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That was one of the better experiences. The worst was when the noble Baroness, Lady Thatcher, introduced into the European budgetary debate the question of the juste retour: “Can I have my money back?”. She completely failed to understand the importance of the non-compulsory expenditure part of the budget to European parliamentarians. That was the money that was being spent on environmental policies, where you did not get your money back but you got a decent European policy; on development assistance in the third world, where, again, you did not get the money back but you did something right and proper for trading relationships in the third world; and on the regional policy that helped countries such as Greece, Spain and Portugal to equip themselves to join the European Union. Without those, how much money would we have spent on the defence of the southern

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flank of NATO without ever mentioning it as public expenditure? The nonsense of the juste retour was one of the worst aspects.

I say with absolute clarity to the noble Lord, Lord Pearson, that no one has said in the debate that the European Union budget is insignificant. Any expenditure at that level is always significant. The European Union budget is perhaps the most examined, the most clearly scrutinised, the most pored over part of our public expenditure. If we pored over defence expenditure and got paranoid about the times when the accounts of social security and work and pensions were qualified by the Comptroller and Auditor-General in the same way as we do over this rather mythical refusal to sign off the budget, we would perhaps have a better state of public expenditure.

I see the noble Lord, Lord Willoughby de Broke, has had his instructions from the noble Lord, Lord Pearson, and that it is his turn to intervene.

Lord Willoughby de Broke: The noble Lord said that the challenges to the accounts were mythical. Can he remind the Committee whether the accounts have been approved or qualified for the past 13 years?

Lord Tomlinson: If the noble Lord had controlled himself, he would have had the answer by now, because I was just coming on to that issue.

We have to consider what the Court of Auditors does. It produces a statement of assurance based on a particular statistical base that produces—I say this to my noble friend Lord Kinnock—far too small a sample to necessarily predict the underlying transactions correctly. I said that frequently as a member of the Budgetary Control Committee. Of the two parts of the statement of assurance, the balance sheet has always been approved and there is always a questioning of the regularity and the reliability of the underlying transactions.

It is all very well to smirk about the underlying transactions, as the noble Lord is doing, but they are 85 per cent expended in the member states. Most of the criticisms of underlying transactions are criticisms of what happens in departments such as Defra. Of the underlying transactions that take place in this country, as my noble friend Lord Kinnock explained, most of the money is transferred money and does not even leave the United Kingdom.

There is a serious problem with fraud and irregularity. However, if we look at fraud and irregularity in the European Union budget carefully, we find that the majority of it is not on the expenditure side of the budget but on the revenue side—the collection of own resources. One of the things that we have to do on the budget—the people who have been taking the lead in this are the members of the European Parliament Committee on Budgets—is to get away from the traditional own resources, which are both a diminishing part of the budget and the most fraud-prone part of the budget, and get a more sensible system of financing the European budget.

The noble Lord, Lord Hunt, paints a picture of the European budget inevitably leading to a bigger budget, but there is nothing inevitable about that because the final control of traditional own resources is a power retained by Parliament. National parliaments retain

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the power for the ultimate approval or disapproval of the level of own resources in the budget.

I believe that the abolition of the distinction between compulsory and non-compulsory expenditure is a proper, right and necessary course. We have been slow to adopt it. It has been on the agenda for a long time; a large number of parliamentarians, including me, supported it during the Convention on the Future of Europe. Tonight we should be inviting the Opposition to withdraw their amendment, although we need not in any sense beg them to, because, if we test the opinion of the Committee, the amendment will be defeated.

Baroness Ashton of Upholland: I am grateful to all noble Lords who have spoken in this debate, particularly for the expertise and experience that has been evident in all the contributions.

I begin where the noble Lord, Lord Maclennan, began, in saying how much the UK has always been in favour of increasing democratic accountability and transparency of EU procedures and policy-making. As many noble Lords have pointed out, scrutiny of the budget by Parliament and Council is key to ensuring democratic accountability and transparency. Giving the European Parliament joint authority with the Council over the annual budget will increase democratic accountability, as the European Parliament will share with the Council the important task of agreeing the annual budget. However, the key budgetary decisions on the multi-annual financial framework expenditure ceilings and own resources, which I will explain further in a moment, will continue to be taken in Council—by unanimity.

