Sunday, February 10, 2013

10/2/2013: EU Budget 'cut': neither reformist, nor significant enough

EU has agreed the next multi-annual framework for its budget. One of the best summaries I have read is here:

The framework covers 2014-2020 period.

The reduction of the EU Budget from from 1.12% of GNI to 1% of GNI, in my opinion, is in line with the overall fiscal tightening across the EU and is a good thing (note, obviously my analysis will be different from that of Bruegel - linked above). The reason why I perceive this to be a strength of the Budget is that I generally do not perceive EU expenditure as being more economically efficient or necessary than that by the Member States. The further you detach spending from the sources of revenues (and the EU Budget is as far detached as feasible to imagine), the more weakly is the expenditure anchored to the needs of the economy.

Net reduction - as measured by the payments, is from EUR988bn to EUR908.5bn - is a relatively marginal 8.05%, not exactly an earth-shattering level of fiscal crunching. Furthermore, much of planned payments allocated in the past have gone unspent, implying that the effective 'cut' is most likely going to turn out much shallower than 8.05% headline figure.

Crucially, I disagree with the implicit Brugel position (based on their criticism of the Budget's 'pro-growth' momentum) that the EU expenditure should be considered in the light of economic growth enhancement or economic contraction. The EU Budget allocations can and do set dangerous precedents of creating permanent interest groups reliant on EU funding for jobs and demand generation. One of the best examples are EU research and development subsidies. Since the EU budget is drawn out of the national resources, any 'stimulus' the EU Budget can create is at the very best a reallocation of similar stimuli from national economies. Synergies at the pan-European or cross-European investment levels (e.g. building common integrated infrastructure etc) enhance the EU Budget growth-support capacity, but bureaucratic duplication, and interest groups politics reduce it in return. With much of EU Budget going to 'soft' programmes, where (1) substitution effects relative to nationally-administered programmes are unclear, and (2) transfers are subject to EU-level political and bureaucratic objectives and constraints, it is hard to imagine the EU expenditure to be more 'stimulative' than a national expenditure.

Furthermore, in the environment of continued debt consolidation and budgetary tightening policies at the national levels, it is hard to imagine that the EU spending priorities would see more efficient allocation of funds than tighter national priorities. In other words, one has to ask a simple question of whether funding another cross-border EU 'cohesion' project is the better use of increasingly scarce resources in the environment where both countries involved are cutting back hospitals and schools.

As Bruegel correctly points out, there are no reforms undertaken in the Budget. My concern here, however, is more on the expenditure side, while Bruegel concern is focused on revenue side. I simply do not see the EU Commission to currently have either democratic or fiscal capacity to begin collecting direct taxes of any variety. Proposed move of the Commission into indirect taxation (e.g. FTT etc) is likely to cement further the democratic deficit in the EU by providing EU Commission with all the trappings of sovereign power and requiring no direct accountability usually associated with direct taxation.

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