Examination of Witnesses (Questions 60-68)
19 NOVEMBER 2003
MR MICHEL
SERVOZ AND
MR PETER
HANDLEY
Q60 Mr Heathcoat-Amory: Could I turn
to the reform of the budget system? Your Work Programme refers
to a proposal for a Council decision on the system of the EC's
own resources. It is known from the Budget Commissioner responsible
that she is hostile to the United Kingdom's rebate. She has repeated
that recently. Of course, without the rebate our net contribution
would go up from an average of about £3½ billion a year
to perhaps twice that. So this is a sensitive issue. Could you
tell us what your thinking is behind the reform of the budget
and whether the Commission will be bringing forward proposals,
perhaps to cure the more general problem of very large net contributions
from states which are not necessarily the most prosperous?
Mr Servoz: I would first say that
I do not think that the Budget Commissioner is against the UK
rebate. I think her point is that the situation today demands
something else. What she is thinking about is a generalised compensation
mechanism which would be available for all Member States who find
themselves in an excessive contribution position. The UK rebate
was agreed in 1984, if my memory serves me well, at a time when
only the UK was in this unfavourable position. The situation today
is that you have at least four or five Member States who are net
contributors. We know, based on some simulations, that this situation
will affect even more Member States after enlargement. Clearly,
there is an issue where some action is required. The idea of Mrs
Schreyer is that there should be a generalised compensation mechanism,
which would be triggered as soon as the excess in contribution
reached a certain threshold of GNP.
Q61 Mr Bacon: I would like to ask
about tax harmonisation. When the last-but-one COSAC met, Mr Connarty
attended it. He told me that two items had been discussed in the
paper—I think a Commission paper, Financial Perspectives
from 2007. One was the budget rebate; the other was tax harmonisation.
What is the Commission's attitude to tax harmonisation?
Mr Handley: There are two issues
here. One is following on from the previous discussion about how
future European Union spending might be financed in the context
of the next Financial Perspective, and that is what I am detecting
from your question. There is also the second aspect of European
Union policy on tax harmonisation.
Q62 Mr Bacon: Can you repeat what
you have just detected? I am not sure that you have detected correctly,
but I want to be clear about what you think you have detected.
How spending is what?
Mr Handley: The question that
you put suggests to me that you are situating yourself in the
discussions about the future Financial Perspective, and how European
Union activity would be financed.
Mr Bacon: You used the word "spending".
I certainly did not mention spending. My question is about tax
harmonisation. You may know that we are having the Queen's Speech
soon. When the Queen addresses the House of Commons and the Lords,
she says, "My Lords, ladies and gentlemen". When she
starts talking about money, she stops talking to the Lords and
she says, "Members of the House of Commons"—that
is us, only us—"estimates for the public services will
be laid before you". She says that for a very good reason,
because we have sole control over taxation. It was wrested from
people who were unelected and unaccountable a long time ago. In
fact, we had a civil war about it. I am quite keen that we retain
control of taxation and that it will not be handed over to those
who are unaccountable and whom we cannot get rid of. My question
is not about spending. I already know, and Mr Heathcoat-Amory
mentioned it earlier, that the European Union cannot account for
how it spends its money and that, for the ninth year in a row,
we read in the papers today, the accounts have been qualified.
Mr Marshall: Do you have a question?
Q63 Mr Bacon: I am asking about taxation.
What is the European Commission's attitude to tax harmonisation?
Mr Handley: Then I think that
there are still two aspects to this. The first aspect is, in the
next year's Work Programme does the Commission have any plans
for harmonised taxes? The answer to that is no. In the context
of the next Financial Perspective are there such proposals? Equally,
at this stage, we are not talking about specific policies, so
the answer is also no. However, in the context of the next Financial
Perspective, we are engaged in an internal debate about what the
Community should do in the future, where it should get its revenue
from, and how it should spend it. That is why I raised the question
at the beginning of my response to you. In that context, we have
an obligation to produce a report by next year on what is called
the "own resources system", which is how the European
Union collects its revenue—which is partly directly from
Member States, partly from taxation, partly from customs tariffs,
et cetera. In that context, we are also looking at whether that
system of own-resources collection of revenue from the EU should
be reformed. We are doing so on the basis of principles which
will be very familiar to this House: accountability; direct link
between the citizen and the level of taxation that is being funded.
