EEC BUDGET (CONTRIBUTIONS)

HC Deb 27 February 1975 vol 887 cc721-78

4.15 p.m.

The Secretary of State for Foreign and Commonwealth Affairs (Mr. James Callaghan)

I beg to move, That this House takes note of Commission Document R340/75. I never thought that the day would come when in moving into a debate on the EEC we would pass from troubled to calm and peaceful waters. Several hon. Members are leaving the Chamber, but I hope that not all will do so, because there is money in the document for us, and if anything has been shown by the points of order it is the Opposition's desire to get their hands on some money. I am giving them the opportunity to do so, so I hope that hon. Members will stay while we discuss the issue.

The document is about the financial contribution that a member State should make to the Community budget and the broad effect that that will have on Britain's position. The document is likely to be of substantial financial benefit to Britain if we remain members of the Community. Under the proposals in the document we shall pay less than we would under the existing arrangements. The document sets out a mechanism for measuring whether a country's contribution to the Community budget is fair. If the contribution is not fair, the document provides a method for repayment of part of the excess contribution when it has been so measured.

The proposals in the documents are of general application. They apply to all member States, so that any one can benefit from the provisions if it fulfils the qualifications. At present it is clear that the United Kingdom will be the main and perhaps the sole beneficiary. The benefit to us will be measured in the form of a lower contribution in many millions of pounds. The initial period during which the scheme will last will be seven years. In every one of those years in which we fulfil the conditions set out in the document—

Mr. Nigel Spearing (Newham, South)

If we do.

Mr. Callaghan

Of course, if we do. But I said "years in which", and I think that it is more likely to be "when" than "if". In every one of those years when we fulfil the conditions, Britain will be entitled to a repayment of part of the contribution that she is making now.

Incidentally, the word "budget" is a misnomer, because when one looks at the Community accounts one sees that they are more like our Estimates than our Budget—that is, they are the financing of ongoing expenditure rather than the provision of money for new policies which are for the Council of Ministers to decide upon. Indeed, new methods of providing finance are for neither the Commission nor Ministers to decide upon, but for the national parliaments. Although I shall continue to use the conventional word "budget", if we think of it in terms of providing for the estimates we are more likely to get near to what we conventionally discuss.

The Government are asking the House merely to take note of the document. One reason is that I hope to secure even further improvements in the conditions under which repayment will be made and in the amount of repayments. I shall be attempting to do this when the Foreign Ministers of the Community meet in Brussels next Monday and Tuesday. If I am not successful, the matter will have to be carried to the meeting of Heads of Government and Heads of State that will take place in Dublin a week later.

The House will realise that the document is not a final document. It states the proposals of the Commission, but not a decision. The decision will be for the Foreign Ministers to take, and they must take it unanimously. The reason I ask that the document be brought before the House at this stage is to give hon. Members the opportunity to discuss the proposal prior to my embarking on a further renegotiation and perhaps reaching agreement—as I hope to be able to do—with the other Foreign Ministers next week. I shall therefore be able to take into account what is said.

Mr. John Davies (Knutsford)

While not wishing at all to deprive the right hon. Gentleman of the honour and glory of having recommended that this document should come before the House at this stage, perhaps I may point out equally that it was a matter which it was decided by the Scrutiny Committee should be discussed on the Floor of the House.

Mr. Callaghan

The right hon. Gentleman may bear the honour, for as I was about to say in my next sentence, the recommendation was also made that the document should be discussed by the Scrutiny Committee, and I regard, as do the right hon. Gentleman and hon. Members, as most valuable the procedure that they undertake on these matters; and I thank them for the scrutiny that they give.

Those who do not follow our proceedings may well ask why such a matter—whether Britain's contribution to the Community should be lower than it otherwise would be—has arisen so shortly after the previous Conservative Government took Britain into the Community. Some one might well ask, "Did not you settle Britain's subscription then?" And the answer would be, Yes, it was so settled, but such was the rush and hurry of the right hon. Member for Bexley (Mr. Heath) and the Government of the day that it was settled on a basis that was unfair to Britain, an unfairness that the document that we are discussing today fully recognises by the nature of its corrective purposes.

There was a time when the Conservative Government had a misplaced reputation for financial prudence. That disappeared some time ago. In recent years the slipshod manner in which Britain's financial arrangements for entry into the Community were negotiated is an example of their profligacy; and this is not something we have only just discovered. We warned them of it at the time. May I quote one statement made on 28th October 1971 by the present Prime Minister when speaking of this matter. Referring specifically to the Budget contribution, he said: … the terms so frivously negotiated … involve an intolerable and disproportionate burden on every family in the land and, equally, on Britain's balance of payments."—[Official Report, 28th October 1971, Vol. 823, c. 2094.] No notice was taken of that at the time and we have now come round full circle to try to put the matter right.

Mr. Eldon Griffiths (Bury St. Edmunds)

The right hon. Gentleman began his speech by seeking to reimport some calm into the House. He is not helping it when he omits to tell the House that among the many things that my right hon. and learned Friend negotiated were arrangements to take up inequities as they arose, and to deal with them.

