The European Commission, on July 16, proposed a modest increase in the EU budget for the 2028-2034 period, raising it from approximately 1.1% of the current gross national income (GNI) to 1.26%. This increase is clearly insufficient given the significant spending gaps in Europe. A September 2024 report identified an investment gap of 4%-5% of GDP, although it did not clarify the role of public versus private spending or the contribution of the EU budget. It has been argued that an additional increase of 0.8% of GDP would be adequate for joint spending at the EU level. The Commissions proposal for an additional increase of 0.15% of GNI falls significantly short.
The resistance of several EU governments to this modest increase is surprising, considering that the EU faces growing spending needs. A large part of the increase will be dedicated to repaying pandemic recovery debt, which will limit funds for new initiatives. Moreover, the proposed increase would be barely noticeable from the perspective of national public spending, as public authorities in the EU usually spend more than 40% of GDP.
Change in expenditure allocation
A more promising proposal is the change in expenditure allocation. Allocations for agricultural and cohesion policies would decrease in relative terms, while competitiveness, including research, education, and cross-border infrastructure, would see significant increases in EU spending. Defense and energy connectivity would also receive more funds, as would ‘global action’ (external spending). These changes are positive but do not go far enough.
Research shows that direct income subsidies for farmers lack a clear European justification. These payments do not support food security and serve mainly as social policy. Current agricultural practices also harm the environment, including biodiversity, a problem that the proposal ignores. While eliminating agricultural subsidies may be politically impossible, they should be transferred to national budgets with harmonized criteria to maintain a level playing field. This would free up EU resources for areas with truly European added value.
There is a stronger justification for EU-level funding of cohesion policy. As the poorer eastern countries of the EU have narrowed the gap with the richer western countries, some reduction would be reasonable. The future framework for agricultural and cohesion policies would be based on new National and Regional Partnership Plans. This planning could improve strategic thinking, but experience with pandemic recovery plans suggests caution. The recovery of these plans was difficult to compare and prioritized the distribution of funds over results. The Commissions role in the design and evaluation of these plans, as well as in the evaluation of the overall impacts of the pandemic recovery facility, created conflicts of interest. This risk could be transferred to the new partnership plans. Moreover, such partnership plans could involve greater centralization, limiting the roles of regional and local stakeholders.
The proposed increases in spending on competitiveness and defense, and a strong increase in funding for energy interconnectors, are likely to be the least controversial elements of the Commissions proposal. The real problem here is that the spending plans are not ambitious enough. Spending on global action should also increase more.
Revenues
Regarding revenues, most of the Commissions proposals are sensible. To raise money for the EU budget, there will be new taxes on emissions (supporting the decarbonization goal), tobacco (promoting healthier lifestyles), and unrecovered electronic waste (protecting the environment). However, these revenues would also be funded through national budgets and could therefore face resistance.
A proposal for an annual fixed tax on large companies is controversial because it would impose unequal burdens based on the size and profit margins of companies. This corporate tax seems intended to replace previous ideas of digital taxes, possibly due to pressure from the US during the Trump presidency.
The EU budget is already partly funded by customs duties. A proposal to reduce the share of customs duties retained by EU countries from 25% to 10% is eminent. However, as a customs union, the EU should receive all the benefit of its commercial income, with only a modest collection fee (perhaps 2%) retained nationally.
Equally welcome is the proposal to eliminate rebates from the EU budget, which since the 1980s have evolved into complex and opaque arrangements that make contributions regressive, with richer countries paying a smaller proportion of their GNI than poorer ones.
Additional instruments
Finally, the Commission suggests some instruments outside the regular seven-year budget, including an emergency fund and a facility for war-torn Ukraine, although the details remain unclear.
Despite the positive points, the plan falls far short of what Europe needs to address strategic challenges. It also fails to address some challenges related to biodiversity loss and performance measurement. The limited ambition may reflect the Commissions concern that EU countries would reject a bolder proposal. It is hoped that the final agreement will not dilute it further and that the details will be clarified in a way that genuinely addresses Europes strategic needs.
