Blog Post

Who pays for the EU budget rebates and why?

A complex system of EU budget revenue corrections has been developed since the mid-1980s. I quantify their impacts: which countries pay and benefit from it and by how much and highlight several anomalies. The best solution would be to reform EU budget spending to provide only European public goods and eliminate all rebates. But if that’s not possible, then at least the rationale for the rebates should be spelt out clearly, and a transparent system built on clear principles should replace the current ad hoc, complicated, non-transparent and regressive system.

By: Date: December 4, 2019 Topic: European Macroeconomics & Governance

The question of ‘rebates’, or revenue corrections, is one of the hot topics of the discussion about the next seven-year EU Multiannual Financial Framework (MFF). Since the mid-1980s, a complex system of corrections has been built up. This includes several different types of corrections with hard-to-justify rates of reductions, necessitating burdensome computations and retroactive revisions.

As a Commission staff working document notes (see page 10), rebates are not included in EU treaties, but resulted from political compromises, as concluded by the Fontainebleau European Summit in June 1984: “any Member State sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction at the appropriate time“. The Fontainebleau Summit concluded a correction to the UK’s contribution (“UK rebate”) and a reduction to the German contribution to the UK rebate (“rebate on the rebate”). These precedents gave rise to a number of other corrections mechanism too (see e.g. a brief summary at the Commission webpage and a longer account by Alessandro D’Alfonso).

The list of rebates and other corrections

UK rebate: Since 1985, the UK has been entitled to a financial rebate of about 66% of its net contribution to the EU budget of the previous year. While the basic concept of the UK rebate has remained the same, the formula to calculate it has been amended many times, making the calculations demanding, and led to a complicated system of rebates. The UK rebate is adjusted retroactively up to three years later, as new information becomes available (see Box 2 in our paper for the current rebate formula). In 2014-2018, the UK rebate averaged €5.6 billion a year.

Rebates on the UK rebate: In principle, the cost of the UK rebate is divided among the other EU member states in proportion to their share in EU’s Gross National Income (GNI) (excluding the UK), but there are exceptions. In 1985-2001, Germany paid only two-thirds of its normal share in the UK rebate, while since 2002, Austria, Germany, the Netherlands and Sweden pay only one-quarter of their normal share in the UK rebate. In 2014-2018, a GNI-based distribution of the UK rebate would have implied a 0.044% of GNI extra contribution from the remaining 27 member states. But these four countries pay only 0.011% of their GNI for the UK rebate and thereby the remaining 23 member states pay 0.065% of their GNI to compensate for the lower payments of the four countries.

Reduced call rate for the value added tax (VAT) based contributions: In the 2007-2013 MFF, Austria, Germany, the Netherlands and Sweden benefited from temporary corrections in the form of reduced call rates for the VAT-based resource ranging between 0.1% and 0.225%, instead of the standard 0.3% rate applied to all other Member States. For the 2014-2020 MFF, Austria lost its privileged status and only Germany, the Netherlands and Sweden benefit from a 0.15% call rate, half of the call rate on the other 25 countries, which remained 0.3%. There is “capping”: VAT base to which the call rate is applied cannot exceed 50% of the GNI of the member state. And before capping and applying the call rate, the VAT base is harmonised across EU member states, which is “based on a complex methodology”, involving “unwieldy computations” and calculations that are “cumbersome and generate onerous administrative work”, as argued by a Commission staff working document.

Lump-sum reductions to GNI-based contributions: In the 2007-2013 MFF, annual reductions were granted to the Netherlands (€605 million a year in constant 2004 prices) and Sweden (€150 million a year in constant 2004 prices) to their GNI-based contributions. In 2014-2020, measured in 2011 prices, Denmark pays €130 million less a year, the Netherlands pays €695 million less a year and Sweden pays 185 million less a year. Austria also benefitted from reduced GNI-based contributions in 2014 (€30 million), in 2015 (€20 million) and in 2016 (€10 million) – perhaps to sweeten a bit its drop-out from the VAT-based reductions.

Correction related to security and citizenship opt-outs: Denmark, Ireland and the United Kingdom are exempt from financing specific parts of security and citizenship policies, for which they have an opt-out in the Amsterdam Treaty, with the exception of the related administrative costs. On average over 2014-2018, Denmark received €10 million annually, Ireland €6 million and the UK €75 million.

Unlike the UK rebate, the other corrections are financed by all member states, including those benefiting from the reductions, based on their share in EU GNI.

I also note (but do not analyse in this blog post) that there is a so-called ‘hidden rebate’ related to customs duties. The EU is a customs union with a common foreign trade policy, so it is sensible that customs duty revenues go to the EU budget. Yet member states retain 20 percent of customs duty revenues as ‘collection costs’, which is excessively high and benefits those countries that have well-located seaports, like Belgium and the Netherlands.

