Examination of Witnesses (Questions 40-59)
Mr Neil O'Brian and Mr Mats Persson
15 JANUARY 2008
Q40 Lord Kerr of Kinlochard: The
opt-out would be an opt-out from receipts not an opt-out from
contributions?
Mr O'Brian: Quite so, and that is a good way
of expressing it. Not from your net contribution, if you see what
I mean; you would opt out of both receiving and paying for SCF
but your overall net contribution to the EU Budget would remain
the same. Does that explain what I am trying to say?
Q41 Lord Kerr of Kinlochard: Yes,
I see what you mean, but there would be a major difference if,
as you recommend at length in your evidence, there was a massive
simplification and repatriation of the system for administring
the fund. Member States that had opted out from receipts would
be making a contribution into a system which had very light central
controls. The present system is criticised by you because the
central controls are fairly heavy, but you would maintain your
recommendation for a lightening of central control even if Member
States like the United Kingdom, if they followed your advice,
would have opted out of all receipts but not opted out from a
major contribution, which would be basically a budgetary transfer
to the poorer Member States, because you would have greatly reduced
the administration of the programme from the centre?
Mr O'Brian: There are two quite distinct questions
there. One is about whether the richer Member States in particular,
the net contributors as it were, should be able to opt out of
receipt of SCF. Then there is the question about for those Member
States that continue to receive it, how should that be run? I
think we would advocate even for those Member States a lighter
and simpler way of administering the funds, and also possibly
the types of projects that they could spend on might be widened
as well. It is like the debate we have in international aid about
direct budgetary support versus specific funding for projects.
The advantage of giving money and allowing Member States to spend
it on what they would like to spend it on is of course that they
know where the funds are best spent and they can spend it on the
kinds of things that they need. The disadvantage is that all these
funds are fungible and if you allowed them to spend EU funds on
one thing, that means that they can spend less on themselves and
you are less able to direct from the centre. There are two quite
distinct questions. One is about our involvement and the second
is about what kind of regulatory regime we should have the funds
from Member States that remain in the system.
Q42 Lord Kerr of Kinlochard: These
questions are linked to the extent that you make both.
Mr O'Brian: Yes. I would agree with both.
Q43 Lord Kerr of Kinlochard: You
believe that the UK taxpayer would be perfectly happy to see a
major reduction in the control over the expenditure, in the poorer
eastern European states, of his money; he would go on contributing
at present levels but would see no benefit in the United Kingdom,
and much reduced control of expenditure. Do you think that is
consistent with your point about fraud?
Mr O'Brian: In answer to your first point, the
UK taxpayer is not going to be paying any more than he or she
currently is at the moment, and so in one sense there is no reason
for them to be obsessed about this. As to your second point, I
think in truth we can distinguish between problems with fraud
and problems about what kind of projects the money can be spent
on. For example, one issue is of course about council housing.
If we allowed Member States or the poorer Member States to spend
SCF on those kinds of projects, that would be an extra dimension
of freedom which they would certainly appreciate. I do not see
why that should make this system as a whole more vulnerable to
fraud. You definitely can distinguish those two problems.
Q44 Lord Watson of Richmond: Frankly,
I am still very puzzled by this problem. Are you saying in effect
that a Member State that decides to become a non-receiver—in
other words, it totally takes itself out of the system—should
continue to remain a donor so that there would be two differences
for that particular state: one, it would be receiving less; and,
secondly, it would have less control over what is spent? It seems
a very curious proposition.
Mr O'Brian: But it would be receiving less and
paying in proportionately less, if you see what I mean, so that
the net effect is neutral.
Q45 Chairman: No, I am sorry, I do
not see that. This may be at the core of our confusion. If you
are paying something in and you are not getting anything back,
that is fine. It may even be Government policy. Nobody may mind
doing that but there is a difference for the UK taxpayer: they
are not receiving anything for the money they put in.
Mr O'Brian: I have obviously explained what
I am saying very badly. For example, if the UK, say, is receiving
£4 billion worth of structural funds every year, the UK would
pay in within its contributions £4 billion less and not receive
back £4 billion. The net contribution would remain exactly
the same.
Q46 Lord Watson of Richmond: The
net contribution could still be very considerable.
Mr O'Brian: It would be unchanged.
Q47 Lord Haskins: Effectively that
would mean that the structural funds would be Bulgaria lending
money to Romania?
Mr O'Brian: No, it would be still us making
a net transfer into the Budget and them receiving.
