Examination of Witnesses (Questions 247-259)
Mr Stephen Pickford and Mr Jean-Christophe Gray
16 JANUARY 2007
Q247 Chairman: Mr Pickford, thank
you for coming to help us with our inquiry into the Own Resources
System of the European Union. We are of course on the record,
as usual. You have submitted an extremely helpful memorandum which
provides a very good basis for our discussion this morning. Would
you like to introduce your colleague, and is there an opening
statement that you would like to make, although you may take it
that your memorandum has been read?
Mr Pickford: Thank you very much, Chairman.
Can I introduce Jean-Christophe Gray, who is the Head of the EU
Finances Team in the Treasury? I will forgo the chance to make
an opening statement, simply to say that I think this inquiry
you are holding is very timely, given the review that the Commission
is in the process of undertaking on the overall aspects of the
budget, both of the resource side and on the expenditure side.
Q248 Chairman: Could you summarise
for us what the Treasury sees as the key attributes of a fair
Own Resources System for the EU, and the extent to which you think
the current system, with the four resources in their present balance,
matches that requirement for fairness?
Mr Pickford: Obviously the main purpose of the
Own Resources System is to generate sufficient revenue for the
EU to finance its budget and in that sense it is EU taxpayers
generally who are footing that bill. We tend to approach the issue
of EU financing in the same way as we do domestic tax financing
and in that regard we would expect any form of revenue raising
to be fair, to be efficient in the sense that it minimises the
impact that it has on the economy as a whole, and that it is administratively
easy to collect. In that sense the Own Resources System is a little
complicated. You have the Traditional Own Resources, you have
the VAT-based resource and you have the GNI-based resource and
I think different aspects of those three criteria apply to those
three. But the system has grown up over a large number of years
and it is now true to say that the GNI resource occupies the bulk
of the resourcing.
Q249 Lord Blackwell: Can I ask you
about the sustainability of the system? Your note makes a point
that the system is based on the four resources—Customs,
agricultural, GNI, VAT—has been in operation for a number
of years and has been relatively stable, but you also have a graph
that shows how the proportion coming from VAT, for example, has
rapidly reduced and no doubt the agricultural one will be changing
as well, and we now have this call for a review. Does the Treasury
think that there is something in the way that these proportions
are changing and the way some of these other bases are disappearing
that makes it inevitable that we need to change the system, or
could we just sustain carrying on as we are and just let it evolve?
Mr Pickford: As you say, the system has evolved
quite significantly over the past couple of decades. I think two
things are driving that: firstly, that the Traditional Own Resources
have become less significant in overall quantitative terms. As
tariffs have come down and some of the levies have come down so
it has been a less sustainable resource. Then the VAT resource
was introduced, but my feeling is that the reason that Member
States did not want to expand that too much was because VAT is
essentially somewhat regressive. Then the GNI resource came in.
Q250 Chairman: Can I stop you on
that? You say that in your evidence, and VAT is indeed regressive
as a tax. But, given the artificial nature of the VAT base used
for the third resource, the VAT resource, surely there is no regressive
effect? In one way, surely VAT is more accurate than GNI in measuring
the domestic economy, because GNI takes account of activity abroad.
Perhaps you could comment too on why it is in fact GNI rather
than GDI, which people are using?
Mr Pickford: On that last point, I am not sure
that we would defend GNI as opposed to any of the other G-aggregates,
GDP, GDI, GNP for that matter. Essentially GNI is there as a proxy
for national wealth and, yes, there will be some differences between
the various measures—they will move slightly differently
over time and they will produce a slightly different pattern between
the different Member States, but essentially they move together.
On the question of VAT, you are absolutely right, that there is
a standardised set of approaches so that the system is not influenced
by individual decisions that Member States take about what is
in and what is out. Essentially, it covers a large proportion
of the economy but it is based on the consumption system, and
the weights within that formula tend to be weighted towards those
things that are consumed by lower income households. So in that
sense it is regressive. I think it was partly for that reason
that the GNI resource came in and has increased over time. It
is seen as a proportional system of raising revenue between Member
States.
Q251 Lord Cobbold: Do you think it
should become a single source of Own Resources and would simplify
the whole system and get rid of the other three components, or
let them be incidental?
