Ripe for Reform – What’s in the EU Budget Proposal and What Should Come Next

Authors

Romy Hansum, Policy Fellow, Jacques Delors Centre
Johannes Lindner, Co-Director, Jacques Delors Centre
Nils Redeker, Deputy Director, Jacques Delors Centre
Eulalia Rubio, Senior Research Fellow, Jacques Delors Institute

The next EU budget must square a near-impossible circle: manage the phase-out of NextGenerationEU funds, cover €24 billion a year in debt repayments, and respond to mounting demands on competitiveness, resilience, and defence. The Commission has now put forward a surprisingly ambitious proposal - but one that is also politically fragile. If the EU wants to seize this rare chance for meaningful budget reform, the upcoming negotiations should be guided by four principles: (1) defend the shift toward common investment priorities; (2) lock in the proposed flexibility; (3) reform agricultural and cohesion policy within the framework of the new single plans and (4) accept that real reform won’t happen without more money on the table.

1) Intro

On 16 July 2025, the European Commission unveiled its proposal for the next Multiannual Financial Framework (MFF) for 2028-34, kicking off what promises to be a highly fraught and marathon set of negotiations.  EU money talks are never easy – this time Brussels should brace itself for an especially bruising budget battle.

The next EU budget will have to square a pretty nigh impossible circle. It must deal with the phase-out of NextGenerationEU funds end-2026 while covering on top around €25 billion annually in pandemic-era debt repayments. It needs to reflect new priorities on competitiveness, economic resilience, and defence and address the staggering investment gaps for decarbonisation and digitalisation outlined in the Letta and Draghi reports. And all of this must be done within the constraints of a notoriously tight and rigid framework: nearly 90% of the EU’s current budget worth roughly 1% of the bloc’s GNI is pre-committed for seven years, with close to two-thirds flowing back to member states via farm subsidies and regional funds.

The Commission has put forward a surprisingly ambitious package. It pairs a very modest bump in volume with big reforms in how the EU spends its money. It cuts the number of budget headings, trims back pre-programmed spending, and injects greater flexibility across all areas of expenditure. It reduces spending on traditional staples like cohesion and agriculture while boosting investment in energy infrastructure, industrial policy, and defence. It also proposes folding the many shared-management funds in cohesion, agriculture, and migration into new National and Regional Partnership Plans, with disbursements tied to reforms and investment pre-agreed objectives. Flaws remain, but the proposal could amount to the most meaningful overhaul of the EU budget in decades – and one that the Union sorely needs.

However, it is also a package that is politically precarious. Even before its release, it drew sharp criticism from the European Parliament and regional authorities across the EU. President von der Leyen’s tightly controlled, top-down approach to pulling it together led to a chaotic rollout and exposed deep divisions within the Commission itself. And once published, the proposal was met with immediate resistance from national governments across the continent - each zeroing in on their own “juste retour.”

While everyone - including us - is still digesting the details, the priority now should be to set the political guardrails for the contentious negotiations ahead. Four principles stand out:

• First, negotiations should fiercely defend the composition of the proposed budget and the relative shift towards EU-level spending on common priorities.
• Second, the stress on flexibility is key, especially where it leads to a strengthening of the annual budget procedure and allows for adjustments within a reduced number of headings.
• Third, the turn towards National and Regional Partnership Plans offers a chance to reform the EU’s agriculture and cohesion policies – outstanding flaws should be fixed within the proposed framework, not used as an excuse to bin yet another reform attempt.
• Fourth, a better budget requires a bigger budget. Architecture and volume go hand in hand: the modest increase can only be justified by meaningful reform - and reform cannot be built on cuts. If member states want a modern EU budget, they will ultimately have to accept that it means sending more money to Brussels.

2) A slightly bigger budget

First reactions to the Commission’s budget proposal were marked by a confused debate over its actual size. Some of that confusion may have been deliberate, but it also reflects the inherent complexity of unpacking the numbers behind a seven-year financial framework. Some clarifications are therefore in order.

