Financial Management
The Committee consisted of the following Members:
Abbott, Ms Diane (Hackney North and Stoke Newington) (Lab)
† Bacon, Mr Richard (South Norfolk) (Con)
† Bingham, Andrew (High Peak) (Con)
† Blenkinsop, Tom (Middlesbrough South and East Cleveland) (Lab)
† Blunt, Mr Crispin (Reigate) (Con)
† Connarty, Michael (Linlithgow and East Falkirk) (Lab)
† Featherstone, Lynne (Parliamentary Under-Secretary of State for International Development)
† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† Morgan, Nicky (Economic Secretary to the Treasury)
† Rudd, Amber (Hastings and Rye) (Con)
† Wheeler, Heather (South Derbyshire) (Con)
Whitehead, Dr Alan (Southampton, Test) (Lab)
† Wilson, Sammy (East Antrim) (DUP)
John-Paul Flaherty, Committee Clerk
† attended the Committee
The following also attended ( Standing Order No. 119(6) ) :
Jones, Mr Marcus (Nuneaton) (Con)
Heaton-Harris, Chris (Daventry) (Con)
European Committee B
Tuesday 4 February 2014
[Annette Brooke in the Chair]
Financial Management
2.30 pm
The Chair: I understand that a member of the European Scrutiny Committee wishes to make a brief explanatory statement about the decision to refer the relevant documents to the Committee.
Michael Connarty (Linlithgow and East Falkirk) (Lab): Thank you, Mrs Brooke. It is a pleasure to be here under your chairmanship. I thought it might be of help to the Committee if I took a few minutes to explain the background to the documents, which of course everyone—apart from those of us on the European Scrutiny Committee—will have read in detail, and the reason why the European Scrutiny Committee recommended the debate.
The first document in the bundle, as it is called, is the European Commission 2011 annual report on protecting the EU’s financial interests. The report is supplemented by five detailed annexes, covering matters such as statistical evaluation of irregularities reported for 2012 own resources, natural resources, cohesion policy and pre-accession assistance; recommendations to follow up the 2011 report on protection of the EU’s financial interests; and the methodology regarding the statistical evaluation of reported irregularities for 2012. That is all meat and drink to members of the European Scrutiny Committee. The European Court of Auditors must report each year on the implementation of the EU’s annual general budget and on the European development funds for development aid.
The second document is the ECA’s 2012 report on the European development funds. The third document is its report on the 2012 general budget. The documents also contain the statements of assurance—commonly referred to, from the French acronym, as the DAS—which the ECA is required to produce, concerning the reliability of the accounts and the legality and regularity of the underlying transactions.
As the ECA’s annual audit reports have, for many years, revealed serious inadequacies in implementation of the EU general budget, it has become customary each year for the latest report to be debated, with the Commission’s annual anti-fraud report. Although the present ECA report affirms the reliability of the accounts, which is an unusual occurrence, for the 19th successive year there is no positive statement of assurance. The European Scrutiny Committee had no hesitation in recommending that the document be debated. We suggest that Members focus in particular on the Government‘s efforts to improve EU financial management. They might also examine the ECA’s comments about the ineffectiveness of some of the UK’s management of EU funds and the Government’s response to them. We
suggest also that Members examine the Government’s efforts to improve European development fund financial management.Finally, we thought that the debate would enable Members to consider what progress had been made in preventing fraud and other irregularities in relation to the EU’s financial resources. For those reasons, we recommended the debate.
2.33 pm
The Economic Secretary to the Treasury (Nicky Morgan): It is a pleasure to serve under your chairmanship, Mrs Brooke. I thank the hon. Member for Linlithgow and East Falkirk, a member of the European Scrutiny Committee, for his clear introductory remarks. I am accompanied by the Under-Secretary of State for International Development, my hon. Friend the Member for Hornsey and Wood Green, to discuss the three reports: the European Court of Auditors Annual Report, on the implementation of the EU budget concerning the financial year 2012; the EU Commission report to the European Parliament and the Council on the protection of the European Union’s financial interests, “Fight against Fraud 2012”, annual report; and the European Court of Auditors annual report on the activities funded by the eighth, ninth and 10th European development funds in the financial year 2012.
The Government welcome the reports, which continue to be crucial in informing our approach to financial management of the EU budget at a national and EU level. The Government are therefore extremely disappointed that the European Court of Auditors has been unable to give a positive statement of assurance to the EU budget for the 19th consecutive year. This year, the ECA’s report on the 2012 EU budget estimates an error rate of 4.8% for the payments made that year. That error rate marks the third consecutive annual increase. I note that the ECA attributes some of that increase— 0.3 percentage points—to a change in methodology, but I am sure that hon. Members on both sides of the House agree that any increase is unacceptable. The ECA’s findings undermine the credibility of the EU budget and clearly show that the UK’s strong stance on financial management is justified.
I take this opportunity to remind the Committee that we were the first Government to take a strong stance on fraud and error in the management of EU funds by voting against the Council’s decision to recommend discharging the Commission of its responsibility for the EU budget. We took that unprecedented stand by abstaining on the Council’s position on the 2009 EU budget and by voting against the Council recommendations for the 2010 and 2011 budgets. We have also continued to work with like-minded, budget-disciplinarian member states to send a strong political message that financial management needs to be improved. In 2011 and 2012, we, along with Sweden and the Netherlands, issued a joint counter-statement that called for improvements to the way EU funds are managed.
On the timing of the debate, I am pleased that we can discuss these reports with the Committee ahead of the vote on discharge at the ECOFIN meeting later this month. It is unfortunate that that had not been possible in recent years, and I am aware of Members’ concerns in that regard. I reassure the Committee, not least by
our presence here, that the Government strive to provide opportunities for Parliament to consider issues before they are voted on in the Council wherever possible.The hon. Member for Linlithgow and East Falkirk mentioned the UK specifics. I suspect that those will come up in questions, but let me turn to those before I conclude my opening remarks. The ECA report does reference specific examples from member states, including examples of where improvements are needed in the UK. I am pleased that in all cases the relevant UK authorities have engaged with the Commission and the ECA and, where appropriate, taken relevant steps to address identified weaknesses.
