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House of Commons
Session 2007 - 08
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European Standing Committee Debates

Financial Management

The Committee consisted of the following Members:

Chairman: Mr. Martyn Jones
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Caborn, Mr. Richard (Sheffield, Central) (Lab)
Cunningham, Tony (Workington) (Lab)
Dobson, Frank (Holborn and St. Pancras) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Heyes, David (Ashton-under-Lyne) (Lab)
Hill, Keith (Streatham) (Lab)
Howarth, Mr. George (Knowsley, North and Sefton, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Steen, Mr. Anthony (Totnes) (Con)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Celia Blacklock, Committee Clerk
† attended the Committee

European Committee B

Monday 12 May 2008

[Mr. Martyn Jones in the Chair]

Financial Management

4.30 pm
The Chairman: Does a member of the Select Committee on European Scrutiny wish to make a brief explanatory statement?
Keith Hill (Streatham) (Lab): I do. It is an unadulterated pleasure to be serving under your chairmanship, Mr. Jones. I am confident that our proceedings are in entirely safe hands. I also welcome the Economic Secretary back from the duties of childbirth and child care, to her public duties. I have heard that young George Patrick is doing very well indeed.
I will explain my role in the Committee and why the European Scrutiny Committee has recommended this document for debate. Under the new scrutiny procedures adopted by the House, two members of the European Scrutiny Committee are nominated to the European Committee, with the expectation that they will offer an explanation of the significance of the document or documents under debate. I will do that briefly.
As the Committee is aware, the European Court of Auditors reports each year on the implementation of the European Community’s annual general budget. Each year, the European Scrutiny Committee recommends that the annual report be debated, normally in Committee and sometimes on the Floor of the House. In January, the European Committee held a very full debate on the European Court of Auditors report for 2006.
The Commission is obliged to inform member states of references to them in the auditors’ annual report and to invite them to respond. In the document that we are considering, the Commission reports on the responses of member states to the references in the court’s 2006 annual report. When the European Scrutiny Committee looked at the document, we noted that it gives useful background to the preparation and conclusions of the auditors’ report. However, we were concerned that it contained issues that needed further examination—notably, that Spain and the UK between them accounted for more than half the quantifiable errors in structural policies. Spain offered no response in relation to more than half the errors identified. Because we were conscious that the next regular debate on audit and financial management would not occur until early next year, we recommended a debate on the document now.
The year 2006 is the 13th successive year in which the European Court of Auditors has been unable to issue a positive statement of assurance—in other words, to sign off the Community’s annual accounts. That is a highly regrettable state of affairs, which is of as great concern to supporters of the EU, of whom I count myself one, as to its opponents.
It is right that firm action should be taken to correct the irregularities. Perhaps my hon. Friend the Economic Secretary could bring the Committee up to date on progress on the action plan to strengthen the Commission’s supervisory role on structural actions, which is dealt with in document 5 in the bundle. If the UK is to play its full part in making such a plan effective, it is vital that we set our own house in order. In 2006, the European Court of Auditors found the control system for the functioning of European social fund objective 3 in Scotland and the European regional development fund in Merseyside to be ineffective. It was the large number of errors in structural policy found in the UK that prompted this debate.
It is a very disappointing situation. We all desire the UK to be seen as a benchmark for financial probity in the European Union. I understand that the north-west objective 2 urban programmes remain suspended and that the Commission has confirmed its decision to impose a financial correction of €25 million on the United Kingdom. Perhaps my hon. Friend could bring the Committee up to date on those matters and finally provide us with a progress report on the Government’s excellent proposal to publish an annual consolidated statement on the UK’s use of European Union funds. Is that still expected to be published this month?
4.35 pm
The Economic Secretary to the Treasury (Kitty Ussher): It is not only a pleasure, but an honour to be serving under your chairmanship, Mr. Jones, in this my first public foray in Parliament since a few essential months of family leave. I thank my right hon. Friend the Member for Streatham for his congratulations. I congratulate him on his opening remarks and I am looking forward to the debate. The new arrangements for involving members of the European Scrutiny Committee properly from the outset in the way in which these matters are debated are excellent.
The Court of Auditors’s report and wider financial management issues were debated in Committee in January. I welcome hon. Members’ continued interest and the opportunity to consider further the Commission’s and member states’ reactions to the court’s findings. It is worth being clear from the outset that the court’s inability to give a positive statement of assurance for the 13th consecutive year on the EU’s accounts is unacceptable.
It is clear that much more still needs to be done by all actors involved across the European Community to improve financial management of EU funds. The European taxpayer needs to be given assurance that the funds are being properly spent. The Commission needs to continue addressing the root causes of financial management errors, such as the complex rules of structural fund programmes—a fundamental problem highlighted by both the European Court of Auditors and member states. However, member states also need to ensure that their national management of EU funds is satisfactory. Some 80 per cent. of EU funds go to the common agricultural policy and structural funds, for which responsibility is shared between the Commission and member states.
