The EU’s expenditure

Budget expenditure is approved jointly by the Council and Parliament. The annual EU budget must respect the expenditure ceilings agreed under the multiannual financial framework (MFF) for different headings, i.e. categories of expenditure, such as those on the single market, cohesion and natural resources. Thematic and non-thematic special instruments ensure that the EU can react in the event of unexpected needs. The use of budgetary guarantees and financial instruments creates a leverage effect as regards EU spending. In addition to the MFF, the total EU expenditure for 2021-2027 includes the temporary recovery instrument NextGenerationEU, which will help the EU economy to recover from the COVID-19 crisis.

Legal basis

• Articles 310-325 and 352 of the Treaty on the Functioning of the European Union (TFEU) and Articles 106a, 171-182 and 203 of the Treaty establishing the European Atomic Energy Community;
• Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general budget of the Union, amending Regulations (EU) No 1296/2013, (EU) No 1301/2013, (EU) No 1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) No 283/2014 and Decision No 541/2014/EU, and repealing Regulation (EC, Euratom) No 966/2012;
• Council Regulation (EU, Euratom) 2020/2093 of 17 December 2020 laying down the multiannual financial framework for the years 2021 to 2027 (the MFF Regulation);
• Council Regulation (EU, Euratom) 2024/765 of 29 February 2024 amending Regulation (EU, Euratom) 2020/2093 laying down the multiannual financial framework for the years 2021 to 2027;
• Council Regulation (EU) 2020/2094 of 14 December 2020 establishing a European Union Recovery Instrument to support the recovery in the aftermath of the COVID-19 crisis;
• Interinstitutional Agreement (IIA) of 16 December 2020 between the European Parliament, the Council of the European Union and the European Commission on budgetary discipline, on cooperation in budgetary matters and on sound financial management, as well as on new own resources, including a roadmap towards the introduction of new own resources.

Objective

The overall objective of the EU budget is to finance the European Union’s policies within the bounds of budgetary discipline, in line with the rules and procedures in place. The EU budget is mainly dedicated to investment. For this reason, the EU adopts long-term spending plans, known as multiannual financial frameworks (MFFs), that run for a period of five to seven years (see below).

Basic principles

The EU budget obeys the nine general rules of unity, budgetary accuracy, annuality[1], equilibrium, unit of account (the euro), universality, specification (each appropriation is allocated to a particular kind of expenditure), sound financial management and transparency, pursuant to Articles 6 to 38 of the Regulation on the financial rules applicable to the general budget of the EU.

The annuality rule has to be reconciled with the need to manage multiannual actions, which have grown in importance within the budget. The budget therefore includes differentiated appropriations consisting of:

• Commitment appropriations, covering the total cost during the current financial year of legal obligations contracted for activities lasting a number of years;
• Payment appropriations, covering expenditure in connection with implementing commitments contracted during the current financial year or previous ones.

The IIA of 16 December 2020 stipulates that the Commission must prepare an annual report providing an overview of the financial and budgetary consequences of various EU activities, whether financed by or outside the EU budget. This report must contain information on the assets and liabilities of the EU, various lending and borrowing operations - including the European Stability Mechanism and the European Financial Stability Facility (2.6.8) - and other possible future mechanisms. In addition, the report must include information on climate expenditure, expenditure contributing to halting and reversing the decline of biodiversity, the promotion of equality between women and men, and the implementation of the United Nations Sustainable Development Goals in all relevant EU programmes.

Structure and categories of EU expenditure

1. Sections of EU expenditure

The general budget is divided into 10 sections, one for each institution. While the other institutions’ sections consist essentially of administrative expenditure, the Commission section (Section III) consists of operational expenditure, and the administrative costs of implementing them (technical assistance, agencies and human resources). In 2024, the overall administrative expenditure is expected to represent 6.3% of the total commitment appropriations of EUR 189.28 billion.

The Commission uses a budget nomenclature that presents resources by policy area and programme, aligning the programme areas with headings or ‘programme clusters’ (see below), thus making it easier to assess the cost and effectiveness of each EU policy.

2. Multiannual financial framework (MFF) (1.4.3)

Since 1988, EU expenditure has been placed in a multiannual framework, which breaks the budget down into headings corresponding to broad policy fields, with expenditure ceilings reflecting the main budgetary priorities for the period covered. The first programming period lasted five years, with the length of the subsequent and current periods being seven years. The annual budgets must respect the limits set out in the multiannual framework.

