Agreeing the EU's seven year budget is always a gruelling scrap. Wealthier member states resist paying more, poorer countries want to receive more, and across the board there are disagreements over which policies get prioritised.

As always those seeking a more "modern" EU budget, with an emphasis on climate change and the digital economy, are at loggerheads with traditionalists who want to keep supporting the Common Agriculture Policy (CAP) and cohesion funding, which helps poorer regions catch up with richer ones.

Brexit means all those arguments have become tougher.

With the UK gone, there will be a hole in the EU's coffers to the tune of between €60 billion and €75 billion over the seven year budgetary period (2021- 2027).

"The message is," says one official working closely involved in the negotiations, "none of us will win. Everyone will lose, everyone is getting less and paying more and we're just going to have to accept that."

Big net contributors want to keep the budget increase at no more than 1% of the EU's gross national income (GNI).

The European Commission has proposed a rise of 1.11%, while last year the Finnish Presidency recommended an increase of 1.07% of gross national income (GNI), with the European Parliament calling for a rise of 1.3%.

The latest "negotiating box" has been presented by Charles Michel, the new European Council President. Following consultations with EU leaders he has proposed an increase of 1.074%, or €1.09 trillion, but this will involve painful cuts of up to €230 billion compared to the commission's figure.

Taoiseach Leo Varadkar has said the Common Agricultural Policy (CAP) "should be maintained at least at its existing level". However, CAP is already under pressure.

European Council President Ursula von der Leyen wants a greater budget focus on fighting climate change.

Ursula von der Leyen

As such, the Michel "negotiating box" envisages €7.5 billion being taken out of the CAP fund and transferred to help central and eastern member states to adapt to the EU's tough new carbon emission targets by 2050 - the so-called Just Transition Fund (JTF).

This has already enraged Irish farm organisations.

"What we have here - however it is dressed-up - is a policy of making the farmers pay for the so-called Just Transition," says Pat McCormack, President of the ICMSA.

"What President von der Leyen is actually saying is that the same farmers who paid through decades of falling margins and unfair practices by retail corporations that were tolerated, if not actually encouraged by the EU Commission, that those same farmers must now pay for the Just Transition to carbon-neutrality and thus carry the can for everyone again."

The European Commission had initially proposed a CAP budget of €383 billion; the Finnish Presidency last year recommended €334 billion; now Charles Michel has put forward a figure of €329, a fall of €54 billion on the original commission proposal.

Ireland is also facing increased net contributions over seven year budget period because of Brexit and the general rise in Ireland's GNI.

With the UK gone, so too will go a number of rebates. In 1984 Margaret Thatcher famously won the British Rebate because at that time 70% of the EU's budget went on agriculture, and the UK felt it disproportionately lost out.

Read more: Michel confident EU leaders will make progress on budget

Over time, other big net contributors to the budget wanted their own rebates - effectively a rebate on the British rebate.

These are Denmark, Germany, Netherlands, Austria and Sweden. The European Commission has proposed that such rebates be phased out by 2027, arguing that they allow richer countries to pay proportionately less into the budget than poorer countries.

The so-called Frugal Four - Denmark, Netherlands, Austria and Sweden - want the seven year budget, or Multiannual Financial Framework (MFF), to rise by no more than 1% of the EU's gross national income.

The Netherlands is proving to be among the most obdurate member states, insisting on a 1% freeze and keeping its rebate.

"Our Plan A is 1% and keeping the rebate," says a senior Dutch official. "Our Plan B is 1% and keeping the rebate."

Charles Michel has been attempting to bring poorer net recipients - the so-called Friends of Cohesion - on board by proposing an extra €6 billion in cohesion funding and changing the rules on how such funding is allocated and implemented.

Charles Michel

As a sop to the rebate countries, Michel has offered a lump sum to off set the phasing out of rebates by 2027.

However, they remain sceptical. Charles Michel is hoping to secure an agreement at the summit this week, but there are fears it could drag on into the weekend.

