Interinstitutional Agreement

The Committee consisted of the following Members:

Chair: Miss Anne McIntosh 

† Alexander, Danny (Chief Secretary to the Treasury)  

† Baldwin, Harriett (West Worcestershire) (Con) 

† Boles, Nick (Grantham and Stamford) (Con) 

† Coffey, Dr Thérèse (Suffolk Coastal) (Con) 

Connarty, Michael (Linlithgow and East Falkirk) (Lab) 

† Cryer, John (Leyton and Wanstead) (Lab) 

† Duddridge, James (Lord Commissioner of Her Majesty's Treasury)  

† Hamilton, Mr David (Midlothian) (Lab) 

† Heaton-Harris, Chris (Daventry) (Con) 

† Hopkins, Kelvin (Luton North) (Lab) 

† Kwarteng, Kwasi (Spelthorne) (Con) 

† McCarthy, Kerry (Bristol East) (Lab) 

Wilson, Sammy (East Antrim) (DUP) 

Alison Groves, Committee Clerk

† attended the Committee

European Committee B 

Monday 14 February 2011  

[Miss Anne McIntosh in the Chair] 

Interinstitutional Agreement 

[Relevant Documents: European Scrutiny Committee, 2nd report of session 2010-11, HC 428-ii, chapter 1, 12th report of session 2010-11, HC 428-xi, chapter 5, and 18th report of session 2010-11, HC 428-xvi, chapter IJ.]  

4.30 pm 

The Chair:  Does a member of the European Scrutiny Committee wish to make a brief explanatory statement, for no longer than five minutes, about the decision to refer the relevant documents to the Committee? 

Kelvin Hopkins (Luton North) (Lab):  It might be useful to the Committee if I take a few minutes to explain the background to the documents and why the European Scrutiny Committee recommended them for debate. 

The interinstitutional agreement on budgetary discipline and sound financial management provides for many aspects of the planning, preparation, execution and control of the European Union budget. The agreement is made among the Council, European Parliament and Commission, and is an important tool of budgetary discipline that includes a multi-annual financial framework. The current financial framework sets annual ceilings for the five broad policy areas of the EU budget for 2007-13. 

The Commission’s report—document A—on the functioning of the interinstitutional agreement focuses on three areas: implementation procedures related to the financial framework, interinstitutional collaboration and sound financial management of EU funds. Errors inevitably arise when EU money is spent, and they are typically involuntary, not fraudulent, errors in spending, for example, misinterpretation of eligibility criteria when using EU funds. However, preventing and detecting errors requires controls, which cost money. The concept of a tolerable risk of error captures the idea that reducing the error rate beyond a certain point requires an increase in the cost controls that outweighs the benefit from the resulting financial corrections—spending returned to the budget. Commission communication document B develops its ideas on the concept of tolerable risk of error. 

The Council’s financial regulation and the rules in the Commission’s implementing regulation govern the formation, implementation and audit of the EU general budget. The financial regulations are subject to triennial or, if necessary, earlier revision. In document D, the Commission presents its proposal for the triennial revision of the financial regulation. It amalgamates amendments from two withdrawn draft regulations; one made technical changes consequent to the Lisbon treaty and the other implemented the triennial review findings. It also proposes amendments in connection with the creation of the European External Action Service. 

Document C is an opinion of the European Court of Auditors on the original draft regulation, but it remains relevant. Given the even greater importance of budgetary

discipline at present and its relevance to the debate now beginning on the financial framework for 2014-20, the European Scrutiny Committee recommended that the European Committee debate the documents. We thought it would give Members the opportunity to explore potential improvements to all aspects of management of the EU’s finances. 

4.33 pm 

The Chief Secretary to the Treasury (Danny Alexander):  I congratulate the European Scrutiny Committee on choosing to debate the documents, because as many households and Governments take difficult steps to balance their budgets, effective financial management of EU funds is more important than ever. I welcome this opportunity to discuss the Commission’s recent activity in that area. 

The steps that the coalition Government have already taken to limit the costs of the EU budget to the United Kingdom taxpayer form the context for my views on the documents. First, we worked hard to ensure that this year’s budget increased by no more than 2.9%. That is not the freeze we wanted, but it is considerably lower than the 6% proposed by the European Parliament. Secondly, on 18 December we and several EU partners published an open letter to Commissioner Barroso outlining our expectations for the 2012 EU budget. We also set out with partners our views for the next financial perspective. That shows that through co-operation with other member states, the coalition can influence debate in Europe, having made real progress in recent months during our discussions on the EU budget. 

