House of Commons

Session 2007 - 08
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General Committee Debates
European Standing Committee Debates

Financial Management

The Committee consisted of the following Members:

Chairman: Mr. Edward O'Hara

† Ainger, Nick (Carmarthen, West and South Pembrokeshire) (Lab)

† Browne, Mr. Jeremy (Taunton) (LD)

† Burns, Mr. Simon (West Chelmsford) (Con)

Cable, Dr. Vincent (Twickenham) (LD)

† Cunningham, Tony (Workington) (Lab)

† Gauke, Mr. David (South-West Hertfordshire) (Con)

† Hollobone, Mr. Philip (Kettering) (Con)

† Iddon, Dr. Brian (Bolton, South-East) (Lab)

† Jones, Mr. Kevan (North Durham) (Lab)

† Kennedy, Jane (Financial Secretary to the Treasury)

† Lucas, Ian (Wrexham) (Lab)

Spink, Bob (Castle Point) (Con)

† Wright, David (Telford) (Lab)

Hannah Weston, Committee Clerk

† attended the Committee

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European Standing Committee

Monday 28 January 2008

[Mr. Edward O’HARA in the Chair]

Financial Management

4.30 pm

The Financial Secretary to the Treasury (Jane Kennedy): I am grateful to you, Mr. O’Hara, for chairing our proceedings this afternoon. It is a pleasure to be here under your chairmanship. I am also grateful for this opportunity to debate the financial management of the European Union budget. I hope that hon. Members have found the papers helpful, particularly the explanatory memorandums produced by the Treasury, which I have always found especially helpful when dealing with what would otherwise be daunting and complex issues that are serious and important.

I want to put record on my gratitude for the Committee’s help and understanding in scheduling the debate ahead of February’s ECOFIN meeting, which will make recommendations to the European Parliament on the discharge of the 2006 EU budget.

Hon. Members will have noticed that I am standing in as a poor substitute for the Economic Secretary to the Treasury, my hon. Friend the hon. Member for Burnley (Kitty Ussher). I am sure that all Committee members want to send their best wishes and welcome to George Patrick, who was born just a few weeks ago. We wish my hon. Friend and her husband success and happiness.

The backdrop to this annual debate is that, again and regrettably, for the 13th consecutive year, the European Court of Auditors has been unable to give a positive statement of assurance on the EU’s budget. That is not acceptable. It is clear that much more needs to be done to improve EU financial management. Hon. Members on both sides will want to suggest ways in which that can be done, and I look forward to discussing their suggestions

However, that should not obscure the improvements highlighted in the most recent report from the European Court of Auditors. The Court was able to give a positive opinion on a greater percentage of EU spending than in previous years—estimated to be more than 40 per cent., compared with approximately 35 per cent. for 2005. That is a 5 per cent. improvement, and although more is required we are moving in the right direction. With only relatively minor qualifications, the Court was able to give a positive opinion on the reliability of the EU's accounts.

The European Court of Auditors reported a marked reduction in the estimated level of error in agricultural transactions, and anticipated being able to give a positive statement of assurance to all agricultural spending in 2007, which is a creditable achievement. It also noted that the Commission has made progress in the implementation of accruals-based accounting. That

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demonstrates the benefits of championing reform through hard-headed engagement with the EU institutions—the Committee will know that the UK has been at the forefront of those efforts.

I am sure that we all agree that there is no room for complacency. The Government are determined to keep up the pressure and to keep taking the lead. When we join our European colleagues at ECOFIN on 12 February, we intend to emphasise three points alongside any suggestions that hon. Members make today. First, we will promote the need to improve systems and controls to tackle irregularities such as the Court’s estimated 12 per cent. error in structural fund programmes. I am sure that hon. Members will, rightly, want to scrutinise levels of fraud in the EU budget. Although no instances of fraud and corruption can be tolerated, overt fraud is not the principal problem that we face. It is irregular payments that do not fully conform to regulations in place, as the House of Lords made clear in its thorough and considered November 2006 report, “Financial Management and Fraud in the European Union”. That is our greatest challenge.

Secondly we will argue that it is essential to improve national management of EU funds. Some 85 per cent. of EU spending goes on the common agricultural policy and structural funds, for which responsibility is shared between the Commission and member states. That is why the Government announced that it would prepare and lay before the House an annual consolidated statement on the UK’s use of EU funds, prepared to international accounting standards and audited by the National Audit Office. The statement and audit will be published in the spring and will enable Parliament better to scrutinise EU spending in the UK and to improve our financial management practices where necessary. We hope that, along with similar Dutch and Danish initiatives, they will encourage other member states to follow suit. Committee members will, no doubt, want to discuss the initiative during our debates.

Thirdly, we will argue the case for expenditure reform. Today’s debate will rightly focus on the means by which the European Union spends taxpayers’ money correctly, but it is equally important that the money is spent well. That is why the fundamental review of the EU budget that was secured by this Government and is now under way is so important. An EU budget that devotes 40 per cent. of spending to the CAP and from which 60 per cent. of structural fund expenditure goes to the wealthiest member states is not designed to meet the challenges of the 21st century. The budget review is, in the Commission’s own words, an opportunity to ensure

“full transparency, visibility and accountability in the management of the budget”.

It is a chance for all those who share responsibility, including national Governments and Parliaments, the Commission, the Council and the Court of Auditors to consider what reforms are still needed, such as the Commission continuing to simplify the complex rules that result in many irregularities and are rightly criticised. Other examples include member states improving their financial management, and the Court working alongside the Commission on how to increase its focus on the effectiveness of EU spending, as well as its legality. Those are the key messages that we will take to ECOFIN, and I look forward to discussing them today.

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The Chairman: Hon. Members now have until 5.30 pm to ask questions of the Minister. They should be brief and should ask questions one at a time. I am sure that there will be time for any Member to ask more than one question. I remind hon. Members that the scope of the questions and debate does not include the budget—they should be on the management and control of the budget.

Mr. David Gauke (South-West Hertfordshire) (Con): I crave your indulgence, Mr. O’Hara, before asking my first question. May I, too, congratulate the Economic Secretary on the birth of George Patrick? I do not know whether he was named after the shadow Chancellor—I doubt it—but it is a fine name.

The Financial Secretary said that it is not acceptable that the Court of Auditors was unable to sign off the EU budget for the thirteenth time. What action will the Government take on that? Will they consider voting against the discharge of the budget at the ECOFIN meeting on 12 February?

Jane Kennedy: The hon. Gentleman will know that there is an agreed action plan, including an integrated control framework. We place great emphasis on the action plan and believe that it is having an impact, but it is too early to judge. The Commission’s most recent update on the plan’s implementation will be published imminently. It will take a first look at the impact of different actions on assurance and draw conclusions on the future consolidation of the integrated internal control framework.

The Court of Auditors also said that it looks forward to assessing the initial impact of the action plan. I shall quickly run through some of the measures that have been implemented as part of the plan. They include the improved assessment of management and of control systems in structural funds that will contribute to overall analysis of controls and assurance gained; the co-ordination of audit standards, the clear definitions of member state responsibilities in the 2007 to 2013 legislation on agriculture and structural funds—that needs to be recognised at a political level within the EU—and the measures to increase the supervision of agencies by member states.

