Examination of Witnesses (Questions 260-276)
Mr Stephen Pickford and Mr Jean-Christophe Gray
16 JANUARY 2007
Q260 Lord Inglewood: You have used
the word "equity" on a number of occasions and, as I
understand it, to summarise the position that you are articulating,
it is that the UK government defines equity in this context as
being a system which brings about certain transfers across the
European Union, which are brought about by what it considers to
be legitimate European spending, adding value ie activities where
the payments are consequences of the existence of the Union, and
that inequitable spending is basically disproportionate spending
on areas like the CAP, where they argue that Europe is simply
carrying on expenditure which has been transferred from the Member
States and does not in itself have any particular added value
attached to it. So in a sense there is schizophrenia at the heart
of all this: one half of us would want to see a juste retour
and the other half wants to see a system which, from the perspective
of a country like ours, by definition almost inevitably will not
involve a juste retour. And we hide this argument under
the noble description of the word "equity". If you look
at it from other Member States' perspective I would suggest they
would look at it in a rather different way, would they not? And
are we sure we are winning the argument about what we think the
budget is for? By definition, if the budget shifts towards what
we want to see it means that its redistributive aspects are different
from what they are now, and then you do not have to be bogged
down by possible questions about the amount of income and the
way the income is introduced into the budget. I think you have
conceded that point already, is that correct?
Mr Pickford: I think equity is a multi-dimensional
word and I have used it a lot because it goes to the heart of
this inquiry, I think, and the Own Resources system as a whole,
and it is equity both on the income and the expenditure side;
it is between different Member States, but it is also in particular
through the tax side in the distribution between the Member States.
So there are all these different dimensions of equity. It does
seem to me that the way in which the debate is going means that
this budget review, that the Commission is currently kicking off,
is going to be really quite fundamental in terms of issues about
what Europe is about, what is the future of Europe. The Economic
Secretary gave a speech a couple of months ago where he tried
to set out the UK's broad principled approach for the budget review.
He set out three principles: one is advancing the national and
the EU interest, which is essentially about our view that the
EU should act together where there are clear additional benefits
from acting together, rather than the individual Member States
acting separately. Secondly, where it does act that that action
should be proportionate and flexible. It does not necessarily
mean that the EU should be spending money to address a particular
issue, it might be a regulatory solution or it may be some other
form of common action which does not necessarily involve the EU
budget. Thirdly, where it does spend money it should do so applying
the highest standards of sound financial management. It is those
broad principles through which we try to look at each of the issues.
I think you are right to say that we have a very strong view about
the role of the CAP and if you look at it through that lens I
think there is a very good argument for saying that it is not
doing much more than what the individual Member States would have
done in their own right. We published a paper with Defra last
year, which set out how we thought the CAP should evolve, what
it should look like in 10 or 15 years, time and I think that very
much reflects our view that we should concentrate agricultural
spending on the things that add value to the EU as a whole.
Q261 Lord Inglewood: What you have
said is something I think that if you were anywhere in the middle
ground of UK politics you would accept, and you would accept the
intellectual logic behind what you have said. But I have been
involved principally with European politics for almost 20 years
now and the clarion cry has always been, "It is coming our
way." It does not matter how good the logic is, what matters
is the votes in the Council of Ministers. Is it your view that
the votes in the Council of Ministers are stacking up in our direction
or not?
Mr Pickford: At the very least we are having
our voice heard and taken seriously. I think that, for example,
our CAP paper has started to stimulate quite a debate and the
Agricultural Commissioner, for instance, is thinking along very
much the same lines. My perception is that a number of the new
Member States do look at these issues in a more similar way to
us than to some other parts of Europe.
Q262 Chairman: There has also been
a rather significant change down the years in the proportion of
Member States who are net contributors to the budget. The first
such review that I remember—the 1987-88 review—took
place at a time when there were only two net contributors. The
review process then was much more uncomfortable, and the balance
of views was at the other end of the spectrum. So I think your
negotiators have an easier task these days!
Mr Pickford: I hope we are as successful.
Chairman: There was one technical question that
we wanted to ask you and I may have known the answer but have
forgotten it. Lord Cobbold.
Q263 Lord Cobbold: Could you just
explain to me how the payment system works? Does the government
put in a monthly amount into the account of the European Commission?
And I gather that if there is money in that account they do not
pay any interest on it. Are there occasions when the interest
rate does get charged and has to be paid? Can you explain how
the system works?
Mr Pickford: I will try. It is not entirely
straightforward, but essentially when the annual budget is set,
which it has just been for 2007, the overall level of spending
in aggregate for the EU budget is set at that point in time. Certainly
on the VAT and the GNI resources the amounts that each Member
State has to pay is set at that point in time. The Commission
requires us to deposit in its bank account, which it holds at
the Bank of England, an amount in sterling.
Mr Gray: We pay in sterling.