Noble Lords are correct in their assumptions that in the context of the annual budget procedure, the Lisbon treaty will expand member states’ influence. As the noble Lord, Lord Hunt of Wirral, said, the treaty will remove the distinction between “compulsory expenditure” and “non-compulsory” spending. As the noble Lord indicated, compulsory expenditure is mostly common agricultural policy spending, over which the Council currently has the final say and which is approximately 35 per cent of the budget. As noble Lords have pointed out, the non-compulsory element is the 65 per cent over which the European Parliament currently has the final say.

Under the treaty, all spending will be subject to the same classification, and therefore no one part of the budget authority will have the final say over particular areas of the budget. We believe that that increases the Council’s leverage across the budget as a whole.

The noble Lord, Lord Grenfell, kindly indicated the comments made by the committee in its report and I am extremely grateful to him. The conclusion of the paragraph that the noble Lord referred to says:

I want to deal with some of the specific points that have been raised before I outline what the procedure will be and, I hope, address the central point made by

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the noble Lord, Lord Hunt of Wirral. I was grateful to the noble Lord, Lord Pearson of Rannoch, for his contribution and for his suggestion about the Court of Auditors. I will explain what the Court of Auditors currently is, because I am not entirely convinced about the noble Lord’s suggestion; I believe that the court does what the noble Lord was suggesting it should. First, there is one member per member state. Secondly, the individuals must have belonged, at national level, to an external audit body, or be especially qualified. Thirdly, their independence must be beyond doubt. I think that that brings together a group of people of extraordinary experience, as expert as any independent group of auditors from any nation state.

Lord Pearson of Rannoch: That may indeed be a somewhat hopeful description of the Court of Auditors, but it is not working. The accounts continue to be qualified. Billions are being wasted. If it were subject to a serious audit from an outside firm of auditors, we would get a very different result.

Baroness Ashton of Upholland: I dispute the fact that it is not working; the Court of Auditors does its job very well. Members of the Committee have already commented on the fact that this is the 13th year in succession that we have not had what I would describe as a clean bill of health. We are not happy about that—we are concerned. However, this is not equivalent to finding fraud. Most of the irregularities that the court has found have been genuine errors which are later rectified. As in previous years, the court has said that the transactions underlying the financial statements for 2006 were legal and regular in respect of revenue, commitments and administrative payments. Further, there has been some improvement from the 6 per cent of accounts that it signed off in 2003, the 35 per cent signed off in 2004 to just over 40 per cent in 2006. Much of its difficulty in giving a positive statement arises from the areas of expenditure which are jointly managed by the EC and member states. This was almost 80 per cent of the EU budget funding in 2006.

We are talking in large part about making sure that those procedures function effectively and not about allegations of fraud. The fact that so many errors are rectified later does not mean that the court is not able to do its job properly. That is incredibly important.

Lord Pearson of Rannoch: But the Commission is still responsible for all the expenditure. The Commission does not have to go on giving millions of pounds to crooked Greek olive farmers or whatever. It could follow it through and withhold the money, but it does not, so the fraud—the irregularities—continue.

Baroness Ashton of Upholland: I hope that the noble Lord is able to support the allegations that he just made. I doubt that he is.

Lord Pearson of Rannoch: The Commission is technically responsible. I am not saying that it is doing this, but under the treaties, the chief financial officer and the Commission are responsible for all the expenditure.

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Baroness Ashton of Upholland: That is not the allegation that I was referring to. If noble Lords look at Hansard, it will be very obvious what the noble Lord, Lord Pearson, actually said. I do not think that we should do that in your Lordships’ House; we must be clear that the word “crooked” is inappropriate. I would argue that it is never appropriate, but I do not think we should use it in these debates.