Mr. Callaghan

Calm has been obviously long since restored. We have almost the silence of the grave at the moment and I am very fearful of disturbing that. But I am afraid I cannot accept the hon. Gentleman's description of what took place when his right hon. and learned Friend was negotiating this matter. When we came back to re-examine this situation we found as the House is well aware that the Community budget had been so arranged that it is financed out of levies and duties on third country trade and a uniformly assessed VAT which would be up to a 1 per cent. rate. This inevitably bears hardest on countries such as the United Kingdom, one of the major trading nations of the world. Moreover, the internal development of the Community with a high proportion of its expenditure directed towards agriculture has meant that our prospective contribution to the Community budget would be unduly high.

When we returned to office and examined this matter, our examination revealed a widening gap, year by year, between Britain's contribution to the budget and our share of the Community's gross domestic product. In 1977 that gap, which can be fairly well assessed, may be 4 per cent. By 1980—because of a number of variables it is not possible to be so exact—there was a time when we thought that it might be as much as 10 per cent., but it looks now as though the gap would be—to quote a realistic figure—as much as 7 per cent. to 8 per cent. That is not supportable. It is quite insupportable that the difference between the amount a member country contributes to the budget and its proportion of the Community's GDP should be as much as 7 to 8 per cent., or indeed 4 per cent.

It was the return of a Labour Government committed to renegotiation that enabled us to make a start on putting this matter right. Here I should and do pay tribute to the members of the Commission for their willingness to listen to our case. Naturally, there was a tendency to grumble. After all, we were reopening a settlement made by a previous Government. They were entitled to say that. But they listened patiently as I made on more than one occasion the case that the Conservative Government should have made during their negotiations. The Commission allowed that there was a case and that it should be looked at.

As a result, last summer the Commission was asked to examine the situation. The Commission did so and in the autumn, about the time of the General Election, confirmed our opinion—an opinion which it was perfectly open to the Conservative Front Bench opposite to have arrived at a year before—that there would be a substantial gap between our share of the budget contribution and our share of the Community's GDP, a gap which simply could not be fair and which should have been seen and argued on earlier but was not. We pressed on, armed with this report, and in December at the Summit the Heads of Government and Heads of State agreed that our case should be further examined. They acknowledged that there was a need for a correcting mechanism in the event of this situation arising—a correcting mechanism that would offset the unfair consequences of disparity between our budgetary contribution and national income.

The principle is very simple, namely, that contributions should be related to capacity to pay—a principle perhaps more frequently heard on this side of the House than on the other side but certainly one that strikes an echo. The Commission was invited to produce a further report on how this should be done and how the correcting mechanism should be brought into effect. It is this report which is now in front of the House and on which further discussions are to take place on Monday and Tuesday next.

Mr. John Ovenden (Gravesend)

My right hon. Friend has told the House of the disparity between our share of the GNP and our share of the Community's budget. Could he give us an estimate of what actual sum we shall be paying, expressed as a percentage of what we would pay, based on GDP? We need to know that before we know how much we shall receive from the correcting mechanism.

Mr. Callaghan

I am not anxious to go into figures and I hope that my hon. Friend will regard what I say as only an illustration as there are many variables. On the basis of the present figures it might be around £130 million a year, but I would not wish to be bound to that figure because of the variables that can arise. I am speaking of the position that would occur in 1977, but I place no weight on the particular figure and I would ask my hon. Friend to do the same. It is illustrative of the kind of thing we are discussing.

The figure might grow between 1977 and 1980 if there were a greater disparity between our share of the budgetary contribution and our share of the Community GDP, or it might decline—and on this one cannot be sure—depending on gross national income and other considerations. I give that only as an illustrative figure and I would ask the House to attach to it no more weight than that.

Having worked closely with the Commission on this matter, it would be ungracious of me not to acknowledge the work that it has done in producing this report, which goes some way to meeting one of our renegotiation objectives. The broad approach for recompensing members set out in the report is acceptable to us though some of the proposed details and conditions will require further negotiation—[HON. MEMBERS: "Oh".] My hon. Friends must speak for themselves. I am speaking for the Government now. For example, on what is acceptable even my right hon. Friend the Member for Battersea, North (Mr. Jay) would not, I think, disagree that the mechanism for repayment will be triggered automatically. That seems to me a very desirable thing and I would think I would have his assent and agreement on this.

Mr. Douglas Jay (Battersea, North)

rose—

Mr. Callaghan

I am sure my right hon. Friend is now going on to another point. If he wishes to say he disagrees with the automatic triggering of the mechanism I will gladly give way to him.

Mr. Jay

I am not saying that the triggering was not automatic. I am saying that it did not operate in the right conditions.

Mr. Callaghan

As to its operating in the right conditions, that is something that I hope to discuss in a moment but in my view it operates entirely in the right conditions. It is not easy for other countries when Britain makes a case to pay less because it means that other member countries must pay more. Therefore, the conditions referred to by my right hon. Friend are subject to close scrutiny by them as well as by us.

The method of measuring whether a country should qualify for repayment is threefold. First, there will be a comparison between a member country's GDP and the GDP of the other member countries. It is less by a certain figure, the mechanism will be triggered. That is one of the conditions which must be satisfied.