The budget must be agreed by the end of this year as programmes will start to take effect at the beginning of 2021.

What does the EU budget cover?

The MFF sets the maximum level of resources for the main "headings" of EU spending. The idea is it reflects the EU's political priorities.

There are seven headings:

  • Single Market, Innovation and Digital: this heading is about promoting the single market and digital innovation. It covers Horizon Europe research and innovation funding, nuclear research, the InvestEU Fund, the Connecting Europe infrastructure facility, the Digital Europe and Single Market Programmes
  • Cohesion and Values: this covers the European Regional Development and Cohesion Funds, as well as the Erasmus education and exchange programme and various other fields of activity in the rights and justice area. It takes the largest share of the EU budget
  • Natural Resources and Environment: this is the second biggest heading in terms of spending and it includes the Common Agriculture Policy, fisheries, climate action and the transition to cleaner energy
  • Migration and Border Management: this includes Asylum and Migration and the new Integrated Border Management Funds which reflect the EU's ongoing challenge in managing migrations flows from the Middle East and Africa
  • Security and Defence: this includes a big increase for the European Defence Fund (EDF), part of the EU's Common Security and Defence Policy (CSDP) which aims to coordinate national investment in defence research and improve interoperability between member states’ militaries
  • Neighbourhood and the World: this includes funding for the EU's near neighbours as well as development and international cooperation aid for countries further afield
  • European Public Administration: this heading covers the costs of running the EU's institutions, schools and pensions

Where does the money come from?

Some 70% of the EU budget comes from member states. The rest of the money comes from customs duties on goods coming into the EU from third countries as well as VAT receipts and money from fines the EU levies on state aid infringements.

The EU has been looking to reform this system so that over time member states are less relied upon for national contributions and more comes from other sources.

Under current rules, member states send 80% of customs revenue on third country imports back to the EU budget and keep the remaining 20%.

The European Commission has recommended that more of that money - 90% - would go to the EU budget, while Charles Michel has proposed 87.5%.

Member states are also looking at using a percentage of the EU's Emissions Trading Scheme (ETS) to fund the budget, as well as a plastics tax.

The commission has proposed that 20% of ETS revenues go to the budget, while Charles Michel has recommended that any revenue above the average ETS levels between 2016-18 would instead be used.

The plastic tax idea would involve member states contributing 80c for every kilo of unrecycled plastic packaging waste to the EU budget.

This would incentivise governments to reduce plastic waste, as the more that is reduced, the less they money they will have to send to the EU budget.

The EU is also exploring the idea of using a so-called carbon border tax to raise funds. As part of the European Commission's signature Green Deal project, the EU is looking at levying a tax on imported goods or energy that have been carbon-heavy in their production.

Officials say this idea - as well as an aviation levy - will probably not be agreed on time for the 2021-2027 MFF, but they may be part of the EU's "own resources" long term.

The European Commission also proposed that a percentage of a long envisaged Common Consolidated Corporate Tax Base (CCCTB) could go to the EU budget, but this has been shot down by member states - including Ireland - because the CCCTB has still to be established (and even if it were, there are objections to it being used, even partially, for the EU budget).

This means that national contributions will remain the big resource for the EU budget, and that's why these negotiations are so politically fraught.

Those contributions are based on a country's gross national income (GNI). Roughly speaking, the wealthier the member state, the more they contribute to the budget (notwithstanding the rebate anomalies).

However, because of the fact that from one year to the next there are fluctuations in the other sources of income - customs duties, VAT and fines - then the amount that each member state contributes each year will fluctuate as well.

Complicating this even further are two factors.

Firstly, if a country enjoys an increase in gross economic income in a given year, even if modest, it can push the member state over a threshold resulting in a potentially sharp rise in EU contributions.

Secondly, a country's contributions are tempered by what it gets back from the EU budget: agriculture payments, cohesion funds, Horizon Europe research funding, infrastructure support and so on.

