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However, fraud is not the main issue that we face; it is administrative errors that lead to payments that do not fully conform to the regulations in place. It is clear that much more still needs to be done by all actors involved, across the European Community, to reduce the number of irregular payments made each year. We will keep pressing the Commission to do three things. First, it should continue to seek opportunities to simplify the procedures and regulations governing expenditure, the complex nature of which is repeatedly highlighted in the Court’s report as the cause of so many errors. Secondly, we want more done to ensure that effective internal control standards are rolled out across the board. Thirdly, we want the Commission to work with
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programme co-ordinators and the ECA to agree a common interpretation of programme requirements early in an expenditure period.

Equally important, however, is the crucial role that member states have to play in the process. Agricultural and cohesion fund spending make up more than 80 per cent. of EU expenditure, most of which is managed at the member state level. Only when member states take full responsibility and act to reduce the number of errors in the transactions that they manage will a positive statement of assurance be obtained. The UK will continue to keep up the pressure and to lead by example on that front. We did so recently, in July, by publishing the first annual consolidated statement on the use of EU funds in the UK, along with the National Audit Office’s full audit report, which gave an unqualified opinion on the regularity of transactions in the United Kingdom.

That initiative will improve the accountability to Parliament of the use of EU funds in the UK and help to provide increased assurance on our use of such funds to the UK taxpayer. It will also highlight any weaknesses in our control and management systems, helping us continually to improve our management of EU funds. The UK’s statement, along with those published by Denmark and the Netherlands, has been welcomed by the Commission and the ECA, and we will continue to encourage other member states to follow suit.

Finally, it is important that we continue to make the case for more effective and efficient expenditure. As well as having to be spent properly, taxpayers’ money must be spent well. We believe that some measures could be taken immediately to improve matters. Better use should be made of the European Court of Auditors’ performance reports, to inform the budget-setting process and to ensure that money is allocated where it will deliver results. We also believe that a clearer link is needed between high-level priorities and the budgetary implications in the Commission’s annual policy strategy, to enable more effective scrutiny of allocations proposed by the Commission.

Mr. William Cash (Stone) (Con): The Minister might be aware that I am the chairman or vice-chairman of several all-party parliamentary groups dealing with Africa, in particular the all-party group on water and sanitation in the third world. Does he accept that the increase in the number of cases in Africa in which OLAF has had serious difficulties is a matter of grave concern? Effectively, when the external aid is itself subject to fraud on the scale that appears to be evident in Africa, it means that people there are not getting water and are dying of cholera. Does the Minister not agree that the necessity to link up with the Department for International Development is essential?

Ian Pearson: I certainly agree that links with DFID are very important, and of course fraud is simply unacceptable, wherever it takes place. The hon. Gentleman referred to the budget for Africa. The EU’s international budget has been the subject of substantial discussion, and the European Court of Auditors looks at it just as it looks at the other elements of EU expenditure. The United Kingdom’s objective is to ensure that we continue to make progress on ensuring that the Commission is spending money in the right areas, spending it efficiently
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and effectively, and cutting down on error. Also, as I said earlier, we must ensure that the individual member states that co-manage much of the European funding spend that money in the right directions, take full responsibility and cut down on error.

More fundamentally, we need to continue to work tirelessly to refocus spending—a point made earlier by the hon. Member for Castle Point (Bob Spink)—to meet the challenges of the 21st century, through the review of the budget process that is now under way. In our view, a budget that devotes such a high proportion of spending to the common agricultural policy clearly remains in need of far-reaching reform, and we will continue to make those points very strongly.

Before I finish, I want to address the point about the depreciation of sterling that a number of hon. Members raised during the previous debate.

John Reid (Airdrie and Shotts) (Lab): I have waited until my hon. Friend reached his final remarks before asking him a question that is pertinent to the intrinsic message that he has been sending out today, which is that the efficient working of the European Union depends on three things: oversight; transparency; and proper regulation and efficiency. Are the Government considering taking the burden of the lessons relating to the internal regulation of the European Union and applying it to external institutions at European level, including the banks? Are there not lessons to be learned from the documents that we have been reading today, on the subject of this debate, which would encourage us to move towards some kind of controlled exchange—at European level as well as in regard to sterling—incorporating oversight, regulation and, essentially, transparency? Will he consider looking at that proposal at Government level?

Ian Pearson: I know that my right hon. Friend has done a lot of work in this area, and that he has strong views on these matters, which he is putting forward across other parts of the Government at the moment. Clearly, what we are talking about here is the financial management of the EU budget and its spending. He rightly made a point about the banking system, and he will have seen the announcement that the Government made only yesterday on further support to ensure the stability of the banking system and the continued lending that we believe to be absolutely necessary. Clearly, there are lessons to be learned internationally as well as nationally from the financial crisis, but as they were touched on in the preceding debate, I will not deal with them substantially here. Nevertheless, my right hon. Friend makes an important point.