I shall summarise briefly the Government’s approach to the three Commission documents before the Committee, specifically on the proposals for the review of financial regulation, the communication on tolerable risk of error and the report on the functioning of the interinstitutional agreement on budgetary discipline and sound financial management. The three issues under discussion form part of a framework for the financial management of EU funds. As many Members here today were present at the debate in the House on this issue less than a fortnight ago, I will not go into detail on the Government’s position, but I reiterate our belief that the changes are taking too long to come into force. 

We are determined to bring about improvements to EU financial management and to continue to engage positively with all parties involved. I have no doubt that these matters will be discussed by the Chancellor at ECOFIN tomorrow, and it would be wrong to pre-empt what may or may not be agreed there, but we have made it clear that we expect substantial reform of EU financial management over the coming year. Transparency and value for money are at the heart of our approach to public spending, whether at home or abroad. Sound financial management underpins our agenda. It is right that we should make more explicit the links between value for money, transparency, administrative efficiency, sound budgeting and financial management. 

For the negotiation of the financial regulation, I welcome the broad objectives outlined in the Commission’s proposal. It is right that it focuses on alleviating unnecessary administrative burdens, streamlining methods of implementation and modernising the system of risk management and control measures. There are

certain areas, however, on which more work needs to be done, such as increasing the budget’s transparency and providing proper cost-benefit analysis for the proposed new flexibility measures. In other areas we are concerned that the proposals might be premature or need further detailed consideration before legislative changes are made; changing the control and management system for member states, for example. It is too soon to move towards a tolerable risk of error approach to setting the error rate of the European Court of Auditors. More work is needed to calculate those rates, and more effort is required to simplify the rules and regulations. That view is held by the majority of member states. 

The Government also believe that the current IIA is an important tool of budgetary discipline. Via the financial framework, the IIA sets ceilings on the funds available to the EU budget and broad policy areas for each of the years it covers. Under the current framework for 2007-13, the ceilings sit well below the own resources ceiling for the EU budget, which would otherwise be the only constraint. That means that the financial framework provides an important brake on EU spending. Furthermore, the financial framework gives the UK more control over spending levels than the annual budgetary negotiations allow for, as all major changes to the financial framework must be agreed unanimously in the Council. 

Finally, the IIA and financial framework help to ensure that in the medium term EU expenditure develops in an orderly manner. That aids planning and, hopefully, improves the quality of EU spending. For those reasons the Government support the transposition of the IIA into new legislative documents, as required by the Lisbon treaty. 

The Chair:  We have until 5.30 pm for questions to the Minister. I remind Members that such questions should be brief. It is open to a Member, subject to my discretion, to ask related supplementary questions. 

Kerry McCarthy (Bristol East) (Lab):  I broadly welcome what the Chief Secretary to the Treasury has said. As he mentioned, we recently held a comprehensive debate in the Chamber on the European Court of Auditors’ report, and we are back in Committee tomorrow to look at the budget review. There was another European Committee sitting on the EU budget not too long ago, too. 

I intend to focus today on things specific to the documents before the Committee. May I start by asking about the tolerable risk of error measures? The Chief Secretary said, and I agree, that it is too soon to implement the measures. He mentioned that the majority of EU states take that view, too. Could he tell us more about the discussions with other EU member states? What chance is there of postponing these measures? I think he would agree that given the level of concern about the failure to sign off the accounts for the 16th year in a row and about the materiality threshold not being met, it would be wrong to raise it now. 

Danny Alexander:  I am grateful to the hon. Lady for raising that important point. Given the landscape of views among member states, we feel confident that it is too soon to make the proposed move. It is a judgment call, because we need to weigh the financial cost of

detecting and reducing errors against the financial benefit achieved through corrections to the money coming in. It is important to remember that there is a big reputational risk, as well as an actual financial risk, if the EU is perceived to be moving the goalposts. 

The proposals have been discussed, in the context of financial regulation, in the budget committee, which is an official-level committee that in due course reports to the ambassadors and, potentially, to the Council. The discussions are at a relatively early stage, and we will keep the House updated. 

Harriett Baldwin (West Worcestershire) (Con):  The Government are encouraging our local councils to publish all expenditure of more than £500 online. In the interests of transparency, would they consider suggesting a similar approach to the EU regarding its expenditure? Having lots of armchair citizen auditors might be effective in improving the margin of error. 

Danny Alexander:  That is an important point. Our agenda in the UK is to use transparency—transparency to citizens, transparency to Parliament and transparency of information—as much as we can, as a key tool for improving accountability and ensuring that there is pressure from citizens so that financial management is sound, money is spent wisely and people are held to account for how money is spent. 

