Mixed implications in EU budget proposals

According to European Commission president Josè Manuel Barroso, the EU needs “an innovative budget where every euro spent reaches its target”. But this pious ambition comes with a sting: the trillion-euro 2014-2020 budget needs to be partly financed by two new taxes. The Commission is, in fact, proposing an increase in VAT that will go directly into the EU’s central coffers and a new tax levied on financial services.

While there has been talk for some time on the need to increase the EU budget for 2014-2020 by about five per cent on the previous budget’s level, the strong resistance to such hikes seemed to have killed the proposal for more taxation to finance this increase. But Mr Barroso’s bombshell proposals for the new taxes mean that this controversy will rage on.

While the details of the new way in which the EU budget will be financed as from 2014 are still scarce, some indications of what the Commission wants are emerging.

One of the main planks of the budget financing strategy is “a VAT levy charged across the 27-nation bloc with a fixed one percentage point raised by governments and transferred directly to the EU from 2014”. Another measure will be the introduction of a new tax on financial services’ transactions in Europe. This measure is likely to be opposed by Britain, France and Germany but also by Malta and Ireland that fear it could threaten their strong financial services industry. The objections to the new taxes come from different quarters for different reasons.

European taxpayers are going through tough times. Taxpayers in the wealthier member states, like Germany, are seeing their hard-earned taxes being used to rescue the economies of the less prosperous member states, like Greece, Portugal and Ireland. On the other end, taxpayers in the poorer states are confronted with increasing taxation and cuts in their social benefits, pensions and wages. Some of them are even losing their jobs because of the austerity measures imposed by the EU as a condition for bailing them out.

European businesses, especially SMEs, are also facing challenging times. Consumer spending in most member states remains sluggish as more Europeans fear for their jobs and their ability to cope with increasing inflation. Hiking VAT by just one percentage point could depress consumption even further, thereby delaying the much-needed economic recovery, especially in the wholesale and retail sectors.

A tax on financial transactions imposed unilaterally by European banks will add financial burdens to European business and damage EU competitiveness as Asian and US enterprises would not be affected by such increased costs.

The European Council needs to be careful not to throw out the baby with the bath water. There are elements in the Commission’s proposal that need to be pursued to make the EU a more competitive economic force. European Health and Consumer Policy Commissioner John Dalli said in an interview that countries like Malta, whose GDP now exceeds 75 per cent of the EU average, could be given the status of “transition country”, thereby still qualifying partly for structural and cohesion funds. If approved, this will be a booster for Malta’s economic growth.

So, while the proposals for the 2014-2020 EU budget include a rather controversial recommendation to increase taxation, there are elements that need to be supported as they aim to make the EU a more competitive economic force and, equally important for Malta, to continue supporting “transition countries” with structural funds.