I said that I wanted to speak about the depreciation of sterling and its effect on EU budget contributions. I think that there is perhaps some misunderstanding among some Members as well as among people outside about the impact of sterling’s recent depreciation on our contributions to the EU budget. That depreciation will lead to a small increase in UK gross contributions, but it is likely to be more than offset by an increase in the sterling value of UK receipts, which will mean that the UK benefits rather than loses out in net terms.

It is not the case that if the pound depreciates by 20 per cent., UK contributions increase by 20 per cent. The actual effect is much smaller. Let me explain why.
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UK and other member state contributions are not fixed in cash amounts, but are based on country contributions, largely made as a fixed proportion of their gross national income as measured in euros. Depreciation of sterling therefore acts to reduce our budget contributions in euros, creating a budget shortfall that all member states must make up in proportion to their GNI. While the UK incurs some costs, they are offset considerably by the remaining member states. We pay our GNI share of the shortfall—not 2 per cent., but our GNI share, which is likely to be roughly 12 per cent. of the total budget, so it amounts to a 2.5 per cent. additional contribution. On the other hand, there is generally a one-to-one effect on receipts, so a 20 per cent. depreciation of sterling will see UK receipts rise by 20 per cent. Although contributions are larger than receipts, the net effect will be far less than 20 per cent., meaning that we are likely to gain overall. I hope that that is helpful in explaining the overall budgetary position.

Mr. Bone: It is useful to hear that from the Economic Secretary, but I have here a document signed by him that says that in 2009-10, our budget in the EU will increase by €670 million, which seems somewhat at odds with what he just said.

Mr. Deputy Speaker: Order. I am sure that this is extremely interesting to the House, but it is actually moving outside the scope of the several documents that we are supposed to be debating.

Ian Pearson: I will therefore not pursue this matter; I am sure we will have further opportunities to do so. I felt it important to correct the misperception out there at the moment that the recent depreciation of sterling will have a significant impact meaning that we will have to pay more to the EU budget, which is not the case.

I have outlined the key points that we intend to take to ECOFIN.

Bob Spink rose—

Ian Pearson: Before I finish, I give way for the last time to the hon. Gentleman.

Bob Spink: I was grateful to the Minister for his explanation regarding depreciation, which I thought was germane to financial management in Europe. On financial management, given that the recession will be harder and deeper in the UK than in much of the rest of Europe, and as the UK is subsidising the rest of Europe through the EU recovery plan, will the Minister remind us just how much the UK will be putting into the EU recovery plan to finance other states that are doing better than us?

Mr. Deputy Speaker: Order. I think that my ruling on how germane that subject was should be accepted by the House.

Ian Pearson: I am sure that the hon. Member for Castle Point raised those points in the previous debate, which dealt principally with the economic recovery plan. The issues that we have debated today are important when it comes to the effective and efficient management of EU budgets—by the Commission itself and by individual member states.

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Although some improvements have been made, further major improvements—which I have described today—are clearly required. We intend to take them to ECOFIN, and to include them in the ongoing financial management discussions that we hold in the Commission and the other usual forums.

I look forward to hearing hon. Members’ views today.

5.45 pm

Mr. David Gauke (South-West Hertfordshire) (Con): I shall bear your strictures in mind, Mr. Deputy Speaker. I think that a number of Members will wish to speak—those, that is, who have not been distracted by the inauguration speech of President Obama. The challenge for us, of course, is to find the words and phrases that shall resonate throughout the world and through future generations. Are we capable of doing so? I suspect that the answer is “No we can’t”, but none the less we have an important issue to debate, and I am grateful to the European Scrutiny Committee for enabling us to do so on the Floor of the House.

This is not the first occasion on which I have represented my party in these debates. It is, I think generally, with a degree of weariness that we address this issue—that probably applies to Labour Members as well—because yet again we are faced with the European Court of Auditors’ failure to sign off the European Union’s expenditure. Once again the Minister says that that is unacceptable, and once again the Opposition say that it is unacceptable. The Minister has outlined some of the ways in which the Government seek to address it, but, if we are honest, all of us expect to be here—or upstairs in Committee—in the same position next year, with the European Court of Auditors having failed to sign off the 2008 accounts.

There is that sense of weariness, but there is also a sense of frustration. I think that that applies regardless of one’s views on the European Union. It is hugely frustrating that, at a time when we are all tightening our belts—households, businesses and indeed Governments, although some of us perceive greater urgency than others in that regard—huge amounts of European Union funds are still being wasted by the EU and by member states. The fact that that money is not being spent wisely is all the more significant in the light of the point made by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) about the increase in our contribution.