Before we take our final decision on the UK’s position at ECOFIN, we need to know the degree to which the different elements of the change will affect the budget. That forms part of our discussions with other member states.

Mr. Philip Hollobone (Kettering) (Con): I want to ask about MEPs’ expenses. Paragraph 10.9 of the Court of Auditor’s report states that the court had

“on several occasions, pointed out weaknesses in the regulatory framework...for the payment of allowances for assistance to Members of the European Parliament”.

I think that MEPs’ allowances now run to about €132 million a year. Given those concerns about the size of their expenses, is the Minister satisfied that appropriate safeguards are in place to verify that expenses claimed have actually been incurred? Does she think that the European Parliament takes a sufficiently rigorous approach to scrutinising the EU budget?

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Jane Kennedy: Similar to our own expenses, primary responsibility for the scrutiny and supervision of MEPs’ expenses lies with their Parliament. I am not going to criticise those controls. As I understand them, like our own, they are reviewed and supervised constantly and changes are frequently made. I note the hon. Gentleman’s point and accept the report’s criticisms, but they are matters for the European Parliament, rather than for me as a Minister.

Mr. Jeremy Browne (Taunton) (LD): I was reflecting on the fact that scheduling this Committee at the same time as the Lisbon treaty is being discussed on the Floor of the House is like a football match clashing with the FA cup final—many of those who are most interested are elsewhere. However, we shall fill the gap and ask the questions instead.

The Financial Secretary touched upon the subject of member states spending EU funds. What assurances can she provide that the British Government are more rigorous in preventing fraudulent or wasteful expenditure when we discharge such spending?

Jane Kennedy: The UK has in place the necessary supervisory and control systems. We have established separate managing authorities in charge of day-to-day checks on project operations, paying authorities and certifying project expenditure. Recent improvements have been made to the management systems for structural funds, which include improved management information systems for data collection, increased numbers of checks, strengthened management procedures and re-verification work by independent auditors.

We desire improvement in that area and we want to understand better the causes of irregularities in the UK’s use of EU funds, which is a major reason that we decided to publish a consolidated statement of assurance on the use of EU funds in the UK, to which I referred earlier. That is properly a focus of public scrutiny and frequent public comment. The best possible financial management is necessary to sustain and promote support for EU reform overall.

Mr. Gauke: In response to my earlier question, the Minister referred to the action plan. She will be aware of the comments made by the Court of Auditors on the Commission’s action plan. I refer her to paragraph 2.21 of its report, on page 51 of the documents, which states that the Court

“notes that the Commission’s timetable for its action plan...appears to be optimistic and points out that most of the actions concerned are likely to have a real impact on the functioning of the supervisory and control systems of the Commission only in the medium/long term.”

Given that the Court of Auditors thinks that the Commission’s action plan will work only in the medium to long term, have the Government made an assessment of when they feel that the Court of Auditors will be able to sign off the EU budget, which it has been unable to do for 13 years?

Jane Kennedy: I am not going to give today a projection of when we hope that the European Court of Auditors will be in a position to do that. We are absolutely focused on continuing the overall reform of the financial

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management of the budget as we have in recent years, taking a high-profile lead on encouraging member states and the Commission to ensure that their responsibilities are carried out rigorously. We have led the way in reforming how we manage, respond to and audit the EU budget, and our report will be produced shortly. As I have said, it will be audited by the NAO, and it will be a weighty document in which the House can have confidence. I am sure that it will receive proper scrutiny and inform the debate.

Member states need to take responsibility for the parts of the budget that are their responsibility, and so does the Commission. We are making progress, and the early indication is that the 2007 budget should show a marked improvement. I shall not give a hostage to fortune by predicting exactly what that improvement will be, but I know from my discussions with Ministers at ECOFIN, and those that my colleagues in the Treasury have had, that it is a high priority for all member states and becoming increasingly so. Some have already signed up to the need for the best possible financial management of the budget, and the UK is taking a lead through vigorous debate and by constantly reaffirming our desire for improvements to be made. We deserve to be commended for making it a priority at nearly all the discussions at ECOFIN on the financial management of the budget.

Ian Lucas (Wrexham) (Lab): Following on from that response, will my right hon. Friend the Minister indicate the specific matters on which the UK Government are pressing other member states to improve their auditing procedures? What response are they getting from other member states when they assert the increasing importance of the work that needs to be done?

Jane Kennedy: I am grateful to my hon. Friend for that question. I have mentioned a number of ways in which we are promoting reform through the implementation of the action plan. There are a number of other changes, particularly on structural fund regulations. I probably should not invite questions on that, but I mention it because a lot of improvement can be made—for example, the consolidation of several regulations rather than one implementing regulation for the 2007 to 2013 programmes will help. The separation of the European social fund and the European regional development fund into distinct programmes has helped in the financial management and control of the budget, and reduces complexity, which, as the report repeatedly points out, we must take seriously. The repeal of the eligibility rules in favour of member states playing a greater role in determining the rules for management of the 2007 to 2013 programmes, and making them more workable, is a further improvement. Those are just some of the ways in which we have advanced discussion.

Mr. Hollobone: I wish to ask the Minister about the financial management of the single payment scheme across the Community. The Court of Auditors’ report states that almost 29 per cent. of payments that it checked contained errors, with the situation being particularly bad in Greece. The court particularly highlighted the continuing failure across the Community to implement key controls, including inspection procedures,

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animal database integrity and the land parcel identification system. In the 10 years to 2005, the Commission imposed corrections totalling some €479 million.

In particular, the court feels that the Greek Government have been breaking the rules of the payment scheme, allowing farmers to get subsidy when they do not actually qualify for it. Embarrassingly for the United Kingdom, the Court of Auditors’ report highlights the fact that the single payment scheme is paying out to inappropriate recipients including, in this country, railway companies, golf and leisure clubs and city councils. The auditors make a specific point describing that as inappropriate. I welcome the Minister’s comments on that.

Jane Kennedy: We are committed to ensuring that CAP single-payment scheme claims are valid. We are working closely with both the Court of Auditors and the Commission in audit investigations, following-up initial observations. The European Court of Auditors is due to visit England between today and 1 February to carry out on-the-spot checks on a sample of 12 beneficiaries, including golf clubs and county councils. We welcome the ECA and will be working closely with it during its visit. We have taken action to investigate and rectify the situation, when it has been drawn to our attention, in a number of areas. For example, analysis and design work on the enhancements to the entitlements register has just been completed, among other things.

The hon. Gentleman asked about Greece. The single-payment system is still bedding down since its first year of operation in 2006, but it needs to be improved. Greece has now agreed to an action plan with the Commission, so we are looking forward to improvements in the way in which the EU budget is managed insofar as it applies to the single-payment scheme and Greece.

Mr. Browne: Further to the last question, the Minister, in her opening remarks, mentioned that Denmark and the Netherlands were taking action. May I respectfully suggest that those two countries, and particularly Denmark, must receive a small proportion of EU funds and that they are probably more rigorous than most at spending them efficiently? Will she give the Committee a list of the top four or five on her target list, down to the 27th, of nations within the EU that take these responsibilities less seriously? Doing so will get to the real nub of it; then we could see which countries we, as a Government, should be putting the greatest pressure on to address the concerns.