Q48 Lord Woolmer of Leeds: How would
you propose that that adjustment be made in the contribution from
the UK? If the effect on the UK is contributing, let us say for
the sake of argument, £20 billion a year but receiving £4
billion a year, in your eyes they do not get the £4 billion
and only pay out £16 billion.
Mr O'Brian: Exactly.
Q49 Lord Woolmer of Leeds: How would
you secure that adjustment because the gross cost presumably is
out of the general UK contribution to the EU?
Mr O'Brian: That links to the wider question
about reform of both contributions and receipts. In terms of this
proposal and this discussion, we are talking really about the
spending side of the EU Budget. You can fix the contribution side
of the EU Budget really how you would like. There are people,
particularly in Brussels and here who would like to simplify the
current system. As you know, we have a mixture of own resources
which are a diminishing share of the Budget. We have the VAT based
resource; and you have the GNI based resource. You can balance
these things how you would like. The really important thing is
the overall net contribution.
Q50 Lord Woolmer of Leeds: To some
extent in countries like the UK, there is an argument—I
do not mean an economic argument but a purely political argument—that
if we are contributing so much to the EU, we might as well get
something back and hence an argument for at least getting something
back under the regional policy. If you did net it out, as you
suggest, it would mean going back to the drawing board and finding
convincing ways in which you can adjust the UK, German and French
contributions to the EU Budget. That would all have to be renegotiated
in some way.
Mr O'Brian: Interestingly, as I understand it,
from talking to people at BERR, we did have quite good support
for our proposal from France and Germany and some of the other
net contributors.
Q51 Lord Kerr of Kinlochard: I can
see why it is more attractive to them than to us because they
do not have a rebate system. We have a system whereby two-thirds
of the difference between what we pay in and what we get back
is refunded to us a couple of years in arrears. You left that
out when you described to the Chairman how the net of that would
be exactly the same.
Mr O'Brian: Yes, I think that is an extremely
good and important point that you are making. All Member States
are roughly having to co-fund all these projects and to say, "We
are providing half the funds from the national level", and
then for the UK, you also have—
Q52 Lord Kerr of Kinlochard: I am
sorry, that is a different point. We are talking about the UK
rebate, which of course France and Germany are very keen to see
eliminated.
Mr O'Brian: I was just trying to add to your
point, which is that not only is the UK Government having to fund
half of the new project itself, but on top of that it is losing
two-thirds of the money that it gains from every successful submission
for SCF because of the way that the rebate works. Really for a
given project, the EU is only ever providing one-sixth of the
money in the UK, and so it is a less attractive system, I suspect,
for the Treasury and that is probably why the proposal came from
the Treasury.
Q53 Lord Kerr of Kinlochard: It is
very ingenious, but the fact is that if your proposal is, as you
explained to the Chairman this morning, that rich Member States
opt out of receipts but are required to remain in for contributions,
the Member State which would lose enormously disproportionately
compared to the others would be the United Kingdom because of
the working of the UK rebate?
Mr O'Brian: I have may have misunderstood. Why
would the UK particularly lose?
Q54 Lord Kerr of Kinlochard: Because
the UK obtains a rebate of two-thirds of the difference between
what it puts in and what it gets back, in broad terms. If we were
opted out of the system, we could not possibly expect that the
UK would continue to get back two-thirds of the moneys that had
been spent in eastern Europe. Indeed, we have already, as I understand
it, signalled that we do not expect the rebate to apply to expenditure
in eastern Europe.
Mr O'Brian: That pass has already been sold.
Lord Kerr of Kinlochard: What we do get back
is two-thirds of our contribution to Structural Funds expenditure
in western Europe, and we would no longer obtain that, because
there would be no expenditure in Western Europe.
Chairman: Lord Kerr, you may have to explain
this to me quietly afterwards. For the moment, I would like to
ask Lord Trimble to ask his question.
Q55 Lord Trimble: If we all were
to be dependent on an expanded United Kingdom regional policy
replacing the existing EU programmes, could we be sure that the
United Kingdom Government would continue to make extra funds available?
What if the Government was in financial difficulties in a way
that the present Government may be in terms of public spending
over the next year or two? Might it not then be tempted to cut
back on its UK-funded regional policy and would we not also lose
the benefit of the existing EU multi-annual programme as well
so that the regions might find themselves worse off if they were
dealing simply with the UK Government rather than dealing, as
they are to some extent, with Brussels at the moment?
Mr O'Brian: Mats Persson may well turn to this.
By way of preface to that, I would say that you could apply that
argument to every single item of UK Government spending. Of course,
the reality is that the amount that the EU spends is not really
any more predictable in the UK Government system.
