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This article is part of a series on thepolitics and government ofEuropean Union

The European Union has a budget to pay for policies carried out at European level (such as agriculture, assistance to poorer regions, trans-European networks, research, some overseas development aid) and for its administration, including a parliament, executive branch, and judiciary that are distinct from those of the member states. These arms administer the application of treaties, laws and agreements between the member states and their expenditure on common policies throughout the Union. According to the European Commission, 6% of expenditure is on administration, compared with 94% on policies.[1]

To pay for this, the EU had an agreed budget of 143billion for the year 2014, representing around 1% of the EU-28's gross national income (GNI).[2] Prior to 2014, the EU had a budget of 864.3billion for the period 20072013, representing 1.05% of the EU-27's GNI for the period.[3]

The EU budget is proposed annually by the European Commission. The proposed annual budget is then reviewed and negotiated by the Council of the European Union (which represents member states' governments) and the European Parliament (which represents EU citizens). In order for the budget to be finalised, consensus of all member states is required.[4]

The annual budget must remain within ceilings determined in advance by the Multiannual Financial Framework, laid down for a seven-year period by the Council (requiring the unanimous approval of every Member State) with the assent of the Parliament.[5]

The budget for a year is determined in advance, but final calculations of payments required from each member state are not completed until after the budget year is over and information about revenue and expenditure is available, and correction mechanisms have been applied.[citation needed]

The European Court of Auditors is the fifth institution of the European Union (EU). It was established in 1975 in Luxembourg to audit the accounts of EU institutions.

Despite its name, the court has no judicial functions. It is, rather, a professional external investigatory audit agency. The primary role of the court is to externally check if the budget of the European Union has been implemented correctly, in that EU funds have been spent legally and with sound management. In doing so, the court checks the paperwork of all persons handling any income or expenditure of the union and carries out spot checks. The court is bound to report any problems in the court's reports for the attention of other states and institutions, these reports include its general annual report as well as specific and special reports on certain bodies and issues.[6] The court's decision is the basis for the European Commission decisions, for example: when the court found problems in the management of EU funds in the regions of England, the commission suspended funds to those regions and prepared to fine those who did not come back up to acceptable standards.[7]

In this role the court has to remain independent yet remain in touch with the other institutions, for example a key role is the presentation of the court's annual report to the European Parliament. It is based on this report that the parliament makes its decision on whether or not to sign off the European Commission's handling of the budget for that year. The court, if satisfied, also sends assurances to the council and parliament that the taxpayers money is being properly used and the court must be consulted before the adoption of any legislation with financial implications but the opinion is never binding.[8]

The European Court of Auditors has signed off the European Union accounts every year since 2007, but has highlighted that they are materially affected by error and, while making it clear that the European Commission has more work to do, has highlighted that most of these errors take place at national level and concern decentralised programmes like agriculture and regional funding rather than money managed centrally in Brussels.[9][10]

Following a report by the European Court of Auditors that found that 4.8% of the EU budget in 2012 was affected by error, senior German MEP Inge Grle (CDU), a member of the European Parliaments budgetary control committee, claimed that "numerous questions arise concerning the willingness of the court, to significantly correct downward, the level of error rate after discussions with the audited authority, the EU Commission half of the errors in the structural funds sector were excluded from the estimate of the damage of the court, otherwise the numbers would be even worse".[11]

On 29 June 2011 the European Commission presented the Communication "A Budget for Europe 2020" to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions.[12]

Due to the tough economic times, seven member states (Austria, Czech Republic, Finland, Germany, the Netherlands, Sweden, and the United Kingdom) argued during the 26 March 2012 General Affairs Council meeting that the EC's proposed overall amount for the seven-year EU budget plan should be reduced by 100 billion, or in the case of Sweden, by more than 100 billion.[13]

On 8 February 2013, European Union leaders agreed to cut the budget by 3.3%; the agreement on the proposed budget by the European Council has yet to be approved by the European Parliament, adopted unanimously by the Council of the European Union and ratified by the national parliaments of all member states; if adopted, it will be the first cut in its 56-year history.[14][15][16]

The Budget was finally approved by the European Parliament Tuesday 19 November 2013 by an overwhelming majority. MEPs voted 537 in favour, 126 against, and with 19 abstentions.[17]

Pie chart showing EU revenue sources (2014)[18]

VAT-based resources (12.26%)

GNI-based resources (68.73%)

Traditional own resources (11.4%)

Other (6.92%)

Surplus from 2013 (0.7%)

The EU obtains its revenue from four main sources:

Traditional own resources[21] are taxes raised on behalf of the EU as a whole, principally import duties on goods brought into the EU. These are collected by the state where import occurs and passed on to the EU. States are allowed to keep a proportion of the revenue to cover administration (20%[22]). The European Commission operates a system of inspectors to investigate the collection of these taxes in member states and ensure compliance with the rules. The effect of a state failing to collect these taxes is that other states will have to contribute more to the budget, so there is a potential conflict of interest on the part of the collecting authorities. Countries are liable to make good any loss of revenue due to their own administrative failure.[21]

VAT-based own resources[21] are taxes on EU citizens based on the proportion of VAT levied in each member country. VAT rates and exemptions vary in different countries, so a formula is used to create the 'harmonised tax base', upon which the EU charge is levied. The starting point for calculations is the total VAT raised in a country. This is then adjusted using a weighted average of VAT rates applying in that country, producing the intermediate tax base. Further adjustments are made where there is a derogation from the VAT directive allowing certain goods to be zero-rated. The tax base is capped, such that it may not be greater than 50% of a country's gross national income (GNI).

