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Summary of the European Union's Post-Brexit Budget Priorities

Core Content

This policy brief by Zsolt Darvas and Guntram Wolff from Bruegel examines the implications of Brexit on the EU's budget and outlines potential reforms to address the resulting financial gaps and inefficiencies in current spending programs. The authors argue that the EU's budget is not aligned with best practices in public finance and that a rethink is necessary to ensure it supports European public goods more effectively.

Main Points

1. EU Budget Overview

• The EU budget is approximately 1% of the EU's GNI, significantly lower than federal budgets.
• The largest spending categories are:
  • Common Agricultural Policy (CAP): 38% of EU spending, €408 billion for 2014–20.
  • Cohesion Policy: 34% of EU spending, €367 billion for 2014–20.
• Other major spending areas include:
  • Competitiveness for growth and jobs: €143 billion.
  • Global Europe (foreign policy): €66 billion.
  • Security and citizenship: €18 billion.
  • Sustainable growth: €11 billion.

2. Effectiveness of Current Spending

• CAP:
  • Provides income support but is less effective in achieving environmental goals.
  • Payments are unevenly distributed, with richer countries receiving more per agricultural worker.
  • 80% of direct payments go to 20% of farmers, raising concerns about fairness.
  • There is no independent evaluation of CAP's overall effectiveness.
• Cohesion Policy:
  • Aimed at reducing regional disparities, but empirical studies show mixed results on its impact.
  • Funding is based on GDP per capita, with less developed regions receiving more support.
  • The policy's effectiveness in promoting long-term growth is uncertain.

3. Post-Brexit Budget Hole

• If the UK does not contribute, the EU will face a €94 billion hole in the 2021–27 MFF.
• This is due to the UK's historical net contribution and the projected increase in EU27 GNI.
• New priorities such as border protection and security may require an additional €100 billion in funding.

4. Options for Filling the Gap

• Freezing real terms of CAP and cohesion spending would fill the Brexit hole without requiring a significant increase in national contributions.
• Nominal freezing would result in a 13% real decline, which could be politically difficult.
• Increasing the percentage of GNI contributions would allow for funding new priorities but may face resistance from member states.
• Creating a new EU tax, such as a carbon tax, could provide additional revenue without treaty changes.

5. UK Contributions and Scenarios

• The UK might contribute €17–28 billion to the 2021–27 MFF, depending on whether the rebate-adjusted or non-rebate-adjusted method is used.
• If a comprehensive economic partnership agreement is signed, the UK could contribute more, similar to Norway or Switzerland.
• Norway-type contribution would be €31 billion, while Switzerland-type would be €3 billion.

6. Future Budget Priorities

• The authors suggest that the EU should focus on true European public goods that can be more efficiently provided at the EU level.
• Cohesion and CAP spending should be reformed to be more efficient and better targeted.
• New priorities such as digital transformation, security, and border control should be funded through either real cuts in current spending or increased contributions.
• A reform of the EU budgeting methodology is necessary to improve transparency and efficiency.

Key Information

• The current MFF (2014–20) is based on an outdated and complex system.
• The Brexit-related hole in the MFF is estimated at €94 billion for 2021–27 if the UK does not contribute.
• Scenario 3 (nominal freeze of CAP and cohesion) could provide €102 billion for new priorities.
• Scenario 2 (CAP and cohesion increase with inflation) would result in a €13 billion surplus.
• The UK's contribution depends on the financial settlement and economic partnership agreement.
• The EU needs to rethink its budget structure and spending priorities to better align with public finance principles and European public goods.

Conclusion

The EU's post-Brexit budget requires a fundamental reform to address the financial gap and improve the efficiency of current spending programs. The authors recommend freezing the real value of CAP and cohesion spending to fill the Brexit hole, while also rethinking the EU's budgeting methodology and exploring new revenue sources such as a carbon tax. A clear case for European public goods and risk-sharing mechanisms within the EU budget is made, rather than relying on ad-hoc instruments. The EU should also consider the role of direct national funding for certain areas like farmer income support.