EU budget post-2020 – what to expect for Lithuania

European Union institutions are beginning discussions over the union’s budget post-2020, when the seven yearlong multiannual financial framework concludes. The withdrawal of the UK will lead to an overall decline in the EU budget, thus there could be discussions of increased contributions from other member states and a redistribution of financing.

The European Commission will present its primary proposal in the middle of next year. At the time lengthy negotiations will begin with member states and the European Parliament. After discussions with Lithuanian government officials, diplomats and European Commission staff, BNS presents potential scenarios and risks for Lithuania.

1. Reduced budget

The UK is fourth in the EU based on contributions to the common budget, thus its withdrawal will open a significant hole in the union’s budget.

Currently every member states’ contribution is calculated based on the country’s gross national income (GNI), VAT base and tariffs. In 2016 65.2% of the Lithuanian contribution was based on its GNI, 18.2% on tariffs and 10.7% on VAT, with 6% – compensation to the UK.

Based on one scenario, the contribution will also include certain other taxes, not just VAT. Another alternative would be to direct a portion of taxation directly to the EU budget. For example 1% of annual budget revenue would go directly to the union’s budget. New budget funding could also be obtained through the long discussed financial transaction tax taxation of electricity, car fuel or carbon dioxide pollution.

Lithuanian officials are sceptical of the tax changes, but would not object if all EU countries would have to contribute more to the EU budget because in the coming perspective the country will still receive more than it will contribute. Lithuania would support the current EU budget contribution system and increasing the GNI portion of it. Furthermore the country would want to see a relinquishing of all budget exemptions which, other than the UK, are still available to Denmark, Sweden, Holland and Germany. In the current financial perspectives Lithuania should receive 12.601 billion euro, while contributing 2.524 billion euro.

2. Budget duration

Ideas are being discussed in Brussels to decrease the financial framework’s duration to five years or increase it to 10 years. Furthermore there are considerations that the next framework could be more flexible – funding could be used and assigned more rapidly, thus the distribution regulations could change.

Lithuania supports maintaining the current financial period. Firstly a seven year perspective does not match the European Parliament elections, thus there would be less of a political influence. There are concerns that a five year budget would have a negative impact on long term projects because the financing of some may need to be split between several periods, while a ten year long budget would prevent adequately fast reaction to unexpected situations.

3. New priorities

In its discussion document released in late June, the European Commission noted that the new budget will have to consider a number of new challenges – migration, increased security threats, the danger of terrorism and closer defence cooperation.

Funding for these areas may be found not only within increased budgetary contributions, but also by redistributing support policy funding. Two of the largest current policies are the Cohesion Policy, which dedicates funds to regional development, seeking to bring them closer to the EU average and the Common Agricultural Policy, which provides agricultural subsidies.

A part of the new priorities can be connected to current areas. For example refugee integration could be financed from the Cohesion Policy. Nevertheless the reduction in financing for both the Cohesion Policy and Common Agricultural Policy is one of the greatest risks because the country receives the most EU funding through these.

4. Regional support

Currently Cohesion Policy funding is distributed to the regions based on the comparison of their GDP per capita to the EU average. In total there are three region categories. Most of the funding goes to the least developed regions where the GDP per capita metric is below 75% of the EU average. Intermediary regions receive less funding, their GDP per capita is between 75% and 90% of the EU average. The lowest amount of funding goes to more developed regions which exceed 90% of the EU average GDP per capita.

In the context of the Cohesion Policy, Lithuania has been viewed as a less developed region, however over the last few years, with the development of the Vilnius region’s economy, there have been concerns that the country could be designated as an intermediary region and would lose a significant portion of future funding.

The government decided to split Lithuania into two statistical regions at the beginning of this year – the Vilnius district and the rest of the country. This way it is hoped to ensure larger regional financing for central and Western Lithuania because the country overall is on the brink of the 75% barrier. On its own, the Vilnius district’s development reaches 109% of the EU average, while the rest of Lithuania 62%.

The European Commission has currently not stated whether it will accept such a statistical split done by Lithuania. Furthermore the head of the European Commission Regional Policy Directorate Marc Lemaitre told BNS that the region categories could have less of an impact thus the government’s move may not pan out. With the three categories gone, the difference between 88% and 92% would no longer be as significant as now.

During discussions in Brussels on reforming the Cohesion Policy, two potential directions are mentioned. There are discussions whether project co-financing should not be increased, meaning that countries would have to contribute more funding from their national budgets, while EU financing would decrease. There are also talks of reducing the overall significance of support, directing more funding to direct investment funds.