I assure the Committee that the Government will continue to work with other member states to push for action to be taken by the Commission on systemic issues such as greater simplification of complex EU-level rules and processes that hinder member states in the effective handling of EU funds. That is something that the ECA recognises and supports. I will now hand over to my hon. Friend the Under-Secretary of State for International Development, who will say a few words about the report on the European development fund. I look forward to hearing hon. Members’ views in the debate.
The Parliamentary Under-Secretary of State for International Development (Lynne Featherstone): It is a pleasure to serve under your chairmanship, Mrs Brooke. I thank my hon. Friend for her opening remarks and the European Scrutiny Committee for bringing this item for debate.
The European Court of Auditors’ statement of assurance on the EDF accounts is an important mechanism to assess the robustness of the EDF financial management system. We welcome its assurance that the EDF accounts are materially correct in 2012, but note with concern that there are a number of areas for action.
The Court found the overall error rate for the EDF to be 3%, which is considerably lower than in previous years. It is, however, still above the ECA’s acceptable level and we continue to take that seriously. One of the most serious ongoing issues in the financial management system is with the common relex information system—known as CRIS—which was put in place by the Commission to support the management, monitoring and reporting of external actions. That is at least partly responsible for some of the payment errors identified and a number of the Court’s latest recommendations.
We have seen the Commission’s real efforts to make improvements: it is one year into a three-year action plan that includes collection of information from users and suppliers to get to the bottom of the system’s weaknesses. Recommendations from that study will be used to update the system to improve usability, helping to reduce errors. The Commission has achieved a reduction in duplication of data between CRIS and other accounting systems and improvements to system security. It has also committed to conduct annual reviews of data quality using external consultants. Further improvements include an audit module currently under development to enable thorough follow-up of external audit reports. The Commission has promised to keep the member states updated on the improvements to CRIS throughout 2014 and beyond.
The United Kingdom has worked hard to strengthen EDF financial management as part of the negotiations for the 11th EDF, which will run from 2014 to 2020. We secured legal commitments from the Commission to report on the efficiency savings, implement a comprehensive results framework and improve financial management forecasting. Specifically, we have increased the Commission’s forecasting period for member states’ contributions from two years to four years, tied the Commission to minimising variations in member states’ annual contributions and ensured that it cannot accrue significant cash balances in its account at the year end, so that member states’ contributions are called only as and when really needed.
In December 2013 the Department for International Development also completed its update of the multilateral aid review across all its multilateral donors. On financial accountability, the review assessed the EDF as performing relatively well. The EDF allocates funds transparently on a needs and performance basis. It has a highly predictable multi-annual programming cycle, with funds generally released on schedule. That continues to improve, with annual disbursement levels now close to commitment levels. That assessment and the improved error rate suggest that EDF financial performance is improving. However, this is not the moment to be complacent, and DFID continues to challenge the Commission both to address the specific recommendations of the Court of Auditors and to improve transparency and accountability to member states.
The Chair: We now have until half-past 3 for questions to the Ministers. I remind Members that questions should be brief. Subject to my discretion, it is open to a Member to ask related supplementary questions, and I suggest that I will exercise that discretion with Catherine McKinnell, whom I call now. I will be calling members of the Committee first as we rotate around the questions.
Catherine McKinnell (Newcastle upon Tyne North) (Lab): It is a pleasure to serve under your chairmanship, Mrs Brooke. I understand that it is usual to put one question at a time. I have more than one question, so will it be satisfactory to put all my questions in succession?
The Chair: I suggest that, as the Opposition spokesperson, if you would like to put your questions to start, we will take other questions afterwards. Sometimes it is helpful for the Minister to have questions in a block together, to get information to answer them.
Catherine McKinnell: Thank you, Mrs Brooke. I also thank my hon. Friend the Member for Linlithgow and East Falkirk for setting out his opening statement, which was helpful to the Committee. I want to put it on record that I take a keen interest in the matters that are before us for discussion, not just in my role as shadow Economic Secretary to the Treasury but as co-founder of the all-party group on anti-corruption. That group believes that the effects of corruption are profound and affect the lives of people in the UK and globally. We believe that we must do our part in this Parliament and in wider circles to ensure that the UK is not complicit in or blind to corruption.
It was therefore extremely disappointing to hear the EU Home Affairs Commissioner yesterday describe the extent of corruption in Europe as “breathtaking”.
The Chair: Order. I suggest that we differentiate between questions and speeches, which come later. If you would like to progress to questions, we will, I hope, have plenty of time for speeches.
Catherine McKinnell: In this time of straitened public finances, it is vital that every pound of EU public money is spent as efficiently and effectively as possible, so national authorities must clearly commit themselves to better management of EU funds. Will the Minister clarify where the Government stand on improving national systems and processes to ensure that the UK manages EU funds effectively? What work are the Government undertaking with European counterparts to ensure that they, too, improve their management systems? What specific actions have the Government taken to ensure that we see an end to the 19-year run of unfavourable statements of assurance? How exactly are she and her colleagues pressing colleagues in various EU institutions to ensure that we see a reduction in the rate of error for payments?
Nicky Morgan: I thank the hon. Lady for her questions. On the improvement of national systems and processes, it would be right to say that whenever the UK has been criticised over the way EU funds have been managed—particularly in relation to the ECA statement published last November—it has immediately taken swift action, if such action has not already been under way, to respond to those criticisms. We think that any level of fraud is too high. All agencies that have responsibility in the UK for distributing EU funds have processes in place to monitor and report fraud in line with current regulations.
It is important to make the distinction that was made in the debate held in September last year. The point was made by my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) that there is a difference between error and fraud. Neither is less serious than the other, but it is a difference that needs to be appreciated. In the UK, as well as improving processes and national systems, all reports are made via the irregularity management system. As I said, criticisms have been dealt with swiftly.
