The Economic Secretary to the Treasury (Kitty Ussher): It is my great pleasure to appear before the Committee so early in my ministerial career at the Treasury, and under your chairmanship, Mrs. Dean. Today’s discussion will help to inform the position that I take when I represent the United Kingdom at the budget ECOFIN meeting in Brussels on Friday, when the Council will conclude its first reading and adopt a draft budget. I should like to widen the context in which I present the Commission’s proposals for the 2008 European Commission budget to include our preparations for the mid-term review of the EC budget and the way in which it will be financed, and our efforts to improve the way in which the EC budget is managed.

The Government’s objective is to ensure that EU expenditure provides value for money and is affordable and well managed, and that the budget is fairly financed by member states. As the Committee is aware, the annual negotiations on the EC budget are conducted in the context of an agreement on the financial perspective for 2007-13, which we reached at the end of the UK’s presidency in December 2005. The financial perspective provides global ceilings for expenditure under six headings, as well as setting out in broad terms how member states finance the budget. The annual budget negotiations are essentially about how to divide up among the various expenditure programmes the resources agreed under the financial perspective ceilings. The negotiations are not the occasion for discussing major reform of the EU budget and their outcome, unlike that of the financial perspective negotiations, is influenced at least as much by the European Parliament as by the Council.

The basis for the annual negotiations is the Commission’s preliminary draft Budget—the PDB. The Government’s priorities for this year’s annual budget negotiations are threefold. First, we will insist, as usual, on budget discipline. In other words, the budget must fully respect the agreed financial perspective ceilings. There must be adequate margin for new initiatives and unexpected contingencies, and the level of payment appropriations must be based on sensible forecasts of absorption and implementation so that our contributions do not simply build up and sit idle in the Commission’s bank account.

Secondly, we want to achieve value for money by bearing down on the areas of expenditure that we regard as particularly questionable. The common agricultural policy and the administrative budget spring instantly to mind, although there are others. Finally, we want, where possible, to protect certain areas of spending that we regard as justified and fulfilling an important role. They include: the Lisbon agenda; dealing with immigration and terrorism; external matters, such as reconstruction in Afghanistan, Iraq and Palestine; and common foreign and security policy stabilisation and peacekeeping missions.

Since the PDB was published, the UK has been working closely with like-minded member states, and I am cautiously optimistic that, so far as our priorities are concerned, the draft Budget to be adopted by the Council on Friday will represent an improvement on the Commission’s PDB. It remains to be seen whether the European Parliament will be as amenable to our arguments in the autumn, but we look to the Parliament, as one part of the budgetary authority, to play a responsible role and to contribute to building taxpayer confidence in the EC budget.

Turning briefly to the wider context, when the European Council reached agreement on the current financial perspective, it invited the Commission to undertake a comprehensive review of the EC budget—on expenditure, including the CAP, and resources, including the UK abatement—and to report in 2008-09. The Commission has indicated that it will begin the review later this year by launching a consultation process with all interested stakeholders. Given that 40 per cent. of the EC budget is still being spent on the CAP, and more than 60 per cent. of structural and cohesion fund expenditure is still directed to rich member states, the Government will argue that the budget is hardly designed to meet the challenges that the EU faces in the 21st century. That is why the review must be genuinely fundamental and strategic. The Government have set out the three principles that will guide our approach to the budget review, and the Committee might like to touch on that aspect of budgetary reform.

The third principle concerns sound financial management and the administration of the EC budget. The UK has been a consistent champion of improved management of the budget, but we must do a lot more to achieve the efficient, effective and scrupulous EC budget process that taxpayers deserve. It is unacceptable that the European Court of Auditors cannot give a positive statement of assurance on the EC budget year after year. There is no room for complacency in this regard.

A particular priority is to improve the management of the 80 per cent. of the EC budget for which the Commission and member states share responsibility, notably agriculture and structural funds. That is why the Government announced last November that the UK would take a lead in showing how member states could improve their management of EC spending at a national level. The Government’s initiative has been widely welcomed and I understand that similar initiatives are now being developed in a number of other member states. I will continue to make the case for such reform when I meet my budget ECOFIN colleagues on Friday. I am grateful for the opportunity to put our discussions into a wider context and I look forward to discussing all these issues with the Committee today.

The Chairman: We now have until half past five for questions to the Minister. May I remind Members that these should be brief and asked one at a time? There is likely to be ample opportunity for all Members to ask several questions.

Mr. Mark Hoban (Fareham) (Con): It is a pleasure, Mrs Dean, to serve under your chairmanship for the first time this afternoon. It is also the first time that I have had an opportunity to congratulate the Economic Secretary formally. In her opening remarks, she referred to ensuring that there was sufficient margin for events that took place during the course of the year and for the agreed amount of spending to be below the ceilings. In heading 1, that margin this year is €87.6 million, compared with a total budget of €57 billion. Does she think that €87.6 million is enough of a margin?

Kitty Ussher: I am not sure that I can give an exact figure, but I know that there are a number of pressures, especially relating to heading 1. Our intention is to make sure that the margin is adequate. We would like a larger margin.

Dr. Vincent Cable (Twickenham) (LD): May I ask the Minister to go back to the big picture of the budget? Last year, the big argument was about whether the Community would exceed the target of 1 per cent. of gross domestic product. The tables at the back of the document suggest that the figure is within that, but will the Minister confirm that the Union will definitely remain within that aggregate figure?

Kitty Ussher: I can give the hon. Gentleman that reassurance. My understanding is that the figure is well within the 1 per cent. limit that was agreed at the time of the December 2005 budget negotiations. That is certainly the UK’s position. I hope that it will not come to this, but we need unanimity to change any of the financial perspective ceilings and we will not allow any of them to be raised.

Mr. David Heathcoat-Amory (Wells) (Con): The Minister, whom I welcome to her new position, referred to the continuing need for reform. Indeed, that has been said in every debate on this matter that I have attended. If we do not get reform, what can we do? What voting system is attached to these decisions?