Jane Kennedy: I will consider the hon. Gentleman’s request. I am not sure how helpful it is to name and shame in that context, particularly as the UK, in the last report, comes in for quite trenchant criticism, which we accept and are responding to. I hear what the hon. Gentleman says and I will give some thought to what he has suggested, but I am not sure that that will be the most helpful thing, particularly given that I am reliably informed that our negotiations in Brussels with other member states are progressing well.

There is increased awareness of the need to improve and the need for member states to raise their game. There is a genuine acceptance by the European Commission that it also needs to improve the way that it handles the

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financial management of the budget. In that context, I am not sure that the most diplomatic thing would be to name the worst offenders, as the hon. Gentleman suggests.

Mr. Gauke: I have some detailed questions about the position of member states, to which I will return in a moment, if I may. However, on the Minister’s point about the role of the Commission, the Court of Auditors’ report contains some strong criticism of the Commission’s failings in respect of its system and controls and with regard to its internal policies and external actions—overseas aid—that are run by it. What representations are the Government taking to try to improve the Commission’s performance?

Will the Minister consider making an assessment of the reforms implemented by Lord Kinnock—Neil Kinnock as he was then—when he was vice-president of the Commission, particularly in a White Paper that he published, containing an objective to improve financial management? We are some years on and, clearly, this remains a major issue.

I should be grateful for the Minister’s thoughts on those points.

Jane Kennedy: The hon. Gentleman asks a good question. The UK presidency took forward the Commission’s proposals for a road map for an integrated internal control framework, on the basis of which the Commission drew up the action plan that we have been discussing this afternoon.

As I said, the main aims of the action plan were to improve internal controls within the Commission but also within member states, and to promote further simplification of complex legislation. Having read the papers, I think that is a point to which we must return often. If the main problem is not deliberate and calculated fraud, or even fraud that might appear on the spur of the moment to be attractive to individuals who are claiming, but the fact that mistakes are being made because of the complexity of the system, it is not in the interest of any of our constituents for the Commission to maintain difficult and complex arrangements. They work against the interests of our constituents, who might legitimately have claims to make under various EU programmes.

We await publication of the latest update on the action plan. The UK will keep up pressure to ensure that the quest for better financial management in the EU and the Commission continues. If I do not have to hand the details of any area of work of which we are aware and would want the House to be aware, I will write to members of the Committee as a follow-up. As this is not my area, if I do not give a full answer to any questions, I will be more than happy to supplement my answers at a later date.

Mr. Hollobone: I know that this is not the Minister’s brief and that she is doing her best to stand in for her understandably absent colleague, but I was surprised that in her opening remarks she failed to mention the United Kingdom’s failings in respect of financial management of the European budget. Indeed, it was confirmed on page 66 of the Court of Auditors report that money was withheld from both the United Kingdom and Spain because of weaknesses in their management

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accounts. Will the Minister confirm that that refers to cohesion fund money? Which Department or Departments were responsible for those failures in handling taxpayers’ money?

On page 82, the report states that the Court found

“late or inaccurate entries, omissions and erroneous cancellations”

for a number of member states, including the UK for our own-resources bookkeeping. Furthermore, the report states on page 84 that the UK’s random checking procedure of imports was held to be very poor and rightly interpreted it as yet another Government IT problem.

Jane Kennedy: The hon. Gentleman raises an interesting criticism. I shall have to review the matter. We were concerned about the negative opinion on structural funds, and the Court’s estimate of a 12 per cent. error rate in respect of those funds. The area is not showing improvement over 2005, so it is one where action clearly is required.

As the hon. Gentleman rightly points out, we have been singled out—or rather not singled out, as there was another member state. There is criticism to which we rightly have to respond. It is the major reason why we decided to publish a consolidated statement of assurance on the use of EU funds in the UK.

There is no excuse for anything less than excellent record keeping, but we believe that the decision against the Government office for the north-west—the hon. Gentleman asked which Department was involved; it was the Department for Communities and Local Government—was unjust, disproportionate and somewhat out of date. We are trying to understand why the EU failed to take account of the substantial assurance that was given by auditors on the handling of ERDF funds in the north-west, or of the fact that stronger processes are now in place to ensure that the situation can never happen again, which commissioners have previously recognised. The proposed correction applies only to ERDF programmes that are managed from the Government office in Manchester, nowhere else. Suspension of the ERDF has been lifted everywhere else, including London and Merseyside.

It is important that I reassure Members that no project or area will lose out as a result of the decision. The Department will meet the cost of any correction imposed and protect the funding available for regeneration in the area. There is no question of fraud or impropriety, or any allegation of that nature; the issue is simply about proper record keeping. I know the issue in some detail, because it has affected people and businesses in my constituency.

We are talking about not a fine but a proposed correction of £20 million, which is less than 0.25 per cent. of the £8.5 billion total EU structural funding for England over the spending period. We believe that the level of correction is unjust, and it is also much lower than the Commission’s original figure of €57 million, so there has clearly been much work in response to criticism about the UK’s management of structural funds. The Commission accepted some of that work but continued to qualify it, and we are working to try to understand the continued criticism.

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Mr. Gauke: The Minister states that the Department will meet the cost for the correction, but presumably it will come from the Department’s budget, so savings will have to be found elsewhere in the budget. To broaden the point, before returning to the detailed comments about the UK’s performance, does the Minister consider that member states, including the UK, are as careful when distributing EU funds as they are when spending their own resources?

Jane Kennedy: As I have tried to explain this afternoon, a high priority of ours is that the same rigour be applied to managing EU budgets as is applied to managing the UK’s resources. One reason why we have made the issue a reform priority in the EU, with the Commission and with member states, is that we want economic management to be taken seriously within the EU. We are taking the necessary steps to ensure that situation, and we will continue to monitor it to ensure that the EC and we as a member state take it seriously. I hope that in the course of our discussions, I have been able to provide some reassurance about how seriously we take the matter.

Mr. Hollobone: External aid is increasingly important to many of our constituents, who are concerned that the EU appropriately manages the funds that go to the third world. Page 166 of the Court of Auditors report shows that correct procedures were not followed in nine of 11 projects that were audited on the spot, so I should be interested in the Minister’s response to those findings.

Jane Kennedy: I agree with the importance that the hon. Gentleman attaches to that criticism. We are conscious of it and accept that more must be done to ensure that the funds are spent precisely as intended when member states make their contribution to the EU budget.

Mr. Gauke: The Minister has referred on a couple of occasions to the expenditure review that is being undertaken. In the context of financial management, what does she consider the prospects are of the review substantially addressing her concerns that 40 per cent. of the EU’s budget continues to be spent on the common agricultural policy, and that 60 per cent. of expenditure through the structural fund goes to the richer countries? Does she believe that those situations are likely to change as a consequence of the review?

Jane Kennedy: The review of the EU budget will take place over the three-year period ahead. It presents the best opportunity for us to influence the way in which the funds are spent, which is why it is so important that the Commission and the Court of Auditors work to ensure that the effectiveness of the use of EU resources is measured by the Court.