The hon. Lady or her colleagues on the Committee may come on to specific criticisms of the UK and we can address what the UK has done to tackle those criticisms at that time. She also asked about specific actions that the UK could take, working with other EU member states, to end the 19-year refusal of the ECA to give an unqualified statement of assurance. As I mentioned in my opening remarks, the UK for the first time in 2009 abstained on discharge of the EU budget, and in 2010 and 2011 voted against. On both occasions of voting against, a strong statement on why that was done was issued along with Sweden and the Netherlands. That sends a clear signal to other EU member states, the Commission and the European Parliament about how unacceptable the UK finds what is now 19 years of refusal. That is the clearest public signal we can send about the state of the finances of the EU budget. We also work behind the scenes, of course, with like-minded member states to make it clear to the Commission that the continued increases and levels of error and fraud are unacceptable.
Sammy Wilson (East Antrim) (DUP): I have two, rather parochial, questions. On page 18 of the report, under “Agriculture: market and direct support”, it is noted that
“of the three national supervisory and control systems examined, two, England and Northern Ireland, were assessed as not effective”.
I know that considerable work has been undertaken in Northern Ireland, especially on the mapping of farms and so on, but perhaps the Minister could say where the gaps still are, what gaps have been identified and what action has been recommended to the Northern Ireland Executive to deal with the issue raised in the report.
The second issue—joint operations—is dealt with on page 43. With smuggling of cigarettes, fuel and people across the border between the Republic and Northern Ireland, how are those joint customs operations to be mounted? Will it be the decision of the two national Governments? They do not seem to be very effective. What actions or initiatives have our Government taken to ensure that, where a problem has been identified, these joint operations are launched to detect the levels of fraud?
Nicky Morgan: I thank the hon. Gentleman, who is right about the agricultural chapter; criticisms were made. In Northern Ireland, the identification of forest as permanent pasture was due to the assessments conducted in the 2011 scheme year, which were based on old maps that predated the completion of an improved land parcel information system. Northern Ireland has recognised the potential impact that this weakness may have had on the eligibility of permanent pasture and is confident that the recently completed land parcel information system refresh has resolved the issues. The areas identified were reassessed, and Northern Ireland authorities were satisfied that the farmers concerned were correctly paid in all cases. The Northern Ireland authorities have also recently had confirmation from the Commission that their control system is adequate. They have also accepted that there were some inconsistencies in their identification of maximum eligible areas.
The Northern Ireland authorities do not agree with the European Court of Auditors’ findings in respect of the measurements referred to in the report. They contest the idea that their methodology of parcel measurement, which is based on guidance documents from the Joint Research Centre, differs from that used by the ECA. The Commission was careful to deploy the same method as the paying agency. The authorities’ understanding is that the Commission shares the view that the ECA’s approach was incorrect.
The authorities also maintain that field conditions, and therefore the eligibility of land, may change over time. They contest the view that the ECA did not take account of that when re-performing the measurement a year after the original inspection. The authorities nevertheless calculated the potential financial impact of the ECA’s findings regarding the six measurements and found it to be negligible.
I will probably need to write to the hon. Gentleman about the detail of how investigations are conducted jointly between the two authorities, unless I am able to come back to him on that before the end of the debate.
Chris Heaton-Harris (Daventry) (Con): I have a question for the Parliamentary Under-Secretary of State for International Development, to tidy up some figures. The explanatory memorandum to the ECA’s report on the European development fund states:
“Total expenditure and financial activities for 2012 was €52.5 billion.”
However, that seems to be the figures of EDFs 8, 9 and 10 all added up, and not the correct figure for 2012. I wonder whether she can clarify that point, though not necessarily today. I think the budget is about €3 billion.
Lynne Featherstone: My hon. Friend probably has a point. I will write to him.
Catherine McKinnell: The Commission’s report on protecting the EU’s financial interests notes that
“significant problems still exist in the differences of approach between Member States in relation to fraud”.
Clearly, if we want to get an accurate picture of the amount of fraud in the EU budget, reporting by some member states needs to be improved. The report suggests that
“no fraudulent irregularities were detected and reported by Greece, Luxembourg, Malta and Finland”.
That could be entirely true, but a more consistent approach to reporting would help us to arrive at a more informed judgment. Will the Minister outline the approach that the UK Government are taking to achieve a consistent and effective level of reporting, not just from the UK, but across all member states?
Nicky Morgan: The UK would hope to lead by example. I have already mentioned the reporting via the irregularity management system and the work that the UK does with the EU’s anti-fraud office, OLAF. Any cases of fraud are reported to OLAF, and the UK acts on the evidence provided by the European anti-fraud office.
As I have said, the UK has a zero-tolerance approach to all fraud. As I am sure the hon. Lady understands, when dealing with fellow EU member states, it is very much a question of trying to lead by example and to explain to other member states why, as she said, at a time of huge pressure on national budgets, when we are asking people in all countries to accept difficult decisions that affect their household budgets, any fraud or error in how the money that we pay to the EU is used, or in how it comes back to member states, is unacceptable.
Lack of uniformity by member states in reporting fraud to OLAF is a recognised issue, and some progress has been made. As I said, the Government continue to encourage member states to fulfil their duty to co-operate to ensure that funds are spent properly. The Government welcome the fact that the OLAF report in 2012 notes an increase in member states’ engagement.
On inconsistent reporting, the Government’s approach is to have Departments submit information relevant to their use of funds. There is clear monitoring in the UK and clear pressure to see that replicated in all other EU member states.
The Chair: If there are no more questions, we will proceed to debate the motion.
