On budget and financial management of European Union

The general budget of the European Union consists of income and expenditure from the EU’s operations within the scope of the Treaties. As a general rule, the use of the resources included in the budget is based on legally binding regulations. They regulate the operations of the EU and the related use of resources in more detail.

Added value at the EU level is often mentioned when discussing funding of the EU. In other words, the resources should be allocated to operations where shared actions by the entire EU can achieve better results than the member states on their own or operation at the EU level would be preferable in all cases where it is more appropriate.

EU budget and financial framework

The resources included in the budget of the European Union are divided into commitment appropriations and payment appropriations. A commitment appropriation means that the EU commits to paying expenditure during the said budget year or following years, while the EU pays payment appropriations during the current budget year.

As our national budget, the EU budget is prepared within a specific framework. The EU’s multiannual financial framework, which is a regulation by its lawful form, specifies an overall framework for the entire period and policy-based frameworks under each heading for annual commitment appropriations.

The amount of payments is set at the annual level. The financial frameworks include some leeway for unexpected expenditure. The EU also uses specific instruments outside the headings for a variety of budget expenditure that can be used to cover unexpected expenditure with specific conditions specified in the regulations.

At present, negotiations on the EU’s new multiannual financial framework for 2021–2027 are ongoing. The European Commission has proposed funding of a total of some €1,161 billion as commitment appropriations for the future financial framework period. Agricultural and cohesion policy would remain as the most important funding priorities, although some cuts have been proposed.

The most important increases would be in research and innovation, as well as new challenges, such as migration, security and defence. In the case of the headings, the Commission’s proposed financing would mean a budget of some €150–160 billion as commitment appropriations at the annual level. The sum can be compared to the Finnish budget for 2018, which amounted to some €56 billion.

It remains to be seen at which level and with which priorities the future financial framework will be approved. Brexit will not make the negotiations on the financial framework easier. Results of the report by the Intergovernmental Panel on Climate Change (IPCC) may also create further pressure for the directing of EU financing.

The EU cannot take out any loans to fund its budget. The revenue side of the EU budget consists of “own resources”, which refers to traditional own funds, or mainly customs duties and payments by the member states to the EU. The EU also has other sources of income, such as penalties. The financial framework regulation sets a ceiling for expenditure. In addition, the decision on the own resources or the revenue side sets a ceiling for the maximum amount of own resources that can be used to cover payments each year.

The annual budget process allocates the EU’s resources to the expenditure needs for the year in question. When the European Commission has prepared its budget proposal, the Council and the European Parliament join the budget process. The views of these bodies on the budget usually differ: the Council wants cuts and the Parliament wants additions. A conciliation procedure between the bodies is arranged to reach an understanding on the budget for each year.

The European Commission implements most of the EU budget in cooperation with the member states. This applies to the agricultural and cohesion policy actions, for example.

Sound financial management and effectiveness of the use of resources

There are general regulations on the finances of the European Union in the Financial Regulation, which at present consists of some 280 articles. It includes regulations corresponding to the Finnish budget legislation on the preparation and implementation of the budget, accounting and final accounts; the level of detail of the Financial Regulation is different, however.

The Financial Regulation also includes numerous regulations on public procurement, allowances, financing instruments and other matters. There are more detailed regulations on the finances of the EU in delegated regulations. Furthermore, there are numerous regulations on financial management and financial administration in sector-specific legislation. As a cautious estimate, one can state that there are hundreds of articles that govern the financial management of the EU and thus also projects funded by the EU in the member states.

An integral part of the EU’s financial management is the principle of sound financial management. The EU’s assets must be used in compliance with the principles of economy, efficiency and effectiveness. The assets should be used at the correct time and the amount of resources should be sufficient, appropriate in quality and as affordable as possible. The resources should achieve the best possible results. The objectives set for the actions and the expected results should also be achieved.

The EU’s financial management also includes a discharge procedure where the Council and the Parliament process the annual report of the Court of Auditors on the implementation of the budget and the Parliament decides on discharge from liability based on a recommendation of the Council.

The Court of Auditors has stated that it focuses more on assessing whether the EU’s policies and programmes reach the set objectives and whether they provide added value. However, assessments of the Court of Auditors on the number of mistakes usually gain the most attention in the annual report.

As it is a question of the use of resources, it should be self-evident that clear objectives are set and their achievement is monitored. Do the EU’s numerous financial management regulations make the setting of objectives and the monitoring of their achievement easier? Or do they create more challenges instead? A whole other question is how we can reach a shared understanding of the concept of added value in the EU and the EU policies and programmes in which most of the resources should be allocated. In some aspects, the EU budget may be more of a means for income transfer than a tool for providing added value at the EU level.

EU is much more than just its budget and framework

Above is a brief description of the budget of the European Union and its financial management. The EU’s framework and budget processes include many of the same elements as our national procedures. A major difference is how detailed the regulations are, however.

In addition to the EU budget, the EU has plenty of other operations related to financing. All in all, the European Union and its internal market are much more than the budget and its framework.

Seija Kivinen

The author is a Budget Counsellor at the Ministry of Finance.