The post-Brexit EU budget: opportunity or more messy politics?

#CriticalThinking

Picture of Iain Begg
Iain Begg

Iain Begg is a Professorial Research Fellow at the European Institute and Co-Director of the Dahrendorf Forum at the London School of Economics and Political Science (LSE). He is also a participant in the Firstrun project funded under the European Commission’s Horizon 2020 programme

Every few years the European Union has to negotiate a new multiannual financial framework (MFF), establishing ceilings for different headings of expenditure. Agreeing a new MFF is invariably an acrimonious process, pitting net contributors against net recipients, the agricultural sector against those who would prefer to spend more on boosting competitiveness, and the member states against the European Commission and the European Parliament.

As always, there are many calls for reform of the EU budget as the current MFF (for the period 2014-20) comes to an end, and there is an expectation that Brexit will make it easier to achieve change. However, because underlying tensions over the budget will remain – and even be accentuated – hopes of reforming it are likely to be disappointed.

Brexit will have conflicting effects. The United Kingdom is the second largest net contributor to the budget, and the loss of its contribution will place a higher burden on other countries. Like the UK, several other member states favour a low budget ceiling, as they too want to avoid making larger fiscal transfers to net-recipient countries. As a result, support for a larger budget will be limited. The UK has also championed certain areas of spending, notably on competitiveness. Brexit may therefore see some areas resisted by the UK finding greater favour, such as on ‘solidarity’, but the UK often spoke for others who may now have to emerge from the shadows.

As always, there are many calls for reform of the EU budget

Since the era of Margaret Thatcher, known for her demand ‘I want my money back’, the UK has had a rebate on its gross contribution to the budget and several other countries have subsequently also been accorded what are now called ‘corrections’. A high-level group on the EU budget – chaired by former Prime Minister of Italy and former EU Commissioner Mario Monti – advocated doing away with this increasingly opaque system, and the UK’s absence might allow them to be scrapped.

However, the rationale for these corrections is the decidedly uneven pattern of EU expenditure, with some net recipients receiving inflows of as much as 5% of GDP. Unless spending on agriculture, in particular, is substantially reduced, demands for corrections from other net contributors will not disappear. A strong status quo bias in EU expenditure programmes means major change is unrealistic.

The Monti group also called for new own resources to replace national contributions, suggesting, among others, financial transaction taxes and energy-related taxes. The UK consistently opposed new EU taxes, so that Brexit may facilitate a move in this direction, but it is important to stress that tax-payers in the member states would still have to pay, even though new resources would reduce what national governments have to contribute.

Brexit notwithstanding, the challenge is less the technical one of whether a new resource with optimal attributes can be identified, than the political one of whether member states and their national parliaments will be willing to cede tax-raising power to EU institutions. In the past they have resisted doggedly.

A larger budget is unlikely to win support at a time of squeezed public finances

Further disputes could arise from European Commission President Jean-Claude Juncker’s provocative suggestion (in his State of the Union address) for “a strong euro area budget line within the EU budget”, as well as a larger EU budget. A larger budget is unlikely to win support at a time of squeezed public finances, and a separate eurozone budget would antagonise countries that do not use the common currency, making it hard to get the MFF ratified.

The budget pressures might be eased if the UK continues to make substantial net payments to the EU, as Norway does. But that would trigger howls of protest from those Britons who voted to leave the EU after believing a campaign pledge that this would save £350 million per week that would be repatriated from Brussels to spend on healthcare.

In addition, the UK will face awkward decisions about whether to continue to fund programmes currently supported by the EU budget – notably for agriculture and research. Hence, even if the Brexit divorce bill is settled relatively amicably, EU finances will continue to weigh on UK politics. Theresa May said in her Florence speech that she does “not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave”. That partially alleviates the short-term concerns of other member states about the effects of Brexit on their public finances, but certainly does not go all the way.

As the 18th century writer and satirist, Alexander Pope, put it: “blessed is he who expects nothing, for he shall never be disappointed.”

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