Regarding the discussions that we will have on these matters, which as I have said are starting now at the official level, we see transparency as an important part of our agenda. It is too early to say whether we will adopt an approach similar to the one we use with local government. Member states, for example, produce annual summaries of their expenditure. As a starting point, those should be made publicly available and member states should provide public analysis of the financial management data they have for their EU spending so that we can also use transparency as a tool for improving accountability at EU level. 

Kelvin Hopkins :   It is a pleasure to serve under your chairmanship this afternoon, Miss McIntosh. 

Despite the fact that for 16 years the European Court of Auditors has failed to sign off the European Union’s budget, it was suggested in the recent debate in the Chamber that the Court itself is not sufficiently independent of the Commission, that it could even be considered a creature of the Commission and that it does not compare with, say, our National Audit Office. Have the Government raised any concerns about that at European Union level, and will they be doing so in the future? 

Danny Alexander:  I agree that progress has been too slow. We have had 16 years of qualification and many Governments sounding off about that, and progress has not been far enough or direct enough. I also agree that a great responsibility rests on member states. The areas where particular problems exist with EU spending are, in many cases, those that are managed with member states. Of course, in this country we publish reports through the NAO on our EU spending so we also have a domestic check on it. Our view is that the Court of Auditors is an independent body; it has an important role to play and we should be supporting it in doing so

more effectively. It is important, however, that pressure is put on member states to ensure that they too are playing their role to the full. 

Kelvin Hopkins:  This very day we are discussing in the Chamber the Budget Responsibility and National Audit Bill, which will further strengthen the independence and objectivity of the National Audit Office. Would it not be useful for the Government to suggest to the European Union that it follows the example that we are setting with the National Audit Office? 

Danny Alexander:  I am certainly always happy to highlight, and indeed I have highlighted, examples of good policy practice that the Government are pushing through. The principal purpose of the Budget Responsibility and National Audit Bill is the creation of an independent Office for Budget Responsibility to ensure that economic forecasting is independent. I can certainly report that a number of other countries—other European Union member states—are taking a close interest in that, because they see benefit to their own fiscal policy in the sort of independent regime that we are establishing here. 

Dr Thérèse Coffey (Suffolk Coastal) (Con):  I have never served on this sort of Committee before, so Members must forgive me if I am not au fait with the procedures. Will my right hon. Friend give us a view on why the Commission is introducing the tolerable risk of error? He has already mentioned in his opening statement that it brings the reputational aspect into question. Is the proposal about trying to establish that money goes to the right spending areas, as it is supposed to do, or is it about trying to get value for money? 

Danny Alexander:  In fairness, it is wrong to describe the proposal as the Commission introducing a tolerable risk of error. It is not something that will happen; the proposal has to be discussed among member states and by the European Parliament before anything happens to put it into practice. It would be wrong to characterise it as something that is to happen; it is a suggestion that is being put forward. 

I am not sure that it is right for me to characterise the Commission’s reasoning; it is set out in the documentation. The view seems to be that in different areas of spending, there are different causes of error, so different thresholds may be appropriate. We do not think that the time is right for that, because, as has been said, we have 16 years of accounts being qualified. There is a risk that the proposal would be seen as a way out of that problem, whereas actually the way out is better financial management at EU and member state level. That is what we are pushing for; that is what I am grateful to the European Scrutiny Committee for highlighting. It also gives us the chance to demonstrate that the British Parliament wants to see much greater attention paid to proper financial management. 

Kerry McCarthy:  On the same point—the tolerable risk of error—a couple of useful examples are given in the document. The first is on the research, energy and transport area, where at the moment there is a 3% error

rate. It is estimated that to bring it down to the 2% materiality threshold would cost €18 million, even if all the errors were recovered. The document goes on to say that accepting a 3.5% error rate would save €8 million. The conclusion is that 

“on balance the Commission proposes a TRE level of 2-5%.” 

After the cost-benefit analysis, once we are saving money, we should not be looking at raising the threshold higher. Will the Chief Secretary tell us why the Commission seems to think that a TRE as high as 5% should be under consideration? 

Danny Alexander:  I am not sure that I can help the hon. Lady. The tolerable risk of error is not the only moving part in the debate. We think that the overarching priority should be the simplification of rules and regulations. A lot of the error arises from the fact that there are extremely complicated rules and regulations. If the Commission worked through a process, as we are encouraging it to do, of simplifying the regulations, it would not weaken the ability to ensure proper financial discipline. The reduction in complexity would reduce the error rate quite substantially in many areas, which would mean that the figures would be quite different from the ones quoted. We would prefer, and are arguing strongly for, the first priority to be given to simplification, looking at the complexity of rules and regulations and trying to ensure that the burden of that complexity is not in itself fuelling error, which is costing taxpayers money. 

