GDP, GNI and the UK’s EU budget contributions | Sept 2015
GDP, GNI and the UK’s EU budget contributions:
an explanatory note
Author: Richard Wild, Office for National Statistics
Date: 8 September 2015
Background
Each year, the UK government makes a contribution to the European Union (EU) budget.
Nowadays, this is predominantly based on the size of the UK’s economy relative to those of
other EU Member States, plus contributions based on tax and levy revenues. Responsibility
for producing the official estimates of the UK economy that feature in the EU budget
calculations lies with the ONS. This note:1. provides further information on how Member States’ contributions are calculated
2. clarifies institutional roles in this process and
3. provides further context on why Member States’ budget contributions may be revised
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How are EU Member States’ budget contributions calculated?
The cost of administering the European Union is almost wholly funded by contributions from
Member States, with the remainder coming from items including external contributions to the
EU and fines on businesses. The overall budget is fixed in advance but then the cost of
financing that budget is shared between the Member States according to pre-agreed
formulae. In general, each Member State is required to contribute an annual payment to the
European Commission based on three elements of economic activity, though there are
various country-specific adjustments – again according to pre-agreed rules - applied on the
grounds of equity:
a) Traditional own resources (TOR)
These comprise customs, agricultural, sugar and isoglucose levies. Member States
contribute 75% of these levies to the EU, with the remaining 25% retained domestically
to cover the costs of administration.
b) VAT-based own resource
Member States contribute a standardised percentage, or ‘call rate’ of 0.3% of their
harmonised VAT bases – that is, based on implied VAT resources if VAT rates were
applied to a common EU standard rather than using country-specific rates - with the VAT
base capped at 50% of Gross National Income. Specific exceptions to the call rate apply
to Austria (0.225%), Germany (0.15%), Sweden and the Netherlands (both 0.10%).
c) GNI-based resource
Member States pay the EU a standard percentage of their Gross National Income (GNI).
GNI is essentially UK value-added (GDP) adjusted for any UK income from abroad less
foreign income owned in the UK (‘net property income’). In short, it counts all income
earned by UK residents regardless of where it was earned. Member States’ GNI-based
contributions cover the remainder of the EU budget not met by revenue from traditional
and VAT-based resources, up to a cap of 1.24% of their respective GNIs. This is the
largest of the three elements and is based on estimates of GNI produced by the National
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GDP, GNI and the UK’s EU budget contributions | Sept 2015
Statistical Institutes in each of the Member States. For the UK, the calculation is carried
out by ONS, as the UK National Statistical Institute.
d) Further adjustments
Specific exceptions apply to the Netherlands, Sweden and the UK. For calculations
covering the period 2007-2013, both the Netherlands and Sweden receive respective
lump-sum annual reductions of EUR 605m and EUR 150m, financed proportionately by
all other Member States. In the case of the UK, a rebate has been applied since 1984,
known as the Fontainebleau Abatement. The size of the rebate varies from year to year
and is based on the difference between the UK’s share of total uncapped EU VAT base
resources and its share of total EU expenditure, multiplied by 66% of total EU
expenditure allocated to Member States. This is then adjusted to account for the impacts
of VAT capping, introduced in 1988, and an increase in the share of traditional own
resource retained for administration purposes from 10% to 25%, effective since 2001.
The cost of the UK rebate is borne by all other Member States.
Figure 1
Breakdown of UK contribution to the EU budget by resource, 2013
Euro bn
20.0
15.0
10.0
5.0
-5.0
-10.0
VAT
GNI
Traditional
Other (inc rebate)
TOTAL
Source: European Commission
Figure 2
Proportion of EU budget1 paid for by each Member State, 2013
Percentages
25%
20%
15%
10%
5%
UK
SE
FI
SK
SI
RO
PT
PL
AT
NL
MT
HU
LU
LT
LV
IT
CY
HR
FR
ES
IE
EL
EE
DE
DK
CZ
BG
BE
0%
Notes:
1 Excluding central EU revenue items, such as fines and prior budget surpluses
Source: European Commission
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GDP, GNI and the UK’s EU budget contributions | Sept 2015
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Respective roles and responsibilities
As noted above, as part of the National Accounts, the ONS calculates UK GNI on an annual
basis. Although the National Accounts themselves are now compiled in line with the
European System of Accounts (ESA) 2010, for the present, GNI is calculated in line with the
legally binding framework of ESA 1995.
The rules and procedures for calculating GNI are set out in great detail, reflecting the
important use to which the GNI estimates are put. Each year, Eurostat, the official statistical
agency of the European Union, audits Member States’ National Accounts to ensure that they
are harmonised as closely as possible.
Eurostat passes these estimates of GNI for each Member State to the Commission’s
Directorate General for Budgeting (“DGBudgeting”). This body uses these estimates to
calculate the budget contributions required from each Member State. The respective national
finance ministries – in the UK, HM Treasury – are then asked to pay them.
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Why are Member States’ EU budget contributions sometimes revised?
Following the annual audits noted above, Eurostat can place EU-wide (‘transversal’) or
country-specific ‘reservations’ on any areas of GNI measurement they would like to see
improved. Member States are then required to address these reservations for a
retrospective range of years and within a given timeframe. The combined impact of all these
improvements determines by how much each Member State may have under- or over-paid
for the period in question. (Currently, the assessment is over the period 2002 to 2010).
As a broad rule, where a transversal reservation affects each Member State to similar
degrees and is addressed by each Member State in the same year, the impact on their
respective GNI contributions is small. For example, if addressing a transversal reservation
caused each Member State to revise up its GNI by 10%, there would be no change in the
proportions of overall EU GNI relating to each country.
Conversely, country-specific reservations tend to have a larger impact on the Member State
in question but no impact on any other Member State. Because such changes have an
impact on the relative position of Member States’ GNI, the consequences for the budgeting
may be greater.
For the past few years, Eurostat’s GNI focus has been to lift any outstanding reservations
relating to the old rules governing the compilation of GDP and GNI estimates, ESA 1995.
This was superseded by the new and improved ESA 2010 in 2012. Member States began to
publish their National Accounts on an ESA 2010 basis from 2014 onwards. However,
Eurostat will continue to measure GNI under ESA 1995 rules until all outstanding
reservations on that basis have been addressed.
As major overhauls of ESA only happen every 15 years or so, they can generate large
amounts of methodological work for each Member State and, potentially, exceptional
revisions to their GNI contribution requirements.
The expectation is that all outstanding ESA 1995 reservations for the UK and other EU
Member States will be lifted in 2015. The UK then has a last and specific reservation to clear
in 2016.
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GDP, GNI and the UK’s EU budget contributions | Sept 2015
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Contact
Richard Wild
Office for National Statistics
[email protected]
+44 (0)1633 456379
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References and further reading
European Commision (2008). European Union Public Finance, 4th edition, Luxembourg:
Office for Official Publications of the European Communities.
European Commision (2015). ‘EU expenditure and revenue’, interactive web content,
available at:
http://ec.europa.eu/budget/figures/interactive/index_en.cfm
European Commision (2015). ‘Revision of Member States’ GNI contribution’, memorandum,
available at:
http://europa.eu/rapid/press-release_MEMO-14-601_en.htm
Eurostat (1996). European System of Accounts ESA 1995, Luxembourg: Office for Official
Publications of the European Communities.
Eurostat (2013). European System of Accounts ESA 2010, Luxembourg: Publications Office
of the European Union.
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