Committee Reports > List of Committees > Joint > 1979 > Committee on the Secondary Legislation of the European Communities > Report No. 47 - Financing the Community Budget

REPORT

INTRODUCTION

1. The Joint Committee has considered a Communication [R/3185/78 (FIN 855)] sent by the Commission to the Council on 27th November, 1978 and entitled “Financing the Community budget—the way ahead”. This document deals with the revenue that will be required to finance the Community budget after 1981. It has been under consideration by an ad hoc working group of the Council and was discussed at the Joint Council of Foreign Affairs and Finance Ministers on 2 April, 1979. At the close of the discussion, the President noted that the questions arising in this area were extremely difficult and that forecasts were uncertain as to when the Community’s current own resources would reach their limits. Accordingly, reference was made to the need to exercise strict economy in managing Community policies, and the Commission was asked to consider these issues in the light of the comments made by the Council.

Financing of Community Budget

2. The Community Budget is financed according to the system of “Own Resources” which was introduced under a Council Decision of 21st April, 1970 and which was accepted in the Act of Accession by Ireland, the United Kingdom and Denmark. Under this system, which is designed to afford a measure of financial autonomy to the Community, Member States are required to appropriate in full to the Budget the revenues arising under the following heads which, in accordance with the Decision of 21st April, 1970, are deemed to be the Community’s “Own Resources”:

(i)the common customs tariff (CCT);

(ii)agricultural levies on trade with non-Member States:

(iii)sugar production and storage levies;

(iv)the yield from a rate of VAT, not exceeding 1 per cent, applied to the uniform basis of assessment provided for under the Council’s Sixth Directive on VAT (the actual rate of VAT to be determined within the budgetary framework and to represent the difference between the revenue accruing under (i), (ii) and (iii) and the aggregate budgetary requirements, that difference being expressed as a percentage of the Community’s VAT base as defined in the Sixth Directive).

A refund of 10 per cent of the CCT, agricultural levies and sugar levies is payable to Member States to cover their collection costs. As regards (iv), the Council Decision of 21st April, 1970 provides that, for those Member States which have not enacted the necessary national legislation implementing the Sixth VAT Directive, the amount of the Budget, which otherwise would have been financed by way of a VAT related contribution, is to be financed according to their relative share in the Community’s GNP.

Ireland’s Contribution

3. The Value Added Tax (Amendment) Act, 1978—implementing the Council’s Sixth Directive—was enacted by the Oireachtas in December, 1978 and its provisions were brought into effect on 1st March, 1979. As Ireland had not implemented the Sixth Directive on 1st January, 1979 this means that, for 1979, our Budget contribution will be related to our share in the Community’s GNP. We will be liable for VAT based contributions with effect from the 1980 Budget.

4. In the period to end-December, 1979, to ensure a smooth progression towards full participation in the Own Resources system, the contributions of Ireland, the United Kingdom and Denmark are being calculated according to transitional provisions in the Act of Accession. Ireland’s contributions in the period are as follows:

As regards 1979, under the transitional provisions in Article 131 of the Act of Accession Ireland will have to pay to the Budget an amount equivalent to our full Own Resources liability (£68 million). The Commission will refund to the Exchequer the amount by which this payment exceeds our liability as calculated in accordance with Article 131. The net liability in respect of the 1979 Community Budget, before allowing for the 10 per cent refund, is estimated at £64 million.

5. Receipts from customs duties and agricultural levies are brought to account in the Exchequer as tax revenue; Ireland’s Budget contribution is a charge on the Central Fund i.e. it represents a permanent charge on the State revenues and does not have to be voted annually by Dáil Éireann; and the 10 per cent refund in respect of collection costs is credited to the Exchequer as non-tax revenue. The Article 131 refundable element of our contribution, which will not arise after this year, is treated as an Exchequer capital transaction.

6. From 1980 onwards, transitional provisions will no longer apply. All Member States, including Ireland, will have to meet their full liability under the own resources system. Quite apart from the ending of the transitional provisions, the changeover from GNP related contributions to VAT own resources in 1980 will involve an increase in Ireland’s Budget contributions.

Budgetary Outlook

7. As the Commission observes neither customs duties nor agricultural levies are levied specifically for financing the Community budget. Customs duties have economic and political rather than financial objectives and in any event receipts from this source are declining in real terms. Agricultural levies are primarily for the purpose of implementing the common agricultural policy and their yield being dependant on trade, prices and monetary fluctuations is inconstant and uncertain. VAT is therefore the primary source to which the Community must look to meet expanding expenditure. However, the Community VAT rate is already approaching the 1 per cent ceiling stipulated in the Council Decision of 21st April, 1970. For those Member States implementing VAT own resources in 1979 the rate is 0.72 per cent and, according to the Commission’s latest estimates, the 1 per cent ceiling will be reached in 1981. The Commission’s forecast is that when the 1 per cent ceiling is reached, the projected yearly increase in existing own resources on account of buoyancy will not be sufficient to keep pace with projected expenditure. Moreover the Commission’s forward estimates of expenditure for 1980 and 1981 do not include any provision for additional expenditure arising out of enlargement of the Community and the renewal of the Lomé Convention.