The Commission promoted a headline figure of €2 trillion in current prices – the number looks impressive on slides but includes inflation forecasts over the next decade. A more accurate reference, therefore, is the proposal in real 2025 terms of  €1763bn. The most meaningful metric, however, is the budget’s size relative to the EU economy: by that standard, the Commission is proposing a financial framework worth around 1.26% of EU GNI.

Whether this amounts to a significant increase depends on the reference point. Compared to the political agreement on the current MFF - set at 1.12% of EU GNI - it represents a very modest bump of 0.14 percentage points. Now, some member states argue that the actual increase is larger. The main reason is that the 2021–2027 MFF was adopted in 2018 prices and, following standard practice, adjusted for inflation using a fixed 2% deflator. As real inflation far outpaced that figure, the real value of the budget has eroded to just 1.02% of EU GNI. In practice, that means capitals are currently paying less than they originally signed up for. From this angle, the new proposal would require a 24% increase in contributions. However, poor inflation adjustment is arguably a shaky yardstick for judging relative size.

More importantly, most of the proposed increase does not translate into new spending power. For one, grants from NextGenerationEU added around 0.25% of GNI in investment funding during the current cycle. While those funds were designed to be one-off, their expiration still means the EU will have less firepower under the new budget - even with the proposed increase.

On top of all this, roughly €149bn (in 2025 prices) - or around 0.11% of EU GNI – in the proposed budget is earmarked for servicing pandemic-era debt. Covering these repayments through a larger budget was part of the original NGEU deal, and several member states have insisted that they should not come at the expense of existing programmes. If the amount required for debt servicing is excluded - as it arguably should be - the proposal would leave the EU with just a marginal net increase of 0.03% to finance new priorities.

Table 1: Overview of how proposed new EU budget compares to the current MFF using on different metrics and reference points.

3) A new composition and architecture

The real news is that the Commission is proposing major changes to the overall composition of the budget and to the way the EU spends its money. Notably, the number of budget headings would be reduced from seven in the current MFF to just four. The proposed MFF also consolidates many programmes into broader envelopes. This increases flexibility but also makes direct comparisons across MFFs by programme or policy area inherently approximate. Still, our estimates suggest that cohesion policy and farm income support would see real-term cuts of roughly 15% and 10%, respectively, while funding for security and defence would more than triple. Below, we focus here on the three key headings, leaving the largely unchanged heading for administration aside. 

Figure 1 – Overview of budget increases and decreases across the four headings, including key programs and subprogrammes within each. Only major programmes are shown; therefore, the individual bars do not sum to the total . Programmes with separate revenue sources - such as the Social Climate Fund (Heading 1) and the Innovation Fund (Heading 2) - are excluded.

3.1) Heading I – Less pre-set money for farms and regions, more flexibility for member states

The first heading largely consists of a new instrument with the catchy title ‘European Fund for economic, social and territorial cohesion, agriculture and rural, fisheries and maritime, prosperity and security’ - fondly referred to as ‘the Fund’ by the Commission. ‘The Fund’ totals € 771bn in 2025 prices and integrates 14 different EU programmes. At its core is a new way of organising the EU’s Common Agricultural (CAP) and Cohesion Policies (CP).

Figure 2 – Composition of the proposed “Fund”. The EU Facility is legally part of the NRPPs but will be managed separately by the European Commission. The overall figure excludes €45 billion for the Social Climate Fund, which will be part of the NRPPs but is financed through ETS2 revenues.

The Commission’s proposal would significantly reduce the weight of CAP and Cohesion in the overall budget. In the current MFF, they account for 62% of total commitments. Under the new proposal, their share drops to 44%. While much of this shift reflects increased spending in other areas it also involves some real cuts (see graph above). This reduction comes with a revised allocation key that marginally benefits some Eastern European states. Overall, however, cuts are evenly distributed across member states.

Figure 3 – Changes in proposed national allocations for cohesion, agriculture, fisheries, and migration compared to the current EU budget.

