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Where does the money come from?

How is the budget financed?

The EU budget:

  • Own resources account for approximately 98% of the budget. The total amount of own resources to cover annual payment appropriations are not allowed to exceed 1.20% of the EU's gross national income (GNI).
  • The remaining approximately 2% of budget revenue comes from other sources of income.

Own resources

Own resources provide the EU's main revenue. There are three kinds of own resources (for background details see European Union Public Finance, 5th Edition, 2014):
  • Traditional own resources

    - mainly customs duties on imports from outside the EU and sugar levies.

    EU governments retain collection cost (under Own Resources Decision 2014/335 the collection costs were reduced to 20%) .

    Background: European Union Public Finance (page 191)

  • own resource from value added tax (VAT)

    A standard percentage is levied on the harmonised VAT base of each EU country.

    The VAT base to be taxed is capped at 50% of GNI for each country. This rule is intended to prevent less prosperous countries having to pay a disproportionate amount (in such countries consumption – and so VAT – tend to account for a higher percentage of national income).

    Background: European Union Public Finance (page 191)

  • own resource based on gross national income (GNI)

    A uniform percentage is levied on the GNI of each EU country. It is used to balance revenue and expenditure, i.e. to fund the part of the budget not covered by other sources of income.

    Although designed simply as a balancing system, this has become the largest source of revenue.

    Background: European Union Public Finance (page 193)

Other revenue

The budget also has other sources of revenue, e.g.:

  • taxes on EU staff salaries
  • contributions from non-EU countries to certain programmes
  • fines on companies for breaching competition laws, etc.

Background: European Union Public Finance (page 197)

Revenue and expenditure – balanced-budget requirement

When the EU Council and the European Parliament approve the annual EU budget, total revenue must equal total expenditure.

In practice, however, actual revenue and expenditure often differ from the estimates. There is usually a surplus, which is used to reduce EU countries' contributions to the budget for the following year.

National compensation mechanisms

In the past, some countries felt that they were paying too much towards the budget, compared to other countries.
Measures were taken to correct (compensate) these imbalances, including:

  • the 'UK rebate' – the UK is reimbursed by 66% of the difference between its contribution and what it receives back from the budget. The calculation is based on its GNI and VAT
  • lump-sum payments to Denmark, the Netherlands, Sweden and Austria
  • reduced VAT call rates for the Netherlands, Sweden, Germany.

The cost of the UK rebate is divided among EU member countries in proportion to the share they contribute to the EU's GNI. However, since 2002 this has been limited to 25% of its normal value for Germany, the Netherlands, Austria and Sweden, who considered their relative contributions to the budget to be too high. This cost is shared by the other EU members.

Background: European Union Public Finance (page 194)

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