Motion made, and Question proposed,
That the Committee takes note of European Union Document No. 12772/13 and Addenda 1 to 5, a Commission Report to the European Parliament and the Council on the protection of the European Union's financial interests: Fight against fraud 2012 Annual Report; and unnumbered European Union Documents, the European Court of Auditors Annual Report concerning the financial year 2012 and the European Court of Auditors Annual Report on the activities funded by the Eighth, Ninth and Tenth European Development Funds; agrees that budgetary discipline and robust financial management at all levels remains crucial, including to support domestic efforts to tackle the deficit and debt, especially given the continuing fiscal constraints and fragile economic recovery across the EU; believes that it is unacceptable that the EU budget has failed to be given an unqualified audit by the European Court of Auditors for the nineteenth year; supports the Government's decision to vote against granting discharge to the EU budget and to press the Commission for a clear action plan to address the European Court of Auditors' recommendations relating to the European Development Fund; and encourages the Government to continue to work with other like-minded Member States to put pressure on the Commission and all those involved in the management of EU funds for clear, positive and urgent improvements to the quality of EU spending.—(Nicky Morgan.)
2.54 pm
Catherine McKinnell: This is only the second opportunity that I have had to serve on European Committee B in my role as shadow Economic Secretary. I thank you, Mrs Brooke, for keeping proceedings in order. I had hoped that ECB sittings would become a more regular event in my diary, but unfortunately we have had to wait four months for another Committee to come along. I am pleased, however, that we have this opportunity to debate such important issues.
As I began to outline earlier, the reports that we are considering this afternoon refer to a wider matter. I mentioned my concern about comments by the EU Home Affairs Commissioner, who described the extent of corruption in Europe as “breathtaking” and as costing the EU economy at least €120 billion, or £99 billion, annually.
Clearly, ensuring that public money is spent effectively and efficiently is absolutely critical and should be the aim of any Government or organisation. Cracking down on fraudulent behaviour should always be the focus of the UK Government, our European counterparts and of course the EU institutions, but particularly at times like this, when there are constrained public finances. When households up and down the country are facing a cost-of-living crisis, and the public services on which people rely are being cut, it is vital for the Government to do everything within their power to ensure that the EU budget is spent as intended, in this country, in Brussels, elsewhere in Europe, and in the developing world.
Before the Minister responds to the debate on the European Commission and the European Court of Auditors, I was hoping that she might be able to update the Committee on the latest position on the 2013 EU budget. The last time I sat on this Committee, on 21 October, we discussed the €7.3 billion top-up to the budget that was agreed in May, and the further top-up of €3.9 billion that was being demanded in September. At that stage, however, the Minister was unable to confirm how much more the UK might have to pay towards the 2013 EU budget. In that debate, she said that
“calculating the UK contribution…is not quite as straightforward, because it will depend on such things as exchange rates and other spending. However, she is right to say that the 2013 budget has increased”.—[Official Report, European Committee B, 21 October 2013; c. 7.]
Will the Minister confirm whether that calculation has been made? It is obviously highly relevant to today’s deliberations, as in about a year’s time we will no doubt find ourselves considering once more how soundly the 2013 budget has been managed and the levels of fraud and error involved, and before doing so it would be helpful to know just how much the UK is contributing towards that 2013 pot.
Mr Richard Bacon (South Norfolk) (Con): The hon. Lady referred to the Commissioner’s description of the amount of fraud and corruption as “breathtaking”. That word connotes a degree of surprise, or that there is something about what has occurred that calls for remark because it is unusual or unexpected. Is she surprised?
Catherine McKinnell: It is obviously an issue of great concern, as I have mentioned, that once again, for the 19th year, the European Court of Auditors is unable to give the EU budget an unqualified audit. It remains entirely unclear whether this year will be the last year that that happens. It is important to do everything that we can, and that the Government do everything they can, in collaboration with member states, to ensure that we reduce that fraud and corruption, and to ensure that not only UK Government resources, but EU budget resources are spent as efficiently and effectively as possible.
In the equivalent discussion in European Committee B in 2012, my hon. Friend the Member for Nottingham East (Chris Leslie) said:
“It is simply not good enough that the process rolls on year after year. We seem almost to have settled into a lazy habit of raising questions, with partial answers coming back from the European Union, yet the steamroller rides forward with little change to the high levels of fraud and irregularities that are occurring. Is the Minister going to step up his action, because I think the time has come for some serious decisions?”—[Official Report, European Committee B, 27 June 2012; c. 11.]
The Minister said, in her response to the European Scrutiny Committee, that this state of affairs
“seriously undermines the credibility of EU spending”.
Although I am aware that we have had the opportunity to put a number of questions to the Minister on the steps that she and her colleagues in Government are taking on the issue, perhaps she could outline what additional action they have taken this year to address this situation.
Chris Heaton-Harris: This is the 19th year on the trot that a positive statement of discharge has not been given. Let us step back three years to the 16th, 15th and 14th times it had not been given, when there was a different Government. Does the hon. Lady feel that her Government at the time did enough?
Catherine McKinnell: I appreciate the hon. Gentleman’s point, but I do not believe it is constructive in today’s debate on reports on the financial year gone by and the budget to which the UK is still contributing. There has
been significant debate around the level of that budget, and whether it is spent effectively and efficiently. I know that the Minister’s concern is to ensure that the Government are doing all in their power to tackle the issues clearly highlighted in the report, so that we can ensure the credibility of spending decisions in future.Chris Heaton-Harris: It is right to look forward. The problem with building consensus on putting a political message together among many countries over a period of time is that for years the British Government just waved through the accounts, even though they knew they were flawed. When it comes to building future consensus, we are starting from the ground zero of three years ago. A lot of damage was done at a time when we could have done more, and would have been in a much better place now, had we tried.
Catherine McKinnell: There are a lot of ifs, buts and maybes in what the hon. Gentleman says. I am interested to hear the Minister’s response on what the Government are doing to take the matter forward with all the necessary steps to ensure that the situation does not simply continue for years to come. I hope she will reassure the Committee about the level at which the work is taking place. Is the Chancellor pressing his European Commission counterparts on the urgency of dealing properly with errors and fraud? If not, why not? If the Minister is confident that the UK Government are taking sufficient steps, perhaps she could say when she believes the ECA is likely to give the EU budget an unqualified audit.