Kitty Ussher: I am not clear whether the right hon. Gentleman is referring to the wider EU budget review that is due to start later this year or the budget for 2008, which is the formal subject of our debate. On the wider issue, there is a bottom-up, blue-skies approach. We will negotiate as hard as possible. We believe that certain pressures will come to bear in the next five to 10 years, such as on the common agricultural policy, which may work to our advantage as the EU expands.

The point of the fundamental review that is taking place in 2008-09 is to inform the financial perspective beyond 2013. We are using quite a long time scale as some of the pressures on other member states could be quite different from what they were when the policies were initially agreed. We shall focus on some quite fundamental changes around reform of the CAP. Moreover, in an enlarged Europe, we believe that it is wrong for such a high proportion of structural and cohesion funding to remain with richer member states. We hope that as time goes on our argument will gather force.

In terms of the specific negotiations on next year’s budget, which is the subject of the ECOFIN meeting that I will attend on Friday, past experience shows that it is worth adopting the type of stance that we are taking at the moment. In previous years, the UK stance has informed the outcome after the first review of the annual budget and, as I said in my opening remarks, we are cautiously optimistic that the negotiations that have taken place at an official level will yield results at the end of the week. However, anything can change and we must be ever vigilant.

The financial perspective, the abatement and the resources are, of course, subject to the unanimous voting procedure, so we ultimately have power, at the last moment, should anything untoward happen. We have qualified majority voting on the annual budget, and, as I explained, the European Parliament has significant powers with regard to that budget. We have a lot of influence through precisely that process, and through negotiation.

Mr. Hoban: Will the Minister elaborate a little on her statement to the House of Lords European Union Committee? She said that cohesion funding is incorrectly allocated. Which countries does she believe should no longer receive such funding?

Kitty Ussher: It has been the UK position for a number of years that structural and cohesion funding should go only to the less well-off member states. The Government published a consultation paper and a position paper on that subject in 2003 to inform our negotiations on the European stage. It was no secret that that would have resulted in parts of the United Kingdom, as well as other richer countries, not receiving EU money, and the Treasury proposed alternative mechanisms, through our regional policy, to ensure that our economic objectives were maintained. That remains our position. We were not successful in our negotiations, but we will continue to try.

Mr. Kenneth Clarke (Rushcliffe) (Con): May I congratulate the Minister on her new appointment? I also offer her my sympathy for having been plunged into these negotiations almost immediately on taking her job.

The Minister said in her opening statement that she hoped that the forthcoming budget meeting of ECOFIN would result in some improvements to the draft budget. Will that involve moving between headings—or within headings, from one subject to another? Does she have it in mind to negotiate particular improvements? Could she indicate in what areas she will try to get more, and where she will try to get less?

Kitty Ussher: I am grateful to the right hon. and learned Gentleman, both for his congratulations and his commiserations. It was with great pleasure that I became involved in the negotiations, but it meant a rather steep learning curve. I thank him for acknowledging that fact.

We are negotiating on a number of levels. I am not sure that it would be appropriate to say publicly exactly where we are, although that will be made public in a couple of days. It is no secret that we were particularly concerned about the high level of financial commitment in the Commission’s draft proposals for the administration budget, and particularly for the structural and cohesion fund budgets, not necessarily because we do not agree with the aims of those budgets lines, but because history shows that they are unlikely to be implemented to the extent proposed by the Commission. We would be concerned if the original budget levels were agreed because we think that the actual amount will come in at a lower level. That would leave a sort of slush fund, which we believe is an inefficient way of working a budget.

Dr. Cable: May I belatedly congratulate the Minister on her promotion, which I should have done earlier? Having heard the speech that she gave to the City at lunchtime, and hearing her speak now, I realise that her job covers a big range.

Will the Minister explain one or two specific items? The first is about heading 1a on competitiveness. The Government clearly have some reservations about the ability of the Commission to absorb this money. Can she explain the 54 per cent. increase for research? What conclusions has the Treasury reached about deploying the money through European research programmes rather than through the Government—or, indeed, entirely through the private sector?

Kitty Ussher: We think that there are occasions when it makes sense to co-operate on research, although we obviously think that there is a huge domestic role for the Government. Indeed, we have a number of domestic policies, such as the research and development tax credit and funding for basic science. In general, we support the line on R and D in the EU budget, because we think it can play a positive role in helping us achieve the Lisbon agenda. It is also in line with the financial perspective agreement, so alarm bells would not lead us immediately to adopting a crisis stance. However, we have some questions over whether the budget allocation for 2008 can be spent wisely. Those are the sorts of questions that we are currently probing.

Mr. Kenneth Clarke: May I ask about the cohesion fund? I agree very much with the Minister’s remarks about structural and cohesion funds going to wealthier countries. I agree with her particularly on cohesion funds, which were originally introduced as a transitional arrangement to help new entrants to adjust to the Common Market and to enable them to join the euro. Portugal, Greece and Spain went through that process long ago. Is there any prospect, in this negotiation, of restraining the cohesion funds for those particular countries and diverting spare money to more attractive budgets?

Is there any possibility of reopening the arguments that the British Government were making last year? I realise that they cannot be reopened in full, but is there a possibility of restraining the amount that goes, by way of cohesion funds, to countries that long ago achieved cohesion and are now prospering under the market and the currency that they joined?

Kitty Ussher: I am extremely grateful for that question. The Government share the right hon. and learned Gentleman’s concern and will pursue it aggressively in the broader review of the whole operation of the EC budget. Given the agreement that was reached in December 2005, however, I fear that there will not be much scope for negotiation on his substantive point in relation to the 2008 annual budget. We will continue to bear down on the overall spend on the budget lines because we are concerned that it is not matched by the implementation capacity across the board. Reallocation among different countries in the longer term is a matter for the next negotiations.

