Published on 20 July 2025

Introduction

The European Commission has started the ball rolling on the setting of the EU Budget for its next seven-year period 2028-35, the so-called Multiannual Financial Framework or MFF. A big increase is proposed in the Commission’s first draft, and this has been met with the ritual cries of alarm from Member States.

Normally Member State politicians will claim a victory once the process has unfolded in its normal manner and a considerably smaller increase is agreed – but no freeze and certainly no reduction.

Things may not be so easy this time around as the European Union needs substantial extra funds, not for discretionary spending (which can be flexed away) but to pay its debts (which cannot).

How is the budget set and what would UK have normally paid?

The budget is set as a percentage of the EU’s Gross National Income for the year in question, so any precise figure discussed at this stage is subject to several variables before it materializes as a monetary amount.

The UK’s contribution was normally around 12% of the whole, before any rebates. The European Commission’s initial proposal of an annual budget of 0.115% of GNI, given as a monetary figure of €181.6 billion, presupposes an EU GNI of €15.8 trillion. The EU Budget (referred to as the EU’s ‘own resources’) is composed of Member State cash contributions, VAT, customs duties and the sugar levy.

One way or another it is money drawn out of the Member State economies, and the UK’s gross share of the 2028-35 MFF would have been around €150 billion or £127 billion. The UK received a rebate against its Member State cash contributions, but this was consistently under pressure, and there are reasons to believe that the EU’s need for money will be even higher than the European Commission’s opening bid. At any rate the UK would have been paying in an increasing amount, as all the remaining Member States will be.

Therefore it is reasonable to assume that the UK would have had to bear an amount of at least £100 billion for 2028-35, down whatever channel it was payable. This would, of course, not be the UK’s total cost of membership for the period, about which there would be considerable debate.

Why does the EU need so much more money?

The increase in the EU Budget is largely attributable to the repayment of the debt the EU took on to mount its Covid Recovery Programme (Next Generation EU). The EU expects to repay €25-30 billion per annum…but the EU Budget would not need any such top-up from member states if (i) none of the fund had been given out as grants; and (ii) the loans portion had been made to Member States and not to other entities within Member States under an opaque process whereby, for example in Spain, ministries each got an allocation, and they distributed it to public entities in line with their spending priorities.

It is not clear whether it is the Kingdom of Spain, or the ministries, some other public entity, or even a private sector entity or scheme that is the debtor towards the EU. This is a major issue: whether only public entities acted as a principal in the loan structure, or whether they acted as an agent with private sector entities acting as principal. Who exactly is committed to make the loan repayments to the EU, so that one can be assured that the EU will at least be receiving that money, and will only be short of the amount that was distributed as grants?

Whoever is now committed to pay back the loans portion, the whole Spanish allocation (of grants and loans) has been gobbled up with little attention given to what was required to recover from Covid. The former finance chief of the Autonomous Community of Madrid, at the recent IES Summer University in Aix-en-Provence, described Next Generation EU as a financial scandal of epic proportions that will soon be highlighted.

It is perfectly possible and likely – given the CBILS experience in the UK – that other Member States have distributed the loans portion of their allocation to fraudulent applicants or to applicants who have become insolvent and cannot repay.

The EU’s estimate of a need for €25-30 billion per annum assumes that all loans are repaid, and as such it needs to be regarded as flawed.

What is the size of Next Generation EU and how has it been spent?

As ever with the EU, the numbers do not quite square up. The total facility was originally sized at €750 billion but appears to have been raised to €806 billion. Not all has yet been drawn, and indeed it may be that a portion expires undrawn:
https://commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/nextgenerationeu_en
The facility is available during the current MFF, so there are still over two years for that to occur. In principle the undrawn amount should then expire, although not if it has been committed before the deadline.

In the case of the European Investment Bank, the trigger is that the borrower should have signed a loan agreement before the expiry of an MFF for the loan to count as covered by the guarantee from the EU for that MFF (in the case, for example, of EIB loans to borrowers outside the EU). If that trigger point is met before the end of the MFF, the loan can be drawn during the following MFF, and EIB loans can have drawing periods of two years.

As well as that there is a track record of EU facilities being extended (e.g. loans being made to Greece out of the European Financial Stabilisation Mechanism after the facility was supposed to have been frozen at the amounts lent to Portugal and Ireland) or being repurposed (e.g. the European Stability Mechanism lent money to Spain to assist with the restructuring of its banking system when the facility’s supposed sole purpose was to support bailouts of Eurozone member states).

