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Mr. John Redwood (Wokingham) rose

Mr. Smith: I will give way to the right hon. Gentleman on gagging the hon. Member for West Dorset.

Mr. Redwood: I did not guarantee to talk about that issue. I want to talk about the issue at the heart of this debate. Will the Government tell us which European taxes they favour under clause 16 of the document from the Commission that we are discussing today? They signed up to the introduction of European taxes by 2006 and the House has a right to know what sort of taxes they want.

Mr. Smith: As we have made clear, and as the right hon. Gentleman knows, any change to the tax regime in Europe is a matter for unanimity. We have made the UK position clear: we do not accept the need to introduce new taxes. Moreover, we strongly support imposing and maintaining firm financial discipline on the expenditure of the Community, as does the Bill.

In carrying into effect the financing decisions of the Berlin summit, the Bill is an important stage in the reform of EU finances. At Berlin, we met our key objectives of

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bringing EU spending under better control, retaining the own resources ceiling at its previous level and safeguarding the UK abatement.

To set those achievements in context, the earlier agreements on EU spending in 1988 and 1994 allowed for real increases of 17 per cent. and 22 per cent. respectively over the five years of those deals. By contrast, the Berlin agreement will stabilise EU spending. For the first time, spending in the EU 15 is projected to be lower in real terms at the end of the seven-year planning period than it was at the beginning.

The Berlin deal also maintained the UK's abatement in full and maintained the overall ceiling for Community own resources at a constant 1.27 per cent. of EU national income, thereby contributing to strict budget discipline and better control of EU spending.

Sir Teddy Taylor (Rochford and Southend, East): Are things going to get better? As the right hon. Gentleman knows, they are celebrating in four countries in Europe—Germany, Austria, Sweden and the Netherlands—because they have been assured that they will pay less. If they are to pay less, does not that mean that others will pay more?

Mr. Smith: Proportionately and relatively, countries not on the hon. Gentleman's list—except the UK whose abatement is safeguarded—will contribute more to the UK abatement. As I was saying, it is an achievement of the Berlin agreement and a UK negotiating success that we fully protected the abatement. At the end of the planning period, expenditure in the EU 15—although there are costs of enlargement that I shall come to later—which was about 89.5 billion euros in 2000, will be 89.3 billion euros in 2006. Anyone with knowledge of the history of the growth of EU spending will know that to bring it under that degree of control is a considerable achievement.

Mrs. Gwyneth Dunwoody (Crewe and Nantwich): I am not terribly clever so I do not quite understand how we can, at one and the same time, cap expenditure and expand the Community yet be allowed to retain a complete abatement. Is the Chief Secretary seriously telling us that, under other provisions in the measure, there will not be a way of taking in much more taxation for the use of Community institutions, but under a different heading?

Mr. Smith: The ceiling of 1.27 per cent. to which I referred relates to gross national product. Of course, it is true that, as the EU's GNP grows, so too does the allowable expenditure. The financial perspective—the framework on spending—does indeed show lower real-terms expenditure planned in the EU 15 in 2006 than in 2000. In contrast to the history of the past growth of EU spending, that is an achievement and is to be praised.

Mr. John Bercow (Buckingham): The hon. Member for Crewe and Nantwich (Mrs. Dunwoody) is far too wily a bird to be taken in by the right hon. Gentleman—the sooner he recognises that pertinent fact, the better. Will he return to the point that he was making a moment ago? He claimed fully to have protected the British rebate but then went on, in a stealthy, subordinate clause, to acknowledge that there are implications of EU enlargement. Why does he not spell out factually now,

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in plain and simple terms, what we will soon realise to be the case—that this country will have to forgo, as part of the enlargement process, windfall gains that we would otherwise have secured?

Mr. Smith: My hon. Friend the Member for Crewe and Nantwich (Mrs. Dunwoody) is indeed too wily either to be taken in by, or to make too much common cause with, the hon. Gentleman. The truth is that we have protected the abatement. Moreover, we will benefit from abatement on any new expenditure incurred as a consequence of both enlargement and the ceilings in the existing EU 15.