Mr. Clarke: Will the Minister tell us what was last year’s underspend in that area? More is always allocated to the countries that demand it and they are incapable of spending on anything sensible.

Kitty Ussher: There are two separate issues worth mentioning. Not only was there an underspend of €3.3 billion below the forecast, but we had some success during the course of the discussions in negotiating a budget line that was lower than at the equivalent point last year. The initial Commission estimate was unrealistic in more ways than one.

Mr. Heathcoat-Amory: I notice that commitment appropriations for macro-economic assistance are due to go up by 58.1 per cent. next year. There is no treaty base for macro-economic assistance, so it goes through under article 308, by unanimity. Will the Minister therefore tell us whether that macro-economic assistance has been valuable and who audits it and reports back to us? That is particularly important because a large increase is inked in for next year.

Kitty Ussher: I need to seek clarification from the right hon. Gentleman. Is he referring to assistance under heading 1a?

Mr. Heathcoat-Amory: I referred to article 308 of the treaty, which is a flexibility clause. It allows the Council to go outside the provisions in the treaty by unanimity, if it is in the cause of the Common Market. We therefore agree, exceptionally, to macro-economic assistance. Given that that is to go up by 58 per cent. next year, we need a report on how the existing assistance has been spent and whether it has worked. Does that come under European Court of Auditors, for instance? We are talking about large sums that were not envisaged when the treaties were drawn up. There is no treaty base for such expenditure.

Kitty Ussher: I am grateful for that clarification. If I am unable to answer the right hon. Gentleman in full, I will answer him in writing. I understand that the purpose of this budget line is completely different from that of the rest of the EU budget. It is to help to support, through loan or grant, countries that have an International Monetary Fund funding gap in the event of a macro-economic crisis. It is generally used only when there is consensus that it is worth doing. The reason why the IMF exists is obviously that there is a benefit to all countries from working together in these periods, and the same principle applies. I agree with the right hon. Gentleman that going back to the EC treaty is not an optimal way of making such decisions. The view of my Department is that the assistance is money well spent, however. If I can add to that response, I shall do so in writing.

Mrs. Louise Ellman (Liverpool, Riverside) (Lab/Co-op): I add my congratulations to my hon. Friend on her worthy promotion. Will she assure me that negotiations on the EU budget will enable the current objective 1 area of Merseyside to continue to benefit from European structural funds so that the growth in Merseyside—a lot of it in the private sector—that has arisen very much as a result of European funding will continue? There has been an agreement about continued European funding for the Merseyside objective 1 area, but I should like to be assured that that will continue and will be directed in a way that will directly benefit Merseyside.

Kitty Ussher: I can give my hon. Friend that assurance. However, I must remind her of what she already knows, which is that the British Government’s position on longer-term policy towards regional funding through the EU is that taxpayers across the EU should not subsidise or support richer member states, but that the moneys collected through the EU should support poorer member states. That is not to say that British taxpayers’ money should not be used to support activities in Merseyside, but that is a rather wider question about the effectiveness of how each British pound is spent. However, in terms of the immediate budget negotiations, I can give her that reassurance.

Dr. Cable: May I ask the Minister about heading 5, which is on administration and the proposed increase of 5.7 per cent. spending, which is about 4 per cent. in real terms? The Government have indicated that they are dissatisfied with that growth, but can she say, first, how the Commission justifies that, and secondly, what the British Government regard as an acceptable level of growth or decline in administrative spending?

Kitty Ussher: That is an extremely important point. We believe that the administration budget is too high and is growing at a worrying rate. We argue for efficiency gains to be identified, and for reductions to be made to administrative and staffing costs. We will pursue that line of argument both in the course of the annual budget negotiations and in the wider budget review. To put that into context, all hon. Members will be aware that the Government have tried extremely hard, and with some success, to introduce productivity gains in the work of our own public sector officials. We have had the Gershon review and year-on-year cuts to cash administrative payments. We believe that we get a better deal for the taxpayer by focusing on productivity, just as the private sector does all the time. We are not convinced that the European Commission has the same rigorous approach, or that for every additional staff in post that it proposes, there is a corresponding increase in productivity and output. That is why we are pursuing the negotiations that we are.

On the specifics, the Commission is proposing €7.3 billion expenditure on administration, which is a 5.7 per cent. increase on last year. We think that that is unacceptably high. The preliminary draft budget also asks for an extra 860 posts for the Commission and the offices in line with staffing plans. The net increase will be 785 posts after some redeployments that are already included. There is also a significant increase for the decentralised bodies or external agencies.

To answer the question directly, the Commission’s justification is that it needs greater central staffing because of enlargement, but we are not convinced that that argument is valid to the extent that it proposes, although it is valid to a certain degree. We want annual efficiency gains along the lines of, and in the same magnitude as, what happens in the private sector in the western world—for example, the 2.5 per cent. increase that we asked for in the UK.

Mr. Hoban: May I pursue the matter of the increase in administration costs? Last year, the explanation given by the Minister’s predecessor was, yet again, enlargement. This year, the European Commission is trying the same approach to justify the increase. What is she going to discuss on Friday? How is she going to lay down to her colleagues on the budget ECOFIN how that figure should be brought down in this year’s budget, rather than waiting for the draft budget of 2009 to see any more progress on this matter?

Kitty Ussher: We have been making that point extremely strongly already, and I will continue to do so on Friday. We think that that is the right thing to do, and in previous years it has led to a reduction in the budget proposed. I will continue to do that and will make the same arguments because it is part of the process. I shall also have absolutely no qualms in mentioning the views of this Committee, as that is a very important part of the review process. In a sense, the reason why this sitting is taking place now is that I seek, through this Committee and also through their lordships in the other place who subjected me to a grilling last week, to go through those avenues to the British people and obtain a mandate for the Government’s negotiating position. It will be with great pleasure that I shall express the concerns of this Committee when I begin negotiating.