Chris Heaton-Harris (Daventry) (Con):  It is always a pleasure to serve under your chairmanship, Miss McIntosh, as a former colleague from the European Parliament. I guess I should start by wearing that hat. I served in the European Parliament at the same time as the Deputy Prime Minister, and he and I were both part of a group of people who tried to bring greater transparency to EU accounts in general, and to the Council when it was dealing with EU accounts. How is that process going? It is quite an important factor in terms of transparency. When we recast the financial regulation, it was the most boring thing one could ever possibly do in human terms. It became so complicated that anybody could walk through it and find a way to spend money in a certain direction. When Deloitte looked at it, it said we could have the simplest or the most complicated financial regulation, but it was the culture of the spending body—the European Commission itself—that needed to change. How do we change that? 

Danny Alexander:  Those are good points. I commend the hon. Gentleman for the work that he did in this area with the Deputy Prime Minister and others when he was a Member of the European Parliament. There is still a strong body of budget disciplinarians among member states and in the European Parliament doing valuable work. They are co-signatories of the letters that we have produced on the overall budget for the next few years, thus demonstrating the continuing alliance, strongly fuelled, of course, by the austerity programmes that many member states are going through. 

The cultural point is interesting. The Court of Auditors’ reports show, for example, that the error rate in the Commission’s administrative spending is a lot lower than that in some of the programmes that are co-managed with member states, such as in the cohesion and structural

funds principally. We need to improve the Commission’s approach and work with it to get the appropriate emphasis on alleviating the administrative burdens, streamlining the methods of implementation and modernising the risk management and control measures that it has put in place. Within the European Council, too, we need to ensure that other member states take proper responsibility to ensure that money is well spent. 

Chris Heaton-Harris:  Following on from that point directly, back in 2003, the European Commission tried to introduce something similar. It was not called a tolerable risk of error, but it was an attempt to have the goalposts moved slightly, so an error rate of between 2% and 5% would have been okay. I guess that that was because it wanted to be drawn back to not having a positive statement on its accounts, or its accounts signed off. I am wary, and most people and Governments who are net contributors to the European Commission budget should be wary of moving the goalposts in such a way. At the moment, if anything is to be done, best practice should be shared across member states about how European money is spent when it comes one’s way. Although the UK has not been fantastic at that, we might have been better than some others. That would be better than allowing the European Commission to move the goalposts in relation to how the money is hosed around. 

Danny Alexander:  I agree with the hon. Gentleman that we should be wary of moving the goalposts, which is something that I hope to have conveyed to the Committee. Many other things need to be done at a European level to ensure that financial management is done properly, too. 

Kelvin Hopkins:  I note that the Chief Secretary has said that the 2% tolerable risk of error has not been accepted by the Government and that discussions are continuing. However, 2% of public expenditure in Britain would be the equivalent of about £12 billion—plus or minus—by my calculation. The argument is that it is not worth putting money in to collect that, but if it were the equivalent of 3p or even 6p on the standard rate of income tax—1p on the rate of income tax is worth £4 billion, so it would be 3p or 6p on the standard rate—would it not be worth using that to collect the rest of the money or to ensure that it is spent correctly, especially if it would save such sums? With 2%, are we not talking very large sums of money? 

Danny Alexander:  Yes, we are, and as the Minister responsible for public spending in this country, I think it is important that every penny of UK taxpayers’ money is spent wisely and in a way for which people are held properly accountable. However, I return to the point that these brackets contain a range of categories of expenditure and the errors are due to complexity and the fact that procedures and accounting processes not properly understood, as opposed to money being misspent or fraudulently misallocated. A lot of sins, therefore, are included under this heading, which is why the first step should be simplification, looking at the rules and regulations, and ensuring that they are properly understood and that member states understand them properly. The system should be clear and simple, and it should be implemented and enforced in a way that is clearly understood. That, in itself, would reduce error rates. 

Kelvin Hopkins:  On the error rate, is it not possible that “error” might cover the inappropriate use of money? It might only be a euphemism for the misuse of funds, and if the EU categorises all of its lost cash as “error”, it could be describing something as more innocent than it really is. Will the Government tease out what is error and what is actually an inappropriate use of European funds? 