I am sure that hon. Members are aware of the key principles for budgetary reform, but I shall remind them. First, the EU should act only where there are clear, additional benefits from collective efforts—EU added value—compared with when action is taken by individual member states. Secondly, where EU-level action is appropriate it should be proportionate and flexible. Expenditure is just one of a number of policy levers that may be applied. Thirdly, sound financial management, including the highest standards of financial

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control at independent audit, is necessary alongside continuing budget discipline. Those sound principles underpin reform and are almost beyond argument. Our aim, and a principal objective of Ministers at ECOFIN and elsewhere, is to ensure that those principles are being carried forward in all discussions with member states and the Commission.

Mr. Hollobone: I want to ask about financial management of the education and culture budget. On page 21, the Court of Auditors claims that the paper trail was so bad that an accounting taskforce with an outside accountant had to clear up invoices and claims, and that about an eighth of the education and culture contracts audited were overpaid. What is the Minister’s reaction to that?

Jane Kennedy: As the hon. Gentleman points out, the criticism is very serious. Let me illustrate my response with a personal recollection. My constituency falls within Merseyside, which is an objective 1 area. A significant part of EU spending on Merseyside would be on improving the skills of the Merseyside work force, so education and training is a large part of that budget. It is absolutely critical to the success of those policies that the money is spent in the right way, so the kind of criticism that the Court of Auditors is levelling at all member states and at the Commission’s management of the budget should be taken very seriously, which we do. That is why we have set such a high priority on sound financial management going forward.

Mr. Gauke: The Minister will have seen reports that the French Government are likely to oppose any attempts substantially to change the structure of the EU budget, certainly before 2014.

On irregularities and fraud, the Minister rightly said that not every amount that is not signed off is an issue of fraud and that there are sometimes irregularities. Is she aware of the information set out in the Commission staff working document, at page 513 of the bundle, about the difficulty of distinguishing between suspected frauds and other irregularities? It says that different member states take different approaches to the definition and that

“a significant proportion of communications received by the Commission do not distinguish between suspected fraud and irregularity.”

In light of that, does she agree that there is a problem in assessing irregularities? We know what the number is for irregularities, but breaking it down into fraud and otherwise is quite difficult. We cannot be clear about whether the vast bulk of irregularities are related to fraud—it is a difficult assessment to make, but much may relate to fraud.

Jane Kennedy: First, on France and the budget, I suggest to the hon. Gentleman, if it is diplomatic of me to say so, that countries will often adopt a position before negotiations. We have heard what the French Government have been saying about the measure. I have tried to demonstrate throughout our discussion that there is increasing acceptance among member states and the Commission that having to debate, for the 13th year, why the European Court of Auditors has been unable to approve the EU budget for 2006 is a serious

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state of affairs, and it is unacceptable. That is one reason why we are winning many member states to our cause. As I said, Greece has signed up to an action plan to correct its internal management of EU spending for which it is responsible.

There is acceptance that we must take the reforms forward. Any fraud in the EU is too much, but it is not true—the hon. Member for South-West Hertfordshire did not suggest that it was—that the situation is out of control. We estimate that fraud remains below 1 per cent. I hope that the European Court of Auditors accepts that it must clarify the proportion of fraud and errors when it provides figures. The hon. Gentleman made the point that it is difficult to see from the papers exactly what the problems are. We have asked the Court to clarify that, and work is ongoing.

Mr. Hollobone: May I question the Minister on the so-called integrated internal control network, which is the action plan to secure a robust and common methodology to tackle financial management between disjointed Commission departments? Will she confirm that the integrated internal control network has some 41 objectives and elements but that the Commission has achieved only 14 of them and the auditors say on page 49 onwards that all but one are not working as they should?

Jane Kennedy: The hon. Gentleman refers to the European Court of Auditors report, but the integrated action plan has been brought forward by the Commission as a result of pressure on it and member states to improve financial management of the budget. The plan is relatively new, but we hope to see benefits in the next near when the 2007 budget is audited. I appreciate the Court’s criticism, and it is right to a degree, but the plan has only just been put in place and it is too early to judge it. We anticipate that publication of the Commission’s last update on the plan will be in February. We also anticipate that it will take a first look at the impact of the different actions on assurance, and draw conclusions for the future consolidation of the integrated internal control framework. We need time to achieve the improvements that I hope those actions will bring about.

Mr. Gauke: The Minister referred to the fact that there has been some progress this year, and that about 40 per cent. of the EU’s budget has been signed off, leaving 60 per cent. not signed off. I should be grateful to know whether she has seen the reported remarks by Hubert Weber, president of the European Court of Auditors, who said that if one adopts the more orthodox approach of including all agricultural spending in the figure that is not signed off, the figure would be up to 80 per cent. Does that not reveal that substantial problems remain in the system?

Jane Kennedy: As I said, there has been detailed discussion with the European Court of Auditors about how it applies its standards in auditing reports, and we are pleased to see the improvements in the management of the CAP part of the budget, but we need to put in place the most robust financial management, not least because it has been so regularly held up to criticism and public opprobrium in recent years. It is essential, therefore, that we get it right.

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I have read the comments made by the gentleman to whom the hon. Gentleman referred, and we are in ongoing discussions with him and the Court of Auditors about the matter. We anticipate improvements, but if on returning to this matter next year those improvements have not been made, it might be this poor Minister who has to respond.

Mr. Gauke: And it might be this poor shadow spokesperson who has to ask the questions.

We have been talking principally about the Court of Auditors report, but I want to ask about the report by the European Anti-Fraud Office—OLAF—and its overall performance. Is the Minister satisfied with its performance? In particular, is she satisfied that sufficient measures have been taken to bring action against suspect fraudsters? During the debate on this subject last year, the EUROSTAT case was discussed. Can she update the Committee on that matter?

Jane Kennedy: The hon. Gentleman will have seen OLAF’s seventh activity report and the Commission’s 2006 fight against fraud report, which show how active the Community is in its fight against fraud in the EU. The seventh activity report is comprehensive and informative, and includes useful statistics. I am pleased that OLAF continues to increase the number of cases that it closes with follow-up, given that its predecessor was criticised for being unable to do so. That is a distinct improvement.

The Committee might be interested to know that, in 2006, OLAF opened 195 investigations and that, at the end of that year, a total of 430 were in progress, covering cases of both suspected fraud and irregularities, with a total estimated financial impact of €1.739 billion. I have no further information on the exact case that the hon. Gentleman mentioned, but I shall try to provide it to the Committee at a later date.

Mr. Hollobone: I am sure that no one doubts the Minister’s word; she takes these issues extremely seriously, as do the UK Government. However, is it not the case that senior officials at the top of the European Union are failing to take this issue seriously enough? Paragraph 2.13 of Court of Auditors’ report states that

“in significant parts of the EU budget, the Directors-General give a more positive account of the...regularity of EU spending than is consistent with the Court’s audit.”

Is it not the case that unless the directors-general take this issue seriously, we will not get anywhere?

Jane Kennedy: I do not accept the hon. Gentleman’s criticism. The Anti-Fraud Office is a key player in the fight against fraud. The main conclusion that can be drawn from the various reports is that it is continuing to become more effective. The new directives for investigations and intelligence have helped to drive the increase in output and to improve the focus of the office. It should be commended for working hard to improve efficiency; the average time taken to close a case has reduced from 29 months to less than two years. We might say that that is still too long, but it is an improvement none the less. It should be encouraged to continue to make those improvements.

