Financial Management

The Committee consisted of the following Members:

Chair: Mr Charles Walker 

Ashworth, Jonathan (Leicester South) (Lab) 

Clark, Greg (Financial Secretary to the Treasury)  

Drax, Richard (South Dorset) (Con) 

Hands, Greg (Chelsea and Fulham) (Con) 

Hemming, John (Birmingham, Yardley) (LD) 

Hillier, Meg (Hackney South and Shoreditch) (Lab/Co-op) 

Hopkins, Kelvin (Luton North) (Lab) 

Leadsom, Andrea (South Northamptonshire) (Con) 

Leslie, Chris (Nottingham East) (Lab/Co-op) 

Mann, John (Bassetlaw) (Lab) 

Mowat, David (Warrington South) (Con) 

Rees-Mogg, Jacob (North East Somerset) (Con) 

Shannon, Jim (Strangford) (DUP) 

Alison Groves, Committee Clerk

† attended the Committee

The following also attended, pursuant to Standing Order No. 119(6):

Brown, Lyn (West Ham) (Lab) 

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European Committee B 

Wednesday 7 November 2012  

[Mr Charles Walker in the Chair] 

Financial Management

8.55 am 

The Chair:  Does a member of the European Scrutiny Committee wish to make a brief explanatory statement about the decision to refer the relevant documents to the Committee? 

Jacob Rees-Mogg (North East Somerset) (Con):  Mr Walker, what a pleasure it is to serve under your chairmanship, which I look forward to doing under another capacity later today. It might be helpful to the Committee if I take a few minutes to explain the background to the documents and the reasons why the European Scrutiny Committee recommended them for the debate. 

The Commission publishes annually a synthesis report on how it has performed its financial and other management responsibilities on the assurances provided by its internal control systems. The Commission’s communication, document (a), is its synthesis report for 2011, which contains a summary of progress made in 2011 towards developing the performance potential of the Commission’s management and control systems on systemic, cross-cutting issues. It highlights priorities for future improvements and sets out the Commission’s conclusions on each main management area. 

Article 318 TFEU imposed a new financial management requirement on the Commission for it to report annually on the evaluation of the European Union’s finances, based on the results achieved. The first of those reports was published in February. In May 2011, the European Parliament requested that the European Court of Auditors gives an opinion on the Commission’s first report, once received. The ECA opinion, document (b), is the response to that request. 

In the opinion, the ECA considers the evaluation report to be 

“vague, short on substance and, consequently adds limited value”, 

but emphasises that it has the potential greatly to increase the accountability and transparency of Commission spending. The ECA concludes that that is an opportunity for the Council, the European Parliament and the Commission to agree on how the evaluation report can be changed to make it as useful as possible and to consider three issues, such as whether the report should cover not only results, but economy and efficiency, and the scope and expectations in respect of the ECA’s role in examining the report. 

As a net contributor to the EU budget, the United Kingdom has a direct interest in enhancing the transparency, accountability and quality of the Commission’s spending. In that context, the European Scrutiny Committee recommended the documents for our debate. We suggested that members of the Committee explore particularly how the Government can promote the opportunity noted by the ECA for changing the Commission’s evaluation report to make it as useful as possible. 

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8.57 am 

The Financial Secretary to the Treasury (Greg Clark):  It is a great pleasure to serve under your chairmanship, Mr Walker. I hope that members of the Committee did not have too late a night watching the election results and are fully prepared for the excitement of the debate. I suppose that this is the first opportunity to put on record our congratulations to the re-elected President and to his rival for a spirited campaign. 

It is a pleasure to appear before the Committee to discuss the important matter of the financial affairs of the European Union, as my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) has said. I shall open the debate by setting out the Government’s by now well-known position on the use of EU funds. As I said in a debate yesterday, my approach to the scrutiny of the documents is that it should not simply be a matter of going through the motions. If constructive suggestions are made, I shall welcome them. There is an amendment very much in the spirit of that, which I am perfectly happy to accept. 

The House is united in wanting to take the efficient management of EU funds very seriously. Improved financial management and control over EU funds are essential to budget discipline and value for money in the EU. That has never been more vital than during the austere times that we are experiencing throughout the continent. Public resources are scarce and European Governments are having to take the difficult decisions necessary to put their public finances in good order. It is always and everywhere right to be proven to be rigorous in the use of public funds but when cuts are being made, that responsibility is even greater. 

As my hon. Friend said, as a major net contributor to the EU budget, UK taxpayers are particularly vulnerable to the consequences of bad financial management in the EU, so the Government take reports on the findings of the European Court of Auditors extremely seriously. 

The Commission needs to be better at making use of existing resources rather than calling for ever bigger budgets to plug the hole that a regime better able to manage its resources would be able to fill. That is precisely the message we will be giving to the Commission and the European Parliament. 

All EU spending must adhere to the highest possible standards of financial management and transparency, and the recurrent failure to achieve a positive audit opinion from the European Court of Auditors on the EU accounts is completely unacceptable. The ECA’s analysis of the legality and regularity of the accounts is of grave concern. The 2011 report on the 2010 budget, which the European Court of Auditors released yesterday—the Committee, I am sure, will want to look at it in the future—estimated that the overall error rate is 3.9%, an increase on the 3.7% error rate for 2010. 

The debates that we were having last week on the EU budget commanded the consensus of the House—the Commission’s call for a 10% increase in the EU budget over seven years was considered, quite rightly, to be a monstrous request. Nearly 4% of current payments are questionable through irregularities of one sort or another, which is nearly half the increase that caused so much outrage in this House. It is particularly important, in the context of the negotiation of the multiannual financial framework, that these matters are taken more seriously. 