Mr Pickford: I think that has happened over
time, the GNI resource now makes up 70 per cent on average of
all the resources raised in the budget. I would not be surprised
if that trend continues. The other point you were referring to
in the earlier question about sustainability is that some of the
resources in the Traditional Own Resources may actually start
to dry up. For example, as the trade round progresses it may be
that agricultural import duties come down even more or, indeed,
may even disappear. My own view is that it is inevitable over
time that more will go into the GNI resource.
Q252 Lord Steinberg: Mr Pickford,
it seems a common criticism attaching to GNI-based resources and
any other taxation that it is not very clear to the public. Can
we do anything about that and, if we can, how can we do it? Coupled
with that, may I also ask you, would it be more efficient for
each Member State to designate an existing tax of their choice
to enable them to raise their contribution? I can of course see
implicit dangers in doing that, but we are already all over the
place with different taxes anyhow, so I do not suppose we are
going to accept the balance too much. What do you think?
Mr Pickford: The Commission has been very concerned
that the sources of revenue are transparent to the EU citizen,
and I can see something in that argument. On the other hand, I
think the system we have at the moment does effectively, for the
bulk of the resource, transfer a proportion of domestic Member
State taxation to pay for the EU budget. In the UK we are very
clear about the payment that we make from that domestically collected
tax resource over to the EU budget; it is part of public expenditure,
it is scrutinised in exactly the same way as other elements of
public expenditure, and I would argue that it gets at least as
much scrutiny both in Parliament and in the media as other parts
of spending. It is true that the Commission has proposed a specific
tax and they have given an example, perhaps, of environmental
taxes that should be earmarked for the EU spending. We have doubts
about that. This is essentially hypothecation of taxes; in general
we do not like hypothecation because it is a relatively inefficient
way of raising money for public expenditure and it means that
that element of spending could be subject to feasts or famines,
depending on how that particular tax resource moves. It also tends
to protect that element of spending from proper review because
it will spend as much as the tax raises. So we are not particularly
attracted to that as a way forward, but it is something that the
Commission has proposed.
Q253 Lord Steinberg: Can you help
me further on the first part of my question? You mentioned Parliament
and the media but my question was directed at how we can get the
general population to understand a little bit better?
Mr Pickford: We try, for example, with the UK's
own Budgets to produce quite a lot of information about how the
total of tax revenue raised in the UK is spent in different areas,
and included in that is our contribution to the EU budget. Without
a direct read across from one particular source of finance to
a particular source of expenditure it is harder to demonstrate
the linkage. But I would be under no illusion that if we suddenly
doubled our contribution to the EU that this would go unnoticed;
I think that would be a major event and there would be a lot of
comments and debate about it.
Q254 Lord Steinberg: It is probably
true that the contribution we currently make is fairly well masked
to the general public.
Mr Pickford: I think the general public has
an understanding that the UK does make a contribution to the EU,
that we have had a correction to that contribution because of
the expenditure pattern, through the UK abatement. I do not know
whether they are conscious about the overall level.
Q255 Lord Cobbold: Do you think that
the GNI per capita aspect should be taken into account and the
differences from one country to another?
Mr Pickford: That goes back to the heart of
what is a fair system for the EU budget and there are a number
of dimensions to that. At the moment the Own Resources System
tends to raise money, raise resources, roughly in proportion to
national wealth. The spending of that money is rather skewed;
there are some aspects which we would find very easy to defend,
which is the spending on structural and cohesion funds in the
new Member States, for instance, where I think it is in all Member
States' interests and the Union as a whole to use the EU budget
as a way of encouraging economic development in the new Member
States. I think there are some aspects of the CAP pattern of expenditure
which we find much more problematic, and that introduces questions
of equity over the budget as a whole. So I think you could look
at using the Own Resources System through the GNI resource in
a more proactive way as a redistribution element, but I think
you would need to look at in the round, particularly with the
expenditure side of the budget as well.