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Mr. Gauke: I shall turn to the issue of the annual consolidated statement on the UK’s use of EU funds, to which the Minister referred earlier. She informed the Committee that the statement will be available in the spring. Will she provide some details about which other countries are likely to follow suit with a similar statement? I think that the hon. Member for Taunton mentioned that Denmark and the Netherlands were looking to do that. Sweden considered it, too. That was the status when this matter was debated last year, when the then Economic Secretary—now the Secretary of State for Children, Schools and Families, the right hon. Member for Normanton (Ed Balls)—was going to raise it at the ECOFIN meeting.

Have any other countries come on board? Clearly, if this is to be an effective measure, it should be adopted as widely as possible. I agree with the hon. Member for Taunton that, notwithstanding the trenchant criticisms of the UK, the UK, the Netherlands, Denmark and Sweden are probably not the worst offenders in this area.

Jane Kennedy: The hon. Gentleman has correctly named three countries that are alongside the UK in agreement on producing such a statement. We have not yet won any other member states to that cause, but we are working hard on doing so and it is possible for other member states to learn from our experience as we go forward. Several member states have expressed an interest. We hope that the publication, in quick succession, of the Danish, the Dutch and the UK declarations will provide the necessary momentum for others to follow suit. The hon. Gentleman is correct in suggesting that Sweden has expressed an interest. I understand that Austria may also be considering it.

In fairness, some countries have federal or devolved constitutions, which make national initiatives more difficult for them. However, we hope that in the medium term member states will find that it is in their interests to improve their procedures transparently, as the Court of Auditors and the Commission focus their attention, increasingly, on member states that have not yet acted.

Mr. Browne: Following the question from the hon. Member for South-West Hertfordshire (Mr. Gauke), does not the Minister understand how absurd it is that the countries that are, by and large, net contributors rather than recipients of EU funds and least likely to have large-scale fraud to detect are volunteering to detect fraud, whereas those that may have a bleaker tale to reveal are allowed to hide away from the more rigorous aspects of the process? Cannot the Government try to turn the attention of the Commission and others in the EU to those nations that are receiving larger sums and have a less glorious record in this regard?

Jane Kennedy: I do not accept the hon. Gentleman’s first point. The Commission or the Court of Auditors should not conclude that one country is less likely or more likely to be subject to fraud or poor financial management than another. We want all countries to raise their game in terms of the financial management of the EU budget. We are seeking to set the standard.

Although we have been criticised this year, along with Spain, for the ERDF problems, that criticism has not arisen because we are in the lead in inviting scrutiny.

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Clearly, it has arisen because there has been a problem and, quite rightly, our attention has been drawn to that problem and we have responded to it. As I have said, we have co-operated fully with the Commission and the Court of Auditors in investigating that. It is not fair to conclude that that has happened because we have been promoting better financial management and that the Commission and the Court of Auditors have come down harder on the United Kingdom as a result.

Mr. Hollobone: May I probe the Minister on the risks highlighted by the Court of Auditors with regard to the new accession and candidate countries? On page 15 of its report, the Court of Auditors says:

“significant risks still exist at the level of the implementing organisations in the newly acceded and candidate countries for all programmes and instruments.”

Although we may believe the Minister when she says that the EU is cracking down in respect of introducing appropriate financial management, is not the Court of Auditors right to highlight that as a potential problem? With all the new countries coming along, more effective controls in the existing EU states may not translate as we would wish into the new economies.

Jane Kennedy: That is an interesting question. The hon. Gentleman’s point is fair, but we are pushing for political recognition so that member states take greater responsibility for their management of EU funds. We have made it clear that that must be a feature of the discharge discussions at ECOFIN, and there are risks, to which the Court of Auditors has drawn attention. The programme is called SAPARD. I am going to be asked now what that stands for!

Mr. Simon Burns (West Chelmsford) (Con): Are you going to tell us?

Jane Kennedy: The programme is designed to help restructure the agricultural economy. The Commission has not approved a selection of projects, the procurement checks that national authorities have carried out have not been sufficient, and the court has drawn our attention to that criticism. In Bulgaria, the SAPARD agency did not perform all the required checks before approving projects, and serious criticisms have been made. The Commission approved €19.6 million for payment to Bulgarian authorities based mainly on unverified information, which is a serious and unacceptable state of affairs, so the Commission should monitor effective functions of national supervisory and control systems. Both Bulgaria and Romania need to bring supervision and control up to an adequate standard, and the Commission needs to facilitate the sharing of best practice in that area. The hon. Member for Kettering asked a good question, which I hope I have been able to answer fully.

Mr. Gauke: I shall resist the temptation to ask the Minister what SAPARD stands for, but if inspiration comes to her, the Committee will be grateful for the information. Will she give us some more information about what will be in the annual consolidated statement from the UK? Will it examine individual transactions, and what opinion will the National Audit Office give? Will it be given on a true and fair basis, or otherwise?

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Jane Kennedy: As I have said, the statement is being prepared, and we anticipate receiving it in the spring. I know that spring is almost upon us. It will be the first time that a consolidated account of the UK expenditure of EU funds has been prepared, and for the job to be done properly, it is right that the necessary amount of time is taken to gather the information, to put it in an appropriate format, to check and audit the data, and to iron out properly as many of the technical and logistical problems as possible. That being said, we anticipate the report being laid shortly, and on the basis of the NAO report, and recognising that the statement will be the first of its kind, we will seek to make any necessary improvements to it in subsequent years. I shall save SAPARD until later.

Mr. Gauke: Is it possible to make use of the additional time, Mr. O’Hara?

The Chairman: It is possible, if there is a desire in the Committee—up to half an hour.

Mr. Gauke: I shall turn in the Court of Auditors report to the details of the UK’s performance, which my hon. Friend the Member for Kettering has already mentioned. Paragraph 4.11 on page 76 relates to

“unchallenged customs debts covered by securities”

that had been

“systematically recorded in the B accounts”.

I think that that means that sums that should automatically go to the EU go into the A account, and if there is some dispute, they go into the B account, but that there are circumstances in which funds, even though there was a security covering them, should have gone into the A account according to the Court of Auditors and the Commission. Do the Government accept that? If so, have they rectified it, and will it mean that the UK’s contribution to the EU will increase as a consequence of a change in how the UK handles the matter?

Jane Kennedy: We have accepted the Court of Auditors’ findings on that and have been taking action, and I believe that we are now in full compliance with Commission guidance. I hope that that is a full answer to the question.

Mr. Gauke: I think it is, but if I understand it correctly—I might not—and more is going to the A account rather than to the B account, it seems that the UK will be making a bigger contribution to the EU. If I have misunderstood that, I would be grateful for clarification.

Paragraph 4.12 of the report criticises the UK for the fact that there were no written instructions for producing estimates of the total entitlements that are unlikely to be recovered. Do the Government accept that criticism and has the situation been rectified so that there are such written instructions?

Jane Kennedy: As I understand it, the position is as I have just described. If it is not, and if we have not accepted the findings of the Court of Auditors, I will add the matter to our other conclusions.