The noble Lord is making a separate point about the role of the Commission. The point I was making is that a lot of expenditure is through member states and that the European Court of Auditors made the point that when there is joint expenditure, some issues arise. Noble Lords who have dealt with getting accounts in public bodies will know that quite often, qualified accounts are not about irregularities that are fraudulent or cause concern; the irregularities have simply occurred in administrative measures. It does not mean that we are complacent or happy about it, but I am concerned that we are clear about what we are describing .

Members of the Committee talked about the Common Agricultural Policy and its proportion of expenditure. Agricultural expenditure has already fallen from around two-thirds of the budget in the 1980s to 44 per cent in 2007. In the course of the 2007-13 financial prospective spending, it will fall in real terms by 7 per cent.

I would like to describe the procedure as it will be, so that noble Lords who are not familiar with how it will work, as I was not, can understand it. I hope that that will be helpful, not least as noble Lords look back on this and think about other stages of the debate. I apologise to noble Lords who know this extremely well, but what is called the financial perspective is agreed by member states by unanimity. That is the overall expenditure for general areas for a seven-year period. The treaty will put that on a secure basis for the first time. There are six areas involved: sustainable growth, which is 44 per cent; natural resources, including agriculture, which is 42 per cent—I am rounding these figures up; justice, home affairs and citizenship, which is 1 per cent; external relations, which is 5 per cent; administration, which is 5 per cent; and compensation to new states, which is 0.2 per cent.

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The own resources decision that is then made by unanimity sets the size of the contributions to the EU budget for the period of the financial perspective—in other words, for the seven years—including member states’ contributions and rebates. That is unchanged from the current arrangements and is implemented in the UK by primary legislation, with which noble Lords will be very familiar. The annual budget procedure, which sets the levels of detailed expenditure for each year within the ceilings that have been determined by the financial perspective by unanimity by the Council, is jointly decided by the Council and the European Parliament.

I hope that puts it in perspective: the overarching figures are agreed by unanimity, there are decisions about the percentage breakdown within that, and then what happens within those budgets is jointly

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decided. After that, the Commission proposes a budget. Both the Council, by QMV, and the Parliament, by simple majority, can propose amendments if they wish. If they cannot agree on the amendments, the Council and the Parliament meet in what is now described as a Conciliation Committee, which is new. The Council, again, acts by QMV. The committee’s proposals are sent back to the Council and back to the Parliament. If the Council rejects them but the European Parliament agrees them by a three-fifths majority, they are adopted. If the committee cannot agree, the Commission must submit a new budget.

The critical part of that process is that when the Conciliation Committee comes together, it consists of the Parliament and the Council. Whether the Council representatives are Ministers or officials—the treaty is silent on that; that is to be worked through—they will be mandated, whoever they are, probably by ECOFIN but certainly by the Council, to speak on behalf of the Council. They will go to that committee and try to reach agreement.

If the committee cannot agree, the Commission has to start again. If the committee agrees—in other words, we have mandated representatives as if we were the European Council and our representatives on our behalf are no doubt reporting back and keeping us informed of each conclusion with which the Parliament agrees—and for some reason, having done that, the Council rejects it when it goes back, the European Parliament then has a say.

That addresses the point of the noble Lord, Lord Hunt of Wirral. I was searching my mind because when I went through this process I was looking for where the Council keeps and grows its strength, in a sense. Its strength is that if its mandated representatives cannot reach agreement in that committee with the Parliament, the whole thing is off. It is only if they have reached agreement and then the Council decides to ignore its mandated representatives that the European Parliament can step in. That is an important way in which the Council retains and, indeed, develops its role and responsibility.

Having said all that, I take nothing away from the importance and value of the role of the European Parliament. I hope that on that basis the noble Lord can withdraw his amendment.