Q256 Lord Inglewood: It seems to
me that if you are looking at the way the European Union works
it is certainly the ideology of the arrangement, and some would
say the theology, that the European Union is not a club where
its members pay a voluntary subscription, it is an organisation
in which the centre, the Union, has the right to collect money
from economic activity that is going on within it in order to
have certain funds at its disposal. You can either do that by
some form of taxation directly on people or you can do that by
levying tax on the Member States themselves. It seems to me that
some kind of GNI system or G-system generally is a perfectly legitimate
form of taxation, a form of wealth tax, and that it meets four-square
the central characteristics of own resources. Is that a view you
feel is fair?
Mr Pickford: I certainly think that the EU as
a whole, as a club, has rules which say if you are a member of
that club you have to pay the subscription—it is not a voluntary
subscription as such. Indeed, the Commission has a legal right
to collect those resources and a legal right to fine Member States
if they do not pay up or do not pay up on time. In that sense
I think that some system which essentially fixes for every Member
the amount of money they have to pay over but leaves it up to
the Member States to essentially collect the money and then pay
that sum over to the EU is probably a sustainable and arguably
a fair way of arranging it.
Q257 Lord Inglewood: It goes further
than that because you are responding in a slightly tentative manner,
it seems to me. Are you being tentative because you are being
intellectually honest or are you being tentative because you have
serious doubts about the analysis?
Mr Pickford: The analysis is pretty clear. I
am being a little hesitant because the system has grown up over
a large number of years. Any major change to the system involves
a lot of debates, a lot of negotiation and, essentially, any big
change to the system will produce winners and losers. These changes
have to be introduced by unanimity, so while from an intellectual
point of view we are pretty clear that we would welcome a move
forward towards GNI as the resource for the EU budget whether
you could achieve that quickly is, I think, a much more open question.
Q258 Chairman: Mr Pickford, I have
the impression that the views you have expressed reflect a judgement
that the system of the four resources, historical accretion notwithstanding,
is imperfect but none the less reasonably satisfactory. I also
have the impression that this view is pretty widely shared view
across the Member States. Yet in the European Council a lot of
Member States were absolutely clear that the review of the expenditure
side, for which the British government was arguing, must be accompanied
by a review of the revenue side. It seems to me that their motive
may lie, not in any deep concern about minor defects at the edges
of the present system of four resources, but in the fact that
the UK rebate is to be found on the revenue side. Is not the argument
from some Member States for a review of the revenue side code
for elimination of, the five abatements, the oldest being the
UK abatement? If so, how will you handle that? Do you accept that
the two sides of the account need to be reviewed simultaneously?
One could argue that since it is, as you yourself said, on the
expenditure side that the skewing arises, which in turn necessitate
rebates, you could say that if the expenditure side was got right
then maybe the necessity for rebates would be reduced or eliminated.
Why have we accepted simultaneity of reviews, and would there
not be a case for a sequence which begins on the expenditure side?
Mr Pickford: That raises a set of complex issues.
I think it is absolutely right to say that we need to look at
both the income and expenditure sides together, because essentially
I think the reason that we have a rebate, why four other Member
States now have corrective mechanisms, is because although in
an uncorrected sense the Own Resources system is, broadly speaking,
proportional to national wealth in terms of the proportion that
the Member States pay in, nevertheless there are features of the
pattern of the expenditure side which a lot of Member States think
is unfair. So I think when you are looking at changes to the resource
system you need to bear in mind that some of the features, in
particular the correction mechanisms, are driven from concerns
about equity on the expenditure side. On the review itself, the
best I can do is read out the sentence from the Council's conclusions.
It said, "The European Council therefore invites the Commission
to undertake a full, wide-ranging review covering all aspects
of EU spending, including the CAP, and of resources, including
the UK rebate, to report in 2008-09." I think that makes
it fairly clear that on the one side the rebate is an issue that
a lot of Member States want to discuss and on the other side that
the CAP, which is the main driver of some of these expenditure
patterns, also needs to be reviewed. In terms of the abatement
the UK is clear that our abatement and the corrective mechanisms
for four other Member States are essentially a consequence rather
than a cause of those perceived inequities and is driven by the
pattern of the expenditure side.
Q259 Chairman: Your excellent memorandum
included a gross contributions table, but it did not include a
net contributions table. It would be helpful, in the light of
what you have been telling us, if you could send us something
comparable for net contributions.
Mr Pickford: I will certainly do that.
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