At the same time, the proposal would fundamentally change how regional and agricultural funds are organised. Borrowing heavily from the governance model of the Recovery and Resilience Facility (RRF), the Commission proposes to largely fold the four cohesion funds, three agricultural funds, three funds dedicated to migration and border management, and the Social Climate Fund into a single, integrated National and Regional Partnership (NRP) Plan for each member state. These plans would be drafted by national governments - in cooperation with local and regional authorities - and must outline investment projects that contribute to the overarching policy objectives of the Fund in question. They would then be negotiated with the Commission and require Council approval before implementation.

The NRP Plans would significantly increase member states’ discretion. Core policy objectives would be preserved. Direct income support for farmers and the proportion of funding set aside for less developed regions is ringfenced (i.e. reserved), although their minimum allocations imply cuts in real terms. 14% of the budget under this heading is reserved for social investment (roughly corresponding to the current weight of the European Social Fund-plus and the Just Transition Fund) and a fixed percentage must be dedicated to climate-related spending. Beyond these safeguards, however, member states are largely free to allocate funds across regions and policy priorities. There is no minimum share earmarked for wealthier regions. And with the thematic scope broadened - now including, for example, support for the defence industry - governments will have broad latitude in setting priorities within their plans.

On the other hand, payouts under the NRP plans would come with new strings attached. Like in the RRF, countries would need to pair investment plans with reform pledges that address European Semester recommendations and other reform guidelines from the Commission.  Funds would then only be disbursed once agreed investment targets and milestones are met. Moreover, payments - in part or in full - could be suspended if a member state fails to meet conditions related to the rule of law or fundamental rights.

Finally, the proposal brings a further dose of flexibility. A full quarter of each country’s allocation would not be pre-planned but held back to respond to crises and shifting investment priorities. A new “Catalyst Europe” programme would offer up to €150bn in cheap loans - financed through EU debt - to help member states fund NRP investments that go beyond their national envelopes. Meanwhile, a new “EU Facility” would set aside €66bn to support new Union-led initiatives and help member states rapidly address crises, such as major natural disasters. The EU solidarity fund, now placed outside the MFF, would be integrated within it.

3.2) Heading 2 – A big boost for EU-level competitiveness and defence spending

The second budget heading - branded “Competitiveness, Prosperity and Security” – bundles together €522.2bn (at 2025 prices) from a swath of existing programmes. Most importantly, it merges the current budget heading for the “Single Market, Digital and Innovation” with that of Security and Defence. It also brings in chunks from other budget lines under direct EU management like the Erasmus + programme (see Table 2).

Table 1: Composition of Heading 2 (millions of euros in 2025 prices).

What’s new? First, the new heading would provide a big boost to EU-level spending on a range of shared priorities and EU public goods.  Horizon Europe, the bloc’s flagship research programme, would see its budget jump from €89bn to €155bn. Transport and energy infrastructure spending under the Connecting Europe Facility would more than double - from €32bn to €72bn - while funding for defence and security industries would leap from €25bn to a hefty €116bn. Moreover, the heading includes a whopping increase in EU-level policy support for strategic industries, technologies and decarbonisation. Altogether, the new heading makes up 30% of the total budget (up from about 18% dedicated to these areas in the current MFF).

This funding boost comes with a major governance shake-up. Nearly 40% of spending under this heading would flow through a new European Competitiveness Fund (ECF), merging 12 existing EU programmes for industry support into a single instrument. The ECF would be structured around four broad policy windows: Clean Transition and Industrial Decarbonisation, Health and Bioeconomy, Digital Leadership, and Defence and Space - each with an indicative budget. Crucially, the scope of each of these is defined broadly in the regulation. The Health and Bioeconomy window, for instance, also covers agriculture, food security, nature protection, and biodiversity. Similarly, the Defence and Space window stretches to include critical raw materials, dual-use infrastructure, and energy systems.

Each policy window will operate to a single rulebook. Funding instruments are flexible: they range from grants and loans to equity and guarantees and are supposed to cover the entire investment lifecycle – from innovation and scale-up to industrial deployment and manufacturing. Support from the InvestEU guarantee under the European Investment Bank (EIB) and similar institutions will also be integrated into the ECF and while Horizon remains a standalone programme, the Commission pledges that it will align its funding closely with ECF priorities.