I have no intention of becoming involved in the debate about the impact of depreciation generally, and I am grateful to the Minister for his helpful explanation to the House, but the fact remains that—as has already been pointed out—we have seen an element of our rebate negotiated away, and it would be helpful if the Minister could update the House on that. When we discussed the value of the rebate that had been negotiated away, this time last year and in the debate on the legislation that formalised the arrangement, the cost was estimated at £7.4 billion over the next accounting period of six years. I hope that when he winds up the debate the Minister will have an opportunity to give us some idea of the updated cost of the rebate surrender, because I suspect that there is such a cost, and the fall in the pound is expensive to United Kingdom taxpayers in that context.

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The first question that we must ask ourselves in relation to the European Court of Auditors is “Have things got better?” Every year some improvement is expected, but it appears that the answer is no. Since 2006-07 the value of irregularities has increased from €804 million to €1,048 million, and over the same period the value of fraud has increased from €189 million to €209 million. I take the point that, for the vast majority of the money involved, the problem is not fraud; it is irregularity, but it is not always clear when one becomes the other. Some reporting from member states simply states that something is an irregularity, and there is insufficient explanation of what constitutes fraud, so it is not always clear.

Under the individual budget headings, the number of irregularities in the structural and cohesion funds has increased by 19.2 per cent. to 3,832, and the value of those irregularities has increased by 17.7 per cent. to €828 million. On agriculture, the Minister, to be fair, highlighted that last year’s Court of Auditors’ report anticipated that the irregularities would be addressed. Indeed, the then Financial Secretary, the right hon. Member for Liverpool, Wavertree (Jane Kennedy), spoke about the matter last year and highlighted it as one about which we could be optimistic. But serious irregularities are found in one fifth of all payments sampled in that very sector, which was supposed to be improving.

Some people defend the Commission by saying that the problem is all the fault of member states. I, for one, acknowledge that there is an important role for those states, and that there are failures at that level, but the Commission is ultimately responsible for the legality and regularity of transactions underlying European Community accounts; it designs the paperwork that is too complex to understand; and it fails to check that the paperwork is properly completed. The European Court of Auditors is clear about that. It says that the Commission is unable to demonstrate comprehensively for 2007 that supervisory and control systems are sufficiently effective in mitigating the risk of error in certain policy areas. The Commission has a role, but is failing to perform it.

A spokesman for the Commission has said that it is not all its fault, and that blaming it is like blaming a referee for all the fouls committed in a football match. I am a football fan and that may be a fair analogy, but when players in a football match are kicking lumps out of each other and the referee fails to enforce the rules adequately, the referee is responsible and should not be allowed to continue to referee matches. The Commission is failing in its responsibilities.

When the UK held the presidency, it said that it would focus on fraud and irregularities, but years later there has been little progress. When the noble Lord Kinnock was the Commissioner responsible for such matters, he said that he would tackle the problem, but his most notable action was to sack a whistleblower who identified fraud and irregularity. A key objective of the Barroso Commission has been to address the matter, but it has failed.

The Court of Auditors, in the context of the action plan developed by the Commission, which it tried to implement and to which it points to show that progress is being made, said that

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Indeed, one MEP estimated that it will take 20 years to obtain a statement of assurance. When does the Minister think such a statement will be delivered on European Union expenditure? How long must we wait?

I said that there is a role for member states. How does the Economic Secretary think the Government are performing with regard to irregularities in EU spending? The only cohesion spending programme sampled by the Court of Auditors showed that the UK has only a partially effective financial control system. This time last year, we debated in some detail the finding that European regional development funds in the north-west of England had not been spent appropriately, and the Commission was seeking to claw back some £20 million. The BBC and The Times reported in November last year that the Commission was seeking to claw back in total—this does not apply to just one year’s expenditure—some £190 million. Can the Government confirm that that is the case? What is their estimate of the funds that may be clawed back by the Commission and how satisfied are they generally that they can spend European Union money without irregularity or fraud?

Once again, there have been significant failures by member states and the Commission, and there is a depressing lack of progress. When will something be done? The widely held view is that there is something endemic, and perhaps institutional, about the problem. Member states raise taxes, and make contributions to the European Union which are then divided among member states to be spent, but there is an essential lack of ownership of the expenditure from the European Union. No one really believes that it is theirs, and the same level of care and attention that one hopes is given to member states’ own money is not applied to anything like the same extent to money from the EU. Consequently, there is failure after failure, irregularity after irregularity, and levels of fraud that shame member states and the Commission.

Mr. Drew: One area that the EU has signed up to do something about is tax havens and ensuring the legitimate use of money. President Obama has also made some straightforward statements about that. Is that not something that the EU should press as a matter of urgency, because it involves not just money that is spent formally through the budget, but money that works its way through the system, often through those tax havens?

Mr. Gauke: I am grateful for that observation. It is right to tackle tax havens and to share information with offshore centres as much as possible. That effectively means obtaining information about what happens in those centres. Whether that is a European issue, or whether it is best done by member states, it is clearly important. I do not know how central that is to our debate today, but I am grateful to the hon. Gentleman for his observation.

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