A landmark agreement was concluded earlier this month in Brussels on an EU coronavirus response. It was remarkable how little comment there was on how the enormous stimulus, valued at some €750bn, would be paid for. This may be because in true EU fashion the bill has been kicked down the road.
The EU has three main sources of income. The first of these are duties and levies, of which the most important are customs duties. Customs duties are taxes paid by importers on goods brought in from outside the EU. Even though national governments collect customs duties at their ports and airports, they merely act as handling agents for the EU. Some 80% of all customs duties collected go straight to EU coffers, with the balance being retained by the individual member countries as a kind of handling fee.
The second main source is Vat. Vat is a truly European tax in the sense that Vat law is created by way of EU directive and then adapted and implemented by national law in the member countries. The EU commandeers a portion of Vat from each of its members. Vat used to be the most important source of income for the Commission. Now that role is held by the direct national contributions, a third source of income which comprises 70% of the EU budget.
Despite the vast amounts raised (the Commission's budget runs to €1.1 trillion over a seven-year period) these amounts will be inadequate to repay the money raised for the coronavirus package or, even for that matter, service the debt. The EU makes up its budgets over a seven-year cycle, and the heavy lifting for the payment of that debt won't start until the next cycle has completed. That won't be until 2027. In the meantime, the Commission is dreaming up ways of securing finance elsewhere.
One idea is to further develop the existing Emissions Trading System. Very broadly, this involves penalising countries whose industries emit quantities of carbon in excess of pre-agreed amounts.
Ireland is well familiar with this method of collecting money, having paid over €100m to date.
Another is a carbon border adjustment mechanism. This is aligned with the environmental concerns of the emissions trading system and penalises European companies that outsource environmentally unfriendly practices to manufacturing locations outside the EU. Europe-wide corporation taxes are also on the agenda.
Traditionally EU member states have often been slow to accept the kind of federalist approach which a centralised taxation system out of Brussels might entail. The most consistent and strident critics, the British, are now off the EU pitch. The powerful bloc of the Germans and the French drove the huge amounts of grant aid to respond to the coronavirus and may find it difficult to push back against measures aimed at funding them. Other countries like Spain and Italy are likely to be significant beneficiaries of the coronavirus response package and this diminishes their capacity to push back against new European taxes.
In future years, Ireland could find itself siding increasingly with the countries now known as the frugal four or five as it assesses the impact of measures which attempt to increase EU tax-raising and harmonisation powers. The EU drive towards tax harmonisation has been resisted by member countries. The irony now is that the EU may achieve success in its fiscal ambitions, not by attempting to devise new taxes, but by spending money.