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The hon. Gentleman asks whether the UK contribution will increase. Our traditional own resources contribution will increase. On whether the EU is owed the money, I might give the wrong answer if I go into too much detail. I thought that I was clear about it, but I shall need to check. If I have inadvertently misled the hon. Gentleman on that, I shall be happy to correct myself in a letter to the Committee.

Mr. Gauke: I am grateful to the Minister. My questioning was somewhat tentative, as was the Minister’s answer. It will probably be best if she returns to the matter having taken further advice.

Paragraph 4.18 of the report, which my hon. Friend the Member for Kettering mentioned, raises an interesting point. The Court of Auditors states that the frequency with which the IT system triggers physical checks on imported goods in the UK is of the order of one in 7,000, whereas in other member states the rate—I have extrapolated it myself—is one in 300, or 0.3 per cent. for other member states compared with 0.014 per cent. for the UK It seems remarkable that the UK makes a physical check of imports so infrequently compared with all other member states. Will the Minister explain why that is the case? It is another failure within Her Majesty’s Revenue and Customs—specifically, in the customs division—and will she discuss it with her new Treasury ministerial colleague as something on which there is a need for great improvement in performance?

Jane Kennedy: I can tell the hon. Gentleman that in my detailed work with HMRC on its performance across the piece that has not been drawn to my attention as something that has caused it concern. In the light of comments made today, I shall read Hansard and consider whether further questions need to be asked as a result of his question. I am sure that we will return to debate the matter on a future occasion, but, as of this moment, it has not been drawn to my attention as a cause for concern.

Mr. Gauke rose—

The Chairman: Order. The hon. Gentleman has had the opportunity to ask 12 questions, and the nature of the questions and answers now suggests to me that we should move on to the debate. Obviously, questions can be put in the course of Members’ speeches, and that may give the Minister time to reflect and then give an answer when she responds to the debate. I rule now that enough time has been allocated for questions.

Motion made, and Question proposed,

That the Committee takes note of an unnumbered explanatory memorandum from HM Treasury dated 8th January 2008, European Court of Auditors’ Annual Report on the implementation of the budget concerning the financial year 2006 together with the institutions’ replies, European Union Documents No. 11724/07 and Addenda 1-2, Protection of the financial interests of the Communities—Fight against fraud—Annual Report 2006, unnumbered explanatory memorandum from HM Treasury dated 9th August 1997, European Anti-Fraud Office—seventh activity report for the period 1st January to 31st December 2006, No. 13117/07 and Addendum 1, Commission report on the follow-up to Discharge Decisions (Summary)—Council recommendations, and No. 13118/07 and Addendum 1, Commission Report on the follow-up to 2005 Discharge Decisions (Summary)—European Parliament Resolutions; and supports the Government's promotion of measures to improve the level of assurance given on the Community budget.—[Jane Kennedy.]

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5.36 pm

Mr. Gauke: Having been in the Committee for some time, I would now like to say formally that it is a great pleasure to serve again under your chairmanship, Mr. O’Hara.

Once again, we are debating the EU budget, and once again the Court of Auditors has refused to sign it off. This debate takes place annually, sometimes on the Floor of the House, sometimes in Committee. I read the Official Report of last year’s debate, and many of the same subjects were discussed then as have been discussed so far today. It would be fair to say that, so far, this debate seems to be slightly better humoured. That might have more to do with the respective Government spokesmen on the issue than anything else.

The Government say that the situation is unacceptable, that more is being done and that reforms are in place. The Commission has reported in the media, and, indeed, in some of its comments in the Court’s report, that the problem is somewhat exaggerated, but the fact remains that billions of pounds continue to be paid to recipients who should not receive them. The Commission’s systems and controls continue to be inadequate and are criticised as such by the Court, and, notwithstanding some signs of progress in the area of agriculture, there is no prospect that the accounts can be signed off in the foreseeable future.

The news that the accounts were not signed off has not provoked the fury that it once did. There is a sense of resignation that that will always happen. No one is surprised; unfortunately, we expect no better from the European institutions, and that remains a matter of concern.

This debate and examination of the financial management of the EU budget must be considered in the context of an ever-increasing EU budget and ever-increasing contributions from the United Kingdom. Our net contributions in the financial perspective period of 2000 to 2006 were £22.9 billion in total—that is in 2004 prices. Our net contribution over the period 2007 to 2013 is likely to be around £39.3 billion—if one puts it on an annualised basis, a difference of £2.3 billion. Of course, that has not been helped by the abandonment by former Prime Minister Tony Blair of £7.4 billion worth of rebate—a matter that we debated at some length during consideration of the European Communities (Finance) Bill.

Our gross contribution over 2007 to 2013 will be some £71 billion, which is a huge amount of money. It is right that we take every opportunity to scrutinise how it is being spent, and the Opposition’s case is that it is not being spent wisely. To give just one example, the EU’s administration costs alone will rise by 28 per cent. in real terms from £4.06 billion in 2004 to £5.21 billion in 2013.

Two arguments are sometimes made for why we should not get too fussed about the objections of the Court of Auditors. To her credit, the Minister has not made this argument, but the first argument is that it is all the fault of the member states and not the Commission. It is an objection that I particularly recall, because on Second Reading of the European Communities (Finance) Bill that expert on all matters, the hon. Member for Grantham and Stamford (Mr. Davies), made the case that it was all the fault of the member states.

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However, reading through the Court of Auditors’ report, and acknowledging that clearly there are problems with the implementation of the CAP and structural funds by member states, it is very clear that there are real concerns about the performance of the Commission. Let me quote one or two examples. Paragraph 2.4 refers to

“significant weaknesses in the supervisory and control systems”

of the Commission. Paragraph 2.6 says that

“in a number of areas, the existing supervisory and control systems do not ensure the prevention or timely identification and correction of errors”.

Paragraph 2.21, which I quoted in one of my questions to the Minister, says that

“the Commission’s timetable for its action plan...appears to be optimistic”.

The paragraph goes on:

“the actions concerned are likely to have a real impact on the functioning of the supervisory and control systems of the Commission only in the medium/long term.”

However, it is not just the control and supervision of member states’ spending that is a problem. There are also problems, which are identified in the Court of Auditors report, with regard to internal policies, which include research. Paragraph 7.30 says:

“The Court’s audit revealed a material level of error in payments to beneficiaries. The Commission’s supervisory and control systems do not sufficiently mitigate the inherent risk of the reimbursement of overstated costs.”

On external actions—matters relating to overseas aid—my hon. Friend the Member for Kettering drew attention to some of the difficulties. Paragraph 8.32 says that

“there continued to be weaknesses in the systems designed to ensure the legality and regularity of transactions at the level of project implementing organisations.”

We can also see—this is striking—the report by OLAF, which is the anti-fraud body. On page 641 of the bundle, we read:

“Direct expenditure cases (including external aid) represent a significant and growing proportion of the new cases opened up by OLAF over time”.

So fraud remains a problem and the Commission remains a source of problems.

It is very clear that the Court of Auditors report criticises not only the member states, but the Commission’s failure to put in place the safeguards and controls necessary to protect European taxpayers.