The Government have consistently argued that all member states should take their responsibilities over the use of EU funds seriously. Improving internal controls in member states, as well as the Commission, was central to the proposals for
“a road map to an integrated internal control framework”—
a bit of a mouthful, but very important—that were taken forward under the UK presidency in 2005 and have since shaped actions to improve financial management.
This February, the Government successfully argued for the political recognition of member states’ obligations to be recognised in the ECOFIN conclusions. The Government have also announced that each year they will lay before the House an annual consolidated statement on the UK’s use of EU funds, audited by the National Audit Office. The NAO is in the final stages of its work for the 2006-07 period. I cannot give a precise date to my right hon. Friend, but I understand that it will report soon.
Britain is not perfect and has faced problems relating to its management of EU funds in the past, but we are absolutely not complacent, and that is why we are at the forefront of pushing for improved financial management across the EU and UK and why our authorities are continually working to improve management procedures.
Having said that, it is now appropriate to deal with the Commission’s estimate that the UK and Spain accounted for more than half of total quantifiable errors identified in 2006 by the European Court of Auditors in structural policies. While the estimated proportion is new, the ECA’s findings are not. We have co-operated fully with the ECA during the course of its audits of the European regional development fund programme in Merseyside and the European social fund in Scotland. The audit process is useful, and we will continue to work closely with the European Court of Auditors now and in the future. Responses have been provided to the ECA and, where appropriate, action immediately taken to address the errors highlighted and to strengthen management procedures. My right hon. Friend the Financial Secretary recently wrote on my behalf to ministerial colleagues across the UK to ensure that this action is being followed through at all levels. However—this is the crucial point—UK authorities are still contesting a great number of the findings of the two ECA audit missions to the UK. In fact, 95 per cent. of the errors are being disputed.
In Scotland, the errors found by the ECA accounted for 18.2 per cent. of expenditure audited, whereas those agreed by the Scottish Executive following further internal review, accounted for less than 1 per cent. The errors are administrative and relate to the interpretation of regulations. They do not concern deliberate misuse of funds. In both cases, the European Court of Auditors has yet to publish its final definitive position on its findings. Therefore it is important that the Commission’s estimate is not blown out of proportion. The findings concern two programmes out of 550 implemented across the EU. They do not mean that control systems are necessarily ineffective across the UK. The incidence of deliberate misuse of funds is extremely low.
The discussions between us and the Commission and the European Court of Auditors are standard procedure. They are iterative and should not blow us off course. It is vital that we continue to improve financial management and accounting procedures of EU funds in the UK and across the EU. The UK’s consolidated statement will help us to do that domestically. The upcoming budget review will be an opportunity to consider reforms that are still desperately needed to improve the legality as well as the effectiveness of EU spend. We will continue to make the case to our European partners of the importance of member states improving their own financial management. We believe that we are leading in that regard. We will also continue to make the case for the Commission to build on existing actions to establish an internal control framework, and to simplify the complex rules that may result in many irregularities.
Mr. George Howarth (Knowsley, North and Sefton, East) (Lab): Will my hon. Friend give way?
The Chairman: Order. There are no interventions during the statement.
Kitty Ussher: My right hon. Friend will be delighted to hear that I am just finishing. I look forward to debating the issues with all members of the Committee.
The Chairman: We now have until half-past 5 for questions. Members can ask related questions at the discretion of the Chair.
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship, Mr. Jones. I congratulate the Economic Secretary on her return to the Front Bench after family duties.
I congratulate the hon. Lady on her opening remarks. Given that 95 per cent. of losses identified by the European Court of Auditors are disputed, and the UK Government’s response to the 2006 annual report contains some serious criticisms of that report, is it the Government’s position that the European Court of Auditors is not accurately reflecting the UK’s position?
Kitty Ussher: I am grateful to the hon. Gentleman for his kind remarks. Yes, that absolutely follows from what I said. If 95 per cent. of the findings of the European Court of Auditors are disputed by the UK Government, we obviously feel that what it says does not reflect reality.
Mr. Jeremy Browne (Taunton) (LD): I am also grateful to you for assuming your position as Chair, Mr. Jones. I am usually a keen exponent of reducing the number of Ministers, but as the Treasury has had confidence in it collapse while the hon. Lady has been away, this seems to be a case where more Ministers may lead to more successful outcomes.
Kitty Ussher: I have made it abundantly clear that any error rate is regrettable. We dispute what the European Court of Auditors has said are errors in the UK, and there is an iterative process to provide a shared analysis of that which has not yet reached its conclusion.
Regarding the level of error within the EU budgets as a whole, the processes that the Government have initiated are bearing fruit. We are rolling out a process regarding the way in which the European Commission exercises its internal controls, which will be reviewed in 2009. That came from an initiative a couple of years ago under the UK presidency. How individual member states exercise effective controls of spending and effective auditing is a joint responsibility between them and the Commission. We are leading the way in Britain by inviting our domestic auditor, the National Audit Office, to audit a consolidated statement of how EU budget funds are spent within the UK, and we are open about that. Areas of improvement might be identified, although I do not know what they might be at this stage. I see that as a positive step, because it is only by shining a light on how the system works that we can hope to make it better. We are in the middle of that process, both domestically and across the EU. While I cannot say for sure that we will have a 100 per cent. success rate next year, I feel that the system is more effective than it was a few years ago and have no reason to believe that it will not improve.