Danny Alexander:  The hon. Gentleman is quite right. Such things are included, as is the misuse of funds—of course, not applying the accounting rules properly is also a misuse of funds. Bodies that accept the funds are required to account for them in a certain way, and in the end, it is their responsibility to ensure that they do so properly. In this country, we have had experience of structural fund programmes where the accounting has not been done properly and, as a result, money has been clawed back. Therefore, I do not wish to give the impression that that should not be taken seriously. Ensuring that we understand the balance between such things is important. For example, we do that domestically with our social security system. The clearer, simpler and less bureaucratic the relevant rules and regulations are, which we can then enforce properly, the more we will be able to tease out misuse and avoid the errors that compose part of the overall total. 

Dr Coffey:  Will the Minister clarify if moves to make such changes require unanimity or qualified majority voting? 

Danny Alexander:  They require unanimity. 

Kerry McCarthy:  I want to press the Minister on the different stances taken by member states. The Government acknowledge that, as well as allowing time for the simplification measures to play out, which we accept and support, there needs to be a push for member states to take more responsibility to improve the management of EU funds at national level. Some countries have better records at doing that than others. Is there a correlation between member states that are perhaps not doing such a good job and those that are trying to push for the higher TRE? I am trying to tease out whether some of them are using this moving of the goalposts to get off the hook in terms of their responsibility to set their own house in order. 

Danny Alexander:  It is a bit too early to draw that correlation, because the debate is at an early stage. The group of budget disciplinarians includes a range of member states, including those such as the United Kingdom that have enormous budget deficits of their own, which are a sign of a need to improve financial management. Another change that needs to be made is a move to a more risk-based approach to auditing, so that, for example, larger projects and institutions that have a proven track record of risk are audited much more closely, as we would in this country, rather than looking at everything on an equal basis. That might help to capture part of the point that the hon. Lady quite rightly makes. 

Chris Heaton-Harris:  Since 1999 certainly, and I believe since 1997, we have not actually had a published error rate. When we discuss tolerable error rates, therefore, we

mean tolerable within a zone that the European Commission is setting, which might possibly be 2% to 5%. Would it not be better to start from a benchmark of what the actual error rate was in each individual area of the European Commission’s spending? We could then move forward from that and judge whether it is improving. 

Danny Alexander:  As I have said, certainly, transparency and the availability of information in such areas always helps the understanding of them, so I would encourage greater transparency of information in the area that the hon. Gentleman suggests. Returning to the points that I was making, however, there are reforms that can be made to the way that such business is done that can help to simplify the system and to ensure that error is substantially reduced, which will expose the areas that are most at risk of the problems that the hon. Member for Luton North has described. 

On voting, I must say that the unanimity requirement that I referred to earlier specifically relates to the interinstitutional agreement. The financial regulation is subject to qualified majority voting. 

Kerry McCarthy:  On the interinstitutional agreement, I noticed in the documents that it is politically binding, but not legally binding. Will the Minister clarify what the consequences of that are if one of the parties to the agreement fails to meet its obligations? 

Danny Alexander:  It is an agreement between the institutions, which is effective in ensuring that we keep the budget down to the lower ceilings that are contained within the agreement. Obviously, all parties are obliged to stick to that agreement, so I am not sure that the circumstance that the hon. Lady describes has arisen. 

Kerry McCarthy:  It is a political obligation. The Chief Secretary is basically saying that it is a moral obligation and a framework within which people will operate. However, what enforcement and accountability mechanisms will ensure that that happens and that people come together? 

Danny Alexander:  It is important to say that while the interinstitutional agreement is a political one—there is still a moral or political obligation to stick to it—the rules around the annual budget that implement it are binding. Furthermore, as the hon. Lady will know, as a result of the Lisbon treaty, a number of elements of the interinstitutional agreement are being transposed into regulations, which also gives them legal force. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Documents No. 9193/10, relating to the functioning of the Interinstitutional Agreement on budgetary discipline and sound financial management, No. 10346/10 and Addenda 1 and 2, relating to a Commission Communication on striking the right balance between the administrative costs of control and the risk of error, .and Nos. 5129/11 and 15759/10, relating to a proposal for a Regulation on the financial rules applicable to the annual budget of the Union and corresponding Opinion of the European Court of Auditors; and supports the Government's approach to ensure that, especially at a time when households and governments across the EU are taking difficult decisions to balance their budgets, EU expenditure must be subject to strict budgetary discipline and appropriate principles of sound financial management.—(Danny Alexander.)  

5.1 pm 

Kerry McCarthy:  I am not sure that I have a great deal to add to what we have already discussed during questions, which I am sure will come as a great relief to the Committee. Both Whips seem glad to hear that. 