While agricultural payments remain largely stable over the seven year period, the other incoming payments might not (if an EU-supported motorway bypass is built the funding might not come in until later in the seven year cycle).

Similarly, the amount of research funding a member state might get will depend on the quality of the application by universities.

All these mean fluctuations in how a country's net benefits, and net contributions, are calculated over the seven year period.

When it comes to receiving money, the amount each member state gets is also calibrated by a range of factors.

Cohesion funding is shared out according to a methodology that differs depending on the type of region involved, on what a country's level of youth unemployment is, on the member state’s relative wealth, on what its carbon emissions are, on what its net migration levels are, and so on.

However, for central and eastern European member states, cohesion funding has been a vital support in developing roads, schools, libraries and other public buildings as they tried to catch up following the collapse of the Soviet Union and the "big bang" accession in 2004.

Thanks to Brexit, there will be less money to go around, so the compromise between the Frugal Four and the Friends of Cohesion necessarily means tweaking the methodology of paying out EU funds here and there.

That is a complicated process.

For example, there are safety nets built into the process to ensure that richer countries can't get too much of an increase in EU funding.

In the 2014-2020 budget period, a member state whose GNI was above 100% of the EU average would be limited in the amount of cohesion funding it could secure.

This time around officials realised that because of stagnant growth in some richer countries they were suddenly qualifying for a higher share of EU largesse.

This allowed Charles Michel to propose switching €6 billion of the cohesion budget from rich countries to poorer countries.

Another trick has been to decrease the amount of co-financing by those national governments. Under the latest proposal, the amount a disadvantaged member state will have to pay in co-financing will fall from 30% to 25% in cohesion projects.

Under agriculture payments, member states will also be able to move a certain percentage of funding from Pillar One (i.e. direct payments to farmers) to Pillar Two (investment in rural development) depending on their priorities.

However, a number of countries - the Netherlands included - are angry that a linkage between cohesion funds for central and eastern European member states and upholding the EU's values has been watered down.

Poland and Hungary have been sharply criticised for alleged "rule of law" violations over interference in the judiciary and clamping down on media freedom.

The European Commission sought to link receipt of cohesion funds and upholding EU values, but Charles Michel has changed the sanctions procedure to give member states a potential veto on any denial of EU funds.

All told, it will be a long an bruising summit, with Michel conducting numerous bilaterals and shifting money around in order to secure a compromise.

Ireland and the EU budget

Ireland has been a net contributor since 2013. Last year the state paid a gross amount of €2.5 billion into the EU budget and officials suggest the net contribution, taking account of what Ireland gets back from the EU, was between €200-€400 million.

If EU leaders agree a seven year budget set at 1.1% then the gross contribution will rise to €2.9 billion in 2021, €2.95 billion in 2021, and €3.1 billion in 2023.

Again, it is impossible, for the reasons cited above, to predict what Ireland's net contribution will be over the seven year period, but in November last year the Taoiseach acknowledged that gross contributions would rise considerably, based on economic growth, inflation and the Brexit effect.

"We are okay about that," he said in Dublin during a news conference with Charles Michel. "As a country that was a net beneficiary of the EU budget, we are going to become a net contributor, but what we gained from the EU is much greater than what we contribute financially."

Most of Ireland's EU receipts go to CAP and direct payments to farmers. Ireland’s receipts of cohesion funds have declined since the 1980s due our emergence into the wealthier part of the EU club.

A hard Brexit would probably have a paradoxically beneficial effect on Ireland's EU budgetary postion.

Should the EU and UK fail to reach agreement on a free trade agreement (FTA) by the end of this year, then that will mean tariffs on UK goods. The receipt of those tariffs by the Revenue Commissioners would mean a reduction in the state’s national contribution.

A hit to Ireland's GNI would also mean the state should ultimately qualify for more EU support over the budgetary period.