Mr. Howarth: I wonder whether the Minister could help me on the tricky subject of the dried grape scheme in Greece. First, could she explain exactly what the problem is? Secondly, will she let us know whether she considers that to be an administrative problem, or something more sinister?
Kitty Ussher: I am extremely grateful to my right hon. Friend for raising that issue, which has made me as curious as he is about what the dried grape scheme could possibly be. I shall make it my absolute priority to find out forthwith and let him know. However, I make the general point that we do not have executive control over problems within other member states and can only lead by example in how we deal with things within the UK.
Mr. Gauke: I am grateful to the Minister for her response to my earlier question, and I would also be happy if she cared to elaborate on her answer about the dried grape skins issue in Greece.
There seems to be such a difference of opinion between the UK Government and the European Court of Auditors, and in some cases the European Commission, over a number of these matters. To what extent does the hon. Lady accept the point set out in the responses to the questionnaire, which indicates that many of the problems result from ambiguity within EU legislation? It appears to be very complex and there seem to be differing views on what the EU legislation requires.
Kitty Ussher: The hon. Gentleman has put his finger precisely on the point. The areas of dispute—they are 95 per cent. of the total, so not insignificant—have arisen because we believe that we and our partner local authorities, and in many cases their partner organisations, have correctly interpreted the EU regulations, but the initial findings of the European Court of Auditors seem to suggest otherwise. The useful outcome of that, however, is that we will hopefully have a better shared understanding of what those regulations are when we reach the end of the road. Obviously, at this stage we believe that our interpretation is correct, but hopefully with a greater shared analysis across the EU, fewer errors will be made further down the line.
Peter Viggers (Gosport) (Con): On reading through this rather sad story, I felt that the German comment was really the most incisive and specific. They said:
“For the 13th time running, the European Court of Auditors has failed to deliver a Statement of Assurance pursuant to Article 248 of the EC Treaty...In Germany’s view, this shows that the provisions of Article 248(1) of the EC Treaty are unworkable.”
Do the Government agree that certain parts of the treaty are unworkable, or do they think that tightening it up will solve the problem?
Kitty Ussher: Legislative changes might be required at the end of the road, but it is too early to say that for sure. There is much to be gained from a shared understanding of how the existing regulations should be implemented, as I have just said in answer to the hon. Member for South-West Hertfordshire. A lot is to be gained from greater scrutiny of the sort that we are having today, and that inevitably comes from publishing the findings of the European Court of Auditor’s reports and our openness to scrutiny through the National Audit Office process that we have set up. Therefore, I do not necessarily feel that this situation has arisen because there is something fundamentally wrong with the treaty, although further improvements could be made.
Mr. Browne : The European Court of Auditors was unable to give a positive statement of assurance for the 13th year in a row. In a previous answer, the Minister said that the Government are in the middle of the process of trying to resolve those difficulties. Will she give an estimate of how many years she expects this failure rate to continue? Are we halfway through a 26-year run of failures or will it be resolved before that? She talked about accountability, and the Government are very keen on setting targets. Which individuals in the Government will take responsibility if those targets are not reached?
The Chairman: Order. I remind the hon. Gentleman that although he can ask a series of questions, he must ask one question at a time.
Kitty Ussher: I am grateful to the hon. Gentleman for his attempt to pin down specifics that he can wave at us later. However, that was not the point that I was attempting to make. There are a number of issues. We kicked off a general process when the UK held the EU presidency in the second half of 2005 to move towards a better integrated control framework for the way in which EU funds are spent. We are at the latter end of that process and the action plan has pretty much been implemented, but we do not know the effects and outcomes because it will be reviewed only next year. We must wait for the conclusions of that review to find out whether we can push this process forward, together with other member states, to achieve the next round of efficiency gains.
We are also in an iterative process on the specifics of the ECA’s report, which looked at a snapshot of a few projects in 2006. My understanding is that the Scottish Executive have given their final response and are waiting for the European Court of Auditors to pronounce that the Department for Communities and Local Government has given its initial response and will very soon be giving its final response. Even then, I presume that it will be some time before the European Court of Auditors responds. Therefore, in our individual circumstances and in the wider policy initiative, we are part way through the process.
Mr. Gauke: As the Minister has said, the UK and Spain account for more than half the quantifiable errors on structural policies identified for 2006 by the European Court of Auditors. Will she indicate whether since 2006 the number of errors identified in relation to the UK has gone up, down or stayed more or less the same?
Kitty Ussher: The year 2006 is the latest year for which we have the findings of the ECA’s process. The results of our audit are not available. We will continue to try to drive up standards across the board, although in the public domain we do not have a formal indication of whether the error rate has gone up or down.
