Select Committee on European Scrutiny Minutes of Evidence


Examination of Witnesses (Questions 1-19)

20 APRIL 2004

RT HON GORDON BROWN MP, JON CUNLIFFE AND GEOFFREY LLOYD

  Q1 Chairman: Chancellor, welcome to the European Scrutiny Committee. This is a very important moment for us in the history of the Committee. This is the first time we have had the Chancellor and we are delighted to have you here, and particularly because obviously we have been dealing with a lot of documents on the Lisbon Strategy, or the Lisbon Agenda, and we are delighted to have the opportunity to look at some of these issues with you today. Would you like to introduce your colleagues, please?

  Mr Brown: Thank you, Chairman, for your invitation. I look forward to our discussion and I have got some short remarks, if that is helpful to you. Jon Cunliffe is the Managing Director for Macroeconomic Policy and International Finance. Geoff Lloyd is the Director for European Issues and they are with me today. Between the time that you invited the Treasury to appear and this session the Treasury has published its document Advancing long-term prosperity—Economic reform in an enlarged Europe, and I just wanted to emphasise, as we started our discussion on economic reform this morning, the importance of economic reform. For years economic growth has been too low, averaging an annual 1.7% only since 2000, and unemployment has been too high, with 14 million Europeans out of work, despite our Lisbon target of achieving 21 million more jobs. Low growth I believe is an even bigger issue for economic reform because Europe faces intense global competition now, not just from America and Japan but from a rise in China, India—both of which are producing two-thirds of a million graduates a year—and Asia. While in recent years Europe acted as a trade block almost sufficient unto itself, constructing rules and institutions for internal trade within its borders, economic reform is vital, I believe. Global competition is creating global not just European companies, and not just European products and brands but global products and brands, and therefore moving Europe to an era where it will live or die by its ability to trade and compete worldwide. To create jobs and growth in this new global era, economic reform in Europe is not an option it is a necessity, and I believe that Europe must now embrace wholeheartedly a decade of economic reform. Indeed, it is the duty of those of us who are pro-Europeans to show that Europe can work better, and at this time of historic enlargement to 25, make radical reform rather than clinging to the old status quo, to show that we can make the most of Europe's assets, including the potential, as yet unfulfilled, of the world's largest single market. We have three specific proposals in our paper. To achieve the Lisbon economic objectives, the Government will press for faster and more radical liberalisation in product and capital markets, including the proposals we are making to step up reform of state aids, R&D, financial services, venture capital and our four-presidency initiative on regulatory reform, on which I am happy to elaborate today. While this session is specifically about the Lisbon reform agenda and not the new Constitution, I can state that we will oppose tax harmonisation and favour tax competition as a route to a more efficient and well-functioning single market. The second area where Europe must embrace reform, and greater reform, is to lead further in liberalisation of trade, with a more outward-looking, globally-oriented Europe committed to delivering a successful Doha Development Round, as well as break down the remaining tariff and non-tariff barriers between Europe and the rest of the world. I want to highlight specifically the need for a better trading relationship between Europe and America and our initiative for a joint OECD study to show the benefits of a stronger USA-European partnership. Third, because in some European countries up to 50% of those out of work have been out of work for more than a year, compared with just 12% in America, we must implement the Kok Report recommendations, matching our commitment to equip people for the needs of the future labour market with greater labour market flexibility. I believe that, learning from tax and benefit incentives which we have introduced and have been introduced in America, we can ensure the unemployed can return to work faster. Finally, Europe must reform the way the Stability and Growth Pact operates so that fiscal policy does not impede growth but contributes to it. All these issues I am happy to develop in detail for the Committee.

  Q2 Chairman: Thank you, Chancellor. What particular priorities did the Government have for the five elements of the reform programme that you set out?

  Mr Brown: I think I have just listed what I believe are the major priorities. Clearly, making the single market work better is an objective that I think is shared by all of us. In the context of enlargement, where we have a large number of additional millions of people joining the European Union, it is going to be even more important that people abide by the single market rules. We have made very radical proposals, which people may wish to question us on, for the reform of European state aids and the reform of regional and structural funds policy in Europe, and I believe these are important. I believe that Europe must look outwards, in a way that it has not done as much before, and that is why we are placing a great deal of emphasis on a successful outcome of the World Trade negotiations but also better bilateral arrangements, particularly with America. Although it is not our problem as much as it is the problem of other countries in Europe, it is clear that to have 14 million unemployed is not acceptable, and it can be tackled. That is why we have got to learn from each other and think radically about how we can get people back to work more quickly. These are our priorities in both discussion and negotiation. Finally, I would emphasise the regulation initiative, which is a four-presidency initiative: Ireland, Luxembourg, the Netherlands, leading from July, and then Britain in the second half of next year. We have constructed a programme of initiatives to remove unnecessary regulation, to have a different system for examining new regulation and for, in principle, putting a competitiveness test on regulation. I think previously the problem has been that you have got all these different councils, for good reasons, in their own areas, proposing changes, but when you look at the overall effect on competitiveness it is necessary that this be evaluated before new regulations are brought into being.