8. Unless revenue from existing own resources is to be regarded as setting an arbitrary limit to Community expenditure it is clear that additional revenue will be required after 1981. Borrowing is already a source of finance for Community action related to investment and on-lending but the Commission rejects, rightly in the Joint Committee’s view, deficit financing as a means of meeting current expenditure. Because of the political difficulties involved the Commission also rejects the idea of reverting to direct financial contributions by Member States. The Joint Committee agrees that such a step would be opposed to both the letter and spirit of the Treaties. The Commission’s own option is for a new own resource. Because of the sensitive political nature of the issue it has decided to seek the views of the Member States before submitting a formal proposal. The current document is, therefore, in the nature of a discussion paper.

Taxable Capacity

9. With regard to equity in Communiity financing there is already a mechanism (known as the “Dublin Mechanism”) operated through the expenditure side of the Budget, under which payments may be made to those Member States whose economies bear a disproportionate burden in the financing of the Budget. In order to benefit under this mechanism, however, Member States have to meet certain economic criteria. While Ireland would probably satisfy most of these criteria, in no case may a refund be made to a Member State which is a net beneficiary from the Budget. According to the Cambridge Economic Policy Review of April, 1979 Ireland is a net annual beneficiary from the Budget to the extent of £254,000,000. Accordingly, the mechanism would not apply to Ireland. The Commission’s paper raises the question whether, in the interests of securing an equitable distribution of the burden of Community financing, the amendments to the own resources system necessary to provide for a new budgetary resource, should also provide that Member States’ liabilities under the system should be related to their ability to pay (i.e. the concept of taxable capacity). As it would not be possible to secure a new own resource of a fiscal nature which would in itself bring Member States’ total liabilities under the system into line with the measure of taxable capacity chosen, a special mechanism on the resources side of the Budget would be required. This mechanism could gear Member States’ contributions directly to, say, their income i.e. non-regressive application of the taxable capacity concept. Alternatively, it could be used to redistribute resources between Member States i.e. the economically stronger Member States would contribute progressively more than the weaker Members.

Possible Sources of Additional Revenue

10. In the Commission’s view it would be desirable that any new own resource should be (a) levied on a harmonised tax base, (b) have a wide field of application, (c) have a high and buoyant yield, (d) present least possible scope for evasion and (e) be administratively simple.

11. In its paper the Commission considers the following possible sources of additional revenue

(a)Indirect Taxes

(i) VAT, (ii) Cigarette duties, (iii) Alcohol duties.

(b)Direct Taxes

(i) Corporation Tax, (ii) Income Tax, (iii) Energy Tax.

The Commission’s own preference is for one or more of the following: an increase in the Community VAT rate, that is, raising the 1 per cent VAT ceiling; the transfer to the Community of part of the tax on petrol; or the transfer of part of the tax on cigarettes. Apart from VAT and cigarette duties, there has been very little or no harmonisation of the other tax bases. The VAT base is already harmonised under the Sixth Directive and the Commission considers that the duties imposed by Member States on cigarettes are sufficiently harmonised to allow these to be used as an own resource. The Commission considers that a Community tax on petrol would be defensible from the point of view of energy policy. It also considers that a corrective mechanism based on taxable capacity could be applied to adjust the overall impact of all receipts (except customs duties and agricultural levies) and suggests that this could aim at either non-regressivity (avoiding worsening of the present economic disparities) or progressivity (narrowing those disparities).

Views of the Joint Committee

12. In the Joint Committee’s view the inescapable conclusion to be drawn from the Commission’s analysis is that the Community will require a new source of revenue after 1981. It would not, in the Committee’s opinion, be desirable even in the short run to make up budgetary deficits by borrowing nor would it be politic or progressive to revert to a system of contributions by Member States. The Committee, therefore, agrees with the conclusion of the Commission that the Community should have a new own resource.

13. The Committee agrees with the Commission that it is important when considering possible resources of revenue for the Community to have due regard to the budgetary powers of the European Parliament. The main powers of the Parliament are in the area of budgetary expenditure. After direct elections the ultimate power over important areas of community expenditure will rest with elected representatives. It would not be proper, in the Committee’s opinion, that the revenue to meet that expenditure should be dependant on decisions taken from time to time by Member States.

14. However, the overriding consideration in introducing a new own resources should be, in the Committee’s view, due regard for taxable capacity. In the interests of greater cohesion in the Community the Committee believes that any new tax should be so levied so as to help reduce the economic disparities between the Member States.

15. The possible sources of the extra revenue required are necessarily limited because of the limited harmonisation that has been so far achieved. At present it appears to the Committee that some increase in the Community VAT rate levied in accordance with an appropriate corrective mechanism might be the most appropriate source of extra revenue. However the Committee would prefer to defer making a considered recommendation until it has had the opportunity of examining the Commission’s formal proposals in due course.

16. The Committee considers that this question of the future financing of the Community should now be pursued with a degree of urgency. The Council has already agreed in principle on the need for the provision of additional resources to meet the requirements of enlargement. As the negotiations with Greece have been completed the time is approaching when the Council’s commitment must be translated into action. In the Committee’s view advantage should be taken of Ireland’s presidency of the Council from 1st July, 1979 to seek an early decision on this matter.

Acknowledgements

17. In considering the Commission document the Joint Committee consulted the Irish Farmers’ Association, Confederation of Irish Industry, Irish Congress of Trade Unions, the Irish Tobacco Manufacturers’ Advisory Committee and the Economic and Social Research Institute. The Committee wishes to acknowledge with gratitude the assistance it received.

(Signed) MICHAEL NOONAN,

Vice-Chairman of the Joint Committee.

30th May, 1979.

*After allowing for the refund under Article 131 of the Act of Accession.