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We would like to see an error rate that is as low as it can possibly be. In this country, the Public Accounts Committee would regard that performance as completely unacceptable. Accounting officers would scarcely leave the Committee Room of the Public Accounts Committee standing if they had to report fraud and error at that level. We want to see the standards of this country adhered to in the continent. 

The opportunities for robust scrutiny are hampered by lack of genuine transparency in the manner in which funds are often used. That is why, in February, the UK took the unprecedented step—it is the first time we have done it—together with the Netherlands and Sweden, of voting against the sign-off of the 2010 accounts, and issued a joint statement calling for immediate improvements. This sent the strongest possible signal that financial management in the EU, in the view of this country, is not good enough and must be improved. 

The Government are disappointed with the Commission’s report, which is both inadequate and unfit for purpose. Reports such as this are vital to enable good scrutiny of Commission management activities. Regrettably, the first iteration of the Commission’s report is disappointing in its presentation and timing. The report should have been issued much earlier to inform the discharge conclusions. The fact that it was not, defeated the purpose of the process entirely. 

The report did not focus nearly enough on the results, which is ironic for a report that analyses management activities “according to results achieved”. Management results have to be more thoroughly analysed but the Commission’s description of its achievements is limited as it provides no clear information on results and impacts of actions taken. It reflects very poorly on the Commission and its commitment to good management if it cannot deliver on these key documents. 

The Government welcome the European Court of Auditors’ critical analysis of the report and its constructive suggestions for improvements. It is good to note an institution of the EU not pulling its punches in holding the Commission to account. We particularly agree with the ECA on the following points: that it is important to enhance transparency and accountability; that the report should concentrate far more on actual results; and, where results are concentrated on, they should be against clear objectives, not just completed programmes. 

The Government remain determined to push further to seek improvements. As I said before, in February we voted against the discharge of the EU accounts. Together with the Netherlands and Sweden, we have set out concrete actions that would improve financial management, including the call for member states to take greater responsibility for spending EU funds and greater transparency. 

In addition to pressing publicly for urgent improvements to EU financial management, the Government have been actively engaging with the Commission to seek further improvements. There have been two guiding principles to our discussions: greater simplicity of rules and ensuring financial propriety. Greater simplicity of rules brings double benefits. Not only will it encourage access to union funds to smaller beneficiaries, such as small and medium-sized enterprises, but it will reduce the probability of errors, a key issue in the 2010 report. 

Another area in which the Government have secured greater powers of oversight is in ensuring member state

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scrutiny of the management of the Commission’s real estate, providing a check against extravagant building projects. Through the new financial regulation we have obtained a Council veto on what might be termed vanity building projects initiated by the Commission, which previously could appear without any check. 

I will finish by reiterating our dissatisfaction with the Commission’s report and the slow pace of reform in the management of EU funds. We consider that good quality performance reporting is essential in ensuring accountability for the EU budget. We will take note of the comments that I am sure members of the Committee will want to make in helping us to advance this agenda in Brussels. 

The Chair:  We now have until 9.55 am for questions to the Minister. Questions should be brief. I will allow colleagues to ask supplementary questions if they are in order. 

Chris Leslie (Nottingham East) (Lab/Co-op):  Good morning, Mr Walker. Indeed it is a good morning: the triumph of hope over fear and good progressive values over austerity and right-wing ideologies, but that is obviously just in the House of Commons, never mind beyond. 

I agree with the Minister that there are massive inadequacies in the report before us. Anybody looking at it today would not regard it as a genuine and rigorous review of the irregularities and error rates in the Commission’s activities. What representations has the Treasury made to the Commission on those points? Obviously, the Court of Auditors has representations to make to the Commission, the European Parliament has its Budgetary Control Committee, and the European Scrutiny Committee is talking about it. On page 39 there are major reservations about rural development and agriculture. On page 41, year after year there are problems with the ERDF and cohesion funds. Fisheries expenditure irregularities are on page 40. Energy and transport programme problems are on page 44. What representations does the Treasury make directly to the Commission when it hears of such issues? 

Greg Clark:  I am grateful for the question. Representations are made at every opportunity. During budget negotiations, for example, when we are in discussions with the budget Commissioner, as we have been in recent weeks, the Treasury consistently highlights the evidence that we have seen in the report to question what could be done better with the resources currently available. We engage in weekly negotiations in the budget committee. 

Financial regulation, to which I referred, is a practical way of not only making representations for the record, as it were, but of looking for improvements to be made. Representations have been led by my officials in the Treasury, supported by Ministers. As the shadow Minister knows, we have a number of ECOFINs coming up during the weeks ahead. The budgetary incompetence of the institutions will be very prominent in every one of those discussions. 

Chris Leslie:  As I understand it, our National Audit Office has a sort of rolling relationship with the Public Accounts Committee. Members who have served on

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that Committee will know that there is a fairly rigorous process of picking particular case studies or programmes and ensuring that they are constantly referenced to the Public Accounts Committee. Is the Minister satisfied that there is the same rigorous and regularised process in the European Parliament? Are those areas where perhaps there needs to be further change and reform? 

Greg Clark:  The hon. Gentleman is absolutely right. If we look at the arrangements that we have in this country through the National Audit Office and the Public Accounts Committee—I served on the PAC for two years—it is a model that we should seek to persuade our colleagues in Europe to follow. Getting a view cumulatively over time, having different reports into different specific areas, not only gives a rigorous insight into problems, in particular items of spending, but gives a picture of wider systemic problems that have linkages between them. That is something that ought to be better done. 

One problem that I mentioned in my opening remarks is that the delay in publishing these reports means that in some cases we are looking, both in the Parliament and here, at errors and deficiencies in processes two years later than is opportune or ideal. There needs to be greater speed and spirit of alacrity in looking at problems at an earlier stage, rather than their being presented as historical facts receding into the distance. 