If I might press upon your patience, Mr. Jones, I should add to my response to the hon. Member for Taunton that the European Commission’s stated goal is to strive for a positive statement of assurance by 2009. I hope hon. Members feel that that is in the medium rather than the very long term.
Peter Viggers: What is being done in practical terms to improve the situation generally? The main underlying reasons for common errors, highlighted by the member states, include the complexity of Community legislation. That is something to be debated, discussed and resolved. There is also a lack of expertise among staff, resulting in negligence and careless mistakes. On documentation, there is a lack of filing, inconsistent filing and a loss of documents. What is being done in practical terms by the European staff to tighten up on those issues?
Kitty Ussher: I am sorry if I did not make myself clear, but I thought I had described in some detail the process that the European Commission is part way through to improve its financial management of EU funds through the action plan that was developed from a UK initiative for an integrated control framework. That is now in train and will be formally reviewed in 2009. Perhaps we can revisit the hon. Gentleman’s question once that has been published.
Mr. Gauke: In response to the Economic Secretary’s answer to my last question about what has happened since 2006, I am looking at the explanatory memorandum submitted by the Treasury on 18 March 2008, which is item No. 3 in the pack. In paragraph 8 it states that following new management controls, during 2007 the level of error was initially high. More errors were found after 2006 as more issues were identified. To be fair to the Minister, it then states that the level of error started “decreasing as actions were taken to address them.”
Will she clarify whether more errors have been identified since 2006? More issues are arising, which I accept are not yet dealt with by the European Court of Auditors, but of which the Government are aware.
Kitty Ussher: The hon. Gentleman is entirely right. We are learning from the errors that have been identified, and as we learn about where errors are likely to arise and shine a spotlight—perhaps in a slightly more focused way—on them, it is unsurprising that we should find the very things that we know needed improvement. It is therefore unsurprising that the level of errors in structural funds is expected to rise publicly before it falls, because we did not know where to look previously. That is a good example of how openness in the audit and scrutiny process is positive and constructive.
Mr. Gauke: I wish to raise some instances of differing interpretations of EU law. The first is the single payment scheme, on which the UK appears to have a unique perspective. It believes that landlords can receive payments under the scheme, whereas the European Court of Auditors, the Commission and other member states say that the scheme is for farmers not landlords. The Commission states that the UK has
“inappropriate criteria for allocations of entitlements”.
Will the Minister update the Committee as to the status on that, and as to whether the Government still maintain that their policy and approach to payments is correct and complies with the relevant EU legislation?
Kitty Ussher: I am sure that I do not need to remind the Committee of the unfortunate recent history regarding the single payment scheme. Is the hon. Gentleman talking about the well-documented issue that has been audited twice by the National Audit Office?
Mr. Gauke: It is the issue of golf clubs and local authorities being able to claim under the single payment scheme, while the view of the European institutions and other member states is that the scheme is for farmers on their own land.
Kitty Ussher: I thank the hon. Gentleman for his clarification. The issue of golf clubs and leisure facilities is interesting because if you look at the headline there seems to be no particular reason why those bodies should be eligible for payments under the single payment scheme. It is therefore unsurprising that little alarm bells started ringing when the European authorities had a look at that. However, it seems clear on further investigation that all the claimants were eligible for capped single payment scheme payments. In some cases, although the claimants were eligible, some of the geographic areas were not, and appropriate corrections have been made. The issue looked more exciting than it ended up being.
Mr. Gauke: I am grateful for that and I will have to come to terms with the fact that it could be less exciting than it at first looked.
I wish to touch upon another area where there was some dispute between the Government and the Commission, and which has already been touched upon with regard to the office of the north-west of England and the financial correction of £25 million. That issue was raised in our discussions on this matter on 28 January, and the Financial Secretary described the Commission’s position as
“unjust, disproportionate and somewhat out of date.”
She added that
“we are working to try to understand the continued criticism.”—[Official Report, European Standing Committee, 28 January 2008; c. 10.]
Will the Minister perhaps give us an update on the position, and tell us whether it is still disputed and whether we have got any of our money back?
Kitty Ussher: As I made clear earlier, the European regional development fund programme in Merseyside is disputing 95 per cent. of the amount that was raised by the European Court of Auditors, so the update that I can give is that that remains the case and we will continue to push our view until it reaches a logical conclusion.
Mr. Richard Caborn (Sheffield, Central) (Lab): May I ask the Minster about the clawback that was instituted at the beginning of this regime of structural funds? Coming from Sheffield and south Yorkshire, it is nice to see that the north-west was actually in the frame as the greatest offender, rather than south Yorkshire. What is interesting in a positive way is the discipline that the clawback has brought to structural funds. What are the Minister’s reflections on that? Has it brought the type of financial discipline back into the system that was lacking last time, because it was a little light before the last round of structural funds? Does she think that some of the problems that she is encountering with regard to complaints about the audit are the result of the imposition of the new clawback and the role of local authorities in that? I welcome that new discipline and think that it is effective. That has been the case in my own constituency and in south Yorkshire, and I think that it represents a more effective use of public moneys across the community.
