The budget of the EU is regularly a bone of contention – notably for those Member States that are net contributors. Prof. Iain Begg explores options for a better model of EU finances.
When the European Commission issued its proposals for the long-term budget for the period 2028 – 2034 this July, “the Dutch government needed just one hour and a half to refuse”, reported Prof. Iain Begg from the European Institute of the London School of Economics and Political Science (LSE) in his lecture that took place on 16 September in Munich as part of the series “The Future of the Fiscal and the Social State in the European Union”, organised by the Max Planck Institute for Social Law and Social Policy and the Max Planck Institute for Tax Law and Public Finance.
Given that prolonged negotiations are expected, Prof. Begg, a leading expert on the political economy of European integration and EU finances, examined options for a more effective EU-level public finance model in his presentation “Rethinking the EU’s Finances: Will This Time Be Different?”.
Since the late 1980s, the bulk of the EU budget – about 1% of Gross National Income (GNI) – has been allocated to agriculture and regional support. Much smaller sums are directed to other budget lines. As a result, expec¬tations of what the EU should fund are not matched by its capacity to do so. The Commission’s proposal seeks to equip “the Union with an ambitious budget in size and design”, foreseeing a rise to 1.26% of GNI, though most of the increase is earmarked to repay Next Generation EU (NGEU) loans issued to support EU Member States in coping with the COVID-19 pandemic.
Contention arises not only over the budget’s size but also with regard to the suggested reorganisation of programmes under “national and regional partnership plans,” which would enhance the Commission’s power at the expense of other institutions, including the European Parliament. The proposal also places a focus on performance-based budgeting to ensure that money is not just disbursed but linked to concrete outcomes and firmly tied to policy priorities, e.g. climate, biodiversity, and gender, which are to be applied consistently across the EU budget. Closely connected is the Commission’s emphasis on investing in European public goods. Yet, as Prof. Begg noted, the Commission does not define a “public good”, leaving it the “elephant in the room”. Equally unresolved is the question whether EU funding also includes spending by national level on EU public goods or even EU funding of national public goods.
Against this backdrop, Prof. Begg highlighted a trilemma that the new budget faces, particularly in the context of current debates on defense spending and increasingly constrained national finances: net contributors have to be appeased, existing flows from the budget preserved, and demands for new spending met. The situation is further complicated by the fact that cross-border stabilisation measures remain politically difficult due to continued resistance to a transfer union. According to Prof. Begg, the dominant narrative among political leaders was “juste retour”, in other words: “We want our money back”, exemplified by Margaret Thatcher’s UK rebate. This thinking, he argued, makes it hard to arrive at a genuine reform.
To maintain its capacity to act, the EU has relied on off-budget mechanisms in times of crisis, such as the NGEU, the Ukraine Facility, and the defense initiative Security Action for Europe (SAFE). While allowing increased and quick funding of EU policies, they challenge EU budget principles such as universality of revenue and unity of budget, and create future repayment obligations that strain subsequent budgets. Moreover, off-budget mechanisms reduce oversight by the European Parliament and the European Court of Auditors, with audits largely left to Member States. Other shortcomings are that the money being spent does not necessarily reflect the costs of projects and that measures undertaken in the framework of the Recovery and Resilience Facility – the NGEU’s centerpiece – have often been stuck with inputs and outputs instead of results. Cohesion policy works better in this regard, an area, in which the EU “delivers”, said Prof. Begg.
In order to arrive at a better model of EU finances, the LSE economist stressed the need to clarify the areas in which EU responsibility is more cost-effective, particularly in the provision of European public goods. Likewise, the politically sensitive issue of equalisation, a basic principle of public finance, should no longer be excluded. In this context, Prof. Begg criticized the dominance of national contributions in the revenue system, which fuels the juste retour mentality. As an alternative, he suggested a stronger focus on own resources linked to EU policies, a consolidation of EU debt, and potentially the creation of a debt agency.
Prof. Begg went even further and raised the question of whether it was time for a separate stabilizing fiscal capacity. The latter could be particularly useful in crises, as standard decision-making is often too slow or even inadequate in responding. Governance could also be strengthened by simplifying and standardizing monitoring mechanisms. Moreover, the legitimacy problem attached to off-budget mechanisms could be solved by applying the Ordinary Legislative Procedure unless, exceptionally, it is not feasible. To this end, the Financial Regulation would have to be amended to define when and why this procedure is not applied.
Ultimately, Prof. Begg argued, it is time to rethink the EU fiscal framework. 37 years after the last substantial EU budget reform, “a major reset is overdue”.
September 2025