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Towards a More Perfect (Fiscal) Union
Lessons for the Euro Area From the Formation of America’s Fiscal Union
Jacob Funk KirkegaardSenior Fellow
Peterson Institute for International Economics | 1750 Massachusetts Ave., NW | Washington, DC 200366/22/2017 1
AgendaI. The Lesson(s) of U.S. Fiscal History
II. The Public Goods a Central Budget Could Deliver
III. A Path to a Larger and More Politically Sustainable EU Budget
America’s Fiscal Union will be forged in crises, and will be the sum of the
solutions adopted for those crises……John Monnet – Fictitious Founding Father
(psst – its the federal government that wages war!)
US Federal Government Expenditures 1792-2020p, % GDP
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Total Federal Government Expenditure 1792-2020p
Total Federal Government Expenditure, Excl. War Department, Naval Department and Interest onthe National Debt 1792-1945
EU Budget in 2014 = ~1.17% of EU GDP
Source: Williamson (2014). Expenditure data from 1792-1945 from US Census (1949); data from 1945-2020p OMB (2015).
War of 1812: 1812-1815
Mexican-American War:
1846-1848
U.S. CIvil War: 1861-1865
Spanish-American War:
1898
World War I: 1917-1918
World War II: 1941-1945
U.S. Federal, State and Local Governments' Gross Debt, By Level of Government 1790-1860, $USmn
26
175
190
257
200
0
50
100
150
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$US
Mill
ions
State
Local
Federal
Source: US Treasury; Studenski and Krooss (1952)
War of1812 against Great
War of1846 against Mexico
Panic of 1819-21
Panic of 1837-43
Panic of 1857-59
U.S. Federal, State and Local Government Gross Debt, By Level of Government 1860-1940, $US Million
257450 211 270 423
2,907200 1,924 4,075
16,680
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
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45,000
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$US
Mill
ions
StateLocalFederal
U.S. Civil War 1861-1865
U.S. Participation in World War I 1917-1920 (Armed forcesreduced in size with a delay)
Great Depression
and its aftermath 1929-1940
Source: US Treasury; Studenski and Krooss (1952)
Public Goods a Central Budget Could Deliver
I. “Economic Convergence”• Hard if not impossible to deliver• Required budget size politically impossible to (ever) achieve
II. “Counter-Cyclical Buffer”• Not easy to do through regular EU budget items (automatic stabilizers are MS)• Banking Union is not part of the EU budget• Best done by “debt financing” (but Eurobonds are for the future)• Possible to give the ESM/EMF a banking license and do it conditionally• Supplementary “European level” catastrophic level unemployment insurance
III. “Best Solved at Regional Level (Subsidiarity)”• EU powers determined by where “EU-level value-added” exist• Subsidiarity is a “living concept” that evolves over time• How to best finance the regional solution of policy challenges?
Today’s EU Budget~$165bn/year and 80% is direct GNI/VAT-based transfers
Focus on “national net contributions” similar to US pre-XIV Amendment federal budget
Lesson From U.S. fiscal history –Direct centralized taxation requires changes to Constitution/Treaty
100,517
18,087
18,730
8,693
EU Budget Resources by Category, Euro Billion, 2015
GNI-based Own Resource VAT-based Own Resource Traditional Own Resources (TOR) Other Revenue
Source: DG Budget
Direct Tax Financing Not Happening
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Share of Residents Feeling National Only or Predominantly
National, Fall 2016
Answer to the question: In the near future - Do you see yourself as ? Source: European Commission
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
3/1/
1992
3/1/
1993
3/1/
1994
3/1/
1995
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2016
Feelings of Self-Identity, Share of EU Residents 1992-2016
National Only National and Then European
European and Then National European Only
Don't Know
Answer to the question: In the near future - Do you see yourself as.... ? Source: European Commission
Earmarked Revenue Widely Used in U.S.
U.S. states derive a minority of revenue from general taxes with full discretion over use
Earmarked U.S. state revenue over 25% of total revenues
35% of U.S. federal budget is earmarked “trust fund revenue”
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
U.S. State Revenues, By Source, $USmn 1987-2015 General Fund Revenue Federal Government Grants
Earmarked State Revenues Bond Revenue
Earmarked Revenues = Bigger EU Budget?
• With voters’ self-identity/allegiance at member state level, single tax for single public service may be EU’s only avenue to raise indirect tax/fee revenue
• Simpler and therefore democratically more legitimate than current complex budget process
• Some applications:– Explicit user fees; polluter pays principle or €5 ETIAS fees– Fees on related use items; Highway TF structures that for
instance finances infrastructure through gas taxes, climate mitigation through ETS (EU Carbon Dividend?) revenue
– Broad taxes earmarked for specific EU budget items; finance a CAP through a 2% VAT on food?
Concluding Remarks• Lessons from U.S. fiscal history – fiscal unions takes a long time to
construct and you really do need crises to do it
• Being a “Project of Peace” sets the EU back in the process of “state/fiscal union building”
• EU budget should focus on funding solutions to regional challenges
• Financing the EU budget through an increasing use of earmarked revenue from targeted indirect taxes/fees best available path for now to more direct European revenue
• Earmarked revenue probably best path to a larger and politically sustainable EU budget
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