Kitty Ussher: I am grateful to my right hon. Friend and completely agree with his point. We expect, once the budget years 2000-06 have been closed and sorted, that the error rate will come down. With regard to my previous answer on the suspensions of the ERDF payments in April 2006, to which the hon. Member for South-West Hertfordshire referred, I probably need to clarify that we feel that we now have a new expertise in Government offices, and the Commission has lifted its suspensions in five of the six regions—even the north-west. I am delighted to say that at least 90 per cent. of the expenditure has now been audited to the level of assurance required by the Commission.
Mr. Gauke: I seek further clarification on that point. As I understand it, there was a financial correction so that essentially the equivalent of £20 million had to be paid back. I will be grateful if the Minister corrects me if that is wrong. That money has been paid back already. Is there any prospect that the UK Government or the office of the north-west might be reimbursed from that if the Government satisfy the Commission that everything has been done that should have been done?
Kitty Ussher: Obviously, the suspension of the grant was lifted. I am advised that the financial correction was €25 million, rather than pounds, which is less than half of the figure originally mooted by the European Commission, so there is some difference there. With regard to whether the moneys have been transferred, I will have to advise the hon. Gentleman a little later .
Mr. Gauke: One other concern raised by the European Court of Auditors related to physical checks for imports, which can be seen on, I think, page 22 of the document, which deals with failures to carry out physical checks. The Government have responded strongly that they use their resources in an appropriate manner and that they are targeted and deployed effectively. Can the Minister confirm that that remains the case and that there is nothing within the ECA’s recommendations, or indeed within the Commission’s powers, that would change the way in which Her Majesty’s Revenue and Customs decides to police physical imports? Can she also confirm that determining how physical checks are undertaken remains a matter for HMRC and the UK Government? Notwithstanding that, the UK appears to be substantially out of line with other member states in the way in which it addresses that matter.
Kitty Ussher: I am sure that it will not surprise the hon. Gentleman to know that the Government stand by what they wrote in their response on physical checks of imports. We believe that we are using our resources most effectively in that regard. I shall go back to the point that we made originally, at the beginning of the debate, that this is an iterative process and we dispute the vast majority of the errors found by the European Court of Auditors. I am sure that the hon. Gentleman will understand that I do not want to get into the specifics of individual projects, since they may, at the end of the day, be found to have done everything correctly. If a contrary impression were given before it was shown to be the case, there would be much concern on the ground.
The general point remains as we laid out in our response, which is in the papers that the hon. Gentleman has in front of him—it is not the quantity of the checks that act as a deterrent, but the quality. We believe that we have effective triggers to target the checking of imported goods in the UK and that we have found the right balance here. People can try to prove the contrary. We are all in the same game of wanting to raise the quality of the checks that we do.
Mr. Gauke: Within the questionnaire, the European Court of Auditors raised concern about the lack of sufficient audit trail. The UK has made the point that
“Retention of documents can also be difficult for small third sector organisations where the onerous rules can require retention for 13+ years.”
Kitty Ussher: We do not think that we keep insufficient audit trails and that is the fundamental point of difference. We think that we keep sufficient audit trails to meet the requirements under contracts of the amounts of information required on both sides. There are comprehensive guidance manuals for UK organisations managing and paying authority staff on how to apply EU legislation, which set out clearly EU requirements for record keeping. We do not accept the premise of the hon. Gentleman’s question. Obviously, we would all be concerned if new processes were introduced that reduced the effectiveness of the moneys being spent, but at the moment we feel that we are complying effectively.
The Chairman: Mr. Gauke, is it a related question?
Mr. Gauke: It is a related question, and you will be pleased to know that it may be my final question. Page 22 of our bundle states that the UK highlighted a lack of sufficient audit trail as one problem that may have caused its position on structural funds. Would the Minister like to expand upon the sanctions available to the Commission against member states, particularly in the light of further developments of the action plan? Does she have any concerns about the powers that the Commission has, or may have in the future, to enforce its position and to scrutinise the way that member states spend EU money?
Kitty Ussher: All taxpayers, whether in this country or other EU member states, want to be reassured that their money is being spent most effectively. It is one area where spreading best practice across the EU, leading by example and peer pressure can have a positive effect. The process that the European Court of Auditors goes through is having that effect. If in the UK Parliament British Ministers are being asked questions about grape skins in Greece, obviously some kind of peer pressure is being exercised in a positive way. I think I have lost the attention of my right hon. Friend the Member for Knowsley, North and Sefton, East in this regard. Taxpayers would welcome greater scrutiny. We are moving in that direction. This Government welcome it too, because it is a very effective way to ensure that all resources are spent in the most efficient way.