Once again, the Commission is putting emphasis on flexibility. Beyond the underlying legal bases, work programmes would define spending priorities and be set by the Commission through implementing acts following the advisory procedure - meaning member states must be consulted, but no formal approval is required. This largely follows how work programmes are designed as of now under Horizon. The one exception: the Defence and Security window, where member states retain a veto. In both cases, the European Parliament is largely sidelined, with no direct role in shaping these work programmes. The Commission would also have the power to tweak procedures or fast-track implementation when needed. And even the indicative budgets for the four windows aren’t set in stone - the draft Regulation explicitly allows spending priorities to shift during the annual budget process, with Council and EP – as the two arms of the EU budgetary authority – being able to define what to do with that new annual flexibility.  

 3.3) Heading 3 - New flexibility for strategic foreign policy

The third heading covers EU external action. Its share of the overall budget remains broadly stable at around 10%, with spending power rising in line with overall MFF growth. That said, the heading introduces several changes - both in how external funding is structured and where it’s targeted.

First, most external spending is reorganised under a new Global Europe Instrument (GEI), which accounts for €176bn and covers most of the heading. The GEI brings together development cooperation, humanitarian aid, and pre-accession support and is organised around five geographic areas and one thematic area focused on global affairs. The new Europe pillar would cover all EU candidates, potential candidates, and Eastern Neighbourhood partners. This will be complemented with a ‘cushion’ for emerging challenges and priorities which will integrate the Emergency Aid Reserve, now placed outside the MFF ceilings.

Again, the Commission is pushing for flexibility in how external funds are spent. Each pillar comes with an indicative budget, but final allocations will be determined in the annual budget procedure. Aside from the indicative €25bn reserved for humanitarian aid, the Commission will have wide discretion to decide how much to allocate across programmes. The proposal also aims to align foreign spending more closely with EU strategic interests. For instance, the GEI could be used to provide direct grants to EU-based companies involved in projects of European interest abroad - such as investments in critical raw materials. The Commission would also gain the power to suspend support to countries that refuse to cooperate on readmitting their nationals.

Moreover, the proposal puts strong emphasis on support for enlargement candidates and especially Ukraine. The Commission proposes a new Ukraine Facility worth €100bn (in 2025 prices), positioned outside the MFF ceilings, to provide support for pre-accession support and post-war reconstruction. Support for other candidate countries is also set to rise. Compared to the current MFF, the financial envelope of the Europe pillar would more than double. While the pillar also embraces some non-candidate countries, support for that group is expected to remain limited - leaving substantial increases for accession candidates.

3.4) A new crisis instrument

Finally, the Commission proposes the creation of a new extraordinary instrument to offer cheap loans to member states in times of crisis. The goal is to improve the EU’s ability to respond quickly to severe disruptions. Unlike previous crisis tools such as NextGenerationEU or SAFE, which relied on Article 122 TFEU and only required a vote in the Council, this new mechanism would be based on Article 311.4 TFEU. That means it could be activated by a qualified majority in the Council but, crucially, it would also require European Parliament approval:  a shift from recent crisis instruments, where Parliament was largely sidelined.

4) Where does new money come from?

To finance both the repayment of NGEU debt and the modest increase in actual spending power, the Commission has put forward a new package of own resources in an effort to overcome the longstanding stalemate in this debate. The new package seeks to combine three tasks: to find new own resources that pursue meaningful EU policy objectives (that would ideally not already be subject to national taxes), reduce reliance on GNI-based contributions (which they would replace rather than complement), and provide a balance in the overall impact on the different member states (which - in the spirit of juste retour - tend to focus on their individual revenue bill).