3.3 pm
Chris Heaton-Harris: It is a pleasure to serve under your chairmanship for the first time, Mrs Brooke, and thank you for being gentle with me so far. I will try not to need a bit of help. I spent 10 years in the European Parliament, including five years with a certain bloke who, I believe, is now the leader of your party, Mrs Brooke: the Deputy Prime Minister, the right hon. Member for Sheffield, Hallam (Mr Clegg). He and I were for five years in the campaign for parliamentary reform in the European Parliament, campaigning on these very issues. We might have different views of how to achieve the change, but he and I agreed on the need for reform in this area. Some socialists were also involved, the hon. Member for Newcastle upon Tyne North will be pleased to hear.
I want to make three relatively brief points. First, I congratulate the Government on coming such a long way in a short time. We have gone from a situation in which the British Government were renowned for waving through the European accounts without even raising a question at ECOFIN to one in which they first rightly questioned what had gone on and are now saying, “No, this isn’t good enough.” We were not going to get any change whatever by continually waving through business as usual.
The political change has made a magnificent change to the Council. It has changed the language of how ECOFIN considers the accounts, and it actually means that a debate goes on. We joined the Dutch and the Swedish this time, but other countries are considering the European accounts in a more stringent way than ever before, and I put it down to the fact that we are now doing so. I congratulate the Government.
I only raised those points with the hon. Member for Newcastle upon Tyne North because there was a period when we could have started the process. Whether it was to protect the back of a noble Lord not so far away in this place or those of other European commissioners of whatever political colour, it was easier to let business go through as usual, which was completely wrong. The change is ever so welcome, and ever so late; it came only after 16 years of accounts not being signed off properly.
I also congratulate the Government on having this debate ahead of ECOFIN. It is fantastic to have the debate now. I sit on the European Scrutiny Committee and the Public Accounts Committee in this place, and for 10 years I sat on the budget and budgetary control committees in the European Parliament being told that our Ministers did not care. Now I know that they do. They care enough to have this debate at a time when we can influence what the Government do. I am not trying to get an answer out of my hon. Friend today, but I would like to think that if there has not been a positive statement of assurance in 19 years, in the Council we will probably vote against giving one when we have that meeting. Perhaps she would like to comment, but perhaps she would not. I do not want to take away her negotiating position.
There are a couple of things that concern me. I am one of the members of the European Scrutiny Committee who constantly ask for us to have this sort of debate. We have a number of amending budgets that go through the European process in which money is moved between headings; obviously, there was a big debate when the Prime Minister negotiated the multi-annual financial framework. Money is lumped into individual headings, and then each year the Commission applies to the Parliament and Council, essentially, to use amending budgets to move money between headings. It has become more and more common—big chunks of money are certainly being moved between headings—and I would like an assurance that the Minister is aware of the processes and that the British Government have a close eye on where money is being moved to and from.
Last week, the Public Accounts Committee considered the troubled families programmes here in the UK. There are two programmes. One is run by the Department for Work and Pensions and one by the Department for Communities and Local Government. Part of the money for the DWP programme came from the European social fund. When the second troubled families programme came on the scene, it was fairly obvious that the DWP programme was not as good as the new one, so the permanent secretary at the DWP told us that he had moved money around from the European social fund away from troubled families into other programmes of a similar ilk.
My knowledge of European social funding rules was pretty good, but may be a bit more vague nowadays. Where the PAC had worries about how we were spending money and whether it was in order in European terms, the permanent secretary agreed to send us a note. It would be worth casting an eye over whether that is the right thing to do, because it is a very big chunk of money. We must ensure that we follow the correct procedures, although I am sure that they are correct, so that the European Commission does not try to pull the
money back or infract us in future. The blasé way in which it was mentioned at the Public Accounts Committee was slightly concerning.The third point is on the Commission’s 2012 report on the fight against fraud. That is a welcome development. When I was in the European Parliament, such reports started out being quite thin and ended up being quite thick as more questions were asked. The Commission states that 1,194 cases of fraud against the EU budget were reported in 2012 and the estimated impact of that fraud increased by about 8% from €295 million to €315 million.
The rate of fraud has varied dramatically between member states. Fraud with the greatest financial impact was reported by Italy, Romania and the Czech Republic. The Commission believes that detection and reporting needs to improve in some member states and highlighted France, Spain and Greece—obviously there was no fraud reported there at all. That suggests a potential problem, especially in regional development spending.
However, a big policy question is attached to all that. The European Commission admits that it needs to strengthen its fight against fraud. It says that it needs more powers to do that and that it needs to establish a European public prosecutors office. I believe that the Government’s and the Opposition’s view—in fact, all of Parliament’s view—is that there should not be such an office, but that the European Commission and OLAF should use the powers that they already have in better ways. When the Minister is in conversations at a European level in which those countries who want better value for money from European spending and to ensure that the money is spent legitimately put their opinions, will she ensure that the Commission’s answer will not be, “Everything is going to be fine—we are trying to sort out how we do our accounts”? It needs to try to tackle the problem, instead of saying, “Actually, what we need is more Europe, with more powers taken away from member states and a European public prosecutors office.” Both Houses issued a reasoned opinion against that just before Christmas.
I congratulate the Government. They have moved a long way in a short period of time. I know that questioning some of this funding takes some doing and makes us unpopular in some European circles, but it is absolutely the right thing to do.
The Chair: I call Sammy Wilson. I slightly apologise for not seeing you first.
3.12 pm
Sammy Wilson (East Antrim) (DUP): Thank you, Mrs Brooke. It is a pleasure to serve under your chairmanship. It is the first time for me as well, although I think it is the first time I have served under any chairman on a European Committee because I think it is the first time I have served on one of the Committees in this Parliament.