We are facing some forces against us, from the European Parliament and some new member states. However, as I said, I am cautiously optimistic that we will make at least some progress.

Mr. Kenneth Clarke: I am sorry to keep dotting about, but Afghanistan was the next topic that I wanted to raise. Does the Minister agree that economic assistance to Afghanistan has been given somewhat lower priority than the military activity there over recent years, and that economic assistance needs to be stepped up if we are to make any progress in Afghanistan? Does she feel that the proposed budget is adequate for that purpose, and does she think that there is, at the moment, adequate agreement within the European Union about how best to provide economic assistance? Finally, how do our Government judge the effectiveness of the deployment of European economic assistance to Afghanistan?

Kitty Ussher: We were glad to see a budget line for Afghanistan and think a fair amount is being proposed. During our negotiations—negotiations that will continue—we have supported that economic assistance and argued for it to be maintained. There are obvious benefits from EU member states working together in that regard. We have been a strong advocate for economic assistance to Afghanistan through the EU, as well as engaging in the separate military role that Britain is performing.

Mr. Clarke: Can I gather from that that this is a new budget line for Afghanistan and that there is no previous programme to comment on? I thought that there was an existing budget line.

Kitty Ussher: I am sorry if I was misleading. There was an existing budget line and we were very pleased to see it maintained in the 2008 draft budget.

Mr. Clarke: I understand the difficulties, obviously. I asked the Minister what the judgment of the Government was of the effectiveness of the deployment of the previous funds for Afghanistan and whether that deployment could be improved. I wonder if it is possible for a new Minister to comment on that issue; I realise the obvious difficulties.

Kitty Ussher: I am not aware of any major concerns; I will clarify that position later should I become aware of any. Obviously, we will always look carefully at implementation capacity in this area, as in every area. However, our general view is that we support the priorities under this heading and we have lobbied hard to ensure that those are maintained.

Dr. Cable: May I ask the Minister about heading 2? There are a couple of very odd items under that heading, particularly as they are in juxtaposition. The first is the proposed increase of 516 per cent. on spending on animal and plant health. I realise that a 500 per cent. increase of nothing is nothing and that this figure may just be a statistical quirk, but it seems an extraordinarily large increase. What is it for? Is it to deal with bird flu, or is it for something else?

Secondly, a big reduction is proposed in spending on the European fisheries fund. Given all the worries that we have about fish stocks and conservation, that seems a very odd area to reduce spending on. Presumably, there is a rational explanation for that reduction. Will the Minister let us know what it is?

Kitty Ussher: I am sure that there is a rational explanation and I hope that it will shortly become clear to the Committee, as well as to myself. However, I suspect that I will have to come back to the Committee in a few moments’ time with it; I apologise.

Mr. Hoban: May I ask the Minister about Galileo, a topic that I am sure she is familiar with from last week’s scrutiny by the Lords Committee? In this budget, I think that we have seen a 51 per cent. increase in the allocation of funds for Galileo. The German Transport Minister, who presumably was president of the Transport Council until the end of June, described Galileo as being in a “profound and serious crisis.” Is it wise to continue to increase the payments for Galileo given its current position?

Kitty Ussher: There are potential huge advantages to be gained from the Galileo project. The question is whether the proposals represent value for money and whether the project can be managed effectively. Crucially, we must also ask if the project is the best use of every euro of taxpayers’ money compared with the other options that are available. The British Government supported and, hypothetically, continues to support the public-private partnership financing arrangements that were initially proposed, but we understand that, in the real world, those arrangements no longer appear to be an option. The purpose of the current negotiations, which I will be pursuing on Friday, is to ensure that the project is not used as an excuse to raise the previously agreed ceilings in the financial perspective. We will not tolerate that situation, although there may be some difficult choices to make on the relative priorities of different budget lines under heading 1.

Mr. Hoban: I hope that the Minister does not take this the wrong way, but I am not sure from her answer whether she is in favour of scrapping Galileo or not. She seemed to move between the hypothetical and the real quite easily.

Kitty Ussher: I am not able to say that at the moment, because in theory we think there could be potential advantages. However, we will not support something that looks as if it does not use taxpayers’ money effectively, and we will not support something that would raise the overall budget levels beyond those that have already been agreed. The situation is in flux and very current, so perhaps the Committee will be updated when there is further information. I have clearly set out the UK’s principles in that regard.

Mr. Heathcoat-Amory: May I ask the Minister about heading 5—administration—especially the 10 per cent. pension increase and the extra 860 posts next year? Given that enlargement happened on 1 January this year, that seems a fairly flimsy excuse for further increases. I am particularly interested in the pension increase and who sets it. All bureaucracies tend to expand without limit unless they are put under very severe financial discipline. It is not clear what body does that. Is it a self-awarding system, whereby bodies make a case themselves and award themselves the money? Is there an external actuary who puts pressure on them? If so, who is it, and has the matter been discussed?

Kitty Ussher: My understanding is that it is the Commission’s proposals both on staffing and on the associated pensions costs. We agree that that is unacceptable, which is why we are pursuing our negotiating stance. Now is probably not the right moment to attempt realistically to achieve a long-term reform of the European Commission pension scheme, but it is something that this Government will be happy to consider later.

Mr. Kenneth Clarke: May I ask about the heading on a common foreign and security policy, which shows an increase in payment appropriations of 29.5 per cent.? It is possible that I would approve of it if I were capable of working out the policy implications behind it and what it is being expended on. Is there some significance in the apparently large increase in the appropriations under that heading?

Kitty Ussher: It refers to our missions in Kosovo, Bosnia and Africa generally.

Dr. Cable: My question is similar in that it is on something that may be perfectly healthy but I do not know what it means. Under the heading on freedom, security and justice, there is a proposed increase of 24 per cent. for

Since the Union does not yet have any competence in migration and asylum, why is it spending money on it?

Kitty Ussher: I understand that some programmes have been established under that heading. In particular, there are benefits in acting together and from the co-ordination of member states’ policies, and that attracts a cost, presumably through information flows and the like.