The other argument that is sometimes heard—we discussed it during questions—is that irregularities, not fraud, are the issue. I hear what the Minister is saying about fraud only accounting for 1 per cent. or so of the budget, but the irregularities in themselves are, of course, hugely important. We are talking about billions of pounds and billions of euros being paid out to people who should not have received them.

I did not have time to develop my questions about the UK’s performance on irregularities. However, my hon. Friend the Member for Kettering touched upon the single payment schemes. It seems rather strange that, contrary to the Court of Auditors’ interpretation of the relevant regulations and, indeed, the Commission’s interpretation of them, the UK was paying single payment scheme contributions to landlords, whereas all the other institutions involved in this area do not think that that

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is appropriate and instead think that the payments are for farmers on their own land, rather than for landlords. Hence, we have this rather curious situation where it seems that golf clubs, railway companies and city councils are receiving single payment scheme moneys.

I would be grateful to know from the Minister why the Government took a rather different view from everyone else; it seems somewhat odd that they did so. Although figures are given in paragraphs 5.20 and 5.21 of the Court of Auditors report, unless I am mistaken we seem to have figures for Northern Ireland but not an overall figure for the United Kingdom. Perhaps the Minister will provide some detail on how much was paid out to landlords under the single payment scheme and why.

The Court of Auditors also raised concerns about increased entitlements due to investments, which were available under the scheme. Under the way that the UK implemented it, essentially, an increase in profits would be evidence of investment, so those farmers who de-stocked—those who sent more cattle to slaughter—would satisfy the UK’s criterion for receiving an initial entitlement, even though slaughtering more of one’s cattle would not appear to constitute further investment. I would be interested to hear what the Minister has to say on that subject.

Finally, with regard to agriculture, I refer to the UK’s performance and irregularities as set out in table 5.2 of the Court of Auditors report. If I understand it correctly, that table relates to area aid, forage areas and other crops. It refers to the on-the-spot checks made in 2005. It is noticeable that in UK performance anomalies appear to be quite high, albeit not necessarily the highest. The random selection inspections show a figure of 63.3 per cent., which is well above the average of about 34 per cent. In applications with anomalies, the UK figure is 54.8 per cent. compared with an EU average of 18.7 per cent.

Again, we should be grateful to the Court of Auditors for throwing some light on the matter. I do not claim to be an expert on the single payment scheme—I do not know whether the Minister is an expert—but I would be grateful if the Government could look at these matters and explain the high level of irregularities.

We have heard about the difference between irregularities and fraud. I think that the matters that I have highlighted clearly fall within the category of irregularity, but the distinction between fraud and irregularity can be blurred at times. In questions, I referred to a Commission staff working paper that drew attention to the fact that the Commission relies upon member states identifying fraud. For example, the paper makes the point that one can determine whether something is fraud only at the outcome of judicial proceedings, but of course that is not how it works. We would have to wait some years for that outcome. It is therefore calculated on the basis of suspected fraud.

The Commission recognises that the various member states take rather different approaches to the problem. I was struck in particular by this statement:

“A significant proportion of communications received by the Commission do not distinguish between suspected fraud and irregularity.”

In some cases, it may be clear that we are talking about irregularity, with no suspicion of fraud, but in other cases it could just be that the Commission does not

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have the information to determine whether something is fraud. That is a concern, because there is the suspicion that the problem of fraud is somewhat larger than is recognised.

The Government will always say that things are getting better and that problems are being addressed. For instance, in 2001, Ministers were talking excitedly about the appointment of Neil Kinnock as Vice-President of the Commission with responsibility for administrative reform, and the March 2000 reform White Paper on overhauling financial management in the Commission. Looking back, that period is best remembered for the sacking of EU whistle blowers Marta Andreasen and Paul van Buitenen, but eight years on the problem persists. There may have been some progress in some areas, but we still see fraud as a major problem. Looking back, I do not think that the UK presidency was enormously successful in addressing that area. As the Court of Auditors said in its assessment, looking at the Commission’s timetable for action, there does not appear to be any prospect of a solution in the short term.

On the proposals for the annual consolidated report, last year, the then Economic Secretary talked about Denmark, the Netherlands and Sweden and expressed the hope that other countries would come on board. One year later, no further countries have come on board, and I wish the Financial Secretary luck in persuading them to do so. However, that addresses neither the fundamental failures in the Commission’s systems nor the weaknesses in the systems and controls that the Court of Auditors identified so strongly.

The report is damning. It reveals that the Commission and member states are failing to protect the best interests of European taxpayers, and it confirms the impression that much of the UK’s substantial and increasing contribution to the EU is not being carefully managed. It also demonstrates that the Commission’s systems and controls are inadequate, and at the risk of shattering the warm atmosphere this afternoon, some of it would shame even a candidate for the deputy leadership of the Labour party. After 13 consecutive failures by the EU to satisfy the Court of Auditors, the Government must now make a stand. We urge them to vote against the discharge of the EU’s budget at the first opportunity—at the ECOFIN meeting on 12 February.

5.52 pm

Mr. Browne: When this topic is approached in a British political context, opinion is broadly divided between those who wish the European Union ill and take delight in having the report as a stick with which to beat the organisation, and those like myself who generally wish the European Union well, recognise its achievements and therefore despair all the more that it is able to shoot itself in the foot annually and in a way that is so damaging to public perceptions of it—certainly in Britain, and I suspect throughout large parts of the continent, too.

Mr. Hollobone: The hon. Gentleman’s analogy of the EU shooting itself in the foot is interesting, because it has run out of toes to shoot off. We are now in the 13th year in which the accounts have not been approved. Does he believe that the accounts will ever be in proper order, such that the Court of Auditors will not refuse to sign them off?

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Mr. Browne: I am grateful for that intervention, because I am not about to make a short speech that looks for excuses. I am critical of the situation, and I share many of the hon. Gentleman’s criticisms, but I do not have a crystal ball and I am unable to give him the answer to his question. I hope that the answer is yes, but auditors deal in detail and in numbers, and this is a question of political will. The auditors have uncovered the wrongdoing and the evidence, but the question is whether politicians throughout the European Union have the desire or the will-power to do anything about it. He is right that this is the 13th year. Can we expect a 14th and 15th? My suspicion is that yes we can. Where are the sanctions? People throw their hands in the air throughout the European Union—in the Commission and the member states—but there is a ritualistic quality about the situation, and we will return next year to this Committee to ask the same questions.

It beggars belief that Britain is an offender to the degree that it is, but there is a wider, cultural issue, too. The member states of the EU have gathered together and resolved that plucky little Denmark will take the lead in busting fraud internally, when everybody knows—even though the Minister cannot say so for reasons of diplomacy—that the problems of EU fraud and financial irregularity will not be solved by the countries with the least to hide volunteering to be those that do the most uncovering of evidence. It is preposterous to expect that by leading from the front, a small nation such as Denmark, which has a generally highly competent Government, will address the wider malaise.