This is so ad hoc and non-transparent

Perhaps the first reaction that anyone can have after reading this list is that these corrections are so ad hoc. As recalled by Alessandro D’Alfonso, the European Court of Auditors have long highlighted that these correction mechanisms do not just compromise the simplicity and transparency of the financing system of the EU budget, but have various shortcomings (see here, here and here). These include:

  • the absence of defined criteria to assess objectively whether a budgetary burden is excessive and when a Member State qualifies for a correction;
  • the lack of a monitoring mechanism to establish whether a Member State benefiting from a correction still qualifies for it,
  • the lack of a monitoring mechanism to establish whether other Member States that do not receive a correction now qualify.

Quantifying the rebates

In a paper on the net contributions to the EU budget that we will publish in a few days, I calculate the total impact of these corrections in the actually executed budgets of 2014-2018. Figure 1 shows the results both in euros and as a share of national GNI.

In terms of euros, France pays the most, €2.08 billion a year, for all these corrections, followed by Italy (€1.54 billion) and Spain (€1.02 billion). The main beneficiary is the UK with €5.08 billion a year, followed by the Netherlands (€0.92 billion), Germany (€0.75 billion) and Sweden (€0.32 billion). As a share of GNI, 22 EU countries contribute by close to 0.09% of their GNI to these corrections, to benefit the UK (0.22% of GNI), Netherlands (0.13% of GNI), Sweden (0.07% of GNI), and Germany (0.02% of GNI). Austria and Denmark are net contributors to the adjustments with about 0.035% of GNI, since these countries benefit from only some of the corrections.

Regressivity contradicts the Fontainebleau principle

These corrections also make national contributions (the sum of VAT-based and GNI-based contributions adjusted by the rebates) to the EU budget regressive, as pointed out by the Monti report on the future financing of the EU. That is, richer member states benefitting from rebates contribute less to the EU budget as a share of GNI than poorer member states.

Figure 2 shows that most EU countries contribute about 0.85% of the GNI to the EU budget in the form of national contributions, but the six countries benefitting from sizeable rebates contribute significantly less – and these countries belong to the more affluent nations in Europe, also having relatively low public debts. Do Austria, Denmark, Germany, the Netherlands, Sweden and the UK suffer from an excessive budgetary burden in relation to their relative prosperity as established by the Fontainebleau principle? Well, if I was asked which EU country suffers from an excessive budgetary burden in relation to its relative prosperity, I would probably say Greece or Italy, not the six countries benefiting from sizeable rebates.

Figure 2: GNI per capita vs national contributions to the EU budget, 2014-2018

The real purpose is the reduction of net contributions

Countries benefiting from rebates are also the largest net contributors to the EU budget. Figure 3 shows the ‘operating budgetary balance’ (OBB), which is calculated by the Commission for the implemented annual EU budgets (see the definition of OBB on pages 72-73 of the EU budget financial report). Figure 3 shows the actual net contributions in 2014-2018 and my hypothetical calculations for net contributions in the absence of rebates, for all EU countries which were net contributors in 2014-2018.

In principle, the EU budget should provide truly European public goods that benefit every European country, in which case there would not be a rationale for rebates. But in practice, this is not the case. In particular, there are serious concerns with the European value added of the EU’s largest spending item, Common Agricultural Policy (CAP), from which e.g. France benefits a lot (see our discussion with Guntram Wolff here). The second largest EU spending item, cohesion policy, has a pan-European rationale, but it needs to be made more efficient and more efforts are needed to fight its improper use (see our work with Catarina Midões and Jan Mazza here).

If the largest net contributor member states believe that a big share of the EU budget is redistributed to countries for spending which do not constitute European public goods, or there are risks for their proper use, the attempt of reducing net contributions is understandable. But if that’s the case, it has to be acknowledged. And there has to be a transparent algorithm for calculating corrections since the current ad hoc system leads to some anomalies. For example, why does Sweden get more reductions than Germany (as a share of GNI) when both countries would have the same net contribution in the absence of reductions? Or why does the Netherlands get so much more reductions than Germany and Sweden (as a share of GNI), which lead to an even lower correction-adjusted net contribution for the Netherlands than for Germany and Sweden?