We more or less share the Government’s view that it is too soon to push for these changes. It seems like a terribly tedious and drawn out process, as the hon. Member for Daventry, a former MEP, said. I expressed concern during the debate on the European Court of Auditors report the other day that, because the 2009 accounts have only just been scrutinised, there is a time lag between drawing conclusions on what went wrong during those spending periods and the allocation of funds and then trying to implement changes. We are always working several years behind schedule. That is the problem with this, too. 

Simplification measures have been in play for perhaps a couple of years, but it will be a while before we know their outcome. We support the idea of giving things a bit more time. There is concern about how the public would feel if the goalposts were seen to be moved. There is public concern about the fact that the accounts have yet again not been signed off. At a time when each country is being asked to put its own house in order and make significant savings, there is still a public perception that there is profligacy and bureaucracy, which lead to waste and misuse of funds at EU level. It is essential that we do all that we can to restore public confidence in the EU. 

I wish that there were simpler ways to do it, rather than all these interinstitutional agreements, financial frameworks, regulations and so on. Public confidence in the system depends on the public being able to understand what the mechanisms are for keeping the EU accountable and having transparency. It is very difficult to have transparency when the system is so complex. I support the Government in their efforts to work through that maze of bureaucracy to try to make it as simple and transparent as possible. 

There would be real concerns if the tolerable risk of error were raised significantly above the 2% threshold. Agriculture is mentioned as an area where it would be difficult to make progress by simplifying the rules without jeopardising policy objectives. Moreover, to get the current 2.8% rate down to 2% by increasing controls would cost five times more than would be recovered. We seem to be in a Catch-22 situation, which means that we will almost have to accept a higher TRE, and there would be widespread public concern about that. Perhaps the Chief Secretary could explain how that would fit in with the reform of the common agricultural policy and everything else that is being done on that front to try to reduce waste within the agriculture budget. 

Broadly speaking, we welcome the Government’s efforts. I appreciate that it is not possible for the Chief Secretary to give a definite timeline as to when some of these issues will be resolved. It is a case of waiting for the simplification measures to play out and other things to happen. Perhaps he could tell us what discussions are going on and at what point decisions would have to be made. Will things come to a head? Will we have to reject or accept the changes to the TRE rates, or will the proposals gradually fizzle out because there is not enough support in member states for them? 

5.5 pm 

Chris Heaton-Harris:  I spent 10 years on the budgetary control committee, which talked about this issue. I once spent three and a half hours talking about a couple of amendments to a minor part of a financial regulation. Indeed, I prepared so much for the debate we had in the House two weeks ago, but then my contribution was squeezed when the Minister decided to talk for 40-odd minutes out of a one and a half hour debate. However, Members will be pleased to know that I will be brief today. 

When I was in the European Parliament, there was no cross-party agreement on this issue. Alas, the commissioner who was in charge of the administrative change at the time was Lord Kinnock, so anything that the British side did immediately became political. I hope that the one thing that the Minister and the Financial Secretary will have taken away from the debates we have had so far is that there is now cross-party agreement in the United Kingdom. We want things to change on Commission spending and we want the Commission’s financial management to improve. 

Let me make just a couple of quick points. Ministers will go into battle on the next financial perspective in the not-too-distant future, if they have not already done so. We have a veto on whatever proposals come out of that. I would very much like to think that we will talk about financial management when we have that debate. 

After that battle, we have the annual battle in each budget area. The budget is broken down into the Commission’s seven big spending areas, including common agricultural spending. There is a big political battle over how much money is allotted to each area. Then, almost immediately—the financial year runs from 1 January to 31 December—we get amending budgets from the European Commission, which transfer quite huge slugs of money from one part to another. Such things go through the European Parliament without anyone batting an eyelid. They then come to this House for scrutiny, and we take note of them, but we should pay more attention to how the Commission manages its money mid-year, as well as at the end of each year when we look back. 

5.7 pm 

Kelvin Hopkins:  I shall not speak for long. I hope that the Government will continue to take these matters seriously in discussions in European Councils. After 16 years, we could become blasé or complacent about the fact that the budget has not been signed off. I do not think we would feel quite so complacent if the Comptroller and Auditor General refused to accept the British Budget and was constantly saying that the Government had got it wrong. We must expect the European Union to adhere to the same standards as we do at national level. We must not accept second-rate financial control, especially because we are substantial net contributors to the budget, and perhaps unfairly so. 

It is astonishing that it would cost so much—possibly five times as much as the amounts involved—to collect these extra millions or billions of Euros. As I said, a 2% error in Britain’s Budget would amount to £12 billion. If it cost five times as much to collect that, we would be talking about spending £60 billion to collect £12 billion—I think not. If we had a few more tax inspectors, we could

collect a lot more than £12 billion in Britain, and the same must surely be true of the European Union, although things might be slightly more complicated. Nevertheless, collecting extra cash or making sure that cash is not misused would surely not cost five times more than the sums involved. 

