EU budgets shape our future more than US elections

Nov 15, 2020

Originally posted on Business Post 16 November 2020.

Since November 3 we have been looking west towards the political drama in the US, but this week’s developments in Europe will have greater practical consequences for us.

Pierre Larrouturou is a Frenchman who is reported to have gone on hunger strike just over a fortnight ago in an attempt to force the European Union to include taxes on financial transactions in its multiannual budget. Larrouturou is a long-standing member of the European Parliament and a member of its Budget committee which negotiates the multi-year framework for European Union budgets extending from 2020 to 2027. Taxes frequently attract extreme forms of protest and I hope M Larrouturou does not endanger himself but protests of this type are usually about the repeal of taxes, not their introduction.

The European Council announced to great fanfare in May that it had approved a multiannual financial framework for the EU budgets for the next seven years and which would see us through the pandemic.

Just as Covid-19 is increasing the size of government in this country, the EU response, involving grants and the issuing of debt to support member countries in tackling the pandemic, is driving up the EU spend. The EU Budget involves raising and spending €1.1 trillion over seven years along with a further €750 billion over four years. The €750 billion, known as the Next Generation EU instrument, will be funded by borrowings from capital markets.

Not only did the multiannual financial framework have to reflect the colossal disruption of Covid-19, it had to reflect the colossal disruption of losing the fourth largest contributor, Britain, to the EU budget. As with all great lies, there was some truth in the sign on the Brexit campaign bus that promised British voters £350 million per week in savings for their national health service. In 2016 the weekly EU contribution to the EU was about £275 million.

Such is the nature of the EU institutions that this multiannual financial framework still requires ratification by the European Parliament, a process which came to a head this week.

The EU has three sources of funding. All excise duties collected by all member states, less a handling fee, are passed to the EU as a direct contribution. The EU also receives a share of VAT receipts, and the balance of its budget, well over two thirds, is funded by direct contributions from the member countries. As was highlighted this week by the Irishman on the European Court of Auditors, Tony Murphy, Ireland has been a net contributor to the European Union since 2016 and that is likely to continue. Just as significant is how Ireland goes about paying its share of the burden in the future.

The European Commission was already floating out ideas for new forms of taxation to be levied and collected directly by Brussels to meet the demands of its bigger budget. The compromise worked out with the European Parliament this week involves a plan for new “own resources” — proposals on a carbon border adjustment mechanism and on a digital levy by June 2021, garnering additional money from the existing Emissions Trading System, and further proposals for a Financial Transaction Tax and a financial contribution linked to the corporate sector or a new common corporate tax base by June 2024.

The carbon border adjustment mechanism involves penalising EU-based businesses which outsource emissions-heavy manufacturing beyond EU borders to avoid emissions quotas. The others involve taxing multinationals and banks. No voters are harmed directly in the making of these promises so, from a political point of view, what’s not to like?

Businesses aren’t a bottomless pit of new sources of income for governments anywhere. When it comes to footing the EU bill it is better that Ireland's contribution to the EU coffers is made through direct payments by the State than by abandoning Irish taxpayers to the mercies of directly levied EU taxes. It is better that companies pay their taxes here and contribute to our exchequer receipts than have more taxes going directly to Brussels.

Direct taxation remains a sovereign right of the EU member countries, yet the current budgetary compromise between the Commission and the Parliament directly challenges that right. The EU Budget still must be ratified by the full Parliament, and once again by the European Council of Ministers. Whatever that outcome, the work of the EU Parliament this week has put European taxes back on the Brussels agenda with perhaps more political backing than ever before.

We have all been watching with considerable interest the political developments in the US, not least because they are interesting in their own right. Some of us are puzzled by the extreme political positions taken by some of our friends and, in many cases, relatives in the US. We may equally be puzzled by the extreme positions taken by our European friends on matters of taxation.

However interesting the US developments are, in terms of the impact on the Irish economy and Irish prospects, they are not as important as the EU budgetary developments happening this week. If you are looking across the Atlantic to understand the future, you may be looking in the wrong direction.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland