European Union Committee: Multiannual Financial Framework

Lord Sassoon Excerpts

Tuesday 19th June 2012 Grand Committee

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, this afternoon’s debate has been very interesting and I welcome the committee’s views and the report into the next multiannual financial framework, the MFF. I would also like to thank the committee for all its work.

The Government will publish their final response to the report at the end of this month, so the debate is timely but, as I am sure those who have spoken this afternoon would expect, I will reflect on some of the more detailed points and ask noble Lords to wait for the formal response. I will answer as many of the points raised as I can, but let me principally set out what the Government believe is most important with respect to the MFF.

As the EU Committee is well aware, the Government are taking tough positions in Europe on the MFF. Negotiations are continuing towards the European Council where a presidency negotiating box will be discussed. This sets out the parameters of the MFF negotiation, moving us on from the Commission’s original proposal in June last year. I have been asked about details of the strands of negotiation, on a number of which there is little to say. In answer to the specific question from the noble Lord, Lord Boswell of Aynho, we are seeking significant reductions and reforms, including cuts from regulations. Negotiations on those specifically are going reasonably well, alongside the MFF negotiations. We are confident that we are making progress, but it is not decision time yet.

The ongoing instability in the euro area is vindication of this Government’s efforts to impose strict financial discipline on our domestic budget. We have made tough choices at home and it is now vital that EU member states show that same resolve. At a time when member states across Europe are tightening their belts, the European Commission must lead from the front to ensure that the same discipline is seen in the EU. What are they doing instead? They have called for increases in expenditure which are frankly incredible. The Commission’s proposal earlier this year to increase the annual budget by 6.8% for 2013 was completely unreasonable. The UK is committed to taking action to curb irresponsible increases in the budget, for 2013 and the next multiannual financial framework, and we will continue to work with like-minded member states to that end.

The noble Lord, Lord Harrison, asked what the evidence is for what we have achieved in the past two years. I remind noble Lords that the original Commission proposal for the 2011 budget was an increase of 5.8% and it came in at 2.9% after tough negotiations. In 2012 the original Commission proposal of 4.9% was reduced to 2.02%. The UK has been at the heart of the negotiations in Council to block increases and that is where we will continue to be. The Commission’s proposals for the next multiannual financial framework go even further, seeking to increase its revenue and spending. It wants new taxes to boost the Brussels budget, as well as an absurd spending increase. This is simply not acceptable on either front. Instead of consolidation, the Commission proposed expansion. Tough multiannual financial framework ceilings represent the best opportunity to restrain EU annual budgets and member states have recognised this link.

At the European Council in October 2010, member states agreed that,

“the forthcoming Multi-annual Financial Framework reflect the consolidation efforts being made by Member States to bring deficit and debt onto a more sustainable path”.

What has happened? Rather than follow this path, the Commission has bowed to pressure from the European Parliament to increase the budget. This returns us to the extravagance and reckless expenditure that sowed the seeds of the global economic crisis. The 11% increase proposed for the next financial framework is therefore incompatible with the tough decisions being taken in the United Kingdom and in countries across Europe. We cannot and will not support it.

In December 2010, the Prime Minister and colleagues from other member states, including France and Germany, set an upper limit for the next framework in their open letter to President Barroso. They stated clearly that,

“payment appropriations should increase, at most, by no more than inflation”.

This view has been acknowledged by the EU Committee. In answer to the specific question from the noble Lord, Lord Hannay of Chiswick, I confirm that it remains the Government’s position. The Commission claims to have done as we have asked, but let me be clear: it has not. On average, expenditure in each year of the next framework would be about €14 billion higher than it is today. In addition, the Commission has earmarked an extra €18 billion in off-budget expenditure. As the committee noted in its report, this shows an alarming lack of transparency, which brings added risks of poor oversight and control.

The Government’s overriding priority on expenditure is to restrain the total budget size but, within that context of restraint, the Government want to see taxpayers’ money directed towards areas of greatest European added value. The great majority of specific suggestions for directing expenditure that I have heard this afternoon are consistent with that.

Growth and competitiveness, external funding and the climate change components of the budget are priority areas. While our objective is to restrain the size of the budget, we believe that these areas should see a proportionately greater share in the next framework. However, this focus also demands tough choices. The first among them is a point raised by the noble Lord, Lord Boswell of Aynho. Very substantial reductions are required to the direct payments component of the common agricultural policy and to the administration budget.

Before I respond to a few of the many points on specific expenditure, a couple of general points were raised. Other noble Lords, including my noble friend Lord Maclennan of Rogart, raised the question of a five-year framework. We agree with the concerns raised in this area, but our overriding concern in the negotiations has to be to seek restraint. If restraint can be guaranteed in a five or seven-year MFF or some form of review can be built in, we are willing to discuss it, but it has to be subsidiary to our main objective.

In response to requests for increases in expenditure as opposed to relative prioritisation within the budget, whether for good things such as Europol or any number of others, I reiterate that if the Government’s opening position were to be to recommend explicit increases in certain areas of the budget before we achieved any corresponding decreases, we would be at risk of seeing ourselves committed to a higher overall budget, which would undermine the Government’s top priority here. Of course we will retain flexibility as negotiations progress in how we allocate spending, but I am going to do nothing this afternoon to endorse any absolute areas of increased expenditure. I hope that all noble Lords will understand why that is.

I turn to a few specifics, starting with issues about the common agricultural policy which were raised by the noble Lord, Lord Carter of Coles. We are seeking substantial reductions to the CAP focused on Pillar 1, the direct payments. The Commission proposal does not deliver the reform that we need. Direct payments represent low value for money. The Government are also sceptical about the Commission’s proposals on greening in the CAP. The Pillar 2 rural development is better and we want to see it taking a greater share of the total.

In answer to the specific question of the noble Lord, Lord Liddle, I am sure that he was not seeking to walk me into some trap, talking about rich farmers. That is not how I would express it. The UK is opposed to the Commission’s proposal to cap direct payments to large farms, which is the right way to see it. The CAP should encourage competitiveness, and capping direct payments would discourage that. I am afraid that I do not believe that there is merit in that capping.

On the European External Action Service, the Government do not support the ring-fencing of expenditure. The key is again—this is my constant refrain—to see restraint over the MFF in respect of the EEAS. Of course we expect the External Action Service to show value for money. We have consistently opposed increases in this specific area.

My noble friend Lord Bowness asked about the need for more judges. Yes, the Government are aware of the large backlog of cases facing the ECJ. We support reforms that would enable the ECJ to operate more efficiently. We hope that ECJ capacity will increase as a result of cost-effective reforms, which are achievable.

The noble Lord, Lord Harrison, asked about support for transitional regions and other structural and cohesion funds. The overall levels of the structural and cohesion funds should fall in real terms. The SCFs in rich member states should be cut significantly, and a greater share should be seen to go to poorer member states. The Government do not believe that the transition regions as proposed are affordable. Yes, the UK’s opposition to the transition category would reduce our share of receipts, but remember that two-thirds of this loss would be offset by the way in which it flows through the calculation of the abatement, a subject to which I will return.

The noble Baroness, Lady Young of Hornsey, mentioned ERASMUS, and ERASMUS for All can certainly add value. Again, the increase proposed is unacceptable. The Government can accept an increased share only within the envelope of a real-term freeze. Within that, among other things, the Government support the inclusion of a reference to grass-roots sport. Yes, of course we recognise the important contribution which cultural and creative sectors make to job creation and growth but, again, with the same caveats that I will not repeat.

In broadly similar territory, the noble Lord, Lord Kakkar, raised the question of the Connecting Europe Facility. He was quite right to draw attention to the 400% increase proposed in that area. Negotiations do not include specific numbers, but it is clear that substantial reductions will be needed from what is proposed.

Those were some issues on the budget—but, as noble Lords have pointed out, it is not the only priority. The MFF represents the only true opportunity for the EU to introduce a new system of own resources, the system that funds the EU budget. I share the strength of view of the noble Lord, Lord Liddle, on these issues. I hope that the noble Lord is absolutely clear that we will defend our rebate. I assure the noble Lord, Lord Williamson of Horton, that we will not trade with the abatement as has happened in the past. We will resist any change to the abatement; our abatement remains absolutely justified. The structure of EU spending means that we get less per capita than any other member state. Without the abatement, the UK’s net contribution would be the largest across the EU and twice as large as contributions made by France and Italy.

Ideas for new taxes have also been touched on this afternoon. Again, noble Lords will not be surprised to hear that the Government strongly oppose any new taxes to fund the EU budget. We attach considerable importance to the principle of tax sovereignty; we oppose any new taxes or changes to the existing system that increase the UK’s contributions or pose a threat to our long-term position—including, specifically, any financial transaction tax to fund the EU budget. We cannot accept a budget that asks for more and asks for a greater share from taxpayers and the UK.

In answer to the points made by the noble Lord, Lord Giddens, if the eurozone moves towards greater fiscal integration and imposes taxes on some joint basis within the eurozone, that will be for the eurozone. Our main concern in that context will be to see that nothing that is done affects the single market and how that is driven forward. The noble Lord also raised the question of project bonds. As I said on other occasions, yes, we will look sympathetically at detailed proposals if and when they come forward.

The MFF represents the opportunity for a far-reaching review of the spending framework. We must focus on combining stability with flexibility and building on the work going on across Europe to improve spending frameworks. We are faced with a liability of unspent commitments, which will soon be worth the equivalent of two annual EU budgets. Again, this is incredible. Of this, the Commission has said that almost €70 billion is “higher than expected”. This is extraordinary. This mountain of unspent commitments has, in the Commission’s own words, created a “snowball” effect on payment levels. We need real, practical solutions to address this liability. So far, the Commission has rejected every suggestion from member states.

The basic credibility of EU spending depends on orderly accounting. We have touched on it many times in your Lordships’ House, but nevertheless it is still astonishing and disappointing that the European Court of Auditors has not granted a positive opinion on the EU’s accounts for 17 consecutive years. This system must focus on the level of cash payments—actual spending—that the MFF will allow. Instead, the Commission continues to focus on commitments and on planned spend. Payments determine the cost to the taxpayer. The Prime Minister made this clear in his letter in 2010.

The Government took tough decisions at home and will continue to encourage our European counterparts, member states and the Commission to take the difficult decisions to cut deficits and tackle the root causes of the ongoing crisis. The current Commission proposal for the MFF is completely incompatible with the decisions being taken in finance ministries across Europe, with the realities felt by taxpayers across Europe and even with the views of President Barroso, who in June last year argued that:

“Many Member States need to show more ambition when it comes to fiscal consolidation”.

The MFF must deliver real fiscal consolidation. This cannot be achieved with substantial increases in the budget, new taxes to fund the EU budget or unreasonable changes to the UK’s abatement. This will be a tough negotiation but the Government are prepared to meet that challenge. We will be working tirelessly towards a deal, but it has to be a deal on the UK’s terms and has to be informed by the excellent work of this committee and the many points that have been made in this debate, for which I am very grateful.