The problems arise because of the nature of the EU budget and the fact that it is spent in a strange way under the CAP and the structural funds. Lots of pots of money go to different people in different places at different rates. That promotes fiscal transfers between member states. Some of those transfers are rather arbitrary and unfair and do not necessarily relate to the living standards in particular countries. That is one reason why Mrs Thatcher rightly negotiated the UK rebate. It was very disappointing when Tony Blair chose to give away a substantial chunk of that rebate for nothing in return. I found that astonishing. I was here at the time, and in a debate just before he went off we said that we wanted a CAP reform. He said he would go away and get it, but he achieved no reform and came back with less rebate than we had had before. However, that is history. We are now looking towards a more rigorous and fairer approach to the European Union. 

I have suggested on many occasions in Committee sittings and in the Chamber that we ought to have a fundamental reform of the European budget. Instead of having complex arrangements, with money allocated under various headings to various pots, we could have a simple fiscal transfer at some level from the rich nations to the poorer nations in the European Union, if that was seen to be appropriate. We would be net contributors according to our relative wealth, and some of the poorer countries would be net recipients in exact proportion to their relative poverty. That would at least be transparent and fair. Responsibility for allocating member state funding would fall to the member state Governments, who would no doubt choose to spend it appropriately. I am sure we would spend it appropriately in Britain if we were net recipients. 

We would say to the net recipients, “It is your responsibility to spend it appropriately.” That would be fair. If they did not spend it fairly within their own countries, at least they would be democratically accountable. The electorates in those countries could say, “We have been getting so many billions of euros from the European Union. We want to make sure that the money is spent fairly.” They might choose to subsidise agriculture rather differently. Who knows? 

In my view, having a standard way of subsidising agriculture across the European Union is nonsense. Agriculture varies from country to country. Some countries practise intensive farming, which can represent a much smaller proportion of the total economy, and are, like Britain, net importers of food. Others are more traditional, less efficient and have a different approach. We might choose—I have said this many times; it goes down well with Welsh colleagues—to subsidise Welsh hill farmers, because hill farming is a part of our culture and preserves environments. If Welsh hill farmers wanted a subsidy to keep their way of life going for all our benefit, that would be a good thing. 

Vast subsidies for grain producers who make millions on the flatlands of East Anglia might not be appropriate. Some do not believe there should be subsidies at all and that it should be left entirely to the market. I am an

interventionist—as one might expect from someone from the left rather than the right. I am happy to see subsidies where appropriate, and a degree of intervention by Governments in the economy. The CAP, however, is complete nonsense, which should be abolished. It should be left to member states to decide how they subsidise their agriculture according to their own needs and choice. 

I hope that one day—it is not going to happen soon —we may move towards a more sensible European Union in which any redistribution using fiscal transfers across the EU is done on the basis of relative living standards in the different member states. The rich would therefore be net contributors according to their wealth, and the poor would be net recipients according to their relative poverty. That situation is a long way off, but I hope that one day we will get there. 

5.14 pm 

Dr Coffey: This may be my only opportunity to speak at a European Committee, so I want to take advantage of it. When I was trying to be elected to the European Parliament, one of the easiest ways in which to get applause was to mention the very fact that the accounts had not been passed off. In addition, I used to say to audiences that one of the challenges in Westminster was that being put on a European Committee was often regarded as being put on detention rather than as being an important part of our legislative scrutiny. So I ought to take the opportunity to speak while I can. 

A key thing that the whole Committee is united upon is the fact that the tolerable risk of error is simply ridiculous. Until we can be confident that money is being spent appropriately, the tolerable risk of error should not be on the words of the European Commission’s lips. I speak also as a former management accountant and finance director of a company. What the Chief Secretary said earlier was absolutely right. Taking a risk-based approach is the right thing to do, but we have to ensure that some dull stuff happens, which is the practice of codifying controls and applying them in risk management. Back in my company, that was one of the most difficult challenges. Employing governance is not exciting, but when one can show people the money that has been saved and the behavioural improvement generated, one can spend one’s time doing valuable things and allow the controls to look after themselves, with occasional monitoring. If we rely on auditors to check that the financial accounts of a business are absolutely correct, we are living in cloud cuckoo land, because it is easy for a financial director to run rings around auditors. That system relies on the integrity and professionalism of the people involved in running the schemes’ finances, and transparency and accountability make up another key part. 