The second condition which triggers the mechanism is if the rate of growth is below a certain percentage compared with the average rate of growth of the Community. It is fixed in the document at 120 per cent. of the rate of growth. Translating it into simple figures, if the average rate of growth of the Community was 5 per cent. and the United Kingdom economy was growing at 5½ per cent. we should be entitled, subject to the other conditions being fulfilled, to a repayment.

It is not therefore a very unfavourable ratio. Clearly if our rate of growth is less than 6 per cent. we are entitled, subject to the other conditions—[Laughter.] There is no point in laughing about this matter. All these things must be taken together. These are reasonable conditions which must be fulfilled. We shall fulfil all of them. In some ways I regret that we shall, but we shall. I wish that we were not in this position, but we shall fulfil them.

The third condition is that there should be a balance of payments deficit on current account. I do not see the case for that. It seems to me that it does not relate to the rate of growth of a country or the state the country may be in. For example, a Chancellor of the Exchequer may take the view that it was necessary to run a balance of payments surplus in the 1980s to offset the deficits which had been running in the late 1970s. Therefore, this is not a condition which I find particularly acceptable. I am not to be taken as being satisfied with the third condition nor as agreeing with the figures proposed in the Commission's document.

The House will not expect me to go into a final negotiating position today when I have to enter into negotiations on Monday, but I give a broad indication of what I should feel about the matter.

Mr. J. Enoch Powell (Down, South)

The Foreign Secretary mentioned a 7 per cent. or 8 per cent. divergence between the experience of the United Kingdom and the general experience of the Community. I wonder whether the right hon. Gentleman could help me and perhaps others by relating that to the 85 per cent. figure in the first of the conditions.

Mr. Callaghan

The two figures do not relate to each other. All I can say to assist the right hon. Gentleman is that when our gross national product is below 85 per cent. of the Community average, the mechanism would be triggered off. It would also be triggered off on the rate of growth. Therefore, both conditions are satisfied. It would also be triggered off, I regret to say, on the balance of payments deficit on the current account. All three conditions would be fulfilled for triggering the mechanism.

Mr. Powell

What did the 7 per cent. relate to?

Mr. Callaghan

It related to demonstrating to the Community that it is not right that a country whose gross domestic product is so much below the average of the Community should pay a contribution which is higher than that of other members of the Community. The difference of 7 per cent. to 8 per cent. relates to those two criteria. In other words, the difference between the amount of the contribution we would make and the amount of our average GNP is about 7 to 8 per cent. I want the House to realise that it is an estimate.

Mr. Mike Thomas (Newcastle-upon-Tyne, East)

Given the free movement of capital in the Common Market countries, and given that on a number of occasions Britain has had a balance of payments crisis situation due to the capital account, why is it simply the balance of payments on current account which is mentioned in this context?

Mr. Callaghan

This is a measure of the economic activity of the country. It is not a measure which I find particularly acceptable. Transfers on capital account are not necessarily a measure of economic activity. I guess that that is why the Commission has put it forward. However, I shall want to discuss it in much greater detail on Monday and Tuesday in Brussels.

The new proposal of the Commission may well result in our paying sums which are much fairer in relation to what is paid and received by other countries. I have said that I am concerned about some of the arrangements which would limit accessibility to the repayment mechanism, including, for example, the size of the refund. I cannot object to a provision which would prevent us from making a profit on the budget as a result of our refund. That would perhaps be carrying matters too far. However, the Government must be satisfied that the refund will be reasonable in relation to the gap between our GDP and our budget share. I prefer not to go into greater detail. The House can well see whether the mechanism could be legitimately improved from our point of view. Everyone would agree that a little more simplicity in the slice limitation formula which the Commission has put forward would not be out of place and might make for greater equity. Clearly there is room for negotiation of these matters, and I intend to go into them next week.

However, I hope that hon. Members will acknowledge the remarkable advance which this mechanism represents over the arrangements which were negotiated. It is sometimes said by hon. Members on both sides of the House that the renegotiation is phoney. I should like to hear what anybody says about this correcting mechanism. There is nothing phoney about the renegotiation here. This is something tangible. I assure anyone who is tempted to take another view that the other Community Governments by no means underestimate the concession which they have shown themselves willing to agree to. But I must emphasise that the renegotiations on this matter are not over.

Another factor concerning the financing of the budget which may be changing for the better is the question of the levies. It is becoming clear that, owing to population increase in the world, to the rise, albeit slow, in living standards, in the developing world, and to the greater use of agricultural land the world is in a period when food shortages may be as frequent as surpluses. That was the analysis which was endorsed last November by the World Food Conference in Rome which recommended measures to increase production and manage supplies to match the growing demand. There will still be surplus years, but the international community is of the opinion that these years will have to be put to good use in order to build up internationally managed stocks to prevent famine in shortage years.

Here there is a subject for discussion at the Commonwealth Prime Ministers' Conference in April to which the Prime Minister and I hope to go, because we are moving into a new era in the supply of food and world food stocks. This is something which could operate to our advantage in our contribution to the Community budget. The international community must ensure that millions do not starve to death in the developing world the next time that there is a bad harvest in a major country.

However, the average level of world food prices is likely to be higher than it has been at any time since the end of the war, perhaps lower than now. If one has to make a judgment about the future, it seems to me that they are bound to be higher. They have been higher for some time, while the level of community agricultural prices has been falling slightly in real terms and is likely to continue to do so.

In 1971 it seemed likely that the Community's agricultural levies would impose a crippling burden on the United Kingdom. By 1974 levies seemed likely to represent a much smaller proportion of the budget than the tariffs we shall have to contribute. Our tariff contribution will be well above the Community average but will not be so much as our levy contribution.

It is against that background of what I would call the new realities, as well as against the background of our determination to remedy the weaknesses of the terms originally negotiated, that I have been renegotiating. I commend the document to the House. I ask only—very modestly—that note should be taken of it. It is well worth starting on this basis and seeing where we get to next week when I have further exchanges with the other Foreign Ministers.

It would be a poor heart that would find nothing to rejoice about in these proposals. Even as they stand today they represent a positive achievement in the renegotiation stakes that we are conducting, and they will have to be taken into account in the balance sheet when the British people and Parliament form their judgment on the substance of the renegotiations.

Mr. Powell

I am grateful to the right hon. Gentleman for giving way. He seemed to be on his peroration without having referred to what is evidently an important part of the mechanism which I thought he would mention in his reference to tariffs and levies, namely, the fact that the mechanism is limited to the yield of VAT as part of the Community resources and that, therefore, Britain's contribution by way of tariffs or levies would not be affected. Will the right hon. Gentleman give the Government's view on that point before he closes?

Mr. Callaghan

I am obliged to the right hon. Gentleman. I had missed that point. It seems to us from the calculations we have made that the likely benefit that we could expect from this document would be contained within the level of payment of VAT or its equivalent. It has to be, as the right hon. Gentleman says, and it will be. In other words, as far as we can measure it, the disparity is not likely to exceed VAT.

The Minister of State for Foreign and Commonwealth Affairs (Mr. Roy Hattersley)

It is not calculated on that basis.

Mr. Callaghan

My right hon. Friend corrects me. It is not calculated on the VAT basis but on the general basis. It is set against VAT because of the view of the Community about levies and tariffs, which is well known to the right hon. Gentleman. As someone who is concerned with the practical result, provided that I can satisfy myself that the repayment can be made out of a sum which is equivalent to VAT, there is no reason why I should object unduly, although I want to discuss the matter further.

What I am interested in is results. Many people argue theology, and I have no doubt that today it will be argued at great length, but no one will be able to deny at the end of the day that the result of this proposal even without any improvements, if it is officially adopted in its present form, will be to claw back for the British taxpayer many millions of pounds that would otherwise have found their way into the Community. It is by that practical test that we have to determine whether the negotiations are successful, and by that practical test there can be no doubt about the answer.

4.44 p.m.

Mr. Peter Kirk (Saffron Walden)

As the Secretary of State rightly said, it would be a poor heart that did not rejoice at any prospect of further money coming into the Exchequer. It would equally be a poor heart that accepted verbatim the right hon. Gentleman's description of the history of the negotiations of 1971 and 1972. We have been into this before and I do not intend to go into it in great detail, except to dispute the statement made by the right hon. Gentleman that the Conservative Government accepted without qualification unacceptable terms and that, even if we rejected that, nobody else did. Of course the right hon. Gentleman did, and so did his Prime Minister, when they signed the communiqué which was issued after the Paris summit meeting last December, paragraph 35 of which states: The Heads of Government"— which presumably includes the Prime Minister— recall the statement made during the accession negotiations by the Community to the effect that 'If unacceptable situations were to arise, the very life of the Community would make it imperative for the institutions to find equitable solutions.' What is interesting about the document we are discussing today is that it refers to the unacceptable situation and the correcting mechanism. The document which we are discussing and which the right hon. Gentleman is commending to the House, albeit in qualified terms, refers back to a communiqué which was issued during the negotiations conducted by my right hon. and learned Friend the Member for Hexham (Mr. Rippon) at that time with precisely this situation in mind.

We did not know in 1971 and 1972 that the British people would have the misfortune of inflicting upon themselves a Labour Government and so would look forward to a steadily declining economic situation. Nevertheless, it was prudent, if nothing else, at that time to make provision for changes in the contributions if they became necessary. I agree with the right hon. Gentleman that such changes clearly are necessary. I agree that this is an example of the way the Community can work effectively in an on-going process of negotiation, with movements forward every day. I am glad that the right hon. Gentleman has persuaded the Commission to produce a document which, although highly complicated, will undoubtedly even in its present form be extremely beneficial to the British people.

Mr. Spearing

One matter which my right hon. Friend the Secretary of State did not mention was the calculation of the three-year moving mean. He claimed that we should benefit from this mechanism as it stands. Is the hon. Gentleman also satisfied that the three-year moving mean will provide additional cash?

Mr. Kirk

I think it will, but I do not have access to the facilities which the right hon. Gentleman has. My calculations are not perhaps as worth while as his, but it seems to me that it will. There are detailed matters in the document I wish to deal with in the course of what will be a short intervention because of the late start of the debate and because so many hon. Members wish to speak.

Despite the complication of the document, it cannot be disputed that the net effect must be beneficial to this country in present circumstances. I accept, as the right hon. Gentleman said, that we cannot ask him at this stage to give away his negotiating position before he goes into negotiations. That would be unreasonable and unfair, and I shall not try to do it. Equally, I accept that the right hon. Gentleman has no personal responsibility for the document and that it would be unreasonable to expect him to produce immediate answers to small points which may be raised on it. If the right hon. Gentleman or his right hon. Friend are unable to answer certain questions immediately, perhaps they can be replied to by correspondence.

I assure the right hon. Gentleman that I look forward to rejoicing again with him—to put it in the words of the Prayer Book—on another shore and in a greater light at Brussels when we examine the process again in the process of concertation next week. Perhaps at that time the Commission or the Council will be able to give us a slightly more accurate assessment of what precisely will happen.

My general point is that this is a matter of general application. Although the document has been produced by the Commission because the British Government requested it at the summit meeting—or the meeting of the European Council as we must learn to call it—there is no reason why any other of the nine member countries which get into financial or economic difficulties should not benefit from it. I can think of at least two which in the near future might feel it necessary to avail themselves of precisely this type of support. Although the right hon. Gentleman commenced his speech with the triumphant shout that there was money in it, there is not money in it just for us. If our economy improves we may find later that we are having to make a net contribution rather than receiving a net gain. That is a point that should be expressed.

I understand that no calculation has been made by the Commission or Council, but it may be that Her Majesty's Government have calculated whether any other countries now fall within the triggering mechanism. I shall be asking the Commission, when wearing my other hat as a member of the European Parliament, what calculations it will make in that respect.

Any judgment that we make of the scheme must be based on how it affects other countries as much as how it affects this country. We must consider the net effect of payments in and out over the whole seven-year period. I imagine it would be the view of the Government—I should be grateful if the right hon. Gentleman will confirm this—if the scheme were reasonably successful that it would be intended to incorporate it as a kind of permanent mechanism into the budgetary procedure of the Community. That would seem to make a good deal of sense. The idea of having a trial period is sensible in that we can see whether it work effectively. If it fails to do so we shall have to find some other way of dealing with the assessments which will have to be made in future.

I agree, too, that the word "budget" in this context is a misnomer. I have said that on more than one occasion both in the House and outside. We are dealing with estimates and nothing more. There is no budgetary mechanism in the sense of using the budget as a means of economic planning. For that reason this corrective mechanism cannot be used for such a purpose. In the same way it would not be possible to use a similar mechanism within the context of the British Budget.

I am horrified to agree so much with the Secretary of State for Foreign and Commonwealth Affairs. The right hon. Gentleman may not welcome it. None the less, I agree with him that the balance of payments qualification is a curious factor. That is a matter that we must explore further. It would seem that there is a clear case that in any given year it might be necessary for a Government to run a balance of payments deficit for particular purposes, whereas at a later stage, though in considerable economic difficulty, that Government could have a net surplus in its balance of payments current account.

Mr. Bryan Gould (Southampton, Test)

Does the hon. Gentleman agree that, if by some mischance or perhaps good fortune we were unable to meet all of the criteria at once over a three-year running mean, it is possible that we would not alter the budget mechanism at all and that the divergence between our proportionate gross national product and our budgetary contribution would be about the same? In those circumstances, which seem more than likely to arise, does the right hon. Gentleman agree, referring to what he said earlier, that we might also be required to contribute under the scheme?

Mr. Kirk

We must accept that there is always the possibility that we might have to contribute to it as well as the possibility that we might get something back given our present circumstances. As the Secretary of State rightly said, there is not the slightest doubt that in 1975—and the forecast for 1976 is not all that rosy—we shall be net receivers and not net contributors. It will be a question of our relative position as regards the other Eight. We must remember that the Commission has put forward this scheme as a mechanism of general application at the request of the European Council. That was specifically stated in the summit communiqué. We cannot put forward a mechanism of general application and then say that we shall accept it only if it applies to us in a beneficial manner. We cannot say that we will not accept the risks which might be involved in such a scheme. Of course, we know that as the scheme wilt be applied at the moment it will act towards us in a beneficial manner.

I now turn to one or two minor points about the scheme which perhaps I might put before the Secretary of State. I accept that it may well be that he will not be able to give me replies this afternoon. My first point relates to page 6 of the document at the beginning of Paragraph C. The paragraph reads: The Commission considers that where the criteria for the possible development of an unacceptable situation are operative this entitles a Member State to apply for the correcting mechanism to be put into operation. I understand—perhaps the right hon. Gentleman will confirm this—that although the words are the same in the English and French texts they are different in the German text and appear as "all relevant criteria". That is a very different matter. That is clearly something which will have to be cleared up before the right hon. Gentleman enters the next round of negotiations. It is certainly a matter that we shall wish to raise with the Council. It is perfectly true that at a later stage there is a reference to "pre-established criteria". There is confusion that should be sorted out.

The second detailed point that I wish to raise relates to page 8. There is the rather curious statement that when a member State has benefited from the correcting mechanism for three consecutive years the Community authorities have to make a special examination of the situation of the State in question and to take the appropriate measures to give effect to Community solidarity … In other words, there is a corrective mechanism for the correcting mechanism. We are getting into complicated and deep waters. I believe that it is unnecessary to carry the matter into such elaborate depths, if that is a correct interpretation. It would be far better to let the rolling procedure continue until the end of the seven-year period and then to review the situation as a whole.

Mr. Callaghan

If the correcting mechanism is a wicket keeper then this provision is a long stop.

Mr. Jay

Oh, no.

Mr. Callaghan

It is no use my right hon. Friend saying "Oh, no". He has not been present during the discussions and I have.

Mr. Jay

I have read the papers.

Mr. Callaghan

My right hon. Friend may have read the papers, but they have not always been read with care. When I hear my right hon. Friend quoting the manifesto it reminds me of Satan using the Bible for his own purposes. If a country finds, after the correcting mechanism has been applied for three years, that it is still in need of the mechanism, the purpose of the provision, as I understand it, is that more assistance should be given or a greater amount of repayment should be made. It is not the reverse at all. The purpose is to try to help even further than was the position in the first place.

Mr. Kirk

I am most grateful to the right hon. Gentleman. That has clarified that point. If we can accept his interpretation, that is a matter of considerable satisfaction. It is a matter that needs to be spelt out in slightly greater detail.

The final detailed point that I wish to make is whether the right hon. Gentleman agrees with the use of the Article 235 procedure. It is a procedure that I personally dislike. Does he agree that it might be better to use the normal procedure of the Community rather than the catch-all procedure? It is said that no treaty has been produced for specific corrective mechan isms of this kind, but, I would have thought that the general financial provisions could cover a scheme of this kind without very much difficulty. I do not think that they would run into any great opposition if they were produced.

Subject to those detailed questions the Opposition give general blessing to the document. I hope that I have been as brief as I promised to be. We give a general blessing to the right hon. Gentleman's efforts and we hope that we shall always see him in so genial a form.

4.59 p.m.

Mr. Douglas Jay (Battersea, North)

I welcome the fact that we are having this debate. Of course, the credit for that must be shared between my right hon. Friend the Secretary of State and the Scrutiny Committee. I very much welcome the fact that my right hon. Friend finds some things in the document which he cannot completely accept. He said that it would be a poor heart which could not find something which it welcomed in the document. I think that it would be a very soft head which welcomed everything in it. It is more in sorrow than in anger that I say to my right hon. Friend that although this is admittedly a consultative document—he has already given us an undertaking, as I understand it, that he will try to improve it—I find it exceedingly disappointing, as it stands, if it purports to be a fundamental renegotiation of the terms of entry. I trust therefore that, in the light of the debate today, my right hon. Friend will seek substantial improvements.

A fundamental renegotiation was, after all, promised by the Labour Party's election manifesto—and I hope that my right hon. Friend does not object to my mentioning that. He quoted it in his celebrated speech on 1st April last year. He has always presented the Budget contribution as one of the main elements in the whole operation. He did not quote today what the manifesto said. It promised: New and fairer methods of financing the COMMUNITY BUDGET. Neither the taxes that form the so-called 'own resources' of the Communities, nor the purposes, mainly agricultural support, on which the funds are mainly to be spent, are acceptable to us. We would be ready to contribute to the Community finances only such sums as were fair in relation to what is paid and what is received by the other member countries. However, the proposals in the document do not ensure that the British contribution will always be fair in relation to what is paid by other member States. Everybody took that to mean that the proposed annual contribution by this country would be drastically revised so that in future it would be comparable, as a percentage, to Britain's percentage share of the total GNP of the EEC. Indeed, my right hon. Friend made it a major issue—and he referred to the principle of the percentage share of GNP this afternoon—that our contribution under the 1971 settlement would markedly exceed our percentage of Common Market GNP. The Commission's own document last December—Document R2829/74—estimates, and I think this is where my right hon. Friend's 7 per cent. figure came from, that under the 1972 settlement we should pay 22 per cent. of the budget compared with 15.9 per cent. of the total GNP four years hence.

But of course the corrective mechanism suggested in this document, which my right hon. Friend did not mention in detail today, does not make our contribution comparable to our share of the total GNP. It does not propose a substantially revised United Kingdom contribution. Instead it provides for possible refunds to be made as a sort of emergency relief when, and only when, a complex series of conditions is simultaneously satisfied. Under this scheme in most years refunds would not be paid and the British contribution would continue to exceed a fair proportion.

The "unacceptable situation" is interpreted not as being a situation in which the British contribution is unfair but as a situation in which we are suffering special economic difficulties. At least four major conditions have to be fulfilled simultaneously before relief is forthcoming. First, the GNP of the applicant country has to be below 85 per cent. of the EEC average. Secondly, its growth of GNP has to be below 120 per cent. of the EEC average. Third, and this is extraordinary, it has to be suffering a deficit on the current balance of payments. All these situations have to be calculated on the basis of a three-year moving average, so even the coincidence of all of them in one year would presumably not enable a refund to be paid. Fourth, there has to be a disproportionate contribution to Community financing and there has to be "simultaneous occurrence" of this disproportion and of all the economic situations which I have already described.