Among the package’s different elements, some are familiar - such as booking 30% of ETS 1 revenues and 75% of the income from the still-to-be-implemented Carbon Border Adjustment Mechanism (CBAM) for the EU budget - others are new. A national contribution based on non-collected e-waste, a share of excise duties on tobacco products (TEDOR), and a tapered levy on companies with annual net turnover above €100 million (CORE) are introduced (see figure below). Added to that is the revenue from ETIAS, the new EU travel authorisation system (to be launched next year for all visa-exempt travellers) and changes to existing streams: a reduction of collection costs to 10% for traditional own resources, inflation adjustment of the call rate for the non-recycled plastic packaging waste own resource, and a new "e-commerce handling fee" which is applied to imported goods sold through distance sales (e-commerce). Overall, the Commission estimates total additional revenues could reach €410bn (in 2025 prices) between 2028 and 2035.

Figure 4 – Overview of proposed changes to own resources and their projected revenues for 2028–2034, based on European Commission estimates.

The headline figures on new own resources should be taken with a grain of salt. For many of the proposed instruments, revenue estimates are rough at best - the actual yield will depend heavily on the fine print of implementation. Moreover, political support is a particularly daunting challenge as changes to own resources, unlike the overall MFF itself, not only require unanimous approval but also ratification under national procedures.  

5) How to move on

The Commission has put forward a complex and far-reaching package. It will take time – and plenty of other policy papers – to digest and evaluate the details of each and every regulation. However, what’s already clear is that there’s a lot riding in the two years’ timeframe running up to the deadline for a final deal. The EU budget needs a root and branch reform. The proposal now on the table provides a basis for the first meaningful adjustment in decades - and minds in Brussels and the capitals should focus on making this happen. We see four principles that should guide the negotiations ahead.

First, negotiators should fiercely defend the composition of the proposed budget. Despite the manufactured headlines in some member states, the real news in this proposal is not the miniscule increase in size but a fundamental shift towards more joint spending on common priorities. Its broad contours head in this direction – more money for joint research and innovation, better resources for cross-border energy and transport infrastructure, a more muscular financial underpinning of the EU’s defence ambitions and a long overdue fund for joint industrial strategy spending at EU level. All this makes a strong case for adjusting the budget to Europe’s actual priorities.

Yet, this part of the proposal is also the most vulnerable to attack in the upcoming negotiations. Spending on common priorities via EU-managed funds lacks the well-oiled interest-group machinery that traditionally rescues spending in areas like agriculture and cohesion. So, negotiators in the Council, the European Parliament and the Commission need to be extra vigilant if they are to defend this part of the proposal. This does not preclude criticism. The ECF’s exact composition and governance will and should be discussed; equally it’s questionable whether programmes that clearly fall outside the competitiveness scope like LIFE should be folded into the new fund. But keeping roughly half of the MFF budget for direct EU spending on joint priorities – as now proposed - will be a key yardstick for success in the negotiations ahead.

Second, the push for greater flexibility is essential. The EU’s limited ability to adjust its budget to fast-changing priorities has repeatedly undermined its policy action in recent years - be it migration, security, or industrial policy competition. Negotiators should therefore retain the proposal’s key flexibility mechanisms. Chief among these are the elements that would breathe new life into the EU’s often irrelevant or largely symbolic annual budget procedure. Things are more complicated where built-in flexibility simply amounts to Commission discretion. Tools like the EU Facility or the ability to redefine ECF work programmes may offer an important room for maneuver, but they need to come with proper accountability and oversight.

Still, some parts of the Commission’s flexibility push are unlikely to survive politically -especially where they hinge on new EU debt. That applies to the proposed debt-based crisis instrument. The idea is sensible: to give the European Parliament a stronger role in emergencies and make joint borrowing easier to activate. But convincing member states to give up their veto on EU debt would require a major political effort.  And it‘s far from clear that the payoff – a smoother process for offering cheap loans to member states in future crises - justifies the effort. The same goes for the proposed loan facility under the National and Regional Partnership Plans, which remains small in size and, so far, lacks a good justification. 

More importantly, both proposals sidestep the real debate on joint borrowing: whether the EU needs fresh rounds of common debt to finance public goods or major European projects that member states won’t - or can’t - tackle alone, and that don’t fit within the constraints of the regular MFF. That’s the discussion worth having. Burning political capital on narrow, loan-based flexibility instruments, in contrast, is not.

