Jörg Haas, Brexit will shake up the EU budget, and that’s a good thing
Brexit will reshape the EU’s finances. It forces the EU to choose between spending less and increasing national contributions. Jörg Haas argues that this could lead to conflicts about burden-sharing, but it could also offer a window of opportunity for overhauling the EU budget, a goal that has proven elusive for many years. A pragmatic package deal could include slightly higher member state contributions in return for an overhaul of the EU’s spending priorities.
Last year, the British debated extensively what effect leaving the EU would have on their budget. In the coming years, the EU will need to discuss the effects Brexit will have on its finances. In this text Jörg Haas shows, that there are three kinds of consequences.
How does Brexit reshape the EU’s finances?
Firstly, there is the “Brexit bill”. The EU and the UK need to agree how the assets and liabilities of the EU should be split. This will likely require a one-off payment by the UK that has been extensively discussed in the press over the last months.
Secondly, the EU will face a structural funding gap. Since the UK is a net contributor to the budget, there will be a revenue shortfall of around €10 billion per year even if the EU no longer spends any money on programmes in the UK.
Finally, Brexit will simplify the EU revenue system. The infamous UK rebate on budget contributions will disappear. This also will spell the end of the “rebate on the rebate”, an exception that reduces payments for some large net contributors.
The latter two effects have received less attention than the Brexit bill, but could ultimately prove more important for the further development of the EU. While Brexit will have an immediate effect on the EU’s finances, the most important implications concern the next budgetary planning period, starting in 2021.
How to fill the Brexit gap?
How can the EU address the €10 billion structural “Brexit gap” in its budget? Since the UK has ruled out large regular payments, Europe has to choose between increasing the contributions paid by the remaining member states (EU-27) and cutting the budget.
If national contributions to the EU budget are increased to make up for the shortfall, all countries will have to pay more according to their economic strength. In order to maintain the spending level of the EU-27, national contributions would need to increase by 8% on average. But more importantly from a political viewpoint, the increase would be highest for a number of countries that are already among the largest net contributors. This is because the aforementioned rebate on the rebate would disappear. Austria, Germany, The Netherlands and Sweden would consequently see their contributions increase by around 15%.
Cutting the budget might seem like an appealing alternative. An expenditure cut of €10 billion yearly would maintain national contributions constant. An even larger reduction of around €23
billion yearly would be needed to maintain spending at 1% of GNI, which has long been a political objective of the EU member states. But the impact of such a cut on the EU’s programmes should not be underestimated. In 2015, the entire European research framework, Horizon 2020, had a budget of €10 billion. All EU spending on foreign policy amounted to less than €8 billion. That reminds as us that most EU spending still goes to cohesion policy (around €50 billion) and the common agricultural policy (almost €60 billion). Cutting either of them could balance the budget, but such a move would likely meet strong resistance from countries like Poland and Hungary.
What are the political implications?