Often, the sanctions that could be applied are another tool. I am not sure how the sanctions are enforced, and I do not expect the Chief Secretary to go into great detail—if any at all—on that. MEPs often said to me that it was the member states that were spending the money incorrectly, and I would respond, “Well, you’re the ones dishing out the funds, so stop doing that if they’re being spent wrongly.” That is one way to try to stem the flow of funds. 

Returning to the point on transparency that was made by my hon. Friend the Member for West Worcestershire, I would appreciate it if the United Kingdom took leadership on that issue and published some of the information on errors in our own spending programmes that my hon. Friend the Member for Daventry referred to, so that in the Council of Europe we can say, from a position of strength: “We are trying to put our house in order, and we encourage others to do the same.” We need to ensure that every time an MEP, a Minister in the Council of Europe or the Commission comes up with a proposal that means spending more money—we and our constituents putting our hands in our pockets to pay more tax—we are confident that the money will be spent appropriately across the European Union, rather than our perhaps being concerned about fraud. 

5.17 pm 

Danny Alexander:  I am pleased to have been able to take part in this short and good debate—it has not felt like detention at all. I will try to answer the few questions briefly, but first it is important to recognise that the context of the debate has shifted substantially, both in this country and in other European countries, because of the austerity regimes and the need to make spending cuts, to ensure that we deal with our massive budget deficit, to reduce our borrowing and to live within our means. That is going on in both the UK and other countries, and across Europe it is promoting a much greater interest in the proper use of funds that are allocated at European Union level. We need always to make the argument in that context. 

Two issues have come across strongly in the debate. One of those issues is a great concern about the tolerable risk of error and the time scale on which that would be considered, and the other is a very strong argument in favour of transparency. As mentioned by the Member for Bristol East, those issues reinforce already strongly held Government views. The debate has shown that there is cross-party consensus. Among those from a traditionally pro-European perspective—the hon. Lady and I worked together in the dim and distant past on the Britain in Europe campaign—and those with a more Eurosceptic position, there is a common view in the United Kingdom that we need to have much stronger financial discipline at a European level. 

Nick Boles (Grantham and Stamford) (Con):  And a great success that was. 

Danny Alexander:  I did not put that on the record as a success, but to show that across Parliament there is a common view that budget discipline, control of public finances and ensuring that European funds are properly managed are matters of high priority. That is an important point. 

Kelvin Hopkins  rose—  

Danny Alexander:  I will give way to the hon. Gentleman, for old times’ sake, if nothing else. 

Kelvin Hopkins:  I am sure that the Chief Secretary has no doubt as to my position on the matters. I agree with him entirely on financial discipline, but he was no

doubt an enthusiast for Tony Blair and his position on the European Union, so what are his thoughts on casually giving away a great chunk of our rebate? 

Danny Alexander:  Actually, one of the points that I wanted to agree with from the speech of the hon. Member for Luton North was that the former Prime Minister did the country a grave disservice in giving away part of the rebate. The hon. Gentleman said that that was in the past, but we are of course living with the consequences now, with the UK’s gross contribution rising. 

The Government have just been through a spending review, which is now being implemented and which has caused difficult decisions to be taken—rightly, in my view, because of the importance of dealing with the deficit that we have. However, of course, one element of public expenditure that is rising is our gross contribution to the EU budget. That is now the size of the budget of a middle-ranking Department. It is just less than the Department of Transport budget but, the way things are going, it could well exceed it in future years. That helps to make our case. 

The hon. Member for Luton North also made the case that a responsibility lies with member states. Although I do not agree with his proposal, it is important that member states should understand their responsibilities. As a highland MP, I join the hon. Gentleman in celebrating

the importance of hill farmers, although that may be stretching the point of the papers before the Committee somewhat. 

The hon. Member for Suffolk Coastal rightly made the point that the “tolerable risk” of error in the proposals is intolerable, as it were, and that we need proper controls of other sorts. I can reassure her that the UK is taking a leading role on the transparency agenda. We are making the case domestically that transparency is important to greater public understanding and control, and to the ability to hold politicians and decision makers accountable here. We think the same about the European level, and we make that argument strongly. 

I hope that I have left the Committee in no doubt that the UK Government attach great importance to continuing strong financial discipline in the European Union; that the lead that the Prime Minister showed in the European budget negotiations for this year sent a strong signal in that regard; and that we shall continue in that manner in the budget negotiations for the next two years and for the next financial perspective, to ensure that the strong control of public spending that we are exerting domestically is also reflected in decisions at European level. 

Question put and agreed to.  

5.22 pm 

Committee rose.