Mr Persson: One of the fundamentals flaws of
the structural funds is that they are negotiated at the EU level
in a bargaining type of manner. I think that makes them quite
unpredictable as well. Striking deals at the EU level when leaders
and ministers get together and negotiate the Budget make the funds
less about development as about securing as much funds as possible
to assure voters at home that they are getting something back.
One of our criticisms is that the funds are not necessarily development
driven; they are more driven by bargains at the EU level, and
so where is the development strategy in the first place here?
I think that makes it all unpredictable as well.
Mr O'Brian: May I add a rather striking example
of that? Instead of having a rationally driven Budget, it is one
driven by deals. In the last two days of the negotiations in December
2005 over the financial perspective, the budget for administration
was increased by €1 billion and when we asked the Parliamentary
question in the other House about this, we received the very blunt
answer from the Government that said it was "necessary to
secure political agreement". They are spending €1 billion,
they are almost admitting, as a political sweetener. That gives
you a flavour of the kind of negotiations.
Q56 Lord Trimble: My experience of
negotiations at EU level is limited but I was involved in the
discussions way back in 1999 or 2000 with regard to structural
funds for Northern Ireland. The key discussion took place during
the German presidency with the German European Minister in Bonn.
It was a discussion that involved him, me and Paul Murphy, who
was the Northern Ireland Office Minister responsible. There was
not any question of which I was aware of any deals or trade-offs
being done on a UK-EU basis. It was simply a matter of discussion
of the changes in the criteria which had to be negotiated as a
result of Northern Ireland getting over 75 per cent of the EU
GDP limit, which meant that we were going to lose our status.
I do not see this point that you are putting so much weight on.
I did not see it in that case. It may be the case elsewhere but
I do not know that it is always the case.
Mr O'Brian: One way to look at this would be
to say that it is a concern. I think the concern underlying your
question is that, given the overall Budget, it should be spent
in the areas where it is needed most; it should be rationally
allocated. Is the best way to do that to do it on a UK basis where
you are closer to the decisions and you do not have rules, for
example about going over the 65 per cent of the EU average GDP
and you do not have these various constraints and you can just
make a straight forward decision on a UK basis.
Lord Trimble: You may also be having to weigh
up which administration has a more positive attitude to regional
policy: the Treasury in London or the Commission in Brussels?
Q57 Chairman: That could be interesting.
Mr O'Brian: It is a question of whether you
believe you can win the argument better in Westminster or do you
believe you can win the argument better in Brussels. Where do
you feel that Northern Ireland has more clout? It is an interesting
question.
Q58 Lord Trimble: At least in Brussels
they listen to you. I do not know that the Treasury does!
Mr Persson: In terms of predictability, consistency
and continuity, there seems to be a certain absence of that in
having the EU running regional policy as well. As you know, six
English regions had their funds cut off just this past spring.
It was not clear from talking to the people on the ground why
that happened. They felt that they had complied with the regulations
and yet the funds were cut off, which of course meant a lot more
work and added uncertainty to the whole situation.
Mr O'Brian: Certainly some of them felt it was
a political move as well.
Mr Persson: It is not necessarily that keeping
the structural funds as they are right now at the EU level brings
this type of certainty and continuity that we seem to be discussing.
Q59 Lord Woolmer of Leeds: If I can
turn to a little bit of theory and see what your thoughts are
on it, one view about regional policy is that it interferes with
the market. You should actually allow for movement of labour and
movement of capital and regional policy slows that down. Another
view is that there is a trade-off between efficiency and equity.
If you do introduce regional policy, you need to accept that it
is going to slow down growth. The third and final view of regional
policy is that lagging regions have under-used resources and regional
policy is actually good for growth in the economy. Really, there
are quite different views. Where do you come from on that theoretical
side of things?
Mr Persson: In the report we argue for targeted
tax cuts as a possible better solution, or a passive solution
rather than active intervention. We would probably therefore subscribe
more towards the framework that it can actually be, if not detrimental,
at least irrelevant to growth and for job creation. Obviously
there is at least a risk that it can divert resources and talent
and inhibit labour flexibly by mis-targeting interventions. Looking
at the targeting of the structural funds, that risk is not insignificant.
You also have this problem of a possible dependency culture. For
example, if you look at the poorest regions in the EU, they have
increased their dependency on grants for disposable income. These
are not good signs. There is also the so-called Mezzogiorno problem
where funds are going one way and the people are going the other.
If you look at migration trends, that is also something that should
be of concern. Obviously a lot will depend on the way regional
policy is pursued and implemented, but in terms of what theoretical
framework falls closest to our report, that would probably be
the one.
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