Chris Leslie:  That is one of my main concerns about the report before us from the Court of Auditors and the Commission. There is some scrutiny of the multiannual programmes, the outcomes that they espouse and whether they are meeting their objectives. However, I am not convinced that there is sufficient drilling down into key milestones of those performance indicators along the road of a programme, year by year, month by month. To what extent is it possible to encourage the Court of Auditors, the Commission and the European Parliament to start getting into the granularity of those issues along the way, rather than just looking at the programme after the fact? 

Greg Clark:  That is exactly the approach we want to see taken. That is also true for some of the supporting institutions. The body that looks at fraud, for example, should take a calibrated approach to look at the biggest new risks that are emerging and seek to be fleet of foot in drilling down in detail on areas that are causing particular concern, rather than take a formulaic, bureaucratic approach. 

Jacob Rees-Mogg:  I have a few questions on error rates. On page 17, the error rate quoted by the Commission is between 2% and 5%, having come down from 7%. It then goes on to say that 

“the method for quantifying serious irregularities in public tendering in all policy areas” 

is about to change and 

“is likely to increase mechanically the reported error rates”. 

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Does a mechanical increase mean that the previous error rate was understated? What else could it mean? I should be grateful if the Minister would explain what the Commission means. 

Greg Clark:  I will do my best, and inspiration might reach me. We face a problem when we see an increase in the reported error rate, for example, in yesterday’s report—up to 4% in dispute—compared with the previous year. However, that might be a positive result of better ability to detect errors that had previously gone unreported. A similar situation arises when an increase in reported crime can reflect better reporting of crime. We need to understand better whether the recent increase is a result of more fraud and error coming to light or whether the incidence of fraud is increasing. As to the mechanical correction, I am not able to shed any light on that now. I will have to write to my hon. Friend and the Committee. 

Jacob Rees-Mogg:  Following on from that, the documentation the Commission provides in annex 1, reservations 2007-11, on a lot of occasions excludes a base error rate of 2%. I wonder, when the figures are calculated, whether that base error rate is viewed to be zero, or is 2% added on as just an ordinary working assumption? 

Greg Clark:  My hon. Friend makes a characteristically eagle-eyed point, and he is absolutely right. We should be rigorous in ensuring that any error or fraud is regarded as unacceptable, and we should not be building tolerance into the system that, frankly, could mislead Parliaments and members of the public in all the nation states that the performance of the institutions is better than it is. There should be a zero base, and we should assume that anything beyond that is a matter of concern. 

Jacob Rees-Mogg:  Finally, page 19 of the bundle states: 

“Commission departments have different approaches to considering and calculating residual error rates, which take into account the specificities of the policy areas for which they are responsible.” 

I appreciate that there may be some areas where it is difficult to have a completely uniform policy, but will the Minister indicate how much progress is being made towards a more simplified approach to error rates, so that we can have absolute confidence in the high figure of 3.9% that has already been quoted? Although it is always difficult to know about an error—if someone knows precisely what their error is, they will surely be able to remove it—we could have more confidence that some departments are not hiding errors when others are admitting to them more straightforwardly. 

Greg Clark:  My hon. Friend is absolutely right that we should have a consistent approach. One of the improvements in the EU that we can point to is the progress on financial regulation, the purpose of which is to simplify rules and conventions across different programmes. If different programmes have different rules and procurement obligations, the obvious difficulty is that that gives opportunities to fraudsters and may potentially conceal practice that departs from good practice. The greater the consistency, the greater the understanding of how things should be done and of

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what is and what is not acceptable. Of course, part of the function of the European Court of Auditors is to make such recommendations, and it has been influential on financial regulation. 

John Hemming (Birmingham, Yardley) (LD):  First, Mr Walker, I share the delight of the hon. Member for North East Somerset in this first dose of your double dose of chairmanship today. 

I have further points that I will raise later, but I have a question for the Minister in reference to page 50 of the bundle. In a sense, what appears in reports often indicates the culture of organisations, and at the bottom of the page it states: 

“This demonstrates that most agencies (except for REA and ERCEA) reached ‘cruising speed’ in 2011.” 

What does “cruising speed” mean? Does it mean that the culture of those bodies is such that the outcomes they achieve are less important than how many staff they employ, or does it have any other significance? 

Greg Clark:  “Cruising speed” is not a term I would choose to deploy, and the hon. Gentleman may be sure that the Government of whom I am a member do not regard cruising speed as an objective to be reached in their responsibilities. That goes back to the point raised by my hon. Friend the Member for North East Somerset: one should aim to root out all fraud and error, and not to build in any acceptance or tolerance. 

John Hemming:  Essentially, the Minister is confirming that the Government have a similar view to mine, which is that we should be looking for outcomes from the European Union Executive agencies, rather than just a desire to maximise their staff rates. Is that true? 

Greg Clark:  That is completely true. One of the reasons why I deprecate the use of the expression “cruising speed” is because it implies that speed is the only objective. Obviously, we want decision-making processes to be fleet of foot, but results, rather than administrative convenience, are the objective on the matters before the Committee. 

Richard Drax (South Dorset) (Con):  It is a pleasure to serve under your chairmanship, as always, Mr Walker. The letter in the bundle, submitted by Her Majesty’s Treasury, says: 

“There are no suggestions that fraud has taken place.” 

Can the Minister honestly tell us that fraud never takes place in this panoply? 

Greg Clark:  My hon. Friend may be referring to a particular aspect. It is undoubtedly the case that fraud took place across a number of EU programmes, and there was error and misreporting also; and just as the National Audit Office and the Public Accounts Committee here sometimes find fraud as well as administrative error, that is, I am afraid to say, undoubtedly the case in the European Union. It is not simply administrative mistakes; fraud does take place there. 