Clearly, the best solution would be to reform EU budget spending to provide only European public goods, in which case all rebates should be fully eliminated. But if such a reform of EU spending is politically impossible, then at least the rationale for the rebates should be spelt out clearly and a transparent correction system built on clear principles should replace the current ad hoc, non-transparent, complicated and regressive system of rebates.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF More on this topic More by this author

Policy Contribution

European Union recovery funds: strings attached, but not tied up in knots

Ensuring effective recovery spending is a high-stakes challenge for the European Union, with the potential for derailment because of fuzzy objectives and overloaded procedures. The EU should work with member countries to identify limited policies that will maximise the impact of EU investment, while accounting for spillovers.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: October 27, 2020
Read article More on this topic More by this author

Blog Post

The European climate law needs a strong just transition fund

To deliver on the goals of the European climate law, the European Union needs finally to get coal out of its energy mix: the EU should quicken the pace of decarbonisation whilst delivering on its goal of social inclusion.

By: Simone Tagliapietra Topic: Energy & Climate Date: October 6, 2020
Read article More on this topic More by this author


Europe’s recovery gamble

Next Generation EU, was rightly hailed as a major breakthrough: never before had the EU borrowed to finance expenditures, let alone transfers to member states. But the programme and its Recovery and Resilience Facility amount to a high-risk gamble.

By: Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: September 25, 2020
Read article More on this topic More by this author

Blog Post

Redefining European Union green bonds: from greening projects to greening policies

European Union green bonds, as promised by European Commission president Ursula von der Leyen, might be better linked to the bloc's achievement of its climate goals, rather than project-by-project green criteria.

By: Georg Zachmann Topic: Energy & Climate Date: September 21, 2020
Read article Download PDF More on this topic

Policy Contribution

Financing the European Union: New Context, New Responses

With the European Union for the first time taking on debt to help finance the economic recovery from the coronavirus, new resources are needed to fund the EU budget. Various ideas have been floated – including a digital tax and a financial transactions tax – but the most appropriate new resource would be revenues from the EU emissions trading system, which could provide enough funding to repay the EU's coronavirus borrowing.

By: Clemens Fuest and Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 11, 2020
Read about event More on this topic

Past Event

Past Event

An EU budget for Europe's future with Johannes Hahn

How do we make the EU fit for future?

Speakers: Zsolt Darvas, Johannes Hahn and Mehreen Khan Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 7, 2020
Read article More on this topic

Blog Post

EU recovery plans should fund the COVID-19 battles to come; not be used to nurse old wounds

In its proposed Recovery Fund, the European Commission uses allocation criteria mainly linked to infection rates and past economic performance. To foster an efficient economic rebound post COVID-19 crisis, we propose instead to allocate funds through a forward-looking approach based on specific industrial and economic structure of EU regions.

By: Carlo Altomonte, Andrea Coali and Gianmarco Ottaviano Topic: European Macroeconomics & Governance Date: July 6, 2020
Read article More on this topic More by this author

Blog Post

The EU’s recovery fund proposals: crisis relief with massive redistribution

Poorer European Union countries and those hardest hit economically by the COVID-19 crisis could obtain up to 15% of their GNI in grants and guarantees from the EU’s proposed recovery instruments. Yet the proposal would represent a net benefit for all EU countries, even if there is only a small positive economic impact over the long-term. The proposed very long-maturity loans would lead to non-negligible benefits, exceeding 1% of GDP for some countries.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 17, 2020
Read article

Blog Post

One last push is needed to improve the Just Transition Fund proposal

The European Parliament and the Council still have an opportunity to improve the Just Transition Fund by refocusing it on social support and basing fund allocations on more granular information that takes into account not only countries’ needs but also their green ambitions.

By: Aliénor Cameron, Grégory Claeys, Catarina Midões and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: June 11, 2020
Read article More on this topic More by this author

Blog Post

Three-quarters of Next Generation EU payments will have to wait until 2023

Because of hurdles in designing, approving and implementing European Union programmes, less than a quarter of the €438 billion in grants planned under the new EU recovery instruments is expected to be spent in the next two and a half years, when recovery needs will be greatest. Well-functioning financial markets can help bridge the gap between urgent spending needs and late-arriving EU disbursements, but more effort is needed to frontload EU payments.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 10, 2020
Read article More on this topic More by this author

Blog Post

An uncompromising budget

Apart from decisive European Central Bank measures, the EU-wide response to the COVID crisis had been rather weak until the Commission put on the table a drastically new proposal: the creation of a new recovery facility, ‘Next Generation EU’, that would borrow money in the name of the EU to finance EU-wide expenditures. The changes to the proposed standard seven-year budget that primarily focuses on long-term structural issues are however generally small, and funding reductions are compensated by new funds from the recovery instrument, suggesting that an opportunity is missed to reform the EU budget.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: May 29, 2020
Read about event More on this topic

Past Event

Past Event

The new EU budget: from COVID-19 remedies to green goals

Can we rescue the economy after COVID-19 and reach the environmental goals?

Speakers: Zsolt Darvas, Maria Demertzis, Karolina Ekholm and Miguel Otero-Iglesias Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 29, 2020
Load more posts