These are all issues which will be explored for the first time
in this general political communication, which Mr Servoz has explained
is shortly to be presented by the Commission, and furthermore
in the report for the middle of next year.
Q64 Mr Bacon: When you said "accountability",
were you also referring to the accounts?
Mr Handley: No, I was referring
to it in the political context.
Q65 Mr Cash: As you increase functions,
that means powers and duties. Inevitably, they have to be paid
for. Under the draft Constitution, it is quite clear that there
will be an obligation on the Union to provide the resources that
are necessary in order to fulfil its objectives. Can you tell
me how that can be done in relation to the expansion of all these
functions without introducing a tax system?
Mr Servoz: There is already a
tax system, in a way. The system we have is a system where the
resources of the Community are in fact a tax which is paid by
Member States. One of the questions which will have to be raised
in the Financial Perspectives is whether there should be a more
direct link between citizens and the Community. What I mean by
that is that, instead of paying 20% VAT on a product, citizens
will know that they pay, for example, 15% for their national government
and 5% for Europe. I hasten to add that the amount will be the
same, just like today. It is only a question of visibility for
citizens—only that. The amounts will not be increased.
Q66 Mr Cash: You cannot close the
gap between the expanding functions and the current resources
available without increasing the tax system, and to be fair it
would have to be harmonised.
Mr Servoz: I am not sure it needs
to be harmonised. However, I think you are right on the point
that, with increasing functions should come more resources, and
therefore probably the need to examine how you can fund these
needs—which, by the way, normally include tax.
Mr Cash: As we say in England, "It
won't grow on trees".
Q67 Mr Connarty: There is one major
omission from the talk about the budgets. It does seem as though
the most important thing—the reform of the Common Agricultural
Policy, in other words the way you spend the money—is not
firmly on the agenda. It seems to me—coming from the fact
that I was at the Helsinki conference, which was mainly Commission
and Treasury officials and one or two of us politicians sneaked
in—that all of this work has been ongoing for some time
within the Directorate General. That is, the idea of having a
Euro tax or a Euro element to the taxation paid. My main concern,
however, is the fact that if you do not change the way you spend
the money, then the very good analogy given by one of your Commissioners
comes to mind. He saw the rebate to one country like a house with
a broken window: all you were doing was turning up the heating.
It appears that you are going to introduce a system where lots
of other countries turn up each radiator, instead of fixing the
main problem, which is to spend efficiently. In other words, reform
the Common Agricultural Policy. Then you may be able to bring
some taxation down for the citizens.
Mr Handley: Last year the Commission
presented a very major mid-term review of the Common Agricultural
Policy. This was something it was required to do under the current
Financial Perspective, as agreed in Berlin. That was essentially
designed to introduce much more discipline into the Common Agricultural
Policy, to prepare the Common Agricultural Policy for enlargement,
and to bring it up to date in terms of contribution to sustainable
development and getting away from the culture of farmers just
getting subsidies. It is really a question of modernising the
market and also making it less distorting as far as international
trade is concerned. This was the subject of a major review last
year. At the beginning of this year, the legislative proposals
on that subject were brought forward, and the Agriculture Council
in the middle of this year was approved. It has major financial
implications for agricultural policy for the coming years. It
takes us through to 2013. By and large, therefore, that reform
which you are calling for has been achieved.
Mr Connarty: It is a total fudge.
Q68 Mr Marshall: Could I thank both
of you for your time and the way that you have answered all the
questions that have been put to you? You were both here, I believe,
in October of last year. This is the second time you have appeared
before the Committee. I suppose, if you are both in the same positions
next year, you will be doing a repeat act.
Mr Servoz: I will not forget to
bring my briefing on hallmarking next time.
Mr Marshall: It is au revoir rather
than goodbye. We have roamed over a large area of the EU policy
and Mr Bacon has even introduced some civil war history of 300
years ago. I shudder to think what might be on the agenda next
year! Could I thank you for your attendance and the way you have
answered the questions. Also, I would remind you of the commitment
that you have given, Mr Handley, to write at least two letters
on two topics raised by Mr Davis. Thank you very much indeed.
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