I support expansion. My next point is less charitable to the Conservative party. In the 1980s, when I was in my teenage years, and we looked at the world as divided in two between the Soviet bloc and the free western nations, it was always my objective, and a legitimate and sensible objective of western foreign policy, to support and give encouragement to countries such as Poland, Hungary and Czechoslovakia in the hope that they would free themselves from the oppression of being part of the Soviet bloc. We hoped that they would have opportunities through free market economics, free elections, free speech and free media. Expansion has been a huge success of the European project, and I do not resent money being given to help countries such as the Baltic states, which were part of the Soviet Union, or to countries such as Bulgaria and Romania that were within the sphere of influence of the Soviet Union, so that they could have opportunities to benefit from many of the things that we take for granted in the UK. If some British taxpayers’ money is spent on trying to advance those objectives in eastern Europe, it is entirely defensible and will advance our wider interests—not only our immediate interests of having trading nations and friendly countries within our continent, but our wider values as a country.

However, I despair when I come to these Committees and attempt to read extremely large documents such as the one before us that makes it so much harder to justify to British taxpayers that their money is being spent as well as we would all want. I suspect that many hon. Members on the Committee share the objectives I have outlined. We have to be able to put our hands on our hearts and say to taxpayers in our constituencies, “Yes, some of your money is going to be spent on helping people in Poland or Hungary, but that is entirely in our

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interests,” but if those taxpayers reply, “Wait a second, a lot of that money is being squandered and spent illegitimately,” those of us who support expansion and wish the European Union well overall, as I do, feel that we are put in a far weaker position than we otherwise would be.

At the beginning of the debate, it was said that the objective was to ensure that the European Union spends taxpayers’ money as efficiently as the British Government do. My ambitions are greater than that: I should like the European Union to spend money as efficiently as an individual would spend his or her own money. I get a sense that culturally, within the EU, we are far from that point. I should like the enterprise to succeed and the EU to expand further and do as much good work as it can, but it has to start by getting to grips with its own budgets. In any organisation, some money will always be squandered and spent improperly—it would be almost impossible ever to say with confidence that every single euro was spent perfectly—but there is clearly a huge amount of ground to make up. I hope that when we gather for these deliberations next year, the British Government will be able to demonstrate that they have led the way in making up much of that ground.

5.58 pm

Mr. Hollobone: There is some good news in the Court of Auditors report, although I find it rather strange that I should highlight that fact. The Court estimated that the share of the budget that could be approved has risen in recent years from 6 per cent. three years ago to about a third last year and to just more than 40 per cent. this year. That is relatively good news, but it is still a shocking state of affairs that the Court estimates 60 per cent. of the budget cannot be approved. More than half the EU’s budget—about €60 billion euros—still cannot be approved. Britain makes an annual gross contribution of £10.5 billion, which means that £6 billion of UK taxpayers’ money is, according to the Court, vulnerable to waste and fraud. That shocking state of affairs makes people extremely cross.

If the European Union were a listed company, its shares would not be allowed to trade. I do not believe that any listed company could produce qualified accounts and still have its shares traded on the stock exchange. There would be huge investigatory work to put that right before the shares were relisted and tradeable again. For those who are pro-European, it is an embarrassment and, as the hon. Member for Taunton said, it is indefensible.

The Minister has done her best today, with a difficult brief, to put positive spin on why the Government should not vote against the measure at the ECOFIN meeting. I endorse the view of my hon. Friend the Member for South-West Hertfordshire that the UK Government should use that meeting to make a stand, which would be a hugely popular move. The Prime Minister would be standing up for Britain, as he has promised, and it would be extremely well received, not least on the Opposition Benches. Her Majesty’s Government have a genuine opportunity to make a point at the meeting, and I hope that the Minister will suggest that.

Unfortunately, the fact that the Court of Auditors cannot sign off the accounts makes the point that there is endemic waste in the EU, as well as unacceptable errors and far too much fraud. In effect, the European Union is being cavalier with UK taxpayers’ money.

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Unless the UK Government stand up for British taxpayers in Europe this year, the reputation of the EU will continue to go from bad to worse.

6.1 pm

Jane Kennedy: The debate has been useful and—the hon. Member for South-West Hertfordshire is right—good-humoured, ahead of February’s ECOFIN discussion in Brussels on the Council’s recommendation on discharge, at which Ministers will represent the UK and consider exactly the point with which he finished his remarks.

There is widespread agreement that the continued inability of the Court of Auditors to give a positive statement of assurance is unacceptable and undermines public confidence in the EU. The fact that it has not provoked fury in the Committee is probably largely because Members who might be categorised as furious are engaged elsewhere in the Commons, although the hon. Member for Kettering did his best to impersonate a furious Member. However, I take the points that he made, seriously and genuinely.

Mr. Kevan Jones (North Durham) (Lab): I must correct my right hon. Friend: the hon. Member for Kettering is actually a member of the “Better Off Out” group.

Jane Kennedy: Not an impersonation, then—a genuine incarnation of a furious Member.

Mr. Gauke: Yes, there is an absence of fury, but instead we have weary resignation.

Jane Kennedy: Absolutely. I am coming to that point.

The hon. Members for West Chelmsford and for South-West Hertfordshire demonstrated what true gentlemen they were when they did not ask me to explain what SAPARD was. I can tell the Committee that it is the special accession programme for agriculture and rural development. I am sure that hon. Members will leave the Committee the happier for knowing that.

The hon. Member for South-West Hertfordshire criticised us for resting too much on the role that Neil Kinnock played on the Commission—I forget what his actual title was. In my view, the Commission genuinely takes seriously the financial management of the budget. The director general is now personally accountable, which directly follows Neil Kinnock’s reforms. He has to account to the European Parliament, which is not a soft option, as those of us who have to account to the UK Parliament for the UK budget can bear witness. The reforms that are part of the action plan are a direct result of the reforms that Neil Kinnock brought forward.

Mr. Burns: Noble Lord.

Jane Kennedy: The hon. Gentleman is absolutely right to correct me. My very good, right hon. Friend and noble Lord. Protection for whistleblowers is now in place as a direct result of his work.

Mr. Hollobone: This is a genuine question: how many times has the European Parliament refused to discharge the annual accounts?

Jane Kennedy: As I understand it, just once. However, clearly that is a matter for discussion. I have tried to indicate the UK’s likely position, and we are pleased with the progress being made.

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I want to bring the Committee back to this point: we share the intense disappointment and frustration over the fact that this situation persists, despite the welcome improvements that I highlighted—the hon. Member for Kettering also drew attention to them. However, I believe that there is now a greater understanding in the UK of the real problems and how they should be addressed. A few myths about widespread fraud and corruption in Brussels can be laid to rest, although a clear need for action remains and greater efforts are required by all concerned. The Commission must implement fully its action plan, the final progress report on which is imminent, as I said, and member states must take steps to improve their management of agricultural and structural funds.

Having said that, it is important to remember the benefits that EU membership continues to deliver. The case remains for some spending at an EU level. A clear case for collective action can be made for many good spending programmes, such as on development of the EU’s poorest regions; on the enforcement of competition in the internal market; on collaboration in the fight against terrorism and crime, and on peacekeeping, reconstruction and international development. I look forward to our publication of a consolidated statement on the use of EU funds in the UK in the spring. Quite apart from the potential benefits to the UK and the EU as a whole, the proposal should enhance this House’s scrutiny of the UK’s use of EU spending and deepen this Committee’s engagement with the issues discussed today.

Question put:—

The Committee divided: Ayes 7, Noes 3.

Division No. 1 ]