009 thanks to cohesion policy investments over the 2000-2006 period. This is estimated to rise to 4% by 2020. In the EU-15 alone, the estimate is a cumulative net effect on GDP of 3.3% by 2020. In other words, regional investment is European development. Growth in one poorer region leads to the purchase of goods and services from another, richer region. This boosts the development of the Single Market, which represents between 60% and 80% of Member States' exports, considerably more than to third countries like China, India or the US. Cohesion Policy over the 2000-2006 period resulted in a return of 2.1 for each euro invested. By 2020, the return is estimated at 4.2 per euro invested. Cohesion Policy also helped to increase the level of employment. Estimates for 2009 are that the number employed was 5.6 million higher as a result of policy in 2000-2006, or an average of 560,000 more a year than without the Cohesion Policy. In the aftermath of the recent downturn and debt crisis, cohesion policy has a key role in the economic and social recovery, leveraging investment in growth sectors like energy efficiency. It also helps people train and improve their skills to find a job.

13. The Multiannual Financial Framework is another example of the EU's path towards a centralised planning economy. Certainly not. The Multiannual Financial Framework (MFF) defines the EUs long-term spending priorities in line with the agreed political priorities and sets annual maximum amounts to be spent on each priority. The financial framework stretches over several years (for example from 2000-2006 and from 2007-2013) to ensure sound and responsible financial planning and management. With such a multiannual financial framework, annual EU budgets cannot grow out of hand and must focus on real priorities. The EU budget never runs a deficit, never builds up debt and only spends what it receives. It is always balanced.

The EU budget explained:http://ec.europa.eu/budget/explained/index_en.cfm The Multiannual Financial Framework explained http://ec.europa.eu/budget/reform/index_en.htm