The EU budget: The Union risks having the wrong debate

In an age of fiscal austerity, the focus of the forthcoming EU budget talks will be even more strongly on net balances: how much a country pays in and how much it gets back. There will also be criticism of the EU for being wasteful, and attempts to curtail overall EU spending. The Germans, who often used to lubricate EU budget talks by throwing in an extra billion, are not feeling generous: they already shoulder the biggest share of the bail-out packages for struggling Eurozone economies. The Dutch - another big net contributor to the EU budget - have also struck an uncompromising tone. British eurosceptics are spoiling for a fight.

However, it would be wrong for the EU member-states to focus only on the size of the budget and individual contributions. Despite its limited size - just over 1 per cent of EU GDP - the EU budget remains an important policy tool. The next 'multiannual financial framework' (MFF) for 2014-20 offers an opportunity to improve climate policy, make the EU's regional and farm policies fairer, and boost spending on countries neighbouring the EU. This is where the focus of the EU budget debate should lie.

The Common Agricultural Policy (CAP) still swallows around 40 per cent of EU spending. The so-called Fischler reforms of 2003 have made farm support less intrusive and distorting. But the CAP still needs major improvement. About three quarters of the CAP budget goes towards 'Single Farm Payments', paid to farmers just for having land - and the more land they have, the more money they get. CAP spending should be focused on rural development and income support for small farmers. The EU can also use the CAP to support its climate protection goals, for example by supporting low-intensity agriculture that uses fewer oil-based fertilisers and pesticides. If Single Farm Payments were phased out, overall CAP spending could be reduced, with money for rural development protected or even increased. The EU should also keep its promise to allow Central and East European member-states to receive full CAP payments from 2013, even though this means less money going to farmers in Western Europe.

Another 37 per cent of current EU expenditure goes on regional support programmes, the 'Cohesion Funds'. This money serves worthwhile causes, namely to redistribute income from richer parts of the EU to poorer ones and stimulate sustainable economic development in backward regions. While the level of cohesion spending should be maintained, it should be dedicated entirely to helping the EU's poorer member-states. At present, a large share of this money goes to poorer regions in richer member-states. These EU countries can finance their own regional policies; there is no good reason for such support to come from the EU budget. Although the share of EU money spent on administration is small (6 per cent of the total), there is some room for further savings. For example, it is time to end the wasteful commute of the European Parliament between Brussels and Strasbourg. With the money saved from a better CAP and other reforms, the EU could support some of its more pressing policy objectives. At least 10 per cent of EU spending should go on foreign policy, including on creating a more effective neighbourhood policy for the Mediterranean and Eastern Europe. The EU should also spend more money on preventing climate change, for example by subsidising demonstration projects for carbon capture and storage. All expenditure should be 'climate proofed' - assessed for its effects on greenhouse gas emissions. And member-states should be asked to use their Cohesion Funds for measures that improve energy efficiency rather than traditional cohesion projects such as road building.

Unlike national governments, the EU cannot run a budget deficit. The treaty obliges the Union to balance expenditure and revenue. Most of the revenue, 78 per cent in 2010, comes from member-state contributions, which are based on value-added tax and the size of a country's GDP. A much smaller share comes from EU 'own resources', such as customs duties and sugar levies raised at the EU level.

The Commission has proposed some new 'own resources', including a carbon tax and an aviation tax. The governments of Germany and the UK have already come out against all 'European taxes'. This is regrettable. The taxes suggested by the Commission could play a valuable role in climate policy, as well as raising money. The EU should move its debate about taxes beyond dogmatic arguments about subsidiarity and sovereignty, and instead evaluate specific proposals.