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European Standing Committee B Debates

Preliminary Draft Budget 2005

European Standing Committee B

Wednesday 30 June 2004

[Mr. Roger Gale in the Chair]

Preliminary Draft Budget 2005

[Relevant Documents: European Community Document No. 6870/04, Commission Communication on the Annual Policy Strategy for 2005 and European Community Document No. 8500/04, Commission Recommendation on the 2004 update of the Broad Guidelines of the Economic Policies of the Member States and of the Community (for the period 2003-05).]

2 pm

The Chairman: Before I call the Minister, let me make one observation for the ease and interest of colleagues. The Speaker's Panel met this morning to discuss several issues, including the conduct of European Standing Committees. The Chairman of Ways and Means indicated that, to secure uniformity in the conduct of these Committees, all hon. Members should take on board two items. First, only the Minister will make an opening statement. Should it run for more than 10 minutes, it will be deprecated—in other words, Ministers have 10 minutes to make a statement. Secondly, all other hon. Members should ask questions, rather than make statements, during the initial part of the sitting. They are free to make speeches in the second, debate part of our proceedings.

The Financial Secretary to the Treasury (Ruth Kelly): Thank you for that clarification, Mr. Gale. Let me say how pleased I am to have this opportunity to discuss the European Commission's proposals for the 2005 EC budget and to set out the Government's priorities.

This debate and the hearing of 14 June in the other place play an important role in allowing the Government to demonstrate to Parliament that, as far as possible, we apply the same sound financial principles and expectations to the EC budget as to our domestic Budget.

As usual, the time between official publication of the budget documents and the Budget Council is short. I submitted my explanatory memorandum in the expectation that all the documents would be available in time for this debate, and it is disappointing that a few volumes have still not arrived. Nevertheless, I hope that the Committee has found useful those that are available, and particularly volume 4, which sets out the Commission's spending proposals in detail.

As a net contributor, the United Kingdom has a direct interest in ensuring through negotiations that the EC budget is based as far as possible on the principles of budget discipline and sound financial management. We want to ensure that the EU works effectively and efficiently for the UK and Europe as a

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whole. That means ensuring that Commission spending is properly planned, implemented and accounted for.

Working effectively with other member states, the Government have achieved important progress in the past few years. The financial perspective ceilings that were established in Berlin in 1999 and amended for enlargement in Copenhagen in 2002 have been respected. Budget surpluses have been returned, and processes have been put in place to bear down on the surplus in future. Several financial management reforms have been implemented, and activity-based budgeting, for which the UK was the leading advocate, is now part and parcel of the budget format.

Although hon. Members will rightly dismiss many of the more misleading headlines about waste and mismanagement, the Government recognise that there is still room for improvement before we have the efficient, effective and scrupulous EC budget that taxpayers deserve. Reports by the European Court of Auditors and the National Audit Office make that abundantly clear. Establishing the annual budget is an important part of that ongoing process, and the UK is a leading player in that regard.

The Government have three broad objectives for 2005: first, to restrict overall growth in the budget and to secure an appropriate margin under the relevant financial perspective ceilings; secondly, to improve the overall efficiency and effectiveness of EC spending; thirdly, to accommodate UK spending priorities where it is clear that EC spending can add value without breaching the budget ceilings.

The Council has begun discussions on the 2005 preliminary draft budget in ECOFIN and its budget committee working group, and I shall take this opportunity to highlight two developments that will affect the negotiating process. First, this is the first budget to be presented solely in activity-based format. For 2004, we had the luxury, if it can be called that, of a budget that was set out in both the old, familiar way and the new activity-based style. That was a somewhat confusing arrangement, and member states were often unsure how to identify budget lines. Some referred to the traditional nomenclature, while others referred to the new nomenclature. This year, we must all embrace the new layout, which should ensure a clearer understanding across the Council of the full cost of Community activity. By transparently linking spending to objectives and targets, which can be benchmarked for effectiveness, activity-based budgeting should improve budget decisions and bring the EC budget process closer to that for domestic spending in the UK, where public spending agreements are a vital tool in ensuring that public money is used to best effect.

Secondly, and equally importantly, this is the first budget to be formally agreed by the enlarged Union of 25 member states. It is also the first full budget for the enlarged Union, which explains much of the increase from 2004. The Government are pleased to welcome the new member states to the negotiating table. Some have already shown admirable inclination towards budgetary discipline. We look forward to working

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with them, and with our usual budget allies, to ensure a fair and responsible budgetary outcome for all EU taxpayers.

The Committee will recall from the explanatory memorandum that EC spending is largely predetermined by decisions made outside the annual budget process—for instance, compulsory or treaty-based expenditure, and expenditure based on pre-agreed, multi-annual programmes. That leaves us with only a limited opportunity for annual negotiation. In addition, hon. Members will recall that the budgetary process determines that the European Parliament will have the final say on non-compulsory spending, further limiting the scope of member states to decide the outcome. Within those constraints, the Government will seek to ensure the best possible outcome for 2005.

The Commission's preliminary draft budget proposes commitment appropriations of 117 billion or £83 billion. That represents a 5.2 per cent. increase on 2004. Payment appropriations amount to 110 billion or £77 billion, which is a 9.8 per cent. increase. Consequently, payments are 1.03 per cent. of member states' gross national income, which is up from 0.99 per cent. in this year's adopted budget. Although much of those increases can be justified by the full impact of enlargement and by statistical practices such as reform of the common agricultural policy, we believe that there is scope for significant savings in some parts of the budget and for more effective spending, and we will be arguing for improvements.

Our main priorities for 2005 are budget headings 2, 4 and 5. Under heading 2, on structural operations, the Commission proposes a 14.8 per cent. increase in payments. Part of that is justified by the expected increase in payments to the new member states in line with agreements reached in Copenhagen in 2002. A significant part of the increase is attributed to improved implementation rates, but the Government have seen little convincing evidence of that. To avoid creating another huge payments surplus, we will argue for a more realistic increase in such payments.

Under heading 4, on external policies, the Government welcome the proposed contribution to Iraqi reconstruction. However, we are disappointed that the Commission has failed to reprioritise effectively. Growing needs such as Iraq and the common foreign and security policy should be financed within the budget ceiling. The Committee will recall that last year's transfer of Turkey to the pre-accession heading helped to free about 175 million under heading 4. With the annual uplift in the ceiling of 37 million, more than 210 should be available for Iraq and the CFSP without reducing resources for the poorest countries.

Under heading 5, on administration, we will be pressing EU institutions to scale back their proposals for further large increases. We are disappointed that they have not found more economies of scale from enlargement, and that they have failed to make savings from investment in IT and staff performance.

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At the ECOFIN meeting on 16 July we will aim to reach agreement with the European Parliament wherever possible, on the basis of our priorities. However, I stress that agreement at the first reading stage is unusual. Instead, it is likely that ECOFIN will establish a draft budget that is lower than the Commission proposals in many areas. That will provide a good basis for further discussions with the Parliament later in the year. We look forward to constructive negotiations between the Council and the Parliament, with a view to agreeing a budget well within the financial perspective ceilings.

The Chairman: We have until not later than 3 pm for questions to the Minister.

Mr. George Osborne (Tatton) (Con): I may seek your guidance, Mr. Gale, as this is the first time in my brief parliamentary career that I have attended a European Standing Committee; it will be an exciting afternoon for me. I have a series of questions. If I ask them separately, and allow the Minister to answer each one individually, she cannot pick and choose which to answer.

The big, overall question is whether the Financial Secretary expects and hopes that the European Court of Auditors will certify the European Union's accounts for the budget, which we are supposed to approve.


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Prepared 30 June 2004