The EU budget is subject to a strict equilibrium principle enshrined in Article 310 TFEU and the Financial Regulation. This means in practice that the EU budget is ‘expenditure driven’. In other words, revenues on aggregate can only increase as much as allowed ex ante by the MFF ceilings and the size of special instruments over and above such ceilings. In accordance with the provisions of Article 4 of the MFF Regulation, such ceilings are subject to a nominal automatic upward adjustment of 2% per year[2]. The MFF covering the period from 2021 to 2027 provided for total commitment appropriations of EUR 1 824.3 billion in 2018 prices, consisting of EUR 1 074.3 billion for the MFF and EUR 750 billion for the NextGenerationEU recovery instrument (NGEU), increased by a further EUR 11 billion as a result of programme-specific adjustments set out in Article 5 of the MFF Regulation.

Following a legislative proposal put forward by the Commission on 20 June 2023, Parliament and the Council reached an agreement on 6 February 2024, paving the way for the first ever mid-term revision of the MFF. This agreement will affect the remaining years of the ongoing MFF by allowing for the revision of the MFF ceilings, as well as the scope and size of special instruments over and above those ceilings. More specifically, the deal provides for EUR 21 billion (in 2024 prices) of additional expenditure in net nominal terms, including EUR 17 billion of grants dedicated to Ukraine through a new special instrument over and above the MFF ceilings[3]. This increase corresponds to a 2.8% increase in maximum allowed expenditure for the remainder of the ongoing MFF period.

All in all, despite the nominal increase of funding for expenditure, EU spending overall will contract significantly in real terms due to the inflation surge of the period 2021 to 2023. For the first 2.5 years of the current MFF for 2021–2027, accumulated inflation in the EU already stands at 23.7%. As pointed out in a recent study commissioned by Parliament, all else being equal this development is expected to reduce the volume of the MFF as a percentage of EU gross national income by 0.96% by the end of the period in 2027. This is well below the 1.05% of gross national income that the MFF for 2021-2027 was expected to represent when it was adopted.

The table below provides the breakdown of the 2024 budget by policy field, as defined under the MFF for 2021-2027.

EU budget 2024 (in millions of euros): breakdown of commitment and payment appropriations into MFF categories

Source: European Commission. Figures expressed in November 2023 prices.

3. Flexibility and thematic special instruments

On top of expenditure programmed in order to finance the EU’s policies under multiannual programmes, some financial resources have been reserved in the EU budget for the purpose of responding to unexpected crises and situations. These special flexibility and thematic instruments may be used in the event of economic crises (e.g. EGF - the European Globalisation Adjustment Fund), natural disasters, public health crises and humanitarian emergencies (e.g. SEAR - the Solidarity and Emergency Aid Reserve) or other unexpected needs (e.g. the Flexibility Instrument) in EU Member States, candidate countries or outside the EU. Such funding allows limited exceptional financial needs to be covered.

European Union recovery instrument - NextGenerationEU

Under this instrument, the Commission will mobilise EUR 750 billion at 2018 prices, of which up to EUR 390 billion may be used for grants and up to EUR 360 billion may be used for providing loans, on top of the long-term 2021-2027 budget, in order to help rebuild a post-COVID-19 EU. The Commission has been empowered, under Article 5(1) of the Own Resources Decision, to borrow funds on capital markets on behalf of the EU. The repayment of the principal of such funds to be used for expenditure (EUR 390 billion in 2018 prices) and the related interest due will have to be financed by the general budget of the EU, including by sufficient proceeds from new own resources introduced gradually from 2021. (1.4.1)

The NGEU should in particular focus on (a) restoring employment and job creation; (b) reforms and investments to reinvigorate the potential for sustainable growth and employment in order to strengthen cohesion among Member States and increase their resilience; (c) measures for businesses, especially small and medium-sized enterprises, affected by the economic impact of the COVID-19 crisis, and strengthening sustainable growth in the EU, including direct financial investment in enterprises; (d) measures for research and innovation in response to the COVID-19 crisis; (e) increasing the level of crisis preparedness and enabling a quick and effective EU response to major emergencies, including the stockpiling of essential supplies and medical equipment, and acquiring the necessary infrastructure for rapid crisis response; (f) measures to ensure that a just transition to a climate-neutral economy will not be undermined by the COVID-19 crisis; (g) measures to address the impact of the COVID-19 crisis on agriculture and rural development.