Peter Viggers: It is disconcerting for British Members of Parliament to read how confrontational the discussion has become with the EU. Paragraph 5.69 states:
“Among the new beneficiaries, the Court noted railway companies, horse riding/breeding clubs, golf/leisure clubs and city councils”.
These are seen as recipients of support and the support has been switched from farmers to landlords. The paragraph concludes:
“The United Kingdom authorities set inappropriate criteria for allocations of entitlements for investments from the national reserve”.
There is a reference to paragraph 5.28, which states that landowners in Germany and Denmark will see the value of their entitlements multiplied by four and tenfold in England. How will that be resolved? Is it a legal matter? Will it be resolved in the European courts? Will it be resolved by discussion?
Kitty Ussher: I come back to the original point. I am sorry if I did not make myself clear, but 95 per cent. of the findings in that report are disputed by the UK authorities. I hope that I have made myself clear about the issue around golf and leisure facilities, which is not as exciting as it looked: none of the claimants were not in the required category. All claimants met the regulatory definition of farmer. So while there were some bits at the edges that needed sorting out, the hon. Gentleman is entirely wrong to imply that we have been using agricultural funds inappropriately in the leisure sector. I think that I have also made it clear that we expect to be able to resolve these issues by an iterative process of discussion with the European authorities and that process is not yet complete.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 7210/08 and Addendum 1, Commission Report, Member States' replies to the Court of Auditors' 2006 Annual Report; and supports the Government's promotion of measures to improve the management of EC Budget funds across the EU.—[Kitty Ussher.]
5.13 pm
Mr. Gauke: For those of us who attended the sitting on 28 January there is a sense of d(c)j vu about today’s sitting. I have no intention of rehearsing all the arguments that we ran through then. It is worth noting, as has been mentioned by the right hon. Member for Streatham and the Minister, that it is appalling that the EU’s accounts have not been signed off now for 13 years. I made the point in our debate in January that it does not create the outrage that it once did. There is simply wearied resignation that this appears to be the way that it works. That may well change.
As the hon. Member for Taunton pointed out, it is customary on these occasions for Ministers to say that there are signs of improvement. One can look at particular aspects where there are signs of improvement. That should be welcomed. But we are still some way away from signing off everything. Some quite substantial sums of money are not signed off. The right hon. Member for Streatham made the point that not all of this is fraud. I made the point in January that some of the money that is not signed off is not deemed to be fraud, but very often the EU institutions are not in a position to assess whether it is fraud or merely inappropriate spending of some sort. It is often not possible to distinguish between the two.
It is an embarrassment that the UK has been highlighted as one of the worst offenders on structural funds. The Minister was very robust in stating that that was not our fault and that the European Court of Auditors has got it wrong. None the less, it is a concern that we have been highlighted as one of the worst offenders and I am sure that Ministers share that concern.
We are debating this document in the context of the European Commission’s action plan. In the update on that, the Commission states that it has a responsibility to
“verify that the Member States are carrying out the tasks entrusted to them correctly.”
I liked that expression because it leaves no doubt as to the way in which the Commission thinks that these things work. It is the Commission that entrusts tasks to member states and they may or may not carry them out as it wishes. The Commission is clearly in charge. It goes on:
“Where it concludes that this is not the case, it must use the available mechanisms to suspend payments and apply financial corrections.”
That raises a number of issues on the approach that the Commission is taking to improve its ability to scrutinise and supervise. Let us accept that the levels of fraud and of inappropriately spent money are far too high. That is deeply regrettable and must be addressed. However, I will raise one or two reservations about the Commission strengthening its position in this area to explore these issues.
First, if the Commission is going to take a more proactive role, will there be greater interference? For example, what will happen if there is a genuine difference of opinion on the interpretation of EU law? As we have heard, there are many genuine differences of opinion on EU law, such as on the single payment scheme and on the issue of the office of the north-west of England. It was highlighted by a number of member states, including the UK, that EU law can be very complex and unclear. In such circumstances, there can be differing opinions.
If a member state holds one position in all good faith, but the European Court of Auditors and the Commission hold a different position, what will happen? I would be grateful if the Minister addressed that point in her remarks. Will the view of the Commission override the view of member states in detailed, technical areas? As we have heard, such differences of opinion happen a lot. We have heard that 95 per cent. of the errors identified by the European Court of Auditors are disputed by the Government. A number of those disputes are presumably on the grounds of different interpretations of EU law. In such circumstances, what will the position be?
I touched on the issue of record keeping in my questions. If the Commission is going to strengthen its position, will it be able to impose new requirements for record keeping on UK bodies? It will be a cause for concern if UK bodies have insufficient record keeping and we would want to see that rectified. The Government have raised a concern about smaller third sector organisations, which might have to deal with onerous record-keeping requirements. Again, if the Minister could address that issue, I would be grateful.
I am also concerned about whether the Commission will have more powers to make financial corrections. Earlier, I quoted the Financial Secretary, who, in response to my question in January about the north-west of England, described the Commission’s position as being
“unjust, disproportionate and somewhat out of date.”—[Official Report, European Standing Committee, 28 January 2008; c. 10.]