Mr. Hoban: In our debate last year, the Minister’s predecessor described one of the three broad objectives as being

Does not the Minister think that in the context of headings 1a, 1b, 3a and 5, the Government have not met that objective?

Kitty Ussher: The objective of the UK Government referred to our negotiating stance, not to the objectives of the European Commission; we obviously do not speak for the Commission. We continue to maintain that objective, and historical precedent shows that it is worth pursuing our line because when we have done so over the past few years, it has led to the overall budgets coming down. My predecessor referred to the Commission’s proposals and our negotiating stance in relation to how we lobby on those proposals.

Mr. Hoban: Will the Minister therefore explain by how much the budget came down last year?

Kitty Ussher: It was by €1 billion; a substantial figure—we had negotiated very hard. At the corresponding stage of the first budget ECOFIN last year, we had achieved substantial reductions in the headings that the Commission was then proposing. The proposal then went to Parliament, was amended and came back to us. At the equivalent stage this year we managed, working with allies, to secure a €1 billion reduction.

Mr. Hoban: Given last year’s Budget payment appropriations of €78.6 billion, does the Minister think that €1 billion is adequate?

Kitty Ussher: We will continue to do everything that we can, but I think that that is a significant sum.

Mr. Hoban: I have one last question, which is on another line in the Budget that was referred to in last year’s debate. It is on a topic close to the Minister’s heart. How much will be spent in this year’s budget on tax harmonisation, and which areas will be covered by that work?

Kitty Ussher: I am not sure what the hon. Gentleman means by an issue close to my heart. I do not think that there is a specific budget line on tax harmonisation, but that is certainly something on which we would use our veto. I am not aware of any specifics on the harmonisation of direct taxation. Perhaps he would like to enlighten us.

Mr. Hoban: All I would say is that there was a line item on tax harmonisation and the expenditure on it last year. I am pleased that the Minister is ready to veto spending on tax harmonisation. I am sure that that will be welcomed by those who object to it.

Motion made, and Question proposed,

Mr. Hoban: May I properly congratulate the Minister on her promotion? She has recognised the wide variety of topics that she will have to cover as Economic Secretary to the Treasury. I am sure that this is not the least onerous of them. I also congratulate her on the addition to her own team. I read on her website that she is to have a baby in the new year. I also notice—she might want to look at this—that the website describes her as serving as a chief adviser to the Treasury. I am sure that she will be able to explain that.

I start by trying to establish some common ground. I was heartened to read in the transcript of last week’s European Union Committee in the House of Lords that she had said that

She is right to say that. It is a view that might be shared by all hon. Members, regardless of their stance on the EU.

We have teased out some things on which we share concerns. I touched on the cost of Galileo. Some of the original reasons behind the proposal for that have been overtaken by enhancements to the global positioning system. That project could cost £10 billion, so it is an expensive commitment, and the Minister hinted at her negotiating position on it. Given the criticisms about the slow progress being made on Galileo, it would benefit UK taxpayers if the Minister were to question that figure very hard and to consider whether it is in our interests to pursue it.

On administration costs, the Minister also said last week:

Again, she is right. It is another year when we have seen significant increases in administrative costs. I am a little perplexed as to how much movement the Government will get on this, given that on her own admission they managed to shave just €1 billion off the overall budget last year. It sounds to me that while the Government may be saying the right thing, other member states in the Parliament are not taking as seriously as they should the need to get administration costs under control. There needs to be much firmer action from the Government to persuade other EU Governments and the EU Parliament of the need to control those costs further.

We should consider whether it is still appropriate for the European Parliament to sit in both Brussels and Strasbourg as that incurs additional costs. The Government should consider that. They should try to persuade the European Parliament to act sensibly and have one location rather than incur additional costs in moving between the two. In one of the EU publications aimed at improving the vision of Europe, one character is quoted as saying:

I am sure that that was said tongue in cheek, but it is an indication of some of the problems that arise when it is perceived that the Parliament itself is unable to make decisions.

One of the things that we have not touched on is the information and communications budget of the EU. A publication that came out either earlier this year or late last year looked at spending across a number of different areas. It suggested that the total cost for information and communication came to £3.8 billion. That included the cartoon character Captain Euro and a Europa diary to go to schools. The Dutch version apparently described the European Parliament as

Would it not be appropriate to trim back some of these costs and to see whether we can achieve some of the savings that we are all keen to have in the European budget?

I notice that there is a little channel on YouTube called EU Tube, which is surely destined to kill YouTube as a cool place to go. There are videos on such matters as anti-fraud measures in the EU, the control of the sugar operation and a short film containing scenes from what might be described in more polite conversation as European art movies. That seems to generate a great deal of comment on YouTube, much to my surprise.

Is it not time to look at the citizenship element of the budget and to see whether more work can be done to bring that expenditure under control? In response to the hon. Member for Liverpool, Riverside, the Minister highlighted the Government’s continued opposition to cohesion funds. She said that she felt that those should not be available to the UK. I asked her which other member states she felt were benefiting that should not. I should be grateful if she could come back to that.

Kitty Ussher: It might be easier if I clarified that point now. Our view is that the funds should not go to the richer member states. The hon. Gentleman can draw his own inference as to which those are.

Mr. Hoban: But I am not the one negotiating on the ECOFIN budget on Friday. I should like to know where the line is drawn between richer and poorer member states. It might be quite useful for the Committee to know. The Minister could go back to ECOFIN on Friday and say that there is concern in the Committee about how this money is allocated.

Does the Minister believe that the deal that was struck last December on the size of the UK’s budget rebate has had an impact on these negotiations? Clearly our rebate as a percentage of the European budget will fall. We have given away £7 billion as a consequence of the deal that was struck last December. When we had this debate last year, the then Economic Secretary referred to some technical discussions that were going on to finalise the wording of the deal. In setting the context for this debate, the Minister did not mention the outcome of those technical deliberations. It would be useful if she could share that with the Committee.