The planned breakdown of Next Generation EU appears to be:
Grants – €338 billion
Loans – €385 billion
‘Reinforcing several existing EU programmes’ – €83 billion
Total – €806 billion

‘Reinforcing several existing EU programmes’ sounds like spending, such that the total amount behind which there is no borrower to pay into the EU Budget is €421 billion, or 52%.

In addition, this usage of the facility as a resource for other EU programmes is a form of repurposing.

If the EU has borrowed-and-spent €806 billion, where does it get the funds to repay the debt?

The loans portion of 48% of the whole is the primary source of the EU’s repayments to investors. It sounds like in Spain that the loans were given to known, public entities who have a chance of paying back. This may not be the case in other members states, where there may have been fraud and/or lending to borrowers who have since gone bust.

If €806 billion has been borrowed by the EU over 15 years, then the EU’s average capital repayment will be €53.7 billion annually.

But if they only have borrowers paying back 48% of that (€25.8 billion), it leaves 52% (€27.9 billion) needing to come from the Member States one way or the other, such as new EU taxes that are directly attributable to the EU but for which the Member States act as collection agents, or higher Member State cash contributions.

Ultimately it all comes from EU businesses and individuals.

€27.9 billion is more or less the mid-point of the range the EU gives of €25-30 billion per annum for the top-up it needs, and it is only at that level if all the borrowers pay their debt service. If loans have been made to fraudsters (as happened here with CBILS) or if borrowers have gone bankrupt, the €27.9 billion will escalate.

Why was Next Generation EU so important?

Next Generation EU represented a sea change in terms of the EU creating much larger future liabilities for Member States. This is in line with EU federalists and the Commission pushing for the EU to take over more roles from Member States. Now we have a similar defence fund being set up for another €150 billion.

Doubling-up: several levels of public entities all borrowing

Member States have continued to borrow-and-spend themselves. One now sees – and the EU public will in due course appreciate – the doubling-up effect of both the EU and the Member States (and other public entities and schemes) all borrowing, and creating hard payment liabilities for EU businesses and individuals.

Accountability

The UK managed, through Brexit, to get out of this increasing liability, both in terms of the amount to be paid over to the EU, and the lack of control over how it is spent. It is disturbing that money is borrowed through Next Generation EU and then passed on to be spent in other EU programmes, such as the Horizon Europe (scientific research) and InvestEU (Net Zero projects). It becomes impossible to follow the audit trail to see where the money was spent, and whether it was well spent. It is well-known that the processes for exposing mis-spending and obtaining redress are almost non-existent, and that the EU apparatus resists transparency.

Getting the EU Budget agreed

It becomes more difficult for the EU Budget to be agreed. Having the EU indebt itself so heavily adds a hard liability for the debt repayments. The EU Budget must bear at least €25 billion per annum, if not a larger sum if the loans portion of Next Generation EU does not get fully repaid.

This restricts the traditional ‘wiggle room’ for the negotiation of a budget increase between the Commission, Council and Parliament, its expected outcome being a landing somewhere in between the preceding budget and the Commission’s initial proposal for its increase. With such a large, extra, hard cost, it must land nearer the Commission’s initial proposal, demonstrating the reduced negotiating power of the elements (the Council and the Parliament) that are supposed to keep the ambitions of the Commission in check.

Impact on the ‘democratic deficit’

Any evidence that Next Generation EU has been mis-spent by its recipients, the wider recognition that half of the recipients are not even obliged to pay back, and any cases that some of those who are obliged to pay back do not, cannot fail to precipitate recriminations and a deepening of the democratic deficit that exists between the EU apparatus and the EU citizenry.

Summary and conclusions

There is no doubt that the UK is better off out of this, both in terms of direct financial cost, and politically: managing expectations at home and selling the resulting costs to the electorate, while dealing with a complex set of EU bodies who resist transparency and accountability.

For the EU the chickens are threatening to come home to roost through the budget negotiations and the 2028-35 budget period. A large amount has been spent on Next Generation EU without any evidence at all that the result has been a recovery from Covid and a reviving of the EU, its institutions, and its economy, to make all of them fit-for-purpose for the next 15-25 years, that being the stated purpose of the programme.

The purpose has not been achieved, the money has been spent, and now the EU economy will need to bear an annual cost of €25 billion or more.

That is going to take a lot of justifying by the EU and its supporters to the EU’s citizenry, especially if there has been weak oversight, fraud, and borrowers failing to repay.