  Q3 Mr Cash: Mr Brown, you referred to the Stability and Growth Pact, but how on earth are you going to be able to achieve reforms in this Pact when it is quite clear, just from what the Spanish have been saying, let alone the French and the Germans, that there is absolutely no intention of doing this at all? Furthermore, when we are dealing with the question of a constitution, the economic co-ordination and the Stability and Growth Pact are both part of that. In fact, are you not condemning the United Kingdom, within the framework of that constitution, to a low-growth, high-unemployment economy like most of the rest of Europe?

  Mr Brown: I do not accept that. First of all, we are insistent on an intergovernmental Stability and Growth Pact and not a Stability and Growth Pact that is run outside the Council of Ministers or the Euro Group, so the Stability and Growth Pact is a ministerial agreement and that is not going to change. The second thing is, I think you are wrong to suggest that we are not winning the argument about the need for change in Europe on the Stability and Growth Pact. Let us be absolutely clear about this. There are six countries that are not meeting the terms of the Stability and Growth Pact at the moment, so that they are outside the 3% requirement of the Stability and Growth Pact. While the European Commission is taking action in the European Courts and against the individual countries, there is a sense amongst the finance ministers, indeed the governments of these countries, that the Stability and Growth Pact does not operate properly in circumstances where you have a worldwide downturn to which governments must be in a position to respond flexibly. While there is a need for discipline in fiscal matters, it is better first of all that you have a Stability and Growth Pact which takes account of the cycle and is not simply an annual inflexible target that has got to be met. Secondly, it has got to take into account debt as well as deficits, and indeed the balance of academic opinion about fiscal policy is giving a great deal more importance to low levels of debt than to the annual level of deficit. Thirdly, it has got to take into account investment. Where you have consumption, as we have, which is wholly covered by revenues but you have low debt in your county, it makes sense to borrow for investment, and I hope that you would agree with that. Therefore, these three positions that would modify, indeed reform quite fundamentally, the Stability and Growth Pact, that it should look at the economy over the cycle, it should take into account investment needs and it should be far more sensitive to the levels of debt, these are exactly the changes that we propose that are now winning a great deal more acceptance in the rest of Europe. I do say to you that the Stability and Growth Pact will remain intergovernmental and we are not going to accept a proposal that would change that.

  Q4 Mr Cash: Of course, we are doing really well because we are outside EMU and because we are outside the ERM, do you not agree?

  Mr Brown: I would agree with you that we are doing really well. It is very kind of you, as a member of the Opposition party, to congratulate us.

  Q5 Mr Cash: I am very happy to, only because of that and despite your other policies.

  Mr Brown: To congratulate us on our economic performance, and I hope you would agree that making the Bank of England independent and the new fiscal rules that we adopted have contributed towards that. Our position on the euro remains exactly the one which I set down last year in the House of Commons. We said that we would consider at Budget time whether there was a case for a further assessment and we decided that there was not a case this year for a further assessment, and obviously I will report back in next year's Budget on these issues as well, so we have had a long debate about the euro. I think people would recognise that the Stability and Growth Pact was right, because it is necessary to have discipline and fiscal discipline, but the way it is constructed can be amended now to take into account the cycle, the needs of investment and levels of debt.

  Mr Cash: Some hope.

  Q6 Mr John Robertson: Chancellor, in your introduction you mentioned India and China and how they are growing. Do you really expect that you can have investment and growth while countries such as India and China can undercut you in every way? How do you combat countries like that, because it may be India and China today and another country tomorrow?

  Mr Brown: I think Britain and Europe have inherent advantages that we should not forget. We have got stability, we have got social cohesion, we have got the advantages of a huge internal market and we have got historically a far more skilled workforce. If you look at the way the world economy is changing and how India and China are becoming a bigger part of it, what actually is happening is that countries like ours should not be competing on levels of poverty pay, so to speak. We should be competing on levels of skills, high levels of investment, in precision goods and technology-driven products, in niche products, in those areas where, by high levels of investment, and particularly of innovation, we are well equipped to beat the rest of the world. Britain and Europe are doing well, for example, in pharmaceuticals, we are doing well in many of the digital electronics products and processes, and there is no reason to believe that we cannot continue to do well in these processes by being more innovative and more skilled in the future. Of course, it is true that China and India will continue to grow. China is using half the world's cement at the moment because that is the level of investment that is taking place in China, in new buildings and new companies and new processes. They are investing in education, with, as I said, two-thirds of a million graduates a year in China and India coming out of their universities. We are in a good position to use these inherent advantages to compete successfully in the world, but we have got to be more outward-looking, Europe has got to be more outward-looking. We have got to make these economic reforms because that is the only way that business can be as competitive as it should be. We have got to change the social dimension so that we can get unemployment down. All these changes, in my view, could make Europe more successful in the years to come, and of course Britain, as a leading player in Europe but also with a global reach, is very well positioned, in my view, to be a success story of the next stage of the global economy.

  Q7 Mr David: Chancellor, as our discussion has already shown, the Lisbon Strategy is very broad indeed and people can disagree about what should be in and what should be out, but I think that perhaps one of the difficulties of the European Union is that often it pursues a contradictory policy as well as complementary ones. On the one hand, you mentioned what constitutes, in your mind, the Lisbon Agenda and the progress which is being made there, but if you look at other aspects of the EU's policies, like, for example, the Working Time Directive, many would argue that those are directly contradictory to the aims of the Lisbon Strategy. On the Working Time Directive, I know that Britain has had an opt-out there, but do you accept that it is one of the difficulties, in terms of pursuing the kind of agenda which you are trying to pursue, that often, in a sense, the EU shoots itself in the foot by pursuing contradictory policies?

  Mr Brown: I think the most important thing we have got to recognise about the European Union is that with a single market you have huge opportunities. But we have not yet made the most of these opportunities. If you take prices charged in the European Union, compared with prices charged right across the single market of the United States of America, you can expect to be able to see competition having an impact right across America, with prices the same from one part of the country to the other for similar groups, on the back of a very competitive environment. That is not yet the case in the European Union, so we have not yet got all the advantages of a single market. If we had these advantages, Europe would be creating more jobs, it would be more prosperous and therefore we would have some of the social problems arising from unemployment resolved as well, so creating a single market is important. I have always argued that a single market must have a social dimension. Markets have implicitly, but should have explicitly also, a social dimension, and it is right that you act against abuses where employees are either exploited or treated unfairly. We have a history in the United Kingdom, in our own laws, of having to deal with long hours and there has been a history of legislation over a century. The Commission has not said actually that the opt-out in the Working Time Directive should go, what it does is identify some abuses and ask how they should be addressed. If there are abuses they should be addressed, but if the Working Time Directive, if you like, by removing the opt-out, would make us less able to create jobs or to have a more flexible labour market then I would not want to see that change made. I think it is right to have a single market, there ought to be a social dimension, that is not contradictory, in my view, that is in the nature of how governments wish to see economic progress take place. If there are abuses in the Working Time Directive and the way it is implemented they should be dealt with, but equally the Commission has not said the opt-out should go, and we are hopeful we can bring this to a successful conclusion.

  Q8 Mr Connarty: We are very happy to see you here, Chancellor. There are many aspects of Europe which I am sure we would love to have you back to talk about again and again, but we might now return to the Lisbon Agenda and the Lisbon Strategy. In your own remarks you mentioned the unemployment problem, 14 million unemployed. We have had a number of supplementary questions on the report and the Presidency Conclusions. Basically they say many things are still to be done. You mentioned a potential internal market as not yet fully realised, and I quote from the report: "A particular priority is to ensure strengthened business investment in R&D." It says specifically: "By comparison with performance elsewhere, the relative weakness of private sector investment in R&D within the Union is striking." You mention in your larger report a number of items, not just the Common Agricultural Policy which was not reformed in the way we hoped it would be. In all of this the conclusion was that the pace of reform needs to be stepped up significantly if the 2010 targets are to be achieved. Can I ask you an overarching question on that. Is the Government satisfied that there is real enthusiasm for effective implementation and enforcement of the Lisbon Strategy among the Member States? We have France dragging their heels very, very much on the internal market question. We have had a lot of problems with freeing up the flexibility of the labour market, which you have talked about. Is it more than a pious aspiration, and can you give us some evidence that they are taken as serious and realistic objectives by the other EU States?

  Mr Brown: In a sense, it is good, coming to this Committee and I think for your question, to be able to review what has changed over a period of years, since first I went as a Finance Minister to the European meetings in 1997 and now. I would say that in 1997, amongst some people, there was resistance to economic reform, and even the mention of the word "flexibility" to some people was regarded as an attack on people who were unemployed or people who were working people. There was an assumption, of course, some people thought at that time, that the single market and single currency would lead to tax harmonisation and a fiscal federal policy. I think the atmosphere now is quite different. I think there is recognition that Europe faces this massive competitive challenge, that if you do not reform you are going to be left behind. Whether it is the Agenda 2010 in Germany or the pension and other reforms taking place in France, or the Netherlands' initiative on innovation and regulation, or the Spanish changes about flexibility, most countries, indeed, I would say all countries, are recognising the need for reform. The issue now is the pace of reform, and that is the challenge. If you take employment, which you have raised, I think the Kok committee recommendations people have welcomed. The fact is that overall employment, under the Lisbon target, is to rise to 70%. We are past that already in Britain, I am pleased to say, but it was 61.9% when the target was set, now it is 62.9%, so it is moving up, but it is not moving fast enough. Female employment was 52.9% in 1999, now it is 54.7%. Actually we are 65%, so we are above the target of 60%. There is movement but it has got to be faster. Reduce by 50% the number of 18-24 year olds with only a basic secondary education, gone down from 20% to 18.5%, so there is some progress, but in Finland, Sweden and Austria the figure actually is 10% and that is where you want to move towards. Then you raised R&D spending and I think there are two issues here, the amounts of money we are prepared to invest in R&D, and there are the rules that we set, both at a European and a British level, for making innovation easier to do and more easily financeable. R&D spending was only 1.92% in 1999, it is 1.99%, nearly 2%, in 2002. The target of 3% would be very difficult to reach under present measures. Sweden is more than 4%. We are less than 2% and therefore we have got a long way to go as well. That is why we introduced R&D tax credits, we introduced them for small firms and then for large firms. That is why we have had this joint innovation initiative with France and Germany, which the rest of Europe seems likely to support. That is why also, if I may say so, and I hope the Committee might look at this, the state aid rules, which were designed in a way to stop unfair subsidies to the heavy industries and government failure by government subsidising loss-making companies, these very same state aid rules prevent us sometimes from giving sufficient resources to innovation, to the regions and to other causes where, if you are going to have a successful economy, it is necessary to invest. If you take these state aid rules, what is interesting is that while the state aid rules have been important in dealing with state failure they have not been as good at dealing with market failure. There is a market failure in research and development. There is a market failure in, for example, the flow of investment funds to our regions and nations in the United Kingdom, and there is a market failure sometimes in the development of local labour markets or local capital markets. We should not be prevented by state aid rules from taking action in these areas, and that is what we are trying to change. We won the debate with the Commission on regional venture capital funds, so regional venture capital funds have been set up now throughout the country. We were the first in Europe to apply for state aid clearance to do so and it took a year, and we were held up for a year and that was unfortunate, but we won the basic principled argument that we, as a Government, could invest in regional venture capital funds. We won the argument about the elimination of stamp duty in Enterprise Areas, and we have created 2,000 Enterprise Areas in the country. Again that was a state aid clearance that was required because, on the face of it, people argued, it was an unfair subsidy, and actually we argued it was to deal with the market failure. Where the Commission, in particular, in my view, could do a great deal better is in understanding that there are problems of market failure which governments should not be prevented from tackling or dealing with. I hope that the Committee might wish to investigate that in the future, because particularly the regions and nations of the United Kingdom, where growth has been less strong than in other parts of the country, would benefit from dealing with these market failures by the Commission changing its attitude on state aids.

  Q9 Mr Tynan: Chancellor, welcome to the meeting. Obviously, we have listened with delight to some of the initiatives that you have been laying out this morning. Employment levels in the UK obviously are at an all-time high. We had the opportunity recently to go to Taiwan, and I know we do not recognise Taiwan as a country. Certainly they have had a success story as regards how they have introduced new initiatives, how they have linked up universities and employment, how they have created a real economy which is based on high-skilled jobs, which is based on ensuring that they are high value added jobs which are in the pipeline and are there for the people of that country. I think we have taken our eye off the ball, to a degree, in this country, as regards chasing call centre jobs, and they made the point to us, when we raised the question of call centre jobs in Taiwan, "We'd much rather they were done in China, because there is a huge source of labour", and, as Mr Robertson said, I do not think we can compete. We have the Employment Taskforce report at the present time, also we have the new Action Plan, as regards research and development, and we have the new Action Plan as regards growth. How are they different from what we have done over the last couple of years, because we do not seem to have attracted the high-level, high-value jobs that we require in this country, when we are competing with the likes of Taiwan?

  Mr Brown: I agree with you that the challenge is always to move to a higher value added, so even as China or Korea or Taiwan or India will, undoubtedly, with the university-educated graduates they are going to have, China, for example, has around 1 million people who are classified as research workers, so they will be moving into high value added. We have got to move into the higher value added areas as well, and that was why I was emphasising, for example, pharmaceuticals, where we are world leaders and we have some of the best companies in the world, partly because we have a National Health Service which has helped the development of pharmaceuticals over the years. We have digital electronics, we have the creative industries that are around television, the media, broadcasting generally. We are a world leader in nanotechnology, which is going to be a very important ingredient of future products and processes. We are in a good position to move forward, but we must invest properly in innovation and research. The Kok Report; you mentioned unemployment, basically that is to deal with the unemployment problem that we have got throughout Europe, and to some extent we were gratified that the Kok Report learned from our New Deal and some of the measures like the tax credit that we introduced. It said also that we had to do more on flexibility, childcare and lifelong learning, and I think the Committee would agree that these are important issues that we have got to address. On innovation, obviously there are collaborative projects across Europe, but one of the things I think we want to focus on in Britain is how the universities and business could have a far closer relationship, to the benefit of both and then to the economy as a whole. I would direct the Committee to the Lambert Report, which we produced from the Treasury, by Richard Lambert, who is a member of the Monetary Policy Committee of the Bank of England. He was showing how universities could link up with businesses but also businesses could see the advantage of linking up with universities. Then I would see universities in Britain linking up with universities in Europe and round the world, like the Cambridge-MIT partnership, and I think that there are many collaborative partnerships which could aid the innovative capacity of the economy. Yes, there are collaborative projects in Europe. Yes, it is also, as Mr Connarty raised, a question of changing the state aid rules, but I think I would focus on how the approach to innovation has changed to the extent that there is far more focus on the role of universities, there is far more focus on the incentives that are available for new technologies. Clearly, we have got to get companies on to the internet, into broadband and using the modern technologies as well. I think we are in a position to respond better. One of the reasons why innovation is worthwhile is getting the advantages of the single market.

  Q10 Mr Dobbin: Good morning, Chancellor. Do you think it is within the power of governments, either individually or collectively, to achieve the Lisbon Strategy's objectives? Would you like to develop that?

  Mr Brown: The spending power?

  Q11 Mr Dobbin: Yes.

  Mr Brown: One of the issues we have at the moment, of course, is what the level of the European budget itself is, but unlike the United States of America only 1% of GDP is spent by the European Union and most money is spent by individual governments. Clearly, where you can work on collaborative projects, as we do on aerospace, on other space research and in other areas, you can get big economies of scale and that is very worthwhile doing. One of our arguments in relation to the Stability Pact is that, by having fiscal rules over the cycle and concentrating on investment in infrastructure, in education, in training generally, in our universities and in innovation itself, the spending power of Government can make a difference. I believe that a fiscal policy which takes into account the needs of investment and, for low-debt countries like ours and many other countries in Europe, makes it possible for them to use public funds for investment, that is a very important part not only of dealing with a recession and a world downturn but a very important part of equipping your economy for the future.

  Q12 Mr Heathcoat-Amory: Chancellor, you have referred several times this morning to the need for greater labour market flexibility, and in your Budget documents this year you referred to the need for less European regulation and fewer burdens on business, but that is not the experience of this Committee. We are deluged with reports of all sorts and additional regulations, and despite occasional assurances to the contrary there has been no attempt at simplification or reducing these burdens, which are to the despair of small businesses in particular. You talk about the need for flexibility but that is just not on the agenda of the Commission, as confirmed by their annual work programme, about which they gave evidence to us earlier this year. Why did not the Government representative on the Convention on the Future of Europe take the opportunity, while negotiating the European Constitution, to entrench a different culture in Europe? Instead of which there is going to be more economic and employment co-ordination, more majority voting, more policy areas are going to come under the Commission, and indeed the Commission's powers, as laid down in Article 25, are even more extensive. Despite your good intentions, you are up against a regulatory culture as propounded by an unreformed European Commission. What are we going to do about that?

  Mr Brown: That is a number of points and I hesitate to move down the road of what may be a Commons statement later this morning about the Convention. What I will do is contest your initial presumption on which the rest of your conclusions are based, that we are not taking any action to deal with regulatory problems in the European Union. I believe, if you look at what we have done over the last period of time, not only are we taking action but we can be seen to be having some effect. Where are we taking action? The four-presidency initiative that I mentioned in my initial remarks which I hope the Committee will be able to look at, and that will be launched in more detail with the Netherlands Presidency, starting at the beginning of July. Can I tell the Committee just what it would mean? Better controls on new legislation, including a competitiveness test on regulations coming forward. A review of existing legislation, that is with a timetable to be agreed during 2004-05. More use of alternatives to regulation, including proactive use of competition policy, so where it is not necessary to have regulation you open up the market to greater competition, and that is a better means of dealing with the problem that you are having to face; Institutional leadership and support from the European Union, greater external scrutiny of impact assessments for regulations that are done and monitoring and supporting progress by developing indicators of regulatory cost. The joint letter that we initiated with these three other countries, which now has got the support of the European Union, means that there is this four-presidency initiative over 2004 and 2005 to deal with these issues of regulation. If I may say so, we are the first Government which has taken this issue sufficiently seriously over the last 20 or 30 years for that four-presidency initiative actually to happen. Where have we had an effect? Of the many issues that we deal with, including the Investment Services Directive, where we have made some progress, I will give you just one example, the Savings Directive. As someone who takes a great interest in European matters, I think you would acknowledge that the initial proposal, under your Government, in 1997, for a Savings Directive involved the harmonisation of savings tax and a complex set of regulations, which would have been run eventually by the Commission, for one savings tax that would be monitored across the whole of Europe. We said that this made absolutely no sense, going back to the original point, in a global economy. If you had a harmonised savings tax for the European Union, all that would happen would be that the savings that were being carried out within the European Union would move to Liechtenstein, Switzerland, America, eventually Hong Kong and Singapore. That was not the best way to deal with what was tax evasion between Member States, as a result of Germans saving in Luxembourg but never paying any tax on the savings which actually they transacted in Luxembourg. We said the answer was not a regulation which would impose tax harmonisation, we said the answer was exchange of information, and we won that argument over a number of years. The new Directive has been introduced based on an exchange of information. There is a long lead time for its introduction, as a result of complex issues which had to be dealt with, including dependent territories. I think, Mr Heathcoat-Amory, you will acknowledge that in that area we did make progress, which had not been made by the previous Government but has been made by our Government, and that is a far more deregulatory approach to the issue.

  Q13 Mr Heathcoat-Amory: You referred to initiatives and reviews. We have had all these before. A presidency initiative, presidencies come and go but the Commission goes on for ever, and we had them, two senior members of the Commission gave evidence about their annual work programme. They referred to a new démarche about violence in the workplace that they were going to launch a great consultation about; this is more paper and more reports and more consultation for the small business sector, more form-filling, box-ticking, more legal interference. It goes completely contrary to the culture which you are trying to promote. I come back to the point about the Constitution. In two months' time the final negotiations will take place. Can you tell us what input the Treasury will have to try to entrench in the Constitution this difference of approach, to clip the wings of the Commission, contrary to the powers set out in the draft Constitution, and ensure that, by majority voting, they do not encroach into new areas of employment and economic policy as laid down in the draft? Can you tell us a little bit about your involvement at top level in those final negotiations, when this will overwhelm completely any well-meaning Directives which may be launched by a six-month presidency?

  Mr Brown: I will come to the final point you made, but I must point out that your allegation is that nothing has been done. The Savings Directive is an example of a change which actually has been agreed as a result of a British initiative. You say that the presidencies come and go and therefore nothing is consistent, but actually we have got a four-presidency initiative, crossing four presidencies over two years, so there is the consistency which has been lacking. You say that there was no overall examination of the effect of regulation. That is precisely why we have demanded a competitiveness test, so that any regulation which may look good for the environment, or look good for social policy, or look good for health and safety, has got to be examined also for its effect on competitiveness. These are all innovations that we have proposed and we have won support for. At the last meeting of the European Council, to show that there is broad-based support for this: "The European Council welcomes the recent four-presidency initiative on better regulation and calls on the Council to pursue proper actions to drive this forward over the coming year." So we have the support of other Member States which normally you would not associate with wanting to take action against regulation. In every country of the world, as you know yourself, regulation is an issue. In America, if you go to America, what does a small business complain about most? It complains about regulation and the issues of red tape, and in every country we are trying to deal with this, including in the European Union. You asked then what are we doing in terms of the Convention? The Treasury has been absolutely clear that we are not going to support tax harmonisation in the Convention. I think we are being successful in persuading people, but of course we will wait until the final documents appear, but we have taken a very strong view that tax harmonisation is not in the interests of the developing European Union, that tax competition makes for a more effective single market functioning better. I will give you an example of this. A few meetings ago the Commission came forward with a proposal on VAT, which I think you spoke out about yourself. They said they wanted to have further harmonisation of VAT, and in the paper involved, for example, removing the British exemptions, which included on food, travel and children's clothing, very controversial indeed, they wanted to remove even some of the exemptions on goods and services for the disabled and charities. We said this was not acceptable, we said we would not support further harmonisation in this area. I think it is very interesting that, from a position seven years ago when France was wanting this VAT harmonisation to happen, France was now supporting greater subsidiarity in the area of VAT, partly because they wanted a VAT reduction on their own restaurants, because they believed that would be a job-creating measure. On the VAT proposals of the Commission, they were not acceptable to the individual Member States and you could proceed only by unanimity in this area. As for other measures being dealt with in the Convention, we are adamant that it is Member States who unite together to conduct economic policy and we believe that will be the spirit of the final document that is agreed. I have to say to you, when people read out to me what is proposed in the Convention text and say, "This is unacceptable because it is greater powers being taken by the Commission", usually it is reading out text from the old Single European Act or the old Maastricht Treaty or even the Treaty of Rome. Sometimes, Mr Heathcoat-Amory, it is reading out text agreed by the previous Conservative Government.