The Chair:  We now come to the debate on the motion. I inform the Committee that I have selected the amendment in the name of Chris Leslie. 

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Motion made, and Question proposed,  

That the Committee takes note of European Union Documents No 11112/12 and Addendum, dated 8 June 2012, relating to a Communication from the Commission to the European Parliament, the Council and the European Court of Auditors: Synthesis of the Commission’s management achievements in 2011; and No. 11479/12, dated 15 June 2012, relating to European Court of Auditors’ Opinion No. 4/2012 on the Commission’s evaluation report on the Union’s finances based on results achieved established under Article 318 of the Treaty on the Functioning of the European Union; considers the Commission’s report to be disappointing, inadequate, and unfit for purpose; consequently welcomes the European Court of Auditors’ critical analysis of the report and the constructive suggestions for improvement; agrees that a thorough analysis of results achieved against planned outcomes would be a useful focus for future reports; considers that useful and timely information on transparency, accountability and quality of European Union spend is essential to facilitate a better understanding on behalf of Member States, the public and other institutions of the performance of the Commission’s management activities; agrees that a timely report is necessary to inform the annual Budgetary discharge process; and supports the Government’s efforts to drive important and urgent improvements in the quality of future evaluation reports, as well as wider financial management in the European Union.—(Greg Clark . )  

9.21 am 

Chris Leslie:  I am not sure whether it is typical practice to move amendments in European Committee B, but should hon. Members wish to see the text, it is available to be circulated. 

There can surely be no doubt now about the general feelings of the House of Commons on the EU Budget, particularly after the decision last Wednesday, when we argued firmly for a real-terms reduction in the EU budget. It was not, however, just about the amount of expenditure; I sense a strong mood in the House for EU budget reform. 

In that spirit, I feel that the motion before us, from the Government, needs toughening up; it needs a bit of vim behind it to give it a slightly stronger edge. In the motion I see a lot of commentary about taking note, considering, and agreeing—all those various terms of art—but it does not focus on specific reforms to move the issue forward, and that is the reason for the amendment. In particular, at the end, we should add a call for the Government to make specific proposals for strengthening the independent external auditor of the EU budget and their programmes. We should focus also on the procurement rules—an integral part of this whole mess—and ensuring that we have qualified and experienced audit professionals who implement a regime that is much more risk-based, and that drills down into the areas where there have been problems in the past, rather than spreading itself so thinly and not getting a grip on the problems. 

We need to ensure that, in EU expenditure, we have high efficiency goals and see the added value that EU expenditure should bring; it should not be substituting for nation state expenditure, but supplementing it. Indeed, the hon. Member for Birmingham, Yardley, pointed out the “cruising speed” phrase on page 50 of the bundle; that typifies the whole issue. The notion that coasting along merrily is an acceptable state of affairs is not right. Optimal performance, efficiency and effectiveness in EU budgets should be our goal. I worry about rolling on, year after year, with us commenting on these issues but without any reform agenda for the EU budget process. That is why we ought to find ways to bring

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forward specific proposals. We might need to find ways to eradicate loopholes and duplication in the procurement rules, so that end users and potential tenderers are watched and encouraged to adhere to best practice. 

We might want to consider giving new powers to the European Court of Auditors, which must be constantly exasperated, because the Commission does not properly adhere to many of its recommendations. We might need to think more about the impact that errors and irregularities have on communities and the economy, because such errors are not simply accounting anomalies; they have a deleterious effect on jobs and economic growth. We need to consider the negative effects that that state of affairs has on certain projects. The Minister must push much harder for a risk-based approach and ensure that we have an agenda in the negotiations on 22 and 23 November, and beyond. 

Richard Drax:  I find these debates completely surreal. Does the shadow Minister realistically think that the accounts will ever genuinely be signed off? 

Chris Leslie:  I hope so. Surely it should not be beyond the wit of a club of 27 nations to insist that their secretariats do a decent job. That requires a number of things; more transparency and rigour is required in how the secretariats work, which of course means that nation states, not just the European Parliament and others to whom the job is delegated, must have some level of scrutiny. 

Improvement is needed at both ends of the spectrum. There are a number of ways in which the procedures of the European Parliament might be improved, but the Governments of the UK and the other 27 member states must also be far more demanding about what is happening. The money is “once removed”, so there is an indirectness about it, but that should not mean that we turn a blind eye and put the matter in the “too difficult to handle” box. A level of active reform is required, which is why, if we are pro-European—we have been accused of anti-European sentiments in the past, and such accusations were certainly flung around last Wednesday, when the House voted for a real-terms reduction in the EU budget—it is our duty to prove that strong stewardship of taxpayers’ money is possible. If we believe in that principle, it is our duty to pursue this agenda, rather than allow the notion of pooled budgets to be tarnished with such a negative reputation. 

Jacob Rees-Mogg:  I am pleased that the Opposition have tabled an amendment, because that helps to ensure proper scrutiny. From what the shadow Minister has been saying, I wonder whether we can do anything other than withhold money to put sufficient pressure on the European Union to get its accounts signed off properly. Surely everything else has been tried. Surely the previous Government were as concerned as this Government about money being wasted, but there has been no incentive for the European Union to improve its act, because the money simply flows in. 

Chris Leslie:  I do not want to be quite so defeatist. We should try to reform the EU budget, and I think that that is possible, but it requires a level of leadership. In opposition, all we can do is implore the Government

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to take stronger and more stringent actions in negotiations. That is why we have tabled the amendment—because it is time to get a grip on the situation. With the greatest respect to the Minister, who is new to the job, we need to pay far more serious attention to the matter, and that is why we tabled the amendment. 