The Minister did not touch in any great length on the need to improve financial reporting and financial controls in the European Union. That issue is raised time and time again in debates such as this. What fresh insights does she have that might enable greater financial control to be exerted over the spending of UK taxpayers’ money? When does she think that sufficient progress will be made to ensure that the EU accounts will not be qualified by the European Court of Auditors? Such qualifications have been made for 12 successive years. Does she feel that there will be any progress this year? For last year’s accounts, the opinion from the auditors was 228 pages long. If a report of that length was produced for a normal public company, serious concerns would be expressed about the quality of management and of the financial records.

It is clear that we need a new budget settlement for the EU. Three key issues cause concern. Until EU resources are under proper financial control, we cannot be certain that the budget has been spent properly. The failure to defend the rebate has given EU institutions the green light to continue to spend unwisely. There are significant increases in expenditure to which the Government object. The Minister made a persuasive case in the House of Lords Committee and again today for voting against the budget. She said in Committee last week that

By making statements such as that, she will gather consensus behind her if she chooses to vote against the budget.

Dr. Cable: May I congratulate the Minister on her first major outing in the House and on trying to explain the inexplicable—or certainly the very obscure, since a lot of these concepts are difficult to get one’s head around in administrative terms?

As someone who has always been a supporter of the European project, particularly its achievements through the single market and enlargement to the south and now to the east, the one time that I almost feel a sense of embarrassment and sometimes despair is when we consider the European budget and, in particular, its administrative aspects. I was reassured by the Minister’s robust attitude towards the administrative budget. There is absolutely no justification for the endless empire-building in the Commission and I am glad that the British Government are taking a tough-minded attitude towards it. If I might qualify that slightly, she mentioned a concern about unaudited accounts. That is absolutely right. There is no justification for unaudited accounts, but we should remember that a lot of the money is not properly audited at a Commission level because of national failures. If I remember correctly, several British Ministries—of which the Department for Work and Pensions is the most prominent—cannot get their accounts audited either. It is not entirely a failing in the Commission.

On the bigger question of the budget, I share the view of the hon. Member for Fareham, although I think that our views on Europe are probably rather divergent. The Government gave in far too easily. They achieved nothing in the wider reforms on agriculture and got no conclusions in the world trade negotiations, yet they accepted a substantial scaling down of the British rebate. That was a major failing and we are left with a profoundly unsatisfactorily budget structure. All we are doing now is talking around the details at the edges of that structure.

On some of the content, there is a tendency in European budget discussions for the British Government—perhaps out of a sense of frustration that they cannot get the agricultural budget down—in particular to say, “Well, let’s do other, more positive things such as research. Everybody is in favour of research, so let’s spend more money on it.” The problem is that there is a quite a lot of research into research that suggests that publicly promoted research is not very productive. Some good research has been done at the university of Buckingham by the vice-chancellor which suggests that for everything except blue-skies research there is not a market failure, and that Government-promoted research is not productive. When research is channelled through the European Commission, it is even less efficient because there are artificial collaborations—for example, people have to find somewhere in Finland or Portugal to team up with. It is all very artificial, and is not the natural research collaboration that people would look out, which would probably be with an American university or institute. That is probably not good use of public money, and the fact that research is a good thing, of which we are all in favour, rather masks that. I hope that the Government will not go too far down the road of trying to correct the existing imbalances in favour of agriculture by promoting money on other things that sound superficially attractive but are not in fact productive at all.

Mr. Heathcoat-Amory: I congratulate the Minister on her outing on this rather complex subject. With a bit of in-flight refuelling, she managed to answer a good many of our questions. There is indeed a lot of history here and a lot of it is very technical, so it is certainly not my intention to try to trip her up or ask a question that she cannot answer.

The Minister kindly said that she will write to me about something that I have already asked her. I rather commiserate with her, because she is trying to control a system and a budget that is formally beyond her control. That is a kind of annual tragedy that we rehearse here. We are putting more and more money into a system that is not accountable or under any real control.

The annual bible is the White Paper published in May, which sets out the European Community’s finances and gives a statement on the current year’s budget. It also sets out the rather dismal story of the European Court of Auditors attempts to grapple with where all this money is spent. I am quoting practically at random from those pages, but it records that on structural measures,

and on internal policies, which is an area that gets a great deal more attention than money, it talks about

On external actions, on which we have touched already, it says:

On EU agencies, which is a particular concern of mine, because they are one removed again from the taxpayer, it reports:

It is hardly surprising that the Court of Auditors rejected the accounts for the 12th year running. This is not an annual comedy; it is a tragedy, because it concerns taxpayers’ money and leads to very widespread disillusionment with what is going on. People have long ceased to believe all the assurances that it is all getting better. No other organisation would survive this. If a commercial company were to have its accounts rejected in this way, the directors would have been disbarred by now. No domestic or national spending Department would survive 12 years of such treatment from the auditors.

I last discussed the matter in detail with the ex-chief accountant of the European Union, Marta Andreasen, and she reported a startling lack of double-entry bookkeeping. I declare an interest, because I am an accountant, but I did not invent double-entry bookkeeping. It was invented in Venice in the 15th century, but it is disappointing that it has not yet reached Brussels. She exposed a catalogue of accounting errors and mismanagement, but it was she who got sacked—she lost her job—not the people responsible for this mess and muddle. Again, it is almost an endless refrain that it is the whistleblowers who lose their jobs rather than the people responsible for all this money.

We are talking about a budget that is now about £115 billion a year, so this is a colossal supra-national budget, which is outside any real control. However, instead of pausing and trying to get this budget right, it is receiving very large annual increases. Most of the expenditure is now “non-compulsory”, to use the technical term; that is, it is not required under the common agricultural policy. It is essentially discretionary expenditure and it will go up next year by 9.2 per cent. We are pouring into this leaky bucket very large sums of extra money.

