The European Union itself does not raise taxes. It is funded by the member states after consultation with the European Parliament. The budget is balanced in revenue and expenditure.
The four sources of revenue are:
- GNP resource – a contribution by each Member State based on its share of the Community’s total gross national product (GNP), up to a maximum rate of 1.27 per cent.
- VAT (value added tax) based on a percentage of the final selling price of a common base of goods and services.
- Customs duties raised from a tariff applied to trade with countries outside the EU.
- Agricultural levies charged on farm products imported from countries outside the European Union.
There are two kinds of European budget expenditure – compulsory and non-compulsory (see section X)
The difference between the two categories is essentially political and relates to the balance of power between the EU institutions. In the early days of the European Community France wanted to defend the interests of farmers through the Common Agricultural Policy (CAP). The present budgetary rules have enshrined the principle that support for agriculture is a priority above debate in the European Parliament.
This division is still a subject for debate within the European Parliament which has long campaigned for the distinction between compulsory and non-compulsory expenditure to be abolished.
Agreeing the Budget
The budgetary financial year which runs from 1 January to 31 December. The procedure for examining and agreeing the budget takes place between June and December of the preceding year.
The process starts with the Commission which prepares a draft budget. This draft budget is submitted to the Council of the European Union and the European Parliament.
Parliament amends the draft budget in accordance with political priorities and returns it to the Council for consideration. The Council will revise the budget before returning it to the European Parliament.
The European Parliament considers the revised budget and will agree it on the basis of a recommendation by its Committee on Budgetary Control. Parliament adopts or rejects the amended budget at a second reading.
The final decision on whether to accept the budget rests with the President of the European Parliament. The budget cannot be implemented until it has been signed by the President of the European Parliament.
There is an important exception to this procedure. In cases where spending is related to agriculture or linked to international agreements, then the Council has the last word on the budget. This is defined as “compulsory expenditure”.
Compulsory expenditure
In accordance with Article 272 of the EC Treaty, compulsory expenditure is defined as a priority claim considered necessary for the Community to meet its internal and external obligations.
Most compulsory spending relates to agricultural price support through the Common Agricultural Policy and foreign aid to third countries.
In cases such as these the EP can only propose modifications to the budget.
Non-Compulsory Expenditure
The biggest component of non-compulsory spending is on European Structural Funds such as the European Social Fund, and the European Regional Development Fund and the Cohesion Fund.
Other non-compulsory expenditure includes internal policies such as education, the internal market, research and the environment as well as administrative expenditure.
Proposals from the EP to increase non-compulsory expenditure must be backed by a vote of the Council. The Commission may set annual ceilings on the growth of non-compulsory expenditure which will restrict the budget.
Powers
The European Parliament has budgetary powers and it can propose amendments over non-compulsory expenditure.
The European Parliament makes an annual assessment of the management of the budget before approving the accounts and granting “discharge” to the Commission based on the annual report of the Court of Auditors.
The European Parliament’s committee on budgetary expenditure monitors EU expenditure. The European Parliament may adopt or reject the entire EU budget on the basis of the committee’s report.
The Court of Auditors
The expenditure of all EU institutions is subject to internal control by the Commission and to the external scrutiny of the Court of Auditors.
The Court of Auditors is responsible for ensuring that all expenditure is legal, that proper accounting procedures have been used and financial objectives have been met. In its annual report, The Court examines the previous year’s budget. The Council takes note of the Court of Auditors’ report and makes recommendations to the European Parliament.
To date, the Court of Auditors has mainly been concerned with checking for fraud and on the proper use of funds. Since the Treaty of Maastricht, the Court of Auditors can refer cases to the Court of Justice.