John Hemming:  The shadow Minister has made it clear that he does not think we should withhold funds because a lot of the money is defrauded away. Would he be willing to make use of a veto as a way of showing leadership? 

Chris Leslie:  We have had this discussion. Of course the veto is there as a potential tool, but surely agreement on a way forward from the 27 member states would be preferable. It is the UK’s negotiating task to ensure that it persuades all its allies to agree with that agenda. Quite honestly, I do not really see a massive amount of resistance from the other 27 nations to ensuring efficient, transparent and proper expenditure of all our taxpayers’ money. 

The anecdotes are dreadful. There was the story in the news yesterday about the European Court of Auditors report: a farmer was given a grant for 150 sheep and it turned out he did not have any sheep. There was a grant for a fruit processing factory built with EU aid to the tune of €200,000, and it turned out that it was for a private residence in northern Italy. There are examples where a level of rigour and improvement is possible in the Commission’s rules, auditing and inspection regime. I do not believe that this is an impossible task. It requires specific recommendations, but we have not listed all of them in the amendment; all we are trying to do is say, “Come on Treasury, roll up your sleeves, get in there and make some proposals, and do a better job.” 

This will no doubt be an ongoing task. It is not a sudden failing of this particular Minister, but we need to grip this in a far more effective way. My right hon. Friends the Members for Morley and Outwood (Ed Balls), and for Paisley and Renfrewshire South (Mr Alexander), mentioned it in their article in The Times a week last Monday. That is another reason why we felt this particular agenda needed to be put forward. I know that hon. Members will agree. I inferred from what the Minister said earlier that he supported the amendment. I hope he does, because it would be good if the House of Commons were united on this issue. 

9.31 am 

John Hemming:  I may make some points on which my hon. Friend the Member for North East Somerset agrees. Ultimately, there is the question of how firm we are willing to be. I believe in being part of the European Union, but I am concerned that it has been allowed to develop in a very lax way because of an unwillingness to take robust positions. I hold the Opposition responsible for that in the past. The Government have been much more robust in the way they have approached the European Union. The shadow Minister reminded me that I should declare my ownership of a farm. Although I do not claim any single farm payment, the tenant farmer does, so arguably I have a potential financial interest there. I refer hon. Members to my entry in the Register of Members’ Financial Interests. 

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One of the things I always look at in the European Union’s budgets is tobacco support. The out-turn figures always show a lot of money spent on tobacco support, but in the original budget there is no money budgeted for that. Clearly, that money is vired from one budget to another during the year. In terms of practical proposals for the Government to look at better financial control in the European Union, one is on the process of virement, who is agreeing the virement, and what pressure is put on them. Obviously, at the time that the budget is agreed, all these figures are put in front of people, and there is zero for spending on tobacco support. Everyone says, “Jolly good show” and passes it through. During the year, pressure is put on a Committee or an individual to keeping vireing money in. 

One of the tests should not so much be the “cruising speed” for organisations—whether we have managed to employ everyone we are allowed to employ—but whether we are getting bangs for bucks. What is the outcome we are achieving for the funds? Although there is a problem with fraud, there is also a problem with waste. If we are going to get better control, that control has to be exercised at the budgetary level; we should not have a lax vireing system that allows people to spend money on anything just by pressurising the right individual. 

There is a secondary problem. I have been involved in local government for many years, ending up as the deputy leader of the largest local authority in western Europe. Hence I have a certain amount of experience of public finances—also of private finances, having run my own business for years. There is an issue with things such as the European regional development fund and it needs to be taken into account. If we are to get effective use of the funds, that cannot all happen in one year. 

There is a difficulty with the processes of agreeing a budget for grants, identifying bids that satisfy that budget and then, having identified those bids and agreed them, paying out on them. That cannot happen in one financial year; if it is, the money is being wasted. At the end of the year, there is what is known as “a dash for trash”, which is finding things and making sure that funds can be claimed against the budget head so that the money is spent and the budget is not taken away. 

In addition to looking at the questions of budgetary control, the details of the authorisation of funding need to be examined and that needs to happen within a sensible period. If the aim is to exercise cash control in one financial year—at the end of the day, it is during the next year financial year when period 13 issues and adjustments and all sorts of things are being dealt with—there must be a process for a reasonable period of time to be allowed to identify charges to the budget and then for control payments to be made against them. Otherwise, there will be the wastage that happens with much European funding. It may be generally accepted that it is used effectively, because it is not fraud, it is properly recorded and it can even be properly recorded in the budget by not being vired, but it is still wasted. 

We are in an environment where we must look after people. We have to protect the financially weak and the vulnerable, so we do not want waste. To get more effective about waste, we need to accept that it takes time to spend money effectively. 

Jacob Rees-Mogg:  We have been putting a lot of time recently into discussing the budgets of the European Union, and the amount of money involved is substantial.

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Over the next multi-annual financial framework, the Government will be arguing for €885 billion of spending and the Commission is going for a figure of somewhere over €1 trillion, so an enormous amount of money is being dealt with. Small percentages of an enormous amount of money are still large amounts of money. I know that this is school-room maths, but it is important to bear it in mind for our constituents, who are facing straitened times. 

There is enormous arrogance within the Commission; I am going to separate the Commission from the European Court of Auditors. Its first report under the Lisbon treaty is clearly deeply inadequate. It does not deal satisfactorily with the problem, and it does not take the problem particularly seriously. Its contempt for proper accounting can be seen in the fact that it has been willing to preside over a system—the Commission takes the responsibility for the budget—whose budget has not been audited for 17 years. It is eye-wateringly extraordinary that we just accept that as a matter of political fact. 

