European Union Finances

Traditionally, three branches of government are distinguished in public finance: the allocation branch, the distribution branch and the stabilization branch. Although the first two branches apply to the EU budget, the third does not for two reasons. First, the EU is legally obliged to balance its budget. Second, the EU budget accounts for only 1% of the EU GNI. The EU can only play a role in fulfilling the stabilization function by policy coordination as it does in the framework of the Stability and Growth Pact. The EU’s revenue system has developed from national contributions (until 1971) to a system of own resources. The traditional own resources (in the form of customs and agricultural duties) were introduced in the early 1970s. The VAT-based own resource was introduced in 1970, although it did not yield revenues until 1979. In 1988, a GNI-based own resource was introduced. The GNI-based own resource is now the EU’s primary source of revenue. Therefore, the current revenue structure resembles the EU’s financing method as it existed before the own resources were introduced as there is hardly any difference between the national contributions from before 1971 and the GNI-based own resource. The share of agricultural spending in the EU budget continued to grow until the late 1980s, when it amounted to approximately two-thirds. However, the share of the CAP has gradually declined due to the implementation of other policies and is expected to amount to approximately one-third by 2013. The EU has agreed on a ceiling of 1.24% of EU GNI for the expenditure. The problem of budgetary balances has led to the introduction of a number of corrections in the EU budget, which have considerably reduced the simplicity and transparency of the EU’s funding system. Moreover, it seems questionable whether these correction mechanisms are still justified. In addition, the problem of budgetary balances has proved to be a serious obstacle to substantive budget reform.