Member countries generally pay 0.3% of their harmonised tax base into the budget,[22] but this is varied for some countries. The rate for Germany, the Netherlands and Sweden is 0.15% in the 2014-2020 period,[22] while Austria also had a reduced rate in the 2007-2013 period.[23]

Countries are required to make an account of VAT revenues to the EU before July after the end of the budget year. The EU examines the submission for accuracy, including control visits by officials from the Directorate-General for Budget and Directorate-General for Taxation, and reports back to the country concerned.

The country may then respond to any issues raised in the report, and negotiations continue until both sides are satisfied, or the matter may be referred to the European Court of Justice for a final ruling. The Advisory committee on own resources, which has representatives from each member state, also receives and discusses the reports. In 2006, nine countries were inspected by controllers, including five new member states who were participating in the procedure for the first time. It is anticipated that 11 countries will be visited in 2007. The EU may be working on figures for three years at any one time.

GNI-based own resources[21] currently forms the largest contribution to EU funding. A simple multiplier is applied to the calculated GNI for the country concerned. This is the last recourse for raising funding for a budget year, so the actual figure is adjusted within predetermined limits to obtain the budget total required. Revenue is currently capped at 1.23% of gross national income in the European Union as a whole.[24]

The GNI for own resource purposes is calculated by national accountants according to European law governing the sources and methods to compile GNI and the transmission of GNI data and related methodological information to the Commission (Eurostat). Basic information must be provided by the countries concerned to Eurostat before 22 September in the year following the budget year concerned.

Eurostat carries out information visits to the National Statistical Institutes forming part of the European Statistical System. Based on assessment reports by Eurostat, the Directorate-General for Budget (DG BUDG) of the Commission may notify to the Permanent Representative of the Member State concerned required corrections and improvements in the form of reservations on the country's GNI data. Payments are made monthly by member states to the commission. Own resources payments are made monthly as they are collected, but monthly instalments of VAT- and GNI-based returns are based upon the budget estimates made for that year, subject to later correction.

Other revenue[21] accounted for 6.9% of EU revenue in 2014.[25] This includes tax and deductions from EU staff remuneration, interest on deposits or late payments, payments from non-EU countries for certain programmes, underspent funding from community programs and any other surplus from the previous budget.

The EU budget has a number of correction mechanisms designed to re-balance excessive contribution by certain member states:

The United Kingdom withdrawal from the European Union has led the EU to reconsider its funding mechanisms, with the rebates likely to change.[26]

Approximately 94% of the EU budget funds programmes and projects both within member states and outside the EU.[27] Approximately 6% of the budget is used for administrative costs, and less than 3% is spent on EU civil servants' salaries.[28]

2006 EU expenditure in millions of euros (Total 106,576 million)

Regional support (30.4%)

Common Agricultural Policy (46.7%)

Internal policies (8.5%)

External actions (4.9%)

Administration (6.3%)

Compensations (1%)

Reserves (0.1%)

Pre-accession strategy (2.1%)

In the 2006 budget, the largest single expenditure item was due to the Common Agricultural Policy (CAP), with its direct aid, export refunds, storage and rural development and support and subsidies, which accounted for around 46.7% of the total budget. In 2014, CAP spending had decreased to 39%.[29]

Next in 2006 came the EU's structural funds, which are used to support specific regions in the EU, as part of EU's regional policy, which aims to reduce regional disparities in terms of income, wealth and opportunities. Europe's poorer regions receive most of the support, but all European regions are eligible for funding under the policy's various funds and programmes. In 2006 approximately 30.4% of the EU budget was used for such support. While the CAP spending is going down, the regional support is increasing, and is expected to reach almost 36% in 2013.[30]

Internal policies (training, youth, culture, audiovisual, media, information, energy, Euratom nuclear safeguards and environment, consumer protection, internal market, industry and Trans-European networks, research and technological development, other internal policies) took up around 8.5% in the 2006 budget.

External actions, i.e. EU's international activities outside the EU (development aid, peace keeping and security work, election observers etc.) accounted for 4.9% in 2006.

Finally, the pre-accession strategy, compensations and reserves brought up the rear of the budget, with approximately 2.1%, 1% and 0.1% respectively in 2006.

2014 EU expenditure in millions of euros (Total 142,496 million)

Growth (inc. infrastructure projects) (49.55%)

Natural resources (inc. CAP) (42.77%)

Security and citizenship (1.28%)

EU as a global partner (0.07%)

Administration (5.97%)

Compensations (0.02%)

Reserves (0%)

Special instruments (0.33%)

For the period 2014-2020, the EU budget is used for six main categories of expenditure:[31]

Net receipts or contributions vary over time, and there are various ways of calculating net contributions to the EU budget, depending, for instance, on whether countries' administrative expenditure is included. Also, one can use either absolute figures, the proportion of gross national income (GNI), or per capita amounts. Different countries may tend to favour different methods, to present their country in a more favourable light.[citation needed]

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Budget of the European Union - Wikipedia