If the Commission is taking positions that are “unjust” and “disproportionate”, what powers will member states have to resist financial corrections that they consider to be “unjust” and “disproportionate”? Again, I would be grateful for the Minister’s news on that.
I also note, and I quoted this last time around, that the European Court of Auditors has said that the European Commission action plan will have an impact only in the medium to long term. Therefore, we are not dealing with something that will be resolved very quickly; this is an ongoing issue. It is a matter that was raised by the hon. Member for Taunton. There is a real concern that the issue of the EU’s accounts not being signed off will continue to be with us for some time.
Of course, that is a concern when the contributions to the EU budget coming from the UK have increased. The latest budget settlement has resulted, for the period of 2007-13, in an increase in net contributions of £39.3 billion, at 2004 prices, compared to £22.9 billion, which was the sum for the period 2000-06. We will make gross contributions in 2007-13 of £71 billion and, of course, within that we have the abandonment of £7.4 billion worth of rebate, which Tony Blair agreed to in his last few months as Prime Minister.
So we are dealing with an organisation that is spending more of our money and an organisation that may be passing even more laws. A lot of the problems relate to the complexity and uncertainty of EU legislation, yet the Government are pushing through a European constitution and reform treaty that will give the EU more powers to pass legislation, and legislation that will be difficult to interpret and understand.
We will not vote to oppose this action plan or the document in front of us, unless the Minister says something very surprising. However, I want to put on record a concern that the fundamental problem that we face here is an EU that is doing more, passing more legislation and spending more money, yet what we want, if we want to tackle fraud and the problem of money being spent inappropriately, is an EU that legislates less and spends less. That is not something that appears to be on the Government’s agenda.
Instead, it appears that, as a consequence of the problems, there is a move to pass to the Commission further powers, in respect of which, for the reasons I have outlined, we can legitimately ask whether that would be in our national interest, notwithstanding the serious concerns about fraud. I hope that the Minister will deal with some of those concerns.
5.25 pm
Mr. Browne: I have found our discussions helpful, and my starting point is that I do not share in the analysis put forward by some commentators that, because there is fraud and inappropriate spending in the European Union, the organisation as a whole must be intrinsically worthless or corrupt. I suspect that most very large organisations probably contain some element of inappropriate spending, and the task is to improve that situation; one does not necessarily throw one’s hands in the air and despair about whether the organisation should exist at all.
Having said that, I am close to a state of despair, even if I have not quite reached it, because the accounts have not been signed off for 13 years in a row. That is a truly shocking record. I do not doubt the good intentions and honourable attitude of the Minister. I am confident about that, not least because she is well known for her strongly pro-European Union views. It is very much in our interest, consistent with that attitude, that the organisation should improve its reputation. However, I despair about Ministers coming before the House and giving the same bland, catch-all assurances about how they are all working on the problem, are not in the least complacent, and anticipate substantial progress, when we know that the whole discussion has an element of charade about it, because we can predict with some confidence, on the basis of more than a decade of such ministerial assurances, that those changes are not likely to progress as quickly as we should all want.
It is deeply shameful that Britain is not doing better in this regard. I accept that the Government dispute some of the findings that have been made, but I should none the less like our country to have a reputation as the most aggressive exponent of financial reform and transparency among the 27 states in the European Union. I do not accept that, were a Minister or anyone else to take over a large private company, for example, its shareholders and customers would find it acceptable to be told, “I’m terribly sorry. We can’t sign off the accounts properly for the 13th year in a row, but don’t worry, we’re working on it. We can’t quite give you a proper estimate of when we’ll turn it round. We’ll certainly not make anyone directly accountable, and no heads will roll if we fail to get to a satisfactory conclusion at some point, but leave it with us. Don’t worry. We’ll brush things under the carpet, and come up with something slightly better next year.” No other organisation would regard that as a satisfactory state of affairs, and it should not be thought satisfactory for the European Union either.
We must remember that it is British taxpayers—our constituents—who pay the bills. In the grand scheme of things, the proportion of their taxation that we are talking about is very small compared with the large amounts that they pay towards social security, the national health service, education and all the other important provisions for which the Government cater. None the less, we are dealing with taxpayers’ money, and the onus is on Ministers to treat it with the absolute seriousness that it warrants.
In January, I pressed the Financial Secretary to specify which countries she regarded as the worst offenders. She said:
“I am not sure that the most diplomatic thing would be to name the worst offenders, as the hon. Gentleman suggests.”—[Official Report, European Standing Committee, 28 January 2008; c. 9.]
