The Multiannual Financial Framework 2028-2034: a seven-year funding plan
The European Union’s budget is developed over seven years in the form of a Multiannual Financial Framework (MFF). The MFF determines the revenue and expenditure ceilings for each major European policy and programme (the Common Agricultural Policy, Erasmus, Cohesion Policy, etc.). Its importance cannot be understated, as it involves identifying Europe’s long-term priorities and efficiently allocating €1074.3 billion (the amount of the 2021-2027 MFF) of the European budget. Once an agreement has been reached, the MFF is very rigid, and can only be marginally modified over the following seven years. The rapidly changing state of the world, including its many crises and the increasingly dangerous consequences of climate change, mean that Member States and the European Commission have no room for error.
The 2021-2027 budget period has been marked by an innovation that no one could have seen coming if the Covid-19 crisis had not taken place: Europe has created its own debt to boost its economic activity. In response to the dramatic consequences of the Covid-19 crisis, in 2020 the 27 Member States agreed on a €750 billion recovery plan, “NextGenerationEU” (NGEU), to relaunch European growth by investing in transition and innovation in the green and digital sectors. As a result, the European budget has almost doubled compared to the initial financial framework. In return for this massive and rapid injection of money – the €750 billion is to be injected into the economy by the end of 2026 at the latest – the EU and the Member States have committed to start repaying the NGEU debt from 2028, over a period of 30 years.
NGEU debt repayment vs. the need to increase EU spending
There is more to worry about that the debt. In addition to repaying the loan itself, the EU has to pay the interest costs, which must be settled each year, starting now. And while interest rates were advantageous at the time of the agreement in 2020, the deterioration in the world economic situation has pushed up the cost of borrowing. According to the European Commission, the additional cost of interest payments is estimated at €15 billion, double the amount of interest initially planned for the period 2021-2027. From 2028 onwards, the Commission estimates that repayment of the NGEU debt will amount to between €25 billion and €30 billion a year. By way of comparison, this is roughly equivalent to the cost of running the Erasmus programme – for seven years.
At the same time, EU spending needs to rise to meet the wider challenges of making European industry more competitive, accelerating the green and digital transitions, increasing defence spending and continuing support for Ukraine. Until now, the European budget has represented only around 1% of European GDP.
The solution to this difficult equation is not likely to come from Member States’ contributions. Each Member State pays an annual contribution to the European budget, the amount of which depends on the economic weight of each country. National contributions accounted for 64% of EU revenue in 2023. However, the financial situation in Europe is pushing Member States to consolidate their budgets in relation to their stock of debt – France’s response is currently the best example of this. The European Commission therefore expects national contributions to stagnate or potentially even decrease during the forthcoming discussions on the 2028-2034 MFF.
Are new “own resources” the only way out of the incompatibility triangle?
As the scenario of increasing national contributions is unlikely, the solutions for resolving this triangle of incompatibility are to be found in the EU’s other source of revenue, namely, its own resources. For now these mainly consist of the following: a fraction of VAT, customs duties; a small part of the EU Emissions Trading Scheme (EU ETS), and the plastic tax. To generate more revenue, two options are on the table: broadening the tax base of an existing European tax, or creating a new source of taxation.
The European Commission, together with the Member States, had already envisaged repaying the NGEU debt in part from new own resources. At the same time as their agreement on the NGEU recovery plan in 2020, the Member States also agreed on a roadmap for setting up new own resources. In December 2021, and again in June 2023, the European Commission proposed the following new sources of revenue for the EU’s own budget: an extension of the areas covered by the EU Emissions Trading System (EU ETS) (maritime, road and construction sectors), and a better distribution in favour of the EU of the revenue generated by the system; the creation of the Carbon Border Adjustment Mechanism (CBAM); and the redistribution of a share of the minimum tax on multinationals’ profits (resulting from the OECD/G20 agreement on international taxation signed in 2021).
But since the European Commission’s proposals, little concrete progress has been made on the introduction of new own resources, and negotiations on the 2023 proposals are currently at a standstill. Political agreement has been reached on the introduction of the CBAM, but an additional agreement still needs to be adopted unanimously by the Member States to transform the revenue generated into own resources for the Union, which should be achieved under the new Polish Presidency of the Council of the EU. However, the revenue of €1.5 billion expected is far too little to have a hope of paying off the NGEU debt. As for the rest of the new own resources on the table, there is no news yet, although the reform of the EU ETS could bring in €26 billion a year, while the minimum tax on multinational profits would bring in around €15 billion a year to Europe’s coffers.
In the absence of new own resources, the Member States will have to resort to reducing funding to existing policies or programmes, even if only the intended increase in European defence. A perilous exercise, given that France is unlikely to accept a reduction in the Common Agricultural Policy budget. Poland, which has just taken over the Presidency of the Council of the EU, is likely to insist on a generous cohesion policy, and there are still 25 other Member States to satisfy. And even if the Council and then the European Parliament agree on new own resources, that is just the beginning of the obstacle course to final adoption. European treaties require national ratification in each Member State. And this process is almost as long and complex as revising a treaty.
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