Lord Hunt of Wirral: My Lords, this has been such an important debate. I am grateful to everyone who has participated, particularly the former commissioners, my noble friend Lord Tugendhat and the noble Lord, Lord Kinnock. To echo the words of the noble Lord, Lord Maclennan of Rogart, I was particularly pleased that the noble Lord, Lord Williamson, participated.

The one question I do not think the Minister answered was when the Government changed their mind. They went into these discussions about control of the budget with Mr Peter Hain saying clearly that they could not accept the European Parliament jointly exercising the budgetary function; that was clearly laid down, whether it was a “red line” or whatever. I do not think the Minister has explained to us satisfactorily when it all suddenly changed and what had been unacceptable became acceptable.

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Anyway, she has done her best with the brief she has, and we will carefully examine all the points she has made.

The noble Lord, Lord Maclennan, mentioned greater democratic control. I dare say the other place would have loved to have been able to rewrite the Budget of Mr Brown and Mr Darling; had it been left to the Parliament, I am sure it would have done. One therefore has to ask oneself: what does one mean by greater parliamentary control and greater democratic control?

The noble Lord, Lord Kinnock, reassured me on a number of points. He promised—and I am going to hold him to this—that the change would result in amendment reduction and the reorientation of the common agricultural budget. He believes it, and that is wonderful to behold—but he has believed a few things in the past and then changed his mind, as he reminded us on Second Reading.

Lord Kerr of Kinlochard: If the noble Lord is so nervous about the abolition of obligatory expenditure, why, during the convention—when, as the noble Lord, Lord Tomlinson, recalled, the idea was first discussed—were the French Government the Government who were most nervous of it and opposed it most strongly? The Governments who strongly supported it were the budget-disciplinarian Governments—that is, those of northern Europe. The only strong support the French had was from the Polish Government. Can he explain that?

Lord Hunt of Wirral: That is all to do with the common agricultural policy and the track record. We all know where we are; the question is, where are we heading and where are we going to end up? That is why I found this debate very interesting. I hope everything that the noble Lord, Lord Kinnock—to whom I was referring before I was quite rightly interrupted—has told us is going to happen will indeed happen.

I am grateful to the noble Lord, Lord Grenfell, for reminding us of those consensus words, but I remind him that his committee reported that it believed the balance on the European Parliament committees had changed. I am not yet persuaded, but if he and his committee are right, that is some hope for the future.

I do not think I am going to satisfy the noble Lord, Lord Pearson, because he has already identified me as a European enthusiast. Although I would rail as much as he does against wrongful expenditure, I am not going to be able to answer him.

The noble Lord, Lord Hannay, made some important points about the “provisional twelfths” and introduced some relevant comments from my noble friend Lord Tugendhat as a very effective way of curbing expenditure. That was also useful. Ideally, as my noble friend said, expenditure has to be at the right level. He is a wonderful exponent of that great principle of subsidiarity. That was a helpful contribution, too.

I thought the noble Lord, Lord Tomlinson, erred in giving the European Parliament a slightly bad name about its motivation for passing the budget just before it went on holiday. However, I realise that it was a pleasantry, and I accept it as such.

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I recognise the relevance of what the Minister said regarding the Court of Auditors. All I would say in support of some of the comments that have been made is that in 2005 the European Anti-fraud Office was in receipt of 12,000 reported cases of irregularities involving the EC budget, including one involving grants totalling more than €1 thousand million. There is a situation that requires remedy; whether it is through the democratic control we have spoken about in this debate or through some other route, we can continue to speculate.

This has been a valuable debate. Indeed, the noble Lord, Lord Dykes, said what a good debate it had been. I agree with him, but he has to recognise that it would not have taken place had it not been for the fact that the official Opposition have put down this amendment, which he and his colleagues are refusing to do on any part of the Bill. We would have no debates at all if it were left to the noble Lord. I would like to reflect on what has been said, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Howell of Guildford moved Amendment No. 9:

“(i) Article 1, paragraph 16, inserted Article 9B TEU, paragraph 6, so far as it relates to the role of the President of the European Council in external representation of the Union; and(ii) ”
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