€100B? €86.6B? A Brussels puzzle: How big is the new research budget?

Who doesn’t love round numbers? The European Commission’s proposal for research and innovation spending for 2021 - 2027, announced last week, had a nice, gigantic one: €100 billion.

Take a closer look at the legal text for the EU’s next seven-year budget, however, and it is quickly apparent that this ‘wow’ figure does not survive contact with decimal points: the number is broken into €97.6 billion for Horizon Europe, the successor to the current Horizon 2020 research and innovation programme, and €2.4 billion for the Euratom nuclear research programme. A further €3.6 billion is raked away by a new umbrella investment fund, called InvestEU.

Further muddying the water, these allocations are in so-called “current prices”, which allow for 2 per cent annual inflation. When the budget is stated in 2018 prices, the sum earmarked for Horizon Europe falls to €86.6 billion.

Proper comparison

For many people scouring through the details of the budget, neither set of figures offers much clarity on the actual changes to the EU’s research spend.

It is “difficult to make proper comparison with available figures,” said the European Association of Research and Technology Organisations.

Isabelle Thomas, co-rapporteur for the budget in the European Parliament agreed. “We need real figures – otherwise we can’t carry out a proper comparison.” The French MEP, speaking during a hearing in Brussels last Thursday, even suggested the higher current price numbers might be “a trick”.

Not quite. But the question is, which figure matters more, the current price, allowing for 2 per cent annual inflation, or the constant 2018 price?

According to the Commission, “Constant 2018 prices are the relevant ones from a legal point of view and reflect the real changes throughout the period.” The reason to state current figures is to make sure governments and citizens “have a clear view” of the proposed expenditure throughout the whole seven year period.

“It does not make much sense saying that one measurement is more serious than the other, because there is a deterministic relationship between them,” said Zsolt Darvas, senior fellow with Brussels-based think tank Bruegel.

Inflation converts one number into the other. The Commission forecasts inflation of 2 per cent per year – so, 14 per cent over the lifetime of the seven-year budget.

But in the past few years inflation has been well below 2 per cent – so is the Commission forecast reliable?

“The rate might be considered high given past trends, but 2 per cent is the target that the European Central Bank has set out as what it wants to achieve, so I wouldn't consider taking that figure as unreasonable,” said Luc Soete, an economist and former rector magnificus of Maastricht University.

If future inflation is below 2 per cent per annum, it would imply that the actual increase in the real value of EU research spending would be larger than is foreseen today. If inflation turns out higher than forecast, it will eat into the real increase in research investment.

So long as the ECB does its job, what matters most in the end is current prices, said Soete.

Laws in Brussels are decided based on current prices. The budget amount commonly cited for Horizon 2020, €77 billion, is in current prices (the constant price figure is €70.2 billion).

The new €100 billion research marker, if it survives a gruelling negotiation between the European Parliament and member states, will represent the amount requested from the budgetary authority and the total money for distribution for annual budgets and calls. In raw numbers, it would be a 30 per cent increase on the EU’s current investment, and this new pie would go much further, with the UK no longer eligible to take the biggest piece of it (although if the UK was getting the biggest slice because it was doing the best research, it leaves a question mark over the value that can be extracted from spending more).

None of this is to say that constant, or 2018 prices, are irrelevant to economists or lawmakers. “In general, I'd rather look at numbers in constant terms, because they capture the real evolution,” said Francesco Saraceno, deputy department director of the Research Centre in Economics of Sciences.

These figures allow meaningful comparison, and lawmakers will refer to the 2018 price during negotiations to make it easier to think about future spending in present values. “If you wish to compare the research spending of the current [multiannual financial framework] with the proposed research spending of the next MFF, constant price figures are relevant,” said Darvas.