I am going to suggest that it may not be the most diplomatic thing, but it might be the most effective and necessary way to proceed. The UK, as the hon. Member for South-West Hertfordshire has said, is making gross contributions of £71 billion to the EU between 2007 and 2013. We should be trying to ensure that that money is properly spent. That might mean league tables, which the Government are very keen on in many other aspects of our public life; it might mean naming and shaming those who fall short of the standards that we expect, which again the Government are quite quick to do in other areas of public life. However, that might be necessary to ensure value for money for the United Kingdom taxpayer and, for that matter, taxpayers elsewhere in the European Union. As we stand, no particularly strong penalty appears to be in place for those who transgress or fall short. Would it not be more reassuring for us all, Mr. Jones—I am not inviting you to agree, but simply posing a hypothetical question—if, instead of vague assurances, we were given an absolute plan involving people specifically responsible for implementing it and sanctions should they fail to do so? I see no indication that such robust mechanisms are being put in place.
I see plenty to recommend the European Union, given what it can offer the United Kingdom. The ideals of the EU capture many of the values that I wish to see implemented throughout Europe and the wider world. So somebody in my position, who wishes the organisation well, finds it extremely frustrating that my constituents and others place such emphasis on this issue. However, they are right to do so, because it represents a serious flaw in the EU, and until it is rectified and improved, and until we have targets for doing that, the British taxpayer will, understandably, continue to be greatly concerned.
5.31 pm
Kitty Ussher: It is with some delight that I see that the allocated time for this debate will not be used, unless hon. Members would like me to speak for one hour and 25 minutes—but I am sure that they, too, are delighted that I do not intend to do so.
I shall answer some of the substantive points raised. The hon. Member for Taunton and I share the same overall view of the benefits of the European Union, although I am never quite clear whether Members of Her Majesty’s official Opposition share the same view—I could not resist saying that. Today’s debate is a very good example of how one can be pro-European in general, but pro-reform in Europe on some of the specifics.
I dispute the fact that, year after year, Minister’s repeat the same platitudes, but that nothing actually happens. The proportion of funds approved and, in a sense, certified as error-free, has risen on a year-by-year basis. At about 40 per cent., it is, of course, still far too low, but only a few years ago it was about 6 per cent. That is testament to the fact that action can be taken, although I am in no way excusing the fact that an enormous amount of progress remains to be made. I think that the combination of effective auditing, at an EU and domestic level, combined with a commitment from the European Commission to improve its internal processes—that commitment is in the process of being implemented—will have a kind of ratchet effect, and I am pretty sure that we will be pleased with the direction of travel after that.
The hon. Member for South-West Hertfordshire asked about who will win in the ultimate eventuality of a continuing dispute. We would seek to resolve any dispute by discussion and the iterative process that I have described. In the probably unlikely, but quite possible, situation in which technical people on both sides cannot come to an agreement on how the rules for the period under discussion—in this case, up to 2006—should be interpreted, it can, of course, be ruled on by the independent European Court of Justice. Ultimately, we are considering a legal process, rather than a kind of European takeover, which I get the feeling that Opposition Members would sometimes like to imply that it is.
The hon. Gentleman also said that the amount of money being spent by the EU is ever rising. In cash terms, I guess that there is a case for that, particularly with European enlargement, but as a proportion of gross domestic product it is in fact falling—from 1.06 per cent. of gross national income in 2007 to an estimated 0.98 per cent. in 2013. Let us not give the impression that this is some kind of megalithic machine destined to grow. Member states’ money can be spent efficiently, and the overall budget as a proportion of the economy can fall as well.
Mr. Gauke: None the less, will the Minister confirm that the UK’s net contribution will increase very substantially over the next period—from £22.9 billion to £39.3 billion?
Kitty Ussher: Perhaps we are straying slightly from the subject of the debate. As the Minister replying, I cannot ask questions directly, but perhaps the hon. Gentleman would like to intervene and explain whether his party supports European enlargement and the idea that each country—
The Chairman: Order. I think that that is stretching the debate too far.
Kitty Ussher: I would counter by saying that it is the logical extension of the question that I was just asked. Perhaps it would be in order not to answer the question.
The Chairman: I should not have allowed the question. The hon. Gentleman got it in when I was not looking.
Kitty Ussher: I shall move on swiftly.
The hon. Gentleman made another point about the burden on small third sector organisations. We are always looking to simplify regulations, not only from the EU, but domestically, and to ensure that the regulatory burden is as low as possible. That is a key part of the action plan for an integrated control framework, which the Commission is pushing forward. As a Government, we emphasised that at the ECOFIN meeting in February, and ensured that it was kept on the agenda in its conclusions. We shall continue to do so, because it is our priority. It would be ridiculous to do otherwise.
You will be delighted to know that I am near the end of my contribution, Mr. Jones. I think that I probably answered the other points raised adequately in my opening remarks. I am sure that this debate will continue. I would not presume to put a figure on the error rate in future years, but I feel that this Government are doing everything that they can, using all the powers at their disposal, to ensure that UK and EU taxpayers’ funds are best used.
Question put and agreed to.
That the Committee takes note of European Union Document No. 7210/08 and Addendum 1, Commission Report, Member States’ replies to the Court of Auditors’ 2006 Annual Report; and supports the Government’s promotion of measures to improve the management of EC Budget funds across the EU.
Committee rose at twenty-three minutes to Six o’clock.

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