If one looks at the headings, research will increase by 54.5 per cent. I agree with the hon. Member for Twickenham—just because research is a good thing, that does not mean that it is best carried on at European Union level, particularly with increases of this size. We need to be sure that the money that is currently being spent is delivering results before we put the expenditure up by more than 50 per cent.

I suppose that trans-European networks are a good thing too, but perhaps not to the extent of deserving an 89 per cent. increase next year. Expenditure on lifelong learning is going up by 20 per cent. That is an interesting one, because we all thought that education was basically a member state responsibility. The European Union has a supporting role, to exchange best practice and so on, but again this increase is a very large one. I know of no Department here that is receiving increases on anything like this scale. Expenditure under the heading of competitiveness also receives an increase, of more than 25 per cent.

Galileo has been mentioned. I know something about Galileo, because, as an amateur astronomer, I use global positioning in the instruments that I use. However, they all work perfectly well with the American satellites, which are all free. Galileo has been described as a vanity project, and yet it is to receive an increase in funding of more than 50 per cent. next year. Of course it is well over budget already and some years behind schedule.

I have mentioned the agencies and my concern about them. Again, they will receive 25 per cent. more money next year. I also mentioned macro-economic assistance and the Minister will kindly write to me about that. Then there is the common foreign and security policy, which has also been mentioned. Again, expenditure on that will go up very substantially.

The overriding point is this: can the European Union absorb this extra money and spend it wisely given the strictures of the European Court of Auditors on the existing expenditure? I asked what the Treasury is doing about that problem, but perhaps I can answer my own question, because they can do very little. I asked the Minister what her powers were and what the voting system is. I can tell her that it is majority voting on the annual budget, and, in fact, she conceded that that was the case. She is quite right that the inter-institutional agreement and the overall amount that is extracted from member states is negotiated periodically, but we must wait until 2013 before we have any real influence over that.

We are practically without powers, beyond the power of persuasion. Again, if one reads the White Paper published by the Treasury, there is a terrible familiarity about the phrases that are used. For example, we are

whatever that is. We are also to

Yes, we “urge” them, we persuade them, we continue working, but we have been doing that for 12 years. I remember doing so when I had a junior position in the Treasury doing the Minister’s job—perhaps that was the start of the problem. We took it as seriously as we could, but I was struck then that we lacked the instruments to enforce the same budgetary discipline that our taxpayers rely on in domestic expenditure.

Another point is conceded in the explanatory memorandum, which states that the final decision on much of the expenditure is taken by the European Parliament, which we all know is basically an expenditure agency. It does not have the pain of taxation; it has the enjoyment of expenditure. Most other member states, being net recipients of the budget, have no particular interest in budgetary restraint. We do, because we are a very large and growing net contributor. The helpful table at the back of the Treasury document records that our net contribution this year is £4.699 billion, which is easily a record, and going up very sharply because we lost a chunk of our rebate during the negotiations two years ago. Most of it is back-end loaded, so it will not kick in until the year before 2013, so our net contribution will rise to at least £6 billion a year. I ask the Minister to look more fundamentally at what we can do to enforce her good intentions. Parliament came into existence to control not just taxation but expenditure.

My final request to the Minister is about the reform treaty. It is self-styled as a fundamental look at how the European Union operates institutionally. Why, then, is it entirely silent on the questions we have been debating? I re-read the presidency conclusion of the Brussels European Council and it says absolutely nothing about budgetary restraint or financial reform. Why is that? It certainly concerns the public, who know perfectly well that the budget is mismanaged, and they want something to be done about it. There was such an opportunity, and it still exists because member states will have an inter-governmental conference in the autumn to draw up a legal document to reform the European Union. What will the British Government do to bring forward specific and legally binding mechanisms to enforce the budgetary discipline that she talks about?

Mr. Kenneth Clarke: There are different views on the European project among the Opposition, but I will speak briefly to show that even those in favour of it, such as the hon. Member for Twickenham and I, feel just as strongly as anyone else about the need for financial discipline and control in the European Union. I get the impression from the Minister’s first presentation of her case that the Government share that view, so we wish her well in her negotiations.

We have made some progress over the years in the direction that British Governments would wish, the greatest of which has been to keep the budget below 1 per cent. of GDP, which at one time would have seemed almost impossible. However, we have not made enough progress in any other direction to shift the balance of the budget towards more modern and relevant priorities. Although we cannot reopen the recent deal, I agree with the hon. Member for Twickenham that the Government made very little progress, largely because of the former Prime Minister’s foolish commitments to President Chirac on agricultural policy, which he entered into, for inadequate reasons, some years before negotiation on the financial framework started.

We are therefore left with annual budgets within a framework that still is not right. We have failed to shift enough from agricultural and fisheries policies into other areas. Agricultural policy has been reformed so that there is more emphasis on environmental expenditure, which the documents refer to. However, I hope that the Minister will continue to press for value for money from the environmental projects because it seems to me that there is a lack of clarity about exactly what environmental benefits are being delivered by the various forms of environmental support that are now being introduced.

Under the Lisbon agenda, there are some headings that are undoubtedly to be welcomed. I share a view that hon. Members have expressed: things that sound attractive as headings do not always represent good value for money, as one will see if one looks at what the money has already been spent on. Like my right hon. Friend the Member for Wells, I have some experience of the research budget from my time at the Department of Trade and Industry and the then Department of Education and Employment, as well as my time at the Treasury. If the research that has been referred to is up to date, it is depressingly familiar. It shows that little has changed in 20 years.

The research budget sounds worth while to make a more modern, competitive economy, but it tends to be dominated by horse-trading. It is shared out country by country, and it often produces artificial tie-ups with people in other countries in order to qualify for grants. There is—there certainly used to be—a terrible reluctance to bring to an end projects that are going nowhere. It is assumed that there is a commitment to the jobs and institutions that have grown dependent on the money that has been granted. I hope that that will be borne in mind.