Mr Pickford: We deposit an amount in sterling,
which is the euro equivalent of our contribution for the year
divided by 12; so every month we make two payments on the different
Own Resources. Essentially, each month we pay over one-twelfth
of our annual due. We pay it in sterling, we pay it into a sterling
bank account that the Commission holds at the Bank of England
and it comes out of the consolidated fund. It becomes a little
more complicated also because the pattern of spending from the
EU budget through the year tends to be concentrated in the early
months of the year, so there is a provision whereby it can require
Member States to pay rather more than the one-twelfth in the early
period, up to five-twelfths in the first three months of the year.
If it asks for that money to be advanced then the commensurate
payments in the latter part of the year are reduced, so that the
annual total is unchanged but the pattern within the year is slightly
frontloaded.
Q264 Lord Cobbold: In cases where
the expenditure on the budget side is going to be done by a Member
State the transfer is then made by the Commission to another account
in the name of the Member State?
Mr Gray: Yes, that is right, I think it is transferred.
The reverse, it is transferred to an account called the HMT Number
4 account, and then goes to the individual departments.
Q265 Lord Cobbold: Is that done on
a regular tri-monthly basis or an as needed basis?
Mr Gray: I can check it and provide a note on
that.
Mr Pickford: We can provide a note setting out
the mechanics of the transfer.
Q266 Chairman: I think that would
be very helpful, thank you very much. Is there any interest payable
on the account in the Commission's name at the Bank of England?
Mr Pickford: No, the account is owned by the
Commission but the Bank of England does not pay interest.
Q267 Lord Inglewood: What happens
if the rate of exchange, the pound and the euro changes? Who is
the beneficiary of this?
Mr Pickford: It depends which way the exchange
rate moves. Twelve of the countries are in the euro so there is
no exchange rate effect there. For those who are not in the euro
the exchange rate is fixed for the purposes of calculating how
much we have to pay at the last working day of the previous year.
So for the 2007 budget the amount we are asked to pay over in
sterling is at the sterling-euro rate on 29 December.
Q268 Lord Steinberg: I assume there
is no such thing as a hedge?
Mr Pickford: All the exchange rate risk is borne
by the Commission, obviously, in that system. The Commission,
I guess, could hedge it if it wished to. Obviously what happens
in that situation is if—and I will probably get the signs
wrong here—the euro appreciates over the subsequent year
then we will pay the same, but the Commission would get more in
euros. If the euro depreciates against sterling then we still
pay the same. I may have got the signs wrong. Essentially, it
is fixed so that could lead to a situation where the euro amounts
fall short of the Commission's spending plans, in which case it
might have to produce an amending budget to require more money.
Q269 Lord Inglewood: In other words,
it has its cake and eats it?
Mr Pickford: The Commission cannot run either
surpluses or deficits and therefore if it has a windfall gain
from the exchange rate then it would effectively have to pay back—
Q270 Lord Inglewood: It reduces the
amount it requests.
Mr Pickford: Precisely. To be absolutely clear
on the sign, if sterling strengthens against the euro then, over
a period, our contributions will fall in sterling terms.
Q271 Chairman: That seems to make
sense.
Mr Pickford: Yes, I always have a problem with
the signs.
Q272 Lord Cobbold: You have covered
the ground before but in an ideal world do you think that the
Own Resources side should be dealt with separately?
Mr Pickford: I think the analogy probably works
with a national budget. I think you can take decisions about the
form in which money is raised fairly independently of the amount
raised, but then when you get into the question of equity most
people tend to think of this in terms of both sides of the equation.
Q273 Lord Cobbold: Own Resources,
especially GNI-based, is a fundamental thing which you can decide
and then argue about how the expenditure is made in a different
forum.
Mr Pickford: Yes, I would agree with that, provided
there is full agreement on what the expenditure is for. It comes
back to the question you were raising, Lord Inglewood, about the
way in which the budget is spent. Is it there for a re-distributory
purpose, is there agreement about what the budget is for? I think
if you had that agreement then you might be able to take decisions
on the resources side independently. But I think where we are
at the moment is that the process of going through this budget
review will expose all of these big questions about what should
the EU be spending its money on and there will be similar questions
about who pays for that. So I think we probably are in a situation
where you have to look at both sides of the equation together.
Chairman: Most of our witnesses, and most of
the evidence we have had, tend to argue that reform of the expenditure
side is urgent, whereas on the revenue side the present arrangements
are sustainable, and I am fairly sure that the only reason you
are obliged to discuss the revenue side as well as the expenditure
side is the rebates and the antagonism to them in other Member
States.
Q274 Lord Inglewood: Just arising
from this part of the discussion, presumably it is intellectually
quite easy to define a system where you have an Own Resources
System based on GNI, where because the varying expenditure patterns
you determine contributions by a series of pre-determined factors,
so that the per centage might be slightly different from Member
State to Member State. I imagine that is politically more or less
impossible to achieve agreement on what those would be?
Mr Pickford: It is not a million miles from
the correction mechanisms that we have in place now, and it is
not just the UK rebate—
Q275 Lord Inglewood: All the rebates?
Mr Pickford: That is right, and they all stem
from the same issue.
Q276 Chairman: You are going to let
us have a net contributions table and a little note on the technical
issue of how the funding mechanism works?
Mr Pickford: Yes, indeed.
Chairman: Thank you very much, Mr Pickford.
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