Through either fraud or irregularities, we have €3 billion of expenditure identified. This point has already been made, but, at a time when we are a major net contributor to the EU budget and there is controversy about the size of our budget contribution, it is important that that is dealt with. There is, however, a difference between fraud and irregularities. As I tried to say in my question to the
Minister, while fraud is a totally black-and-white issue, irregularities are not. Often, that depends on the interpretation that the Commission and the EU authorities have placed on expenditure in member states. Agricultural expenditure in Northern Ireland is still subject to clawback, which I think amounts to £30 million, even though the Department of Agriculture and Rural Development in Northern Ireland would say that it was abiding by the rules as it understood them. If we are going to deal with irregularities, there must be clear information for the authorities that manage budgets—Departments or whoever it happens to be—about how funds should be applied. Northern Ireland spent quite a lot of money on trying to map farms in accordance with the rules, but at one stage we were breaking the rules and we were not even aware that we were doing so.The other problem with irregularities, which has implications for national Governments and which the report identifies, is that sometimes they are not discovered until about three and a half years later; I think that is mentioned on page 40 of the report on fraud. They are discovered only when the accounts for projects are finally looked at. Sometimes the irregularities amount to the loss of some paperwork—not fundamental paperwork or paperwork that could have been hidden to try to conceal fraudulent activity, but paperwork that is simply lost because of the passage of time. Some documentation was found to be missing at the final audit of funding to some smaller groups in Northern Ireland, and that became an irregular payment. Of course, at that stage it was too late to correct the situation, and percentages were taken off the amount of money allocated by the EU. That adds to bureaucracy, especially for payments to less professional organisations such as community groups. I sometimes wonder whether some of the payments deemed irregular fell within that category. What discussions has the Minister had with the European authorities about standardising or at least bringing some sense to the discussion about what are deemed to be irregular payments?
The hon. Member for Daventry referred to what we should do about fraud. I am one of those people who believe that we have already surrendered too much power to Europe. When we talk about protecting the EU budget, we all of course hold our hands up and say, “That’s good.” However, when I read a report like the one before us, which says that there needs to be further enforcement, harmonisation of offences, sanctions, and substantive criminal law to protect the EU’s financial interests, I wonder whether it is another route for further interference in member states from Europe. If the process is carried on, not only will the European authorities harmonise laws across Europe but they will create a European public prosecutor’s office.
Why will national laws not be sufficient in such cases? My hope—I seek reassurance from the Minister—is that any discussions on the matter and the final decision on whether we move down the path of harmonisation and handing further powers to Europe will rest with this Parliament and with the people of the United Kingdom.
The last point that I want to make is about cross-border smuggling. The report raised the issue of smuggling along the eastern borders of Europe—particularly the
smuggling of alcohol and tobacco. In some instances, smuggling is made easier and more profitable by new laws and rules, which encourage it.Hundreds of people are employed in my constituency by Japan Tobacco International, in Ballymena, and they are concerned about the impact of the proposed EU directive on tobacco products. It would be a smugglers’ charter, because it would for example increase the minimum packet size, and open the field for smugglers to find a new market through the illegal sale of smaller packets of loose tobacco.
I know that this is not the Minister’s responsibility, but I believe that the Government should consider the consequences of European directives; some of them are contradictory. The intention is to stop smuggling, but the directive and rules that are proposed would make it more lucrative.
3.21 pm
Mr Bacon: The point that I was trying to make in my earlier exchange with the hon. Member for Newcastle upon Tyne North was that no one who has been paying attention should find it breathtaking that there is corruption on such a scale. On 28 November, the Court of Auditors reported—
3.22 pm
Sitting suspended for Divisions in the House.
3.47 pm
Mr Bacon: I was just pointing out that in November 2002, the Court of Auditors commented:
“The Court has been concerned that, while in the past the Commission has recognised at least some of the deficiencies pointed out by the Court, it has not given sufficient priority or devoted sufficient reflection and appropriate resources to overcoming them within a reasonable timescale. The Commission has stated in its reply…its commitment to the modernisation and improvement of the accounting system. It now needs to develop urgently a detailed action plan with the necessary resources and a timetable that is both realistic and reasonable.”
I understand that, because of the break for voting, we have injury time of 25 minutes. I am tempted to expand my remarks greatly, but I detect that there may not be universal enthusiasm for that among Committee members; also, I have made long speeches on this issue before, and they have had absolutely no effect. The Court of Auditors report that I am referring to dates to 28 November 2002; I said of it:
“after eight consecutive years of qualified accounts, the Commission has not yet come up with a detailed action plan.”—[Official Report, 2 December 2002; Vol. 395, c. 712.]
More than 11 years later, in 2014, we are taking note of a motion that supports not only the Government’s decision to vote against
“granting discharge to the EU budget”—
amen to that, I say, and congratulations to the Government for doing so, and to Sweden and the Netherlands for doing the same—but the Government’s decision
“to press the Commission for a clear action plan to address the European Court of Auditors’ recommendations”.
Just a minute; let me see. In 2002, it was said that the Commission needed to
“develop urgently a detailed action plan with the necessary resources and a timetable that is both realistic and reasonable.”
The reason I took issue with the hon. Member for Newcastle upon Tyne North earlier is that no one in their right mind could be surprised by the scale of corruption or find it breathtaking, if they had been paying attention, because this has been going on for years and years. What is surprising—I join my hon. Friend the Member for Daventry in congratulating the Government on tackling this issue—is that after all this time, the Treasury finds itself alone with Sweden and the Netherlands. Last time I checked, there were 28 member states in the European Union. What have the others been doing? Where is Germany on this, or Spain, France or Italy, to name just some of the big countries, never mind the others? The truth is that if people were serious about the reform that is required, it would have happened by now.