I have always had grave doubts about the value of structural and regional funds. I understand that Liverpool Members seek to defend the right of Liverpool and other less prosperous parts of the country to those support funds, whose value in promoting economic progress I have always doubted. In this country, as well as in Germany, France, Spain and other wealthier countries of the Union, there is scope for a national, rather than European, regional policy to deal with the matter. The cohesion funds, to which I have already referred, were introduced for a temporary purpose that has long since been served. As we are doomed to have expenditure remaining in that area, I hope that it will be kept to a minimum.

I asked about economic assistance for Afghanistan. I discovered that foreign security policy referred to Kosovo and Bosnia and the various European Union activities in trouble spots in Africa. I think that hon. Members on both sides of the House would strongly support properly judged European efforts of that kind and would wish to see them better financed, once satisfactory ways of spending the money effectively have been outlined.

I wish the Minister well. I do not think that she will find herself alone at the Council. With respect, I do not share the vision of my right hon. Friend the Member for Wells that it is only the British who are advocating restraint and value for money while being surrounded by Governments from 26 profligate continental countries who see the budget merely as a bean feast through which they distribute money among themselves. I should be surprised if the taxpayers of Germany and the Netherlands did not feel as strongly as those of the United Kingdom about such matters. I suspect that their Ministers feel equally strongly; in my day, we were lucky to have a blocking majority, as long as the Germans, the British and the Dutch stayed together. Now that France is a net contributor, I suspect that its taxpayers are looking for better value for money.

I realise that we are talking about a negotiation. It would be quite wrong for us to try to tie the Minister to precise heads, and to what she will achieve here and what she will achieve there. She will have to engage in a great deal of give and take. She will have to concede on things on which she would like to do better, but, in return, she will try to make some progress in the right direction. This is not about only the British interest because it is in the sensible interest of every European taxpayer that the overall budget is restrained to a size that is useful and necessary, and only that, for European purposes.

Even more importantly, better value must be achieved from the money that is provided by each of the member states. I wish the Minister well in her efforts. I suspect that there is a British view common to all politicians, parties and others who follow European affairs about the kind of progress that we would like to make to improve the cost-effectiveness of the Commission and the European Union.

Kitty Ussher: The debate has been extremely useful. It demonstrates that Parliament can perform its scrutiny effectively. I covered most of the points raised in my earlier remarks, but I shall respond to a couple that we did not discuss in detail.

The hon. Member for Fareham and the right hon. and learned Member for Rushcliffe mentioned that they thought that the Government had somehow conceded on the abatement during European Council conclusions in 2005. I do not believe that that is in any way the case. In absolute terms, our rebate has gone up. As the then Prime Minister said in 2005, the rebate

We think that that reason remains. We also think that it would be wrong for Britain not to play its part in paying the fair costs of enlargement, but the rebate remains firmly in place.

The hon. Member for Fareham suggested that my comments should be interpreted as implying that we should vote against the EU budget. That would not achieve much, as has been acknowledged, given that the annual budget negotiations are conducted by QMV, but I believe strongly that we gain more by engaging constructively, as history has demonstrated.

To respond to the point made by the right hon. and learned Member for Rushcliffe, part of the reason for going on Friday—not every Minister goes to the initial budget ECOFIN—is to ensure that alliances are built so that we can negotiate effectively as a group in the later, tenser stages. We can achieve much by working together.

A number of hon. Members, particularly the hon. Member for Twickenham, mentioned research and development expenditure. It is worth saying that the Government believe that there is a clear case for the Community’s research and development framework programme. Improved investment in R and D is one of the bedrocks of future EU prosperity, but as individual member states can lack the volume of resources to make suitable investment, economies of scale can make funding at the EU level attractive and help to avoid a duplication of effort. That is our rationale, although of course we must ensure that each individual project represents value for money, as the hon. Gentleman said.

The right hon. Member for Wells made a well-reasoned argument and expressed well-known concerns about accounting issues and implications of fraud. Although it is deeply regrettable that the European Court of Auditors has been unable to sign off the accounts, the British press sometimes implies that all the money is being siphoned off into someone’s back pocket. That is not the case—not always, anyway. Their lordships’ recent report on the subject makes that clear.

I have seen the figures for actual fraud, as opposed to inability to meet the required accounting standards. They are close to 0.05 per cent. of the overall budget. That is not to be tolerated, but it is not as much as one might presume given the heightened attention paid to the issue. Britain is playing its full part in supporting the Commission in its stated objective to strive for a positive statement of assurance by 2009, and we shall continue to do so. That ambitious aim is dependent on action by all concerned, including member states, and I am proud that the UK has taken the lead in providing a quality standard to which others can aspire through administering our own spending.

The right hon. Gentleman mentioned whistleblowers, who play a vital role. The latest EU staff regulation introduced better protection for them—I understand that a whistleblowers’ charter is now in operation. On a slightly more light-hearted note, the hon. Member for Fareham suggested that it is inefficient for the European Parliament to travel to Strasbourg. I could not possibly comment, but I note that it would require—“sadly”, my officials write—a treaty change to stop it doing so, and there are other treaty changes that should perhaps be higher up the negotiation list.

I believe that Britain gains from EU membership. It is therefore in our interests to negotiate positively, strongly and effectively at the EU level. I have enjoyed taking part in the debate.

Question put:—

The Committee divided: Ayes 7, Noes 5.

Division No. 1 ]

Clarke, rh Mr. Tom

Cunningham, Tony

Ellman, Mrs. Louise

Sheridan, Jim

Smith, Geraldine

Ussher, Kitty

Wright, David

Cable, Dr. Vincent

Clarke, rh Mr. Kenneth

Heathcoat-Amory, rh Mr. David

Hoban, Mr. Mark

Newmark, Mr. Brooks

Question accordingly agreed to.

Resolved,

Committee rose at fourteen minutes to Six o’clock.