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Mr. Prisk: The Paymaster General and, indeed, the Financial Secretary are on record as saying that the EU budget should ensure sound financial management and budget discipline. Given that for nine years the Commission's accounts have not been audited, and there is no statement of assurance, how will the Government achieve their policies? What specific plans do they have to apply pressure so that we can have a budget that we can trust?

Jacqui Smith: Measures to increase the effectiveness of EU spending and the quality of EU finances through better financial management and the tackling of fraud and waste have continued to improve since 2003. In particular, we welcome the Commission's proposal to link administration expenditure with operational expenditure, as that will create a better activity-based approach to expenditure, although costs must not increase at the expense of policy delivery. We therefore share the hon. Gentleman's objectives of ensuring that spending is effective and that financial measures are in place to make sure that that is the case.

Mr. Prisk: We would certainly want to continue the consensual approach that has characterised our debate by trying to ensure that the accounts matter. I fully accept that it is difficult to turn words into practical action, but without genuine leverage I am doubtful, as are many members of the public whom we represent, whether, after seven years of asking the Commission to change its approach, progress has been made. Why does
 
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the Minister believe that her policies will make any difference this year, and does she believe that next year's budget will be audited?

Jacqui Smith: Progress has already been made in Commissioner Kinnock's proposals, which I outlined earlier. Of course, it is a difficult challenge, but a programme of reform is in place and we are beginning to see progress.

Mr. Luff: In her dialogue with other EU member states, how much support has the Minister noticed for the ambitious programme set out in the document that I discussed in my speech? On page 27 of "Building our common future", for example, the EU talks about an attempt to

"saddle the Union with a set of goals and then deny it the resources required".

Does the Minister believe that there is an attempt to saddle the EU with a set of goals, or is the Commission wishing those goals on itself?

Jacqui Smith: To answer the first part of the hon. Gentleman's question, there is considerable support, as represented by the letter to President Prodi from our Prime Minister and the Prime Ministers of France, Germany, Austria and the Netherlands—the majority of net contributors to the EU budget, who share the objective of achieving EU goals while focusing on a budgetary limit of 1 per cent of gross national income. We may not share all the reform objectives of those member states, but they are a strong group, determined to limit EU spending.

Mr. David Stewart: Does my right hon. Friend share my view that it is important that state aid rules are applied consistently across Europe?

Jacqui Smith: Yes, I do. Several hon. Members have touched on state aid, and we need consistent state aid rules across Europe because excessive state aid, as my right hon. Friend the Paymaster General pointed out, prevents us from having a level playing field and can distort competition. However, that must be linked to the flexibility needed to enable us to focus regional and other spending on initiatives that will drive up productivity in our regions. My hon. Friend the Member for Caerphilly (Mr. David) mentioned the struggle to get clearance for regional venture capital funding. What we need in the system is sufficient flexibility to be able to focus on such serious contributions to tackling market failure and addressing regional development needs. We also need a system that ensures a level playing field, for the good of our business and consumers across the whole of Europe.

On our EU regional policy objectives, I have set the budget context within which we are pressing for a radical reform of EU regional policy in order to focus the EU's finite resources on key priorities, while also providing nations and regions with the flexibility to deliver projects that genuinely reflect local needs. Many hon. Members press the case for their constituencies with me as a Minister, but there are few, if any, who are more able advocates of their constituency than my hon. Friend the Member for Falmouth and Camborne. She
 
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was right to emphasise the need for creativity in the way in which we think about the development of projects and spending.

If the Government's proposals for the reform of structural funds were implemented, we would want to build on the strengths of existing objective 1 programmes in aspects such as multi-annual programming, partnerships and sharing of best practice. We would also want to build on our current devolved and decentralised arrangements so that our nations and regions have the flexibility, as my hon. Friend suggested, to be creative and to deliver innovative projects that reflect local needs.

As is apparent from the debate today, we have serious concerns about some of the Commission's proposals. Its approach is dependent on an unaffordable expansion in the EU budget, promising money to everyone from a pot that does not exist. Not only are we promised jam tomorrow, but we are promised it from a jam pot that has not even been cast yet. That creates some of the difficulties underlying the questions posed by hon. Members about the comparisons between UK and EU proposals, some of which I shall deal with in a moment in relation to the guarantee.