My professional career has been as an investment manager. Any company that fails to get its auditors to sign off its accounts at the end of the year will be suspended by the stock exchange on which it is listed within months of the financial year’s ending. It will be suspended within minutes of the audit report’s failing to give clearance to the accounts that have been issued. 

Indeed, companies that have even a question mark or a slight qualification because of some different practice that the company may use abroad, or something of that kind, will see a significant depression in its share price purely due to the fact that the auditor’s report is qualified. For 17 years, the European Union has been unable to get its accounts signed off by its own auditors. It is not going to outside auditors that would apply standards applicable to other multi-national organisations; it cannot persuade its in-house auditors that it is doing the accounts honestly and decently. That ought to shock us so deeply that we should consider the toughest remedies. 

I am glad to see the Government moving in the right direction. The document pack includes the joint statement on the discharge of the 2010 EU budget, and I am glad that Sweden and the Netherlands have joined us and were not willing to sign off the accounts for this year. However, there is a clear need to go further and there is the evidence to do so. 

The European Court of Auditors’ report is a quite remarkable and forthright document. The language that it uses is not covered by the obfuscation typical of the European Union. The Commission talks about how the accounts should be more transparent and then mentions “synthesis reports” and that sort of thing; it always falls into bureaucratic-speak to confuse people trying to follow what is going on. 

The European Court of Auditors, however, uses the sort of language that is simply not used in diplomatic circles. We all know that diplomatic language is highly codified and euphemistic. I rather like euphemisms and have never objected to them. They are an adjunct to good manners, but in this context the European Court of Auditors is not actually good mannered. It is robust. I will quote little bits of its opinion, which mentions the inadequacies of the report early on, and then says that 

“the Commission does not yet have a clear view of how to fulfil what is being asked of it in the Treaty.” 

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That seems to me to be a sharp criticism of what the Commission has managed to do. The Court of Auditors says that the report is relatively thin, needs a fundamental rethink and that it is 

“vague, short on substance and, consequently, adds limited value.” 

That is a diplomatic raspberry and a half. It reminds me of when I was at school—it was quite a long time ago— 

Chris Leslie:  What school? 

Jacob Rees-Mogg:  It was a well-known school. If someone handed in a piece of work that was particularly poor, the schoolmaster would tear the top of the page and hand it back to get signed by their housemaster and tutor. I was relieved and pleased to see that the recent Nobel prize-winner had a lot of his work returned to him in that state, because so did I. I feel the Court of Auditors has given a rip to the report provided by the Commission. We should take that seriously. 

We have a situation where we are a substantial contributor to the European Union budget. In fact, even if we were a beneficiary, we would be concerned about it, because beneficiary nations want the money to be spent properly on useful projects rather than wasted and stolen. The hon. Member for Nottingham East gave some wonderful examples of where the money is disbursed. Money should not be spent like that; it would be better spent genuinely helping people in the poorer countries of the European Union. As a net contributor, we have a particularly strong and crucial interest in ensuring that the money is well spent. We are taking the right steps. 

The Government are moving in the right direction and I commend the Opposition for their amendment. I will not support it, but it is helpful that the Opposition are uniting with the Government in taking a reasonably strong stand on this issue. I do not mind what their motivations are for doing so. Whether it is because they have seen the light and become as Eurosceptic as my hon. Friend the Member for Stone (Mr Cash), or whether it is because they now love quoting Disraeli, who said that the job of the Opposition is to oppose, so they do so at every opportunity, does not worry me. I welcome them into the tent. 

John Hemming:  Will my hon. Friend accept that it does not necessarily require agreeing with the hon. Member for Stone to feel that the European Union should do its maths right? 

Jacob Rees-Mogg:  My hon. Friend makes a beautifully put point. He gets to the crux of the matter, which is that the European Union is not getting its maths right and is therefore defrauding what it likes to call European citizens, although I reject that idea. 

John Hemming:  Does my hon. Friend also agree that although it is best to achieve agreement among European nations to improve things, if we have no willingness to use any of the tools at our disposal, such as a veto or refusing to pay, we have no pressure to use? 

Jacob Rees-Mogg:  I entirely agree with that. Now is the time to ratchet up the pressure. We started the process when the Government refused to sign off the accounts for 2010. That was an important step, because nobody had done that before. I imagine that it caused

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some shock in the Commission that three countries were going that far, but we need to go further. We know—the hon. Member for Nottingham East is absolutely right on this—that the mood of the country in a time of austerity is one that resents excessive and increased spending in the European Union. Even more, it resents the money being wasted. I usually like cavaliers, but the Commission has a cavalier attitude in failing to report on this failure in a way that the Court of Auditors can take seriously. That is why I urge the Government to ratchet up the pressure. 

Richard Drax:  My hon. Friend is making an excellent speech, which, as always, is humorous. The Government may start to ratchet things up, as he says—we all hope they will—but practically that will not happen. We have talked and talked for years about doing something. If we did do something, surely we would face the EU law. 

Jacob Rees-Mogg:  My hon. Friend makes an important point. To some extent, my quibble over the amendment and the quibble over the main motion is that we have a wonderful set of words—great, fine-sounding, bold words—but bold words butter no parsnips. We need to act. In this Committee Room, I always like to look at the picture of the great man, Alfred the Great, who knew how to deal with Europeans when they were being troublesome. We need action, and I am so glad that the Minister is here because he is a wise Minister, who properly understands these things and does not sweep them under the carpet. 

The great thing is that we have so many points of strong negotiation, which we consistently do not use. There may be many things that are covered by qualified majority voting, and there may be many things that would not be lawful unless we repealed or amended the European Communities Act 1972, but we have the European Union (Croatian Accession and Irish Protocol) Bill going through Parliament at the moment. We have unanimity required for the multiannual financial framework but, absolutely crucially, we have an Act of Parliament required for the unanimity needed for the own resources directive. 