To support the Member States with investments and reforms, the new Recovery and Resilience Facility (RRF) was agreed on 12 February 2021. The facility was initially expected to provide up to EUR 672.5 billion (in 2018 prices) in loans and grants available to the Member States to be implemented through the national recovery and resilience plans[4]. The plans need to contain reforms and investments covering key policy areas (six pillars[5]), advance the green and digital transitions and address the country-specific recommendations of the European Semester.

In the context of the Russian invasion of Ukraine, the Commission published the REPowerEU communication on 18 May 2022, which lays down a strategy for reducing the EU’s dependency on Russian energy imports. According to the Commission’s assessment, this strategy requires an additional EUR 210 billion of investment in order to be a success. With that in mind, the Commission proposed, among other measures[6], to amend the RRF Regulation to reshuffle up to EUR 225 billion of the leftover loans from the RRF as well as to allocate up to 7.5% of funds available under European Regional Development Fund, the European Social Fund Plus and Cohesion Funds for REPowerEU purposes. Moreover, up to EUR 20 billion in 2022 prices will be made available from auctioning allowances from the Emissions Trading System under Directive 2003/87/EC or from transfers from the Brexit Adjustment Reserve established by Regulation (EU) 2021/1755. These resources will fund a new chapter of national recovery and resilience plans identifying specific measures to diversify energy supplies and reduce dependence on fossil fuels, in the form of loans (up to EUR 225 billion) and grants (up to EUR 75 billion). Member States requested EUR 127.24 billion of loans in the context of revised RRPs by the deadline set in the REPowerEU Regulation

The above-mentioned mid-term MFF review agreement notably introduces a new funding ‘cascade mechanism’ for covering overruns related to NGEU-related interest payments. This mechanism may mobilise as a last resort a new thematic special EU Recovery Instrument over and above the MFF ceilings, only if the amounts already provided under Heading 2b, in addition to decommitments, reprioritisations and resources available under non-thematic special instruments, are not sufficient.

Role of the European Parliament

Parliament shares budgetary authority with the Council, and powers in this area were among the first to be acquired by MEPs in the 1970s (1.2.5). The budgetary powers relate to the establishment of the overall amount and distribution of annual EU expenditure, as well as the exercise of control over the implementation of the budget.

Parliament’s Committee on Budgets is responsible for negotiations on the MFF and the adoption of the annual budget on behalf of Parliament and represents Parliament’s views in the negotiations with the Council. It has usually been successful in taking on board priority increases resulting from its amendments (although not always of their initial magnitude).

In the negotiations for the 2021-2027 MFF, Parliament notably defended and largely secured (a) an increase of the MFF ceiling and a reinforcement of a number of flagship programmes; (b) a commitment to introduce new EU own resources with the aim of covering at least the costs related to the NGEU (principal and interest); (c) its role in the implementation of the Recovery Instrument, in line with the Community method; (d) the importance of the EU budget contribution to the achievement of the climate and biodiversity objectives and gender equality; (e) the introduction of the new mechanism to protect the EU budget from breaches of the principles of the rule of law (1.4.3).

Parliament has also been systematically insisting on budgetary transparency and proper scrutiny of all operations and instruments financed from the EU budget.

Parliament is the discharge authority (Article 319 of the TFEU) for which the Committee on Budgetary Control prepares all the work on political scrutiny of budgetary implementation (1.4.5). Each year, the discharge procedure reflects its conclusions at the end of a process on the way in which the Commission and other institutions and bodies have implemented the EU budget. It aims to verify whether implementation was carried out in accordance with relevant rules (compliance), including the principles of sound financial management (notably performance related requirements).

Parliament’s Committee on Budgetary Control holds an annual meeting with the European Investment Bank (EIB) (1.3.15) to scrutinise its financial activities, and prepares an annual report assessing the EIB’s past performance and results. Parliament’s Committee on Budgets and Committee on Economic and Monetary Affairs agreed to produce an annual report assessing the EIB’s current and future actions; they alternate as the lead committee. While considering that financial instruments can be a valuable tool in multiplying the impact of EU funds, Parliament has stressed that they should be implemented under strict conditions, limiting risks to the EU budget. To that end, detailed rules for the use of financial instruments funded or guaranteed by the EU budget have been included in the Financial Regulation.

Parliament’s Committee on Budgets and Committee on Economic and Monetary Affairs are jointly responsible for the scrutiny of the RRF, by means of a Working Group and bi-monthly Recovery and Resilience Dialogues with the Commission.

 

Francisco Padilla Olivares

04-2024