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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