Third, negotiations will need to find a way to make the National and Regional Plans work. The Commission’s proposal has several advantages. It would reduce the fragmentation of cohesion policy by merging overlapping funds like the ERDF, Cohesion Fund, and EAFRD into a single framework with shared procedures and governance. It could increase the focus on delivering results by linking disbursements to investment milestones and give economic policy coordination sharper teeth. Importantly, the Commission proposal preserves core objectives by ringfencing funding for less-developed regions and social investment, while introducing a merit-based logic for actors in wealthier areas – which would have to make a compelling investment case to access EU funds.

However, the proposed shift does not come without trade-offs. In some countries, it could lead to a concentration of EU funds in certain regions or areas, potentially reducing the EU’s visibility in other areas. The role of regional authorities in implementation may shrink in some member states, weakening the direct link between EU policymaking and local governance. Critics also warn that granting member states greater leeway in shaping income support and climate-related investments could erode the CAP’s common standards and accelerate the trend towards more renationalisation. Also, the move to a performance-based model under shared management is unprecedented and could mean that national governments end up being in charge of monitoring their own progress on reforms and investments. Arguably this would defeat the whole purpose of the exercise.

Finally, it rests on a somewhat risky quid pro quo logic: more flexibility and discretion for national governments in exchange for more funding and a stronger Commission hand on EU-level instruments, particularly under the second heading. It’s a good deal - if both sides keep up their end. But there’s a real risk that member states may pocket the benefits of national discretion while dumping the commitment to bolster shared European tools.

Reasonable people can disagree on how to weigh these trade-offs in the current proposal (as the very reasonable authors of this paper do). But EU cohesion and agricultural policies need root and branch reform and rejecting the proposal on the table outright would reinstate the same old inertia that has derailed meaningful budget overhauls in the past. Instead, negotiators should try and fix the weaknesses within the proposed framework. Two priorities for us stand out: first, ensuring that regions retain a meaningful role in shaping the new plans, and second, strengthening the European Parliament’s hand in both the design and oversight of the framework, thereby ensuring that the Commission’s increased discretion is put to good use and member states follow European objectives.

Finally, none of this will fly without a bigger budget. The focus in the coming months will rightly be on the structure and priorities of the next MFF. But eventually, the package will need a price tag - and the idea that serious modernisation can succeed politically while imposing broad and huge cuts is a delusion. If member states want a more flexible, investment-oriented, and future-proof budget that also enables the repayment of NGEU loans, the MFF will need to grow - if only in the modest way proposed now by the Commission.

Ideally, a substantial share of the increase should be financed through new own resources. At the very least, these should cover the repayment costs of NGEU debt - sending a clear signal to markets that the EU is a credible borrower with a broadening revenue base. Not all elements of the Commission’s current package are convincing - take the proposed corporate levy, for example - and others, like a digital services tax, may have been discarded too hastily. But this is not the end of the road. Additional options should be explored, including a stronger reliance on EU-level fees. And if member states have to cover the remainder through GNI-based contributions, so be it. Ultimately, budget reform requires real money - and capitals should be willing to pay for the modernisation they claim to support.

Outlook

The first multiannual budget plan was introduced in 1988 under Jacques Delors. Back then, the MFF was a congenial innovation. After years of conflict among member states and between the Council and the European Parliament - brought the budgetary peace and financial predictability badly needed for completing the single market and agreeing on the Economic and Monetary Union. But over the decades, the MFF has grown increasingly rigid and arcane, while the EU’s political and economic environment has become more volatile, crisis-prone, and in need of agile responses.

Delors would have turned 100 five days after publication of the Commission’s proposal. As much as he was a visionary, he was also a pragmatist. In that spirit, time the MFF today is ripe for a real reform. More flexibility, more EU-level spending on shared priorities, and real reform of cohesion and agricultural policies are long overdue. The Commission’s proposal is far from perfect - and on size, it sets a floor rather than a ceiling for what’s truly needed to equip the Union for the future. But it opens the door for progress on all these elements. Member states and the European Parliament should seize the opportunity.

^{CC: Photo John Vid, Source: Unsplash}