But even here the disproportion is not calculated in the way in which the Government originally wished—as a straight comparison of our GNP as a proportion of the total GNP of the EEC. A new complication is introduced. We are told that the excess contribution should not materially count unless it is transferred across the exchanges, and that otherwise member States must not call in question the consequences of the Own Resources system". Even more ludicrously, the document states that because agricultural levies and customs duties cannot be regarded as a burden on the States concerned, therefore the aggregating mechanism could appropriately be limited to the total payments in respect of VAT. But of course the agricultural levies and customs duties are a massive and the main burden on our economy. In addition to all this, two further ceilings are placed on the total refunds that can be made, thus limiting them even further.

There therefore appear to me to be three serious defects in this proposed mechanism. I am not saying that my right hon. Friend has not done his best to improve it, I am saying that he has not yet by any means fully succeeded in doing so. First, the introduction of the balance of payments deficit condition entirely alters the nature of the proposed reform. There is no reason why the United Kingdom should pay an unfair contribution to the budget just because we have no balance of payments deficit. My right hon. Friend the Foreign Secretary is a former Chancellor and a former official of the Inland Revenue. This proposal is rather as though the Inland Revenue were to argue that a person was not entitled to the ordinary reliefs under income tax unless he had a large overdraft with his bank. I am sure that my right hon. Friend would not argue that. Although we sometimes forget it, this country had a large balance of payments surplus as recently as 1970 and 1971. Surely the Government have not assumed that we shall not have a balance of payments surplus again for an indefinite number of years.

The second weakness is that I cannot believe that a Government, pleged by its manifesto—which I hope I am allowed to refer to—to the promise that the "own resources" system is not acceptable could accept a document which says, as this one does, The Heads of Government confirmed that 'the system of "own resources" represents one of the fundamental elements of the integration of the Community'. Thirdly, the whole scheme is so hedged about with complex conditions that in the interests of brevity I have not mentioned, all of which have to be fulfilled at the same time, that it is hard to believe that in very many years anything but a pretty small refund, if anything at all, would be payable. I would guess that it would be a rare year in which a French lawyer could not find some condition somewhere which had not been satisfied.

Even that is not quite all. If ever the aggregating mechanism does operate and refunds are made for three years, the Commission is then apparently to move in and exercise some special powers which are not clearly specified over the economy of the country in question. My right hon. Friend interpreted what this means, but his interpretation is not what the words say. They are on page 8 and they read, The Community authorities would then make a special examination of the situation of the State in question and take the appropriate measures to give effect to Community solidarity in the light of the assessment made by the convergence of economic situations and policies. Some hon. Members may be in doubt about what that means. That makes me a little sceptical, if not suspicious. If it means what my right hon. Friend said today, I hope his interpretation will be written into the document, because, if not, some people will remain sceptical.

Mr. Callaghan

My right hon. Friend, of whom I am deeply fond, would, if given a copy of the Sermon on the Mount, be able to parody it. Supposing I remedied the three serious defects to which my right hon. Friend has pointed, would that make the slightest difference to his attitude towards leaving the EEC?

Mr. Jay

It would make a good deal of difference. If my right hon. Friend does not believe what I say to him, I shall have difficulty in believing what he says to me. I assure him that I much prefer the Sermon on the Mount to this document.

The document contains a concluding remark suggesting that the scheme will operate for a seven-year trial period, after which, if it does not continue, we shall presumably revert to where we were before. On the evidence before us today, the final result is that we are not offered a real reform of an unfair system and a scheme for a fair contribution in future. All that we are offered is an emergency relief scheme which we cannot tell how often would operate, and which would trigger off, after throe years, some form of exceptional supervision of our economy, not on the grounds that we were insisting on fair play but because we were in exceptional difficulties.

I am encouraged by what my right hon. Friend has said today. However, I cannot believe that the Government, in view of the election pledges which I have quoted, will accept these terms, or anything like them, as a serious piece of renegotiation.

The least we should ask for is a simple adjustment scheme to ensure that this country makes no more than a fair contribution based on GNP. The balance of payments criterion should be omitted. I am glad that we are reaching agreement on that. The payment of refunds should in no way permit additional interference in the British economy. I trust that my right hon. Friend will take his stand on those principles in the forthcoming talks next week and achieve a considerable amendment of those proposals. If my right hon. Friend assures us that he will do that, I shall ask my hon. Friends not to oppose the scheme in its entirety. If he cannot, we must regard it as seriously unsatisfactory.

5.14 p.m.

Mr. John Davies (Knutsford)

All hon. Members must have been impressed with what the right hon. Member for Battersea, North (Mr. Jay) said, to the effect that if his three points were handled satisfactorily by the Foreign Secretary, his attitude of mind towards withdrawal from the Community would be changed considerably. That is a remarkable, interesting and powerful statement.

I am incapable of quickly doing the mental arithmetic concerning his three points, but I guess that the figure involved is about one-third to one-quarter of the present milk subsidy. It is interesting to observe that the right hon. Member for Battersea, North, who is associated with the thought that this is the single greatest decision that this country has had to make since the war, would agree to the decision for between one-third and one-quarter of the amount paid in milk subsidies.

Mr. Jay

The right hon. Gentleman is now misinterpreting what I have said. I was seeking brevity. I said that it would make a difference if those improvements were made. I believe—as the right hon. Gentleman must believe—that the budget contribution is of far less importance than our total deficit with the Community and the burden of the common agricultural policy.