When we use such instruments—the things that need unanimity and need everyone to come on side—we have to say, “If you don’t get your accounts signed off, we’re not going to give the concessions to Ireland and then the Lisbon treaty won’t be properly ratified. If you’re not going to have your accounts signed off, we’re not going to pass the own resources directive through UK law; we will simply leave it in isolation and run on the previous one, which may well be financially beneficial for us.” 

Again and again, there are opportunities for us to take a tough stance, and when it is on something such as fraud, we will carry a lot of people with us, even if their rather more quisling Governments are not willing to stand up to the European Union. We know that the Finns are becoming increasingly Eurosceptic, and they are not alone; there are the Swedes, and the Germans do not like the approach taken by their Government in spending increasing amounts of money in Europe. There is support for what we would want to do, even in the institutions of the European Union, and that is why the Court of Auditors’ report is so important. 

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It is the Commission that is the blockage. It has a high-handed, arrogant view of the world, which is that whatever it does is right, that it should not be held to account and that it can just get away with what it is directly responsible for, without anyone ever saying no. We are feeling, as a nation, that we are very close to the point at which we say no. The Opposition are coming on board and are representing what they no doubt hear from their constituents about the growing anger with what is going on in Europe. The failure to take seriously the depth of recession that we have been through, and the depth of financial crisis that the world has been through, is something that, if not addressed, will allow that anger to grow to such a level that our relationship with the European Union will not be changed in a way that many of us, even the Eurosceptics, would like. 

9.49 am 

Greg Clark:  It is a pleasure to respond to such a wonderful debate, with some excellent speeches. I shall start with my hon. Friend the Member for Birmingham, Yardley. In his illustration of tobacco support he gives a precise example of a problem, which is that things can be agreed at one point and changed during the year, or even beyond it. That is precisely why the auditors and those responsible for financial management need to be fleet of foot, and prepared to change their audit and inspection arrangements as the budgets change during the year. That is important. 

My hon. Friend is absolutely right to talk about outcomes. One feature of the arrangements that we have in our Parliament is that the Public Accounts Committee and the National Audit Office focus on value for money. The Committee’s reports are not just about whether procedures have been properly adhered to and are systemically robust, important though that is; they consider whether value for money has been achieved. That is an assessment of the outcomes as well as the inputs. That approach is one that we ought to take, and we will press for it in Europe. 

The point that my hon. Friend the Member for Birmingham, Yardley makes—again, drawing on his experience of local government in Birmingham—about spending crossing financial years is obviously true. However, every nation on earth that has a budget—indeed, any local authority of any size—has dealt with that problem before. It is a classic problem for the discharge of public expenditure. The idea that it is not handled well at the European level seems to me to be an unacceptable detachment from the best practice that every country in the world has moved towards over many years. In too many ways, the practices, culture and systems that pertain in Brussels are very different from what is taken for granted in every other part of the world, as my hon. Friend was saying. 

John Hemming:  There is a difficulty at the European level, which arises from the EU’s remoteness and tendency to go through other bodies at a lower level. The budgetary control for grant-giving schemes from local authorities is often still a bit iffy here: with Whitehall, there is a tendency to have a dash for trash. The difficulty with the European Union in particular is that that remoteness and the need to go through local bodies such as local councils add additional difficulties to the whole process. Those difficulties need to be factored into the system of budgetary controls, and at the moment they are not. 

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Greg Clark:  My hon. Friend makes an important point. I will say that we have recognised that problem in the past and it is now better than it has been: the dash for trash, as he very evocatively puts it, is better now. There were some egregious examples—[ Interruption. ] He is not totally convinced, I see. Speaking from my experience first as a local councillor, and then more recently as a Minister, I will say that earlier in my public service I saw some short-term grabs of remaining budgets. There is less of that now, but then there is less money now, so those two things may be related. However, my hon. Friend has made an excellent point: the detachment that we see in the institutions of the EU reinforces the problem. 

My hon. Friend the Member for North East Somerset gave a fantastic speech. He talked of the possibility, and in fact the reality, for the Court of Auditors of being both good-mannered and robust. That expression characterises his own contribution to the debate; in fact, he personifies that phrase. I cannot imagine that he was ever in receipt of a ripped piece of homework at school—he has certainly never merited that in this House. There is an important point to emphasise here, which he made very eloquently: whether one is in a recipient member state, or a member state such as ours, which contributes to the EU budget, every penny counts. The ordinary working people of this country and others are paying from their taxes, in difficult circumstances, for every penny that we are talking about. It involves not just millions but billions of euros. That is a responsibility that we feel keenly, although sometimes I am not convinced that it is felt as keenly elsewhere: we are dealing with our constituents’ money and we therefore have an absolute responsibility to make sure that it is spent wisely. 

My hon. Friends the Members for North East Somerset and for Birmingham, Yardley both talked about the remoteness of EU institutions. One aspect of that remoteness is the non-appearance of both the officials and the leading politicians of EU institutions to give an account in debates such as this one. One thing I know from my time on the Public Accounts Committee is that appearing before the representatives of the taxpayers in this country, to be interrogated and to feel directly the concerns they have on behalf of their electorate, is a very significant experience for an official such as an accounting officer. 

John Hemming:  Does the Minister consider that there is an argument for parliamentary Committees to summon Commissioners? 

Greg Clark:  My hon. Friend gets my drift. I think it would be salutary. In fact, it is a slightly odd position for a Minister or, indeed, the Opposition to be debating a critical report on the institutions and the management of the EU without representatives of the EU to explain themselves. They might have some arguments in mitigation, and I would be keen for them to be able to make them. That takes us into the whole process of reform and how we operate with institutions, not only in this country but elsewhere. 

