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Towards budgetary federalism

Posted by Richard Saturday, May 29, 2004

Do we want the Union to be genuinely capable of independent financing? In practice, do we want (the European) Parliament to be granted the power to raise taxes? Unless we give up the idea of any progress towards political union, the answer must be yes.

In this third post, exploring the commission document "Building a Political Europe" – the federalist equivalent to Mein Kampf - we explore the ambition of the EU, through its "round table" group, to acquire independent taxation powers.

Addressing this issue, the "round table" begins by anticipating the outcome of the constitutional treaty negotiations, stating that "The European Union's powers are being strengthened." It then concludes that, with these additional powers, "it must therefore be provided with the financial means to act."

What concerns the "round table" is the current EU budget of one percent of GDP. "The development of a political Union and of the European model is inconceivable", with that budget, it asserts.

"No federal institution can function with such a limited budget. By way of comparison, the United States federal budget is around 20 percent of American GDP, and the German federal budget is almost 13 percent of German GDP. Due to the severe limitations imposed by its budget the Union is forced to act mainly through legislation, thus creating a kind of regulatory inflation."

Assuming that CAP spending is reduced, the "round table" considers that an initial increase to between 1.5 and 1.6 percent of GDP could be aimed at, requiring the removal of the ceiling on own resources of 1.24 percent of GDP.

As to financing, some would come from "budgetary transfers from the Member States linked to transfers of powers" and another part would could come from an increase in national contributions.

However, this is not good enough for the "round table". "If the European Union is to become a political Union, in addition to the existing four "own resources", it needs a fifth budgetary resource "which would be federal in nature."

"This raises a highly political question: do we want the Union to be genuinely capable of independent financing? In practice, do we want Parliament to be granted the power to raise taxes? Unless we give up the idea of any progress towards political union, the answer must be yes."

The "natural" candidates are identified as "a supplementary national contribution" of 0.1 percent of European GDP and a three-point supplementary company tax. Furthermore, a company tax would have an added advantage. "The harmonisation or partial harmonisation of the company tax base and rate would be a further step towards completion of the single market. It would make it possible to limit tax competition between Member States, which chiefly centres on this tax."

As it stands, however, the chances of this happening are extremely remote. But, elsewhere in the document, the "round table" suggests a 20-year time-scale to achieve its objectives.

This year, it is the 20th anniversary of Spinelli's draft treaty on European Union and, looking at this document then, many commentators would have suggested that its objectives were unrealistic to the point of fantasy. Yet, with the Single European Act, Maastrichht, and now the proposed constitutional treaty, almost all of those objectives have been attained.

Given the current rate of progress of the march of European integration, twenty years hence, who is to say that the objectives in this federalist Mein Kampf will not also be attained? It can never be said too often that, when dealing with the EU’s aspirations, what starts off by seeming fantastic has a nasty habit of coming to fruition.