The Commission's proposals fail to focus on the poorest member states or to ensure that EU funding adds value in comparison with national measures. Under the UK's proposals, member states would agree to high-level objectives for regional policy. We still believe there is a role for the European Council to set the objectives for regional policy. We are not saying that Europe does not have a role with respect to regional policy, but the limited financial resources should be focused on the poorest members, where EU funding is likely to have the greatest added value and, as my hon. Friend the Member for Inverness, East, Nairn and Lochaber (Mr. Stewart) pointed out, is also likely to have value for the UK by promoting economic development and getting to the core of what cohesion and structural funding should be about—that is, enabling us to develop growth in the poorest EU member states, where it is most needed.

The hon. Member for East Carmarthen and Dinefwr seemed to suggest that we did not support that approach. It is precisely in order to ensure such cohesion that we want to focus support on the poorest member states. The scatter approach proposed by the Commission in the third cohesion report leads to the position where, despite the economic discrepancies between the older and the newer member states, the resources are divided 50:50, with 50 per cent. of the resources continuing to go to the richer member states. In our reform we must ensure that resources are better focused.

None of our proposals would mean a reduction in our support for regional development. On the contrary, we have guaranteed that if our proposals were adopted, we would increase domestic regional spending in order to pursue our ambitious programmes for economic regeneration. We spelled out in the details of our guarantee how we could use that to avoid some of the cliff edges in support that my hon. Friend the Member for Falmouth and Camborne and others highlighted as a concern.
 
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The hon. Member for Hertford and Stortford asked what would happen to the guarantee if the reform proposals were not implemented in full. The Government would be able to offer their guarantee to the UK regions if their proposals for structural funds reform were implemented in full within a budget of 1 per cent. of EU gross national income. An expansion in the EU budget would increase UK contributions, bearing in mind that we spend €1.6 for every €1 that we get back. In those circumstances, we would have to assess the budgetary implications for the UK and the level of domestic regional funding that we would be able to provide.

Mr. Prisk: The Minister is trying to provide a degree of clarity. She said that total spending could be maintained if the UK's proposals were not fully accepted, but what is the spatial dimension? In other words, what does it mean in reality? Does she mean that objective 1 areas in, for example, the Camborne and Falmouth area—I say it that way around for personal reasons—will be maintained or that the overall pot will be maintained? All hon. Members would find it helpful if she clarified that.

Jacqui Smith: It will be important to consider the way in which we deliver those resources. This guarantee is unprecedented. It provides some certainty in relation to the cliff-edge issue and our continued commitment to regional policy. It also goes some way towards answering the hon. Member for East Carmarthen and Dinefwr, who asked what would happen in the event of a Conservative Government. The nature and methodology of the guarantee, as well as the fact that previous Governments have maintained guarantees from one to another, would make it pretty hard, even for a Conservative Government imposing the cuts proposed by the Conservative party, to go back on it. I am sure that having pushed me so hard today, the hon. Member for Hertford and Stortford would not dare to do so were he to find himself in a ministerial position.

Hon. Members questioned the negotiation process. It is fair to say that the UK has focused minds on the need for radical reform. Indeed, the Commission has already adopted key aspects of our approach. We welcome its proposals for the Council to set the strategic orientation of EU regional policy and its commitment to develop more flexible mechanisms for the delivery of projects—although, as my hon. Friend the Member for Caerphilly argued, we need to align regional policy with regional and national priorities and to get away from the stifling effects of Commission bureaucracy on structural funds projects.
 
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We are at an early stage in the reform process, but we have a considerable amount of support for our proposals. We have strong support from the Netherlands, Sweden, Denmark, Germany, France and Austria, which agree on the need for a smaller structural and cohesion funds budget and a better focus on new member states. Furthermore, the new member states have joined us in questioning the generous funding that would go to richer member states—including Poland, Slovakia, Slovenia, Hungary and the Czech Republic—under the Commission's proposals. Although the negotiations have some way to go, there is a strong view, first, that the Commission's proposals do not deliver what is needed; and secondly, that the radical proposals put forward by the UK require further consideration. I assure hon. Members that we will not only take the tough approach that is required, but build on the support that we have received to ensure that we make the necessary progress.

This debate has enabled us to clarify the Government's objectives as we take forward negotiations on the future of Europe's budget and regional policy.

Unlike some others in the past week, we can appreciate and will argue for the benefits of our membership of the EU for our jobs, trade, prosperity and security. However, that will not be achieved by an unrealistic budget expansion when we rightly expect fiscal discipline in member states. It will be achieved by focusing EU spending where it can demonstrably make a difference and provide genuine solidarity and economic growth and by ensuring that the UK Government can further fund our commitment to strong economic growth and regeneration in the regions and countries of the UK.

We shall continue to argue for that reform package, confident that it is in the interests of the UK and the EU. I urge hon. Members to support the motion, as amended.

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