I feel strongly that those with direct responsibility for such matters should be able to answer for themselves. Not only should they be accountable to the people elected democratically in the European Parliament, but there should be regard for those true sovereign citizens

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in the nation states. It would be a salutary experience for those with direct responsibility for such matters to be subjected to direct confrontation, robust though my colleagues and I will be in the Government when we take up such matters. If we could build in more direct accountability, so much the better. 

John Hemming:  I think that my hon. Friend agrees that if the European Scrutiny Committee saw fit to issue a summons to one of the European Commissioners, it might find favour with the Government. 

Greg Clark:  I am very conscious that I am straying into areas in which my personal thoughts can be discerned by my hon. Friend, but he will know that I am not qualified to make such far-reaching constitutional commitments on behalf of the Government. However, I know what he is saying and it will be noted for the record. We have a common understanding of what would be desirable in such matters. 

My hon. Friend the Member for North East Somerset explained how we can advance our case in Europe. He is right in both aspects, the first of which is that we have an opportunity to display the leadership that other nation states have looked to on such issues. We are proud and often refer to the lead that we have set in matters of democracy and freedom. Other countries also look towards our standards of probity and accountability in the use of public funds. They consider it a good example to set other nations. We have a standing, and we should not be shy in our interventions. 

I also agree with my hon. Friend that such a position needs to be accompanied by a determination to be robust. Sometimes, there is not necessarily a favourable hearing. Although we took the significant step for the first time when voting against the discharge, it is evident that most member states failed to do that. It is incomprehensible that other member states did not take the same view as we did. It is right to make a stand even when others disagree. 

Richard Drax:  As the Minister just said, other states have not acknowledged what we have done. The whole accounting system is completed flawed. Is there any realistic hope that we shall ever reach the utopia land in which 27 countries will sign off millions of euros? It will not happen, so why are we trying? 

Greg Clark:  We need to observe the injunctions of our friends and use our positive influence, but we must be robust, stand up and take such action that no doubt did cause a shock throughout Brussels. However, we did encourage some member states to support us, and I want to extend that process. I think that there should be increasing appetite for such action. 

I conclude by referring to some of the points that the shadow Minister made. I believe that the amendment is constructive. In European Committees, in which members of the Committee spend their time looking in detail at documents such as these, my attitude is that it would be absurd for Ministers not to be open to sensible suggestions. That would be a waste of everyone’s time, and such suggestions can only strengthen legislation. I regard the amendment as helpful in that sense. 

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I would chide the shadow Minister in one respect, however. He talked about there being an appetite for reform in this country and abroad, and I think he is right. Among Government members, however, there has always been an appetite for reform, particularly in areas such as the common agricultural policy. The shadow Minister mentioned an article written by the shadow Foreign Secretary, the right hon. Member for Paisley and Renfrewshire South (Mr Alexander), and the shadow Chancellor, the right hon. Member for Morley and Outwood (Ed Balls), in which they expressed an interest in reform. 

We must remember, however, that the shadow Foreign Secretary is the former Minister for Europe who agreed a new seven-year financial settlement that was devoid of reform, which talked about an ambition to reform the CAP but delivered nothing. I do not want to be excessively partisan, but we would prefer to have engaged in this reform seven years ago rather than having to wait until we had the opportunity. 

John Hemming:  I do not share the counsel of despair expressed by my hon. Friend the Member for South Dorset. I think that there is an appetite for reform across Europe, and if the UK takes a position of fiscal rectitude—that we will get it right and support others to do so—others will join us. 

Greg Clark:  I am sure that my hon. Friend is absolutely right. We must certainly display strong leadership in that area, and I know that we are capable of doing so. I have enjoyed the debate, and the points that have been made strongly reinforce our determination not only to seek but to achieve improvements on the matter. I have no difficulty whatever with the proposed amendment to the motion, and I hope that the Committee shares my view. 

Amendment made: (a), Line 16, after first ‘and’ leave out to end and add ‘calls on the Government to make specific proposals which strengthen the independent external audit of the EU budget and programmes, improve procurement rules and ensure that experienced and qualified audit professionals implement an audit and inspection system geared to addressing risk and securing efficiency and added value in all EU expenditure.’.— (Mr Leslie.)  

Main Question, as amended, put and agreed to.  


That the Committee takes note of European Union Documents No 11112/12 and Addendum, dated 8 June 2012, relating to a Communication from the Commission to the European Parliament, the Council and the European Court of Auditors: Synthesis of the Commission’s management achievements in 2011; and No. 11479/12, dated 15 June 2012, relating to European Court of Auditors’ Opinion No. 4/2012 on the Commission’s evaluation report on the Union’s finances based on results achieved established under Article 318 of the Treaty on the Functioning of the European Union; considers the Commission’s report to be disappointing, inadequate, and unfit for purpose; consequently welcomes the European Court of Auditors’ critical analysis of the report and the constructive suggestions for improvement; agrees that a thorough analysis of results achieved against planned outcomes would be a useful focus for future reports; considers that useful and timely information on transparency, accountability and quality of European Union spend is essential to facilitate a better understanding on behalf of Member States, the public

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and other institutions of the performance of the Commission’s management activities; agrees that a timely report is necessary to inform the annual Budgetary discharge process; and calls on the Government to make specific proposals which strengthen the independent external audit of the EU budget and programmes, improve procurement rules and ensure that experienced and
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qualified audit professionals implement an audit and inspection system geared to addressing risk and securing efficiency and added value in all EU expenditure. 

10.2 am 

Committee rose.  

Prepared 8th November 2012