The EU’s shrinking budget

We’ve heard a lot about how Brexit will affect the UK’s finances. But what impact will it have on the EU’s? Simon Wilson reports.


EU structural funds account for at least 60% of public investment in Portugal
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How big is the EU's budget?

In the three most recent years for which full accounts are available (2014 to 2016), the EU spent on average €141bn a year; around €1trn during the current seven-year budget agreement (known as the Multiannual Financial Framework, MFF) that covers the years 2014 to 2020. That's around one percentage point of GDP across the 28 member states, or just 2% of all public spending by governments in the bloc.

Compared with the UK, that makes the EU a fiscal minnow: it spends around a sixth of what the UK does (£828bn projected in the current financial year). And despite its status as a supranational institution, national governments manage 80% of the money in the EU budget.

Where does it get its money?

The majority (67%) comes from the coffers of each member state, based on a standard proportion of its annual gross national income (GNI). That proportion must not legally exceed 1.23% of GNI, and it's a bit less than that (1.02% in 2014-2015). This system means, broadly speaking, that richer countries pay in more and get fewer direct benefits.

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In addition to direct transfers, the EU levies customs duties on imports (accounting for 14% of income) in other words, it generates revenue from protectionist measures and takes a slice of each state's VAT revenues (11%). It gets another 5% from fines, interest on late payments, and contributions from non-member states (such as Norway and Israel) for access to specific EU programmes.

What does it spend it on?

Of the €141bn annual spend (in 2014-2016), €41.5bn a year (30%) went direct to farmers under the common agricultural policy and another €11.8bn (9%) went to rural development. Structural funds made up €47.8bn (34%) a year, which goes on things such as new energy, transport or communications infrastructure, and grants to small businesses to promote competitiveness.

Another smaller, but significant, chunk goes on Horizon 2020, the EU's main research and innovation programme, accounting for €9.2bn (7%). In some countries this spending is vital. In Slovakia, Bulgaria and Hungary, for example, transfers from the EU account for more than 4% of GDP. And in Portugal, Croatia, Lithuania and Poland, EU structural funds account for at least 60% of public investment.

How big a hole will Brexit make?

Gross, the UK contributes around €18.2bn a year (on figures from the Centre for European Reform). After accounting for what we get back, the UK's departure will leave a funding gap of about €10bn or €11bn a year (some projections put it at €12bn, or even €13bn). In other words, Brexit means the loss of a major, large, relatively rich country an overall net contributor to the EU and a funding gap for Brussels in the region of 8%.

How will they fill it?

Gradually, they hope, and without big, painful cuts in spending, by increasing the (gross) contributions made by member states (from about 1% of GNI now, to a level capped annually at 1.08%). A recent paper for the Bruegel think tank calculates that assuming modest annual economic growth GNI for the post-Brexit EU27 will be 28.1% higher in 2021-2027 than in 2014-2020, due to inflation and growth.

Under this scenario, the EU could keep its budget at the historic level of 1% of GNI and still protect all of its existing spending in real terms, with a bit left over. That's the optimistic scenario. The pessimistic one is that the bloc stagnates, there's no Brexit deal and the Brexit black hole turns out to be more like €14bn a year €100bn over the seven-year period.

Is that possible?

By chance, Brexit (assuming it happens in March 2019) will coincide with a period of intense negotiation for which, read bitter wrangling over the next Multiannual Financial Framework, covering the years 2021-2027. The EU is already beset by political divisions between west and east, over issues including immigration, border security, and the populist-authoritarian turn in the likes of Poland and Hungary.

Negotiations over the next budget are all but certain to exacerbate these, since the Commission wants to rebalance spending away from eastern Europe (a beneficiary of much largesse since the "A10" enlargement of 2004) towards the south (badly hurt by the crisis and years of ensuing austerity).

What is it planning to cut?

The Commission's draft proposals were published in May, proposing a budget of €1.279trn. The main points are a 5% cut to the common agricultural policy (and a reskewing to favour smaller farms) and a 7% cut to cohesion funds (together with new criteria that would see funding to eastern European and Baltic countries slashed in several cases). Those cuts will be used to fund the EU's major new priority: it wants to expand its coast and border guard from 1,200 to 10,000 staff, and almost triple its budget for border management, migration and refugee flows from €12bn to €33bn (over the seven years).

Where could it get more cash?

Budget commissioner Gunther Oettinger "wants to create several new sources of income" including by imposing a tax on non-recyclable plastics, and also by redirecting revenues from selling carbon pollution permits to the EU. The Commission wants to phase out rebates for rich countries (such as the Netherlands, Denmark and Austria).

It also wants to create a "rule of law" mechanism that links budget payments to a country's respect for "EU values", although Brussels insists this won't be used to target the likes of Hungary and Poland, with which it has wrangled over issues including judicial independence. Negotiating all this could make Brexit look like a piece of cake.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.