The Economic Secretary knows that I love her dearly, and I do not wish to pour cold water on anything she does or says—I worship the ground she walks on—but I am afraid to say that the Government’s attempts in this area, though very welcome, may prove to be too little, too late. The atmosphere and mood in the United Kingdom over the past 12 to 15 years have changed considerably—we all know that—and there is a reason: we have a framework that does not provide for consent in how we are governed; it appears that no one will take responsibility for sorting the problems out; and the people making the decisions, who are by and large in the European Commission and who do not pay income tax—they are a separate set of platonic guardians, above all the rest of us hoi polloi, who have to respond to our constituents—are not that interested in addressing the problem. If they were, they would have done so by now. I wish the Minister luck—I really do—but I will not be holding my breath.
3.51 pm
Nicky Morgan: I thank all hon. Members who have spoken for their contributions, all of which were interesting in their own way and raised extremely useful points. There was recognition of the fact that this year’s debate was held before the ECOFIN meeting, and before the UK places its vote on record. To begin with the final remark, other member states will have heard what has been said in this Committee Room today, and will note that British parliamentarians feel strongly about the fact that, for the 19th consecutive year, the European Court of Auditors has been unable to give an unqualified statement of assurance regarding the payments.
I shall start with the comments made by the shadow Economic Secretary, the hon. Member for Newcastle upon Tyne North. She asked about the latest position on the 2013 EU budget. As I have said, and as she reminded the Committee, the UK contributes approximately 12% of the EU budget; that can be used to estimate the additional contributions that the UK makes to any amending budget. However, as I have said, the percentage can change year on year, depending on factors such as the exchange rate.
The independent Office for Budget Responsibility, set up by this Government, published its latest forecast of UK contributions to the EU on 5 December 2013. It showed some upward revisions in the UK’s annually managed expenditure contribution to the EU,
but approximately half of the increase was due to a spending-neutral reclassification of contributions to the EU aid programme, and the remaining half reflected changes in the technical determinants of the EU contributions.Interventions by Government Members show that this Government, while hoping to see further reform of the EU, its finances and the budget process, have nothing to be worried about when it comes to how we have approached negotiations with the European Union. It was 12 months ago when the Prime Minister negotiated a complete change in attitude towards the next seven-year budget cycle. As the hon. Member for Newcastle upon Tyne North recognised, at a time when we are asking people and households to make sacrifices, we will not carry on allowing the EU to spend more and more of our hard-earned money. That is why the Prime Minister was able to secure the financial framework. In its Budget 2013 forecast, the OBR said that the European budget deal secured by the Prime Minister in February 2013 saved Britain £3.5 billion over the forecast period to 2017-18. He also secured the continuation of the UK rebate. I gently remind the hon. Member for Newcastle upon Tyne North that it was her party in government—I do not think she was in this place at the time, and neither was I—that handed away part of that valuable rebate, at a cost of £10 billion to this country over this Parliament.
Catherine McKinnell: While we are on gentle reminders, may I remind the Minister that the Prime Minister secured that reduction only after Opposition Members sent him back with a mandate do to so, following a vote in the House?
Nicky Morgan: That intervention is beneath the hon. Lady. It was a bit like the interventions we get sometimes from the Opposition in debates on the great Labour recession, in which they say, “You didn’t tell us that we were spending too much money.” Forgive me, but they were in government at the time and we were not; they were in charge of the financial regulation system.
Let me turn to the 2014 budget, which is £8 billion less than the 2013 budget. I was the Minister at ECOFIN in November last year. We were not quite at the stage of having a real-terms cut, although significantly less money is being spent in the 2014 budget than the 2013 budget, so I was not quite prepared to give it our backing. We can see, however, that the EU is moving some way and that the UK is having an influence, with like-minded member states, on the way in which the EU spends its money and the relationship it has with member states.
I also gently remind Opposition Members that it is the Conservative party that wants to give everyone a vote on our relationship with the European Union, but that legislation was killed off by Labour and Liberal Democrat peers in the House of Lords only in the last week.
Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab): Will the hon. Lady tell us where the European referendum was when the Government had the opportunity to put it in the Queen’s Speech?
The Chair: Order. May I remind Members of the item in front of us? I suggest that we keep to that.
Nicky Morgan: I understand your strictures, Mrs Brooke, but I think that the people listening to this debate outside will have heard that this Government have nothing to be concerned about and, in fact, have done many good things in relation to strengthening our relationship with the European Union. We have made it clear that certain red lines will not be crossed while our Prime Minister is in office.
We were talking earlier about the criticisms of the UK in the ECA report. Weaknesses were identified in certain areas, and I said that I wanted to raise examples of positive action taken. It is important that the UK is seen to address those weaknesses, as that strengthens our hand with other member states. We have already talked about the Northern Ireland issue and land parcels; I will come on to the hon. Member for East Antrim’s remarks.
The report identified that the UK had eight outstanding VAT reservations. Following the Commission’s control visit to Her Majesty’s Revenue and Customs in October 2012, that number was reduced to six, and by January this year, it had fallen again to four. For the remaining reservations, reviews have been conducted or scheduled and, pending the Commission’s approval, the relevant authorities anticipate that three of the reservations will be lifted in 2014-15.
In relation to the European social fund, the relevant managing authority continues to work closely with the Commission to develop detailed action plans to strengthen management and control procedures. With proactive action, that has resulted in a significant fall in associated error levels.
The hon. Member for Newcastle upon Tyne North asked when the ECA would give a positive statement of assurance. She will understand that I do not have a crystal ball and therefore cannot tell her exactly when that will take place. It is true, however, that overall responsibility for the management of the EU budget funds lies with the Commission. The Government therefore believe, and have made clear to the Commission, that the Commission needs both to review its own systems and processes and to work with the ECA member states to understand better and address the often systemic reasons for identified errors. Improvements to the error rate, therefore, depend on resolving the identified issues, and the UK will continue to press for these changes.
I turn to the remarks of my hon. Friend the Member for Daventry. We heard from someone who served in the European Parliament how the UK stance in recent years is making a real difference to the way in which the EU looks at the budget and allocates spending. I have already mentioned the vote in the November ECOFIN, when the UK did not support the 2014 budget, although it was a huge improvement on the 2013 budget.