The first idea could be risky for Lithuania because greater co-financing would place stress on the national budget. The current minimum level of co-financing for Lithuania is 15%, but every project can have a higher level set.

The second idea is viewed positively because Lithuania is one of the most active financial engineering users in Europe, where support funding is directed to funds, which distribute loans or guarantee loans. Such financial instruments allow to invest support funding rather than directly spending. Lithuania sees that such a course of action allows to encourage investment and attract private capital. Furthermore the invested funds later return and can be reused.

One of the best known examples is the Jessica Fund which lends EU support funding for apartment building renovation. The country made use of funding from the Jessica fund to encourage such renovations and attracted private funds from banks. Nevertheless Lithuania would not want direct EU support to vanish completely because certain projects such as school renovation or state kindergarten construction could hardly survive without it.

In the current perspective, financing from the main EU structural and investment funds is provided if the country meets certain conditions linked with the preparation of financing strategies and documents as well as good administration. There are currently deliberations on dedicating more attention to macroeconomics, the legal system and migration. For example if the country would not uphold the premises of the rule of law, financing for it would be halted or even frozen. Extra risks could appear for Poland due to this, given criticisms over its court reform and refusal to accept refugees, but Lithuania is currently not faced with such threats.

Lithuania should receive 6.901 billion euro from the Cohesion Fund in the 2014-2020 period, while in 2007-2013 the amount was 6.885 billion euro.

5. Support for agriculture

Lithuanian farmers have made use of direct EU subsidies based on the Common Agricultural Policy right from accession to the EU. The discussion document on the future of EU financing writes that currently the policy lacks effectiveness, simplicity and correct distribution of funding to member states.

Lithuanian farmers receive far lower funding that Western farmers, thus the country would like all farmers in the EU to have equal funding. Whether this can be achieved depends on France and Germany. Based on officials it currently appears that the more supportive voices can be heard from Berlin. Paris’ position is not fully clear because the new government only began work recently.

So far the direct funding for farmers were 100% financed from the EU budget, but the new challenges to the EU and the need for funding could lead to changes in this. There are discussions of co-financing from national budgets. This would put further strain on the Lithuanian budget due to the need to seek further funds for supporting the agricultural sector.

This proposal could be even more painful for Lithuanian agriculture if countries could raise co-financing at their own behest. For example instead of the minimum 15% co-financing for a farmer’s direct support, the country would add 30%. This way countries with strong national budgets would be able to help their farmers more than other countries. With France losing in the competitive struggle against Germany and Spain, this would be a good opportunity for it to raise its agricultural funding.

In 2014-2020 Lithuania received 5.070 billion euro from the Common Agricultural Policy, of which 3.394 billion euro was for direct funding. In 2007-2013 CAP funding was at 3.869 billion euro, of which 2.049 billion was for direct funding.

6. Financing the closure of Ignalina Nuclear Power Plant

During its accession to the EU, Lithuania committed to closing down the Russian-made RBMK reactors of the Ignalina Nuclear Power Plant, which were held to be unsafe. Meanwhile the union committed to adequately financing the halt of operations. These commitments were established in the EU accession agreement.

Last year the European House of Audit proposed to discontinue closure funding after 2020 because the project’s implementation is belated and financing issues remain. EU auditors proposed that in the future the financing of the closure could be received from five European structural and investment funds.

Lithuania feels that it has a strong legal position to receive support for the closure of Ignalina NPP because the closure and financing of the power plant is established in EU accession documents. Nevertheless, a weakness in the political position is felt. This is mostly linked with this question being relevant only to Lithuania itself, while the other EU countries do not receive any direct benefit from the power plant’s closure. Due to this Lithuania will stand alone in proving that the funding for the closure of Ignalina NPP is of vital importance because the country fundamentally feels it has legitimate expectations regarding receiving support.

Vice President of the Commission for the Energy Union Maroš Šefčovič told BNS in late May that support for the closure of Ignalina NPP post-2020 will depend on the results of Brexit. It will depend on these negotiations whether Lithuania will receive full financing for the closure of the nuclear power plant during this financial period because the remainder is entered into the requirements for the UK’s withdrawal bill which reaches around 100 billion euro.

During this financial period the Ignalina NPP closure project received financing of 450.8 million euro, while in the 2007-2013 period – 837.4 million euro.