Transcript EMU - SIEPS

FISCAL FEDERALISM,
SUBSIDIARITY AND THE
EU BUDGET REVIEW
Iain Begg
European Institute, LSE
WHAT THE EU SHOULD SPEND
Central issue for budget review
Extensively discussed in public economics
– Notably fiscal federalism
And in multi-level governance theory
– Focus more on legitimacy concerns
Yet (oddly?) absent from current debates
Instead, main issues in EU budget deals
are around net accounting balances
WHAT FF MIGHT SAY
Powerful central government
Government may be benevolent
– But could have ‘Leviathan’ tendencies
Assignment of functions
– Highest level: stabilisation and distribution
– Locus of allocative policies shaped by trade-off
Reflecting heterogeneity of preferences
Efficiency gains from centralisation
Containment of benefits within boundaries
Hard budget constraints
Scope for tax-payer mobility
Importance of aligning incentives for government
SOME RAMIFICATIONS
Own resources
– Principle of equivalence
– Would imply genuine ORs, such as EU taxes
– The power to tax and accountability
Stabilisation
– Allowing the EU to borrow
– Some scope for discretionary fiscal policy
Redistribution
– Difficult political economy of social policy
MacDOUGALL REPORT 1977
Recall that it was for (homogeneous) EU- 9
Pre-federal budget of 2-2.5% of GDP
Mainly for structural and redistributive policies (i.e.
what we now refer to as ‘cohesion’)
‘Federal-light’ budget of 5-7% of GDP
Excludes main social programmes
But could be 7-10% if defence is included
Distant: federal budget comparable to US
20-25% of GDP
In essence, a roadmap for fiscal federalism
KEY PRIORITY AREAS
Identified in consultation
Dealing with globalisation
– Competitiveness (stressed by private sector)
– Also sustainable development, migration (NGOs)
Countering climate change
– And solving energy problems
The transformation to knowledge economy
Responding to security threats
Reducing inequalities and disparities
Addressing demographic change
SUBSIDIARITY TEST
Application to EU budget areas
Assess the net benefits of centralisation
– In favour:
Economies of scale; externalities
Limits to system competition; implementation advantages
– Against
Heterogeneity of preferences
Common-pool problems
Scope for effective policy co-ordination
Proportionality: regulatory or budgetary action
THE ECORYS STUDY
Their subsidiarity test applied
Valid, but largely predictable results
Should move up to EU level
Research, external action
Climate change and environment
Back to Member State level
CAP; cohesion for richer Member States
No significant change warranted
Much of single market; cohesion for poorer MSs
Main social and employment policies
…BUT CONSIDER THE TENSIONS
HISTORICAL
BAGGAGE
COUNCIL
vs
COMMISSION
vs
PARLIAMENT
WHAT YOU
GAIN, I LOSE
Net Balances
PUBLIC GOODS
or
DISTRIBUTION
FUNDING: A SIMPLE CHOICE
Two broad approaches conceivable
– Inter-governmental transfers
– Genuine own taxes or other resources
Current system mainly the former
True own resources more complex
Theory, though, concentrates on transfers
– With highest tier as mediator
Inverted in the case of the EU
– Middle-upwards, not top-down
‘CORRECTIONS’: NOT EASY!
Justified by political economy factors
– Starting with the UK in the early 1980s
– Spread to other net payers
Yet little in theory to justify them
Maybe club theory helps, but not much
– Odd mix of policies and accounting ratios
Answer may be explicit equalisation
– Various conceivable formulae
But, overall, unique to EU
THE TROUBLE WITH THE
THE THEORIES AND HOW
WE APPLY THEM…
‘We have been spending too much
time looking down from the central
Government’s layer. It is time to look
up from that layer’.
Vito Tanzi, 2007
LIMITS OF ANALYTIC WORK
1% as an over-arching constraint
– Qualitatively different from other federal levels
– Means a wide range of policies off-limits
Defence, social protection
However, EU public goods are distinctive
– Calls for debate on ‘best’ EU ones
Legitimacy or path dependency could justify
others, despite doubtful economic logic
May even, if we try very hard, justify CAP
The Council as ultimate veto-player
– For example in reserving taxing powers
CONCLUDING REMARKS
The banal: EU is, unavoidably, sui generis
– Corollary: standard federal model can’t cope
– But role in legitimating integration still germane
Much of what the EU now spends, or
conceivably might, at odds with theory
The myth of clearcut EU added value
– EU can only undertake selective spending
Difficult to establish how or on what
Hence, need for hard political choices
– With theory only of tangential relevance
WILL ANYTHING CHANGE?
…
Or is inaction just too tempting
…