I assure my hon. Friend that the UK is very aware of the amending budgets and the risk that they pose to good, robust financial management. We keep a close eye on them, and we have adopted a clear and tough stance in the Council in calling for all requests for additional money to be scrutinised, for a rationale to be given and for them to be restructured when necessary to ensure that the EU lives within the means set by the Council and the European Parliament. The Government opposed additional spending in 2013 in almost all cases—if memory serves, in one instance, we supported, for good
reasons, a draft amending budget. I assure the Committee that we scrutinise the type of spending to ensure best value for UK taxpayers.My hon. Friend made a point about the troubled families money and the transfer within budgets, which came before the Public Accounts Committee. It would be best if I wrote to him about that interesting point. I am sure that Departments continue to scrutinise carefully how they spend EU money, but I should like to look into that further, and I will come back to him.
My hon. Friend also mentioned the European public prosecutor’s office. The coalition agreement confirmed that the UK would not participate in establishing a European public prosecutor. The Commission has not provided robust evidence to justify the creation of a new, supranational agency with extensive and harmonised powers. We believe that the principle of subsidiarity has not been fulfilled in the arguments for a European public prosecutor’s office. I entirely agree with my hon. Friend. It is typical of the Commission to ask for more powers without using its existing powers as effectively as it might.
My hon. Friend tempted me to go down the road of how we might vote at the February ECOFIN, which will take place two weeks today. I am delighted to confirm that the UK intends to vote against the discharge of the 2012 EU budget. We will have to see how other member states decide to vote and engage, and the pressure that they place on the Commission, but the UK’s position is to vote against.
The hon. Member for East Antrim talked about fraud. He drew the distinction, as I did, between fraud, error and irregularities. I think that he mentioned the figure of €3 billion in relation to fraud. According to the Commission’s “Fight against fraud” report, fraud affected the EU budget in 2012 by €315 million. That is still far too high, but less than the figure that the hon. Gentleman cited. He also mentioned the European public prosecutor’s office—I think that I have made the Government’s position on that clear.
The hon. Gentleman is right that there is a difference between irregularities and fraud, and there are times when member states, organisations and bodies may not know that the rules have been broken. In the question and answer session, we discussed agricultural land in Northern Ireland and the fact that sometimes matters are open to interpretation. For example, Northern Ireland was mentioned in relation to the measurement of land parcels under the European agricultural guidance and guarantee fund. That report stated that 12 out of the 47 parcels that the ECA assessed were outside tolerance, but, following submissions from Northern Ireland, the number was reduced to six. From the British taxpayer’s point of view, I would perhaps rather that the Commission authorities were sometimes a little over-zealous, and then listened to reason about some of the criticisms that they level, than that they missed other opportunities to ask whether a member state authority had interpreted the rules correctly.
Sammy Wilson: Does the Minister agree that, when irregularities are due to interpretation, penalties can be attached and that, therefore, it is important at the outset that we understand the rules under which we are operating and that there is a common interpretation of them?
Does she also agree that some of the bureaucratic interventions were, as I showed, in some cases pieces of paperwork of no consequence, and that we should ensure that rulings are not made about such irregularities and then clawed back?Nicky Morgan: I understand the hon. Gentleman’s point. There is no doubt that better guidance is needed to ensure consistent application and understanding of the complex rules that govern agricultural expenditure. Some of the errors are systemic and have been noted in previous reports, and that is why we continue to press for simplification and better guidance. I noted that one of the ECA’s main conclusions was that complex EU and national legislation governing the use of EU funds need to be simplified. It is right to point out that sometimes the complex rules and regulations make it difficult for people to know exactly how to interpret them. It would be wrong for them to lose out because of that.
The hon. Member for East Antrim expressed strong views on the EU tobacco directive, but that is not the subject of this debate so I will not go down that path. He also mentioned cross-border smuggling, and I have undertaken to write to him. I will just say that on my visit to Northern Ireland last November I visited the border area for myself and I understand the issues he is talking about.
Finally, we come to the comments of my hon. Friend the Member for South Norfolk, who was very kind about me. If I could have him on all Committees and he could say such nice things in debates in which I am speaking, that would be fine, thank you very much. He is absolutely right: there is a long history of the European accounts not being signed off. I do not want to trample on your good offices, Mrs Brooke, but I will just say
that that is why many in this country feel that the time for having a say on our relationship with the EU has definitely come. Many of our constituents want to have that say.I hope that I have dealt with all the points that have been raised and that the Committee will agree to approve the Motion. I have made clear how the UK intends to vote at ECOFIN in two weeks’ time.
That the Committee takes note of European Union Document No. 12772/13 and Addenda 1 to 5, a Commission Report to the European Parliament and the Council on the protection of the European Union’s financial interests: Fight against fraud 2012 Annual Report; and unnumbered European Union Documents, the European Court of Auditors Annual Report concerning the financial year 2012 and the European Court of Auditors Annual Report on the activities funded by the Eighth, Ninth and Tenth European Development Funds; agrees that budgetary discipline and robust financial management at all levels remains crucial, including to support domestic efforts to tackle the deficit and debt, especially given the continuing fiscal constraints and fragile economic recovery across the EU; believes that it is unacceptable that the EU budget has failed to be given an unqualified audit by the European Court of Auditors for the nineteenth year; supports the Government’s decision to vote against granting discharge to the EU budget and to press the Commission for a clear action plan to address the European Court of Auditors’ recommendations relating to the European Development Fund; and encourages the Government to continue to work with other like-minded Member States to put pressure on the Commission and all those involved in the management of EU funds for clear, positive and urgent improvements to the quality of EU spending [17th Report of Session 2013-14, HC 83-xvi, Chapter 4, 26th Report of Session 2013-14, HC 83-xxiii, Chapters 3 and 4].