The hon. Gentleman refers to windfall gains. A precedent was given by Sir Geoffrey Howe who, I think, described a previous agreement as not a euro more, not a euro less. That precedent, which is fair, is that there should be neither a windfall gain nor a windfall loss as a consequence of these adjustments.

The abatement is protected in full. The precedent, in both 1992 and 1998, was that it would be unfair for us to benefit twice: to benefit from the substance of the changes that we had argued for and welcomed, and to benefit accidentally as a result of the way in which the abatement was applied. There would have been a double gain if those windfall gains had not been adjusted in the way that I have described, which was consistent with what was done in 1992 and 1998.

The important thing is that we said that we would protect the abatement, and we have protected the abatement. Moreover, the United Kingdom will benefit very considerably from the application of the abatement to any new expenditure on enlargement. Expenditure that was incurred before accession does not fall within the abatement, just as it does not fall within the basis of the calculation of the expenditure that I referred to previously.

Therefore, the abatement has not been an issue as far as pre-accession expenditure is concerned, and the abatement will not apply to such expenditure as it continues in future, but it will apply to all new expenditure. That was a considerable negotiating gain. Many of our partners in Europe would have said that the United Kingdom should have surrendered the abatement. We certainly did not and would not, because we want United Kingdom contributions to the EC budget to continue on a basis that is fair, and is combined with the stricter discipline on overall EU expenditure—very much stronger discipline than Conservative Members voted for when they voted through the European Communities (Finance) Act 1995.

Mr. Nicholas Winterton (Macclesfield): The Chief Secretary gave a very full answer to the hon. Member for Crewe and Nantwich (Mrs. Dunwoody), but will he tell the House what contingency has been made for the situation that will arise if the economic growth to which he referred does not occur, and there is a reduction in growth in the European Union?

Mr. Smith: If the GNP of the European Union were to come down, the ceiling on expenditure would come down with it. It is right for that discipline—ensuring that spending bears a relationship to what is affordable on the basis of the production and wealth of the EU—to be imposed.

I draw a very strong contrast with what happened previously. When the last two EC finance Bills were passed, under a Conservative Administration, the ceiling

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went up. We kept the ceiling in place at 1.27 per cent. Before Berlin, many Conservative Members claimed that we would be unable to safeguard the abatement or maintain financial discipline, but we did. It is reflected in the Bill, so Conservative Members should support it.

The UK contribution will not increase as a result of the new own resources decision, and we shall gain a fair benefit from the application of the abatement to new costs of enlargement. The UK's abatement also means that other changes agreed at Berlin have a neutral financial impact on the UK. Overall, the new own resources decision is a very good deal for the UK, leading to no increases in our contribution and keeping the abatement.

Other elements of the Berlin conclusions also benefit this country. The tight controls on common agricultural policy spending that we negotiated will mean a fall in the price of cereals, beef and milk, bringing benefits of £1 billion a year in Britain—about £70 a year for a family of four. Indeed, the summit represented the most radical reform of the common agricultural policy since its inception; spending on the CAP will decline in real terms from 2002 onwards.

Berlin also introduced the so-called second pillar of the CAP. The increased focus on rural development is a significant and welcome advance. It moves the CAP from production-based subsidies and towards incentives that are more sensitive to the environment, tackling some of the anomalies and perverse incentives of the current system.

Another welcome feature of the changes to EC financing emanating from Berlin was the reform of EU structural and cohesion funds. That streamlined the categorisation of funds, while maintaining a level of funding for UK regions amounting to £10 billion over the years 2000 to 2006. The funds are addressing structural difficulties in qualifying regions, assisting economic development and promoting skills.

The financial reforms to which the Bill commits us pave the way for the enlargement of the EU, which my right hon. Friend the Prime Minister described in Warsaw as perhaps the EU's greatest challenge, but also its greatest opportunity. As I believe is widely acknowledged in the House, enlargement will bring great economic benefits to central and eastern Europe, providing an opportunity for growth, development and prosperity. EU membership will help to raise standards of living and spread education and employment opportunities. It is important to stress that it will benefit existing EU countries as well. Expanding the single market will increase trade, stimulate competition, cut input costs, improve access to larger labour markets and encourage productive investment.

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