Demands for rebates by states upset the EU apple-cart

It was always a forlorn hope. EU Commission President Jacques Santer had suggested in "Agenda 2000", the Commission's plan for the millennium, that in preparing for enlargement the EU should reform spending in the post-1999 budget but leave the difficult reform of the other side of the equation, EU revenue, for another day.

He had a good case. EU spending this year, at more than £60 billion, is well below the spending ceiling of 1.27 per cent of EU GNP set by the Edinburgh summit (courtesy of strong agricultural prices), and if Agenda 2000 is implemented will not exceed 1.22 per cent of GNP in 2006. Hardly profligate!

But, sure enough, the Germans and the Dutch, the Union's biggest paymasters (both with elections looming), are determined to upset the apple-cart by making reform of the contributions system an issue. This week, the Commission contributed a well-argued paper to finance ministers in defence of the status quo.

At present the EU gets its funding, known as "own resources", from three sources:

- 20 per cent from customs and agricultural duties on imports to the Union, known as "traditional own resources"; - half from a share of member-states' VAT receipts; - and 30 per cent, a rising direct contribution from member-states based on their relative wealth or GNP.

It's really quite like national taxation, with the EU taxing countries instead of citizens - you can raise money from importers anxious to get into your market or from your own taxpayers. The latter can be levied on their consumption through VAT, a very regressive form of tax for citizens and countries, or through income tax based on ability to pay - in the EU's case, the GNP levy.

In the long run, with the gradual opening up of world markets, duties on imports are likely to decline further and so traditional own resources will become less important as a resource. VAT resources will also decline relatively because of a 1992 budget reform which recognised the growing inequity of the system and addressed it by capping national VAT contributions and increasing the importance of individual GNP contributions.

The reform was the equivalent of a national switch from indirect to direct taxation and has brought a rough equivalence between member-states' GNP and their payments to the EU (see table).

But the reform has not satisfied the Germans or the Dutch. The two countries argue, in a reprise of the row that got Mrs Margaret Thatcher her famous rebate, that what matters is not the equity of one's contribution but the equity of the difference between what one pays in and what one gets out, the net contribution. Their targets are the Danes, Luxembourgers and even the French, whose per capita wealth is well in excess of the EU average but whose net contributions are marginal or non-existent.

But their argument is profoundly subversive of the whole idea of the Union as a genuine community and fails to take account of the unquantifiable benefits of membership, such as access to markets.

The problem is that taxation is not like insurance - what is paid out by the EU or by a government is not based on contributions paid in, but on political choices. We decide, rightly or wrongly, we want to support cohesion, agriculture, training of young people, roads . . . and so we spend the money where these things are most needed.

That choice currently takes the form of dividing up the cake between agriculture (51 per cent), structural funding (32 per cent), miscellaneous internal policies (6 per cent) and 5 per cent each for administration and external policies.

It is a balance the Commission suggests leaving unchanged for the post-1999 budget.

The reality is that, while equity in contributions is perfectly achievable, and arguably has been achieved, equity in net contributions is only achievable through inequity in the former or the emasculation of community policies.

If the reform of community policies is desirable, it should be pursued for its own sake and not for the spurious and dangerous notion that net contributions are a measure of economic justice in the Union.