  Q14 Mr Steen: Chancellor, a lot of this discussion with you so far has been about rules and regulations, and you have given a very spirited defence of the Government's commitment to less regulation. As I chaired our party's Deregulation Committee in the nineties, it is a matter very close to my heart, and Mr Wayne David and Mr David Heathcoat-Amory both mentioned these matters. In its priorities for 2004 the Commission talks about boosting investment to support growth, and you have explained how our country is trying to change the culture of the other European countries so that they are more affected by our way of thinking than their rather dogmatic, bureaucratic, state-run system. One can judge whether we are going to have much success in that only if you look at how far the better regulation has appeared and succeeded in this country. As I am on the Select Committee for Deregulation, I can tell you, in the last five years, the areas in which we have deregulated most in this country have been gambling, dancing and drinking. Those are the three important areas where we have managed to succeed in reducing the rules and regulations, so you can dance more in Britain, you can drink more in Britain and you can gamble more in Britain. Whilst I accept your approach to deregulation and the need to deal with the global challenge, economic reform and liberalisation, if we cannot get it right in this country how can we lead the rest of Europe in persuading them that they should do these things that we believe should be done, or are we going to confine our deregulation in Europe to gambling, dancing and drinking?

  Mr Brown: I know that it is a good headline to say that gambling has been deregulated but nothing else. You would have to thank the Treasury for that because these were decisions that we made in the Budget, and I do not know whether my late father would have approved of it, as a Church of Scotland Minister. I have to point out that there are other deregulation initiatives which have been successful as well. If you take VAT for small firms now, 670,000 small firms, we have deregulated the way that VAT is applied, from people having to account for every single transaction in the past to a flat-rate VAT payment. That is deregulation, it is saving paperwork and it is saving bureaucracy. Actually the problem at the moment is not that the measure is not available to firms, it is persuading firms that it is worth their while to take it up. If you take audit for small firms, we removed the requirement I think for firms with a turnover of a million or less to have to have a statutory audit required of them in addition to the normal accounting, and that is a deregulatory measure that we are extending now into other areas. I met the business community only a few weeks ago to talk about areas where they want to press for changes, and one of the areas, which then I announced in the Budget, was the inspection regime and the enforcement regime. Clearly, as a result of what has happened over many, many years, and it is nobody's fault that this has happened, it is natural, you have had action on health and safety, action in other areas, action that enforces standards in different areas, both local authority and national, but there is overlap and duplication. We have set up this inquiry so that we can minimise that and have a far more deregulatory approach, if you like, even when of course you must have proper standards for health and safety. On information, business came to us on the Information Commissioner and said that he was demanding far too exacting requirements for the disclosure of information, and we have tried to help in that area as well. On statistics, business came to us and said, "Look, why don't you do random studies, instead of requiring every firm, every year, to fill in a form for the purposes of national statistics?" Again, we are making changes on that. Because you have taken an interest in it over time, I think you would agree with me that these are not minor changes, these are changes which will help numbers of firms. We have got to do more. You asked me about the climate of investment in Europe. I will give you just one example, the venture capital industry that I have mentioned in the past. In America, venture capital is absolutely vital to investment by new firms, particularly start-up firms in high technology who are moving towards high levels of investment in particular products. Venture capital is a dynamic, thriving, successful industry in the States but it has been very small, in some cases virtually non-existent, in some countries. In Britain, venture capital is a strong industry but mainly it has been management buyouts rather than financing the risk-taking from new ventures. What we have tried to do is have not only new rules and encouragements, like in the Budget, for venture capital trusts and enterprise investment schemes, which we announced in the Budget only a few weeks ago, but we have tried to persuade the European Union that venture capital is the way forward. We have been having some success in this area. It will take time. It is not good enough. The levels of investment in Europe are not good enough, but action is being taken in this area and we will continue to press for action in this area. I may just say that, as far as the fiscal policy is concerned, if public investment is, as I believe, important to infrastructure and to training and to skills and to size then clearly you do need a Stability Pact which allows people with low debt to make these public investments that are necessary for growth as well. These are a number of areas where we are putting the argument and I think we are winning the intellectual argument. Of course, as I said at the beginning, the question is the pace of change here, and it is unacceptable that 50% or more of regulations come from the European Union, that is unacceptable, but that is why we are taking the action. I hope, on this occasion, despite all the party differences that there will be on the detail of some of these things, we can support the fact that there is a four-presidency initiative to take action to deal with these problems.

