The EU’s €9bn Brexit budget gap

As the UK prepares, again, to attempt an EU exit, the remaining 27 member states are struggling to fill the loss of €9bn in net contributions. The forfeiture of around 13% of the EU’s 2020 budget could not come at a worse time: recent 2019 Eurozone second quarter GDP figures slowed to 0.8% from 1.8% in the first quarter.

Larger member state contributions are unlikely. The small, contributory states (Austria, Denmark, the Netherlands and Sweden), have adopted the austerity slogan ‘a smaller EU, smaller budget’. And reductions on spend in the Central European states or agriculture expenditure have powerful opponents, too.

When in doubt, go the new taxes route

The EU will therefore have to look to develop more of its ‘own resources’, Brussels-speak for the direct revenues raised by the EU Commission (EC). At present, in addition to member state contributions, the EC takes a small slither of member states’ VAT revenues, plus about 80% of import customs duties. To close the €9bn post-Brexit gap without spending cuts, there are a range of additional taxes the EU is exploring with little success so far:

• Harmonised Corporate Taxes – a plan to standardise the taxing rules of member states to prevent profit shifting by corporates looking for the best rates. The EC has suggested that it take a cut of the resulting profit redistributions, similar to its existing share of VAT revenues. However, the regime under discussion, CCCTB, is vulnerable to a veto from low-tax states such as Ireland and may never materialise.
• EU Financial Transaction Tax – a proposed levy on trading in shares, bonds and derivatives which has been around since the 2008 financial crisis. Failure to gain pan-EU agreement on the rates and scope has whittled down the original €33bn per annum revenue estimates to just under €4bn in the 10 states still in discussions. The EU could look to take a cut of this, although it may have to credit it against participating members’ contributions.
• Aviation Tax – an emissions-busting levy to tax EU flights which are currently VAT exempt. This would play well to the EU’s ‘green’ credentials and is being championed by the Dutch. Some countries have already progressed domestic versions, including Germany, Sweden and most recently, France, with rates varying on budget airlines and business class seats. This is a near certainty to help cover the UK contribution losses.
• Emissions Trading tax – the charge on businesses to buy carbon allowances in the EU. The EU Commission has proposed taking 20% of the revenues raised for its own budget. However, since the UK is the second-largest greenhouse gases emitter in the EU, post-Brexit, this will only be a limited amount.

Decision time

The EU is covered on the contribution gap for 2019 since the UK is committed to paying its full 2019 dues even in the case of a no-deal Brexit. However, unless there is another postponement of Brexit, or a two-year transition period, then that is it.  The 2020 EU budget should be agreed upon by September. So far, the member states have failed to agree on the right new tax mix.

The quandary on how to fill an UK-shaped budget hole remains unsolved with just a few months to go.