  Q15 Mr Cash: In order to achieve the objectives that you are setting with regard to deregulation, do you not agree that there will be times, in fact there will be many times, when you are not going to be able to get the kind of agreement that you want, yet you know that it is in the British national interest that this legislation has got to be repealed? Would you not agree that you will have to amend the 1972 Act along the lines of my Parliamentary Sovereignty Bill, with which you may not be entirely familiar, but, on the other hand, which says that our courts will have to give effect to a subsequent British law which was clear, unambiguous and inconsistent with European law? That is the way to go forward if you are going to protect the national interest in relation to this deregulation.

  Mr Brown: I would not like to conclude that an individual issue on state aid related to venture capital requires a change in the national laws of 25 countries overnight, so I do not think that is necessarily the measure which is needed to deal with the problem of venture capital that I was describing.

  Q16 Mr Cash: Where is the beef, or is it hot air?

  Mr Brown: Is it not the case that, when we are looking at this new Convention, it has been made clear that what powers the European Union has arise from the decision of Member States, and that is an important statement of the need for subsidiarity which is being put forward and we are determined to emphasise in this Constitution.

  Q17 Mr Cash: So you will not amend the 1972 Act?

  Mr Brown: The 1972 Act, I think, was brought in by your Government.

  Q18 Mr David: Can I return to the Lisbon Agenda and approach the issue of regulation in a slightly different way, because I think that most of us would accept that if the internal market is to work effectively and competitiveness is to be enhanced there needs to be a joint regulatory framework. I think that progress has been made in this respect, and it is interesting, but it is a conclusion too of the European Commission in its Spring Report to the European Council. One of the things that report says is that, although the European Union has adopted some 70 Directives under the Lisbon Strategy, 40 of those Directives should have been transposed by national governments by the end of 2003. The states which are leading the way in that transposition progress are Denmark, Spain and Italy, the ones at the bottom are France, Germany and Greece, and somewhere in the middle is the United Kingdom. Given that the United Kingdom, more than any other country, has pioneered the Lisbon Agenda, do you not think that the UK should be leading the way in terms of transposing the Lisbon Directives into national law?

  Mr Brown: I think I would like to look at what these individual Directives are, to be able to comment on why there has been either a delay or a reluctance to move quickly on them. I suspect that in some cases we may have achieved already what the purpose of the regulation was. I will come back to you on that, and we will look through each of these individual Directives and then give you some information so that the Committee can have that for its report. [1]I think generally we have implemented laws that are necessary for the functioning of the single market. It is important to recognise that our proposals on the single market do not extend only to liberalisation of product and capital markets, and to some extent a new labour market policy which creates jobs. It is important to recognise also, and we have not had questions on this, that our proposals about a more competitive Europe do depend on Europe being more outward-looking as well. I believe that our proposals for a better trading relationship between Europe and America could deal with some of the objections which Mr Cash and Mr Heathcoat-Amory have perhaps about the European Union. A more outward-looking European Union, which is prepared to enter into agreements with the United States of America to remove tariff and non-tariff barriers and cease to be protectionist in some of the areas where it has been protectionist and not open to trade in the past, would be to the benefit of Europe but also the benefit of the world. I think that is very important.

  Q19 Mr Dobbin: Chancellor, following on the point that Mr Connarty raised about research and development, I am thinking in particular about my own region, in the north-west of England. Accepting that you recognise the importance of investment in that, you demonstrated that in your own Budgets, are the proposals in the Commission's recent Communication on the next Financial Perspective for significant budgetary increases for research and development helpful in promoting the Lisbon Strategy?

  Mr Brown: I think we must look at the budget as a whole, as well as at the individual measures within it. I want to stress that we do not believe there is a case for raising the EU budget to 1.24% of European GNI, as it is called. That would involve a massive rise in public spending by the European Union at a time when most Member States are having to exercise fiscal discipline. As far as the individual commitments within the European Union budget are concerned, I think it is important to recognise that where Member States can make the commitment themselves and it is not necessary that the European Union spend money on a function the principle of subsidiarity should operate. While I am interested in what the European Union can do collaboratively on research and development, my own view is that the bigger change is to deal with the state aid rules, to make it possible for countries like ourselves to be able to support innovation and research and development and encourage our universities without being subject to restrictions that were put in by the European Union. In replying, can I just add that you said we were not a good Lisbon performer. I will just say that we have been praised by the European Commission, and you can take that for what you wish on this issue, for what we have done to lower long-term unemployment, increasing the quality of public spending, good performance on Kyoto targets and positive steps towards making productivity and R&D improvements as part of the Lisbon Agenda. As I understand it, and you may wish to correct me with new information, we have transposed 70% of the Lisbon Directives, which is above the European average of 58%. We read out the names of Denmark, Spain and Italy, actually the top four are Denmark, Spain Italy and the United Kingdom. There are different ways of looking at statistics, and I think this is one of them.


1   F/N not yet received. Back


 
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