Mr. Davies

I understand that. None the less, I think that we must hold the right hon. Gentleman to his earlier statement, the record of which we shall shortly see in the Official Report.

I have not been inclined to pour cold water on the Foreign Secretary's endeavour to get a more favourable and reasonable budgetary contribution scheme. On the contrary. I wish the right hon. Gentleman well in his endeavours. He seems to have been able to press this point home. There is a certain amount of shadow boxing, but that is part of the normal political horseplay in these matters. The appropriate moment to seek such an adjustment is a matter of judgment. At the time when the previous Conservative Government, of which I was a member, was seeking in terms of priorities to achieve an effective regional policy, it seemed wiser to leave this issue for subsequent handling, although not relegating it to a position of no importance. I regard what the Foreign Secretary has done as substantial, and I welcome it. However, I think we shall have difficulty.

The "own resources" provisions of the Community operations are hard to overturn. They form a relatively impregnable area. The Foreign Secretary will find that hard to change. The purpose of the Community is the creation of a single market. The object is to break down barriers, be they tariff or non-tariff, which exist between member countries of the Community, so as to ensure that in due course there is a free and open market similar to that which exists in the United States of America.

The members of the Community believe—I think rightly; the right hon. Gentleman may think wrongly—that that is the precise condition in which the fortunes of the Community will prosper most. We believe that, although not for purely selfish or jealous reasons. However, I do not doubt that the idea of self-enrichment is not totally unpopular to the members of the Community either. They believe that through such an arrangement they will create in Europe a Community which will have a powerful and valuable effect on the rest of the world in terms of its external political emphasis and of its ability effectively to help the conditions of life in the developing countries.

I commend the recent agreement with the African, Caribbean and Pacific countries on arrangements which could not have been entered into by a single country. All this reposes in the belief that in due course the Community can be created into a single tariff-free, barrier-free market. In the case of a universal market, as is the case in the United States of America, tariffs which are raised at the point of entry belong to the total exchequer of that country. In the same way tariffs will belong to the total exchequer of the Community.

The operation and purpose of the Community is geared specifically to the proposition of "own resources", because "own resources" mean that tariffs which are levied at the frontiers of the Community belong to the Community to dispose of as its members consider right. That is the purpose of the operation. That is why "own resources" were referred to, and why it will be hard to persuade the Community to change the relationship of its member States.

Mr. Jay

That may be the right hon. Gentleman's view, but I am sure that he will agree that it was not the view expressed in the Labour Party's election manifesto.

Mr. Deputy Speaker (Mr. George Thomas)

Order. This is a very brief debate. The right hon. Member was called to speak. Perhaps I may be allowed to return to the Beatitudes and remind the right hon. Gentleman that Blessed are the meek, for they shall inherit the earth.

Mr. Davies

Perhaps I might make one comment upon the right hon. Gentleman's intervention and say that, fortunately, I am not bound by that manifesto in any way. Moreover, I believe that I am right in saying that the conclusion reached by the Heads of State at their summit meeting was to endorse the principle of a common market and, therefore, the principle of "own resources". Therefore, the Foreign Secretary and the Prime Minister have made it clear already that they accept that to be the principle of the Community and one by which they will abide.

The purposes implicit in the creation of "own resources" are well understood. They have never been concealed or doubted by those who have had to deal with the Community. They represent a basic requirement for member States to comply with in dealing with the budgetary purposes of the Community.

Naturally, I was relieved to hear the Foreign Secretary say that, as a result of the change in the pattern of tariff and levy arrangements and the extent of them, the likelihood was that a greater proportion of the total budgetary contributions would come from the VAT contribution and that therefore it would accommodate a greater degree of differential if ultimately a differential showed itself.

Much reference has been made to the criterion dealing with the 85 per cent. of what hon. Members have called "average gross national product". We are discussing GNP per head. That should be kept very much in mind. Population change and the like has a powerful effect on GNP per head.

I share the views already expressed today that it is not certain that with all the changes and chances likely to occur in the next decade we shall find ourselves necessarily on the receiving side of the operation. Nonetheless. I welcome the corrective mechanism, which is a fair and reasonable approach to what is a real problem.

My final comment takes the form of a question to which I hope that the Minister of State will be prepared to respond. If I understand the mechanism correctly, where there is a differential which is regarded as being a justified reclaim by a member State, subject to the criterion that I have stated, that differential will be aggregated with the budget of the ensuing period. Therefore the payment out to the member State will result in the inclusion in the budget for the ensuing period of a supplementary figure which will make good the shortfall of the member State. In other words. The member State itself will contribute a proportion of it. Is the right hon. Gentleman content with that? It seems to be slightly interesting from an accounting point of view and from a resource point of view. If the right hon. Gentleman cares to comment on it, I shall be happy to hear what he says.

5.24 p.m.

Mr. Evan Luard (Oxford)

My right hon. Friend the Member for Battersea. North (Mr. Jay) began his speech, as he has done on other occasions, by quoting from the Labour Party manifesto. It came as no surprise to hear him conclude that the terms of the proposed corrective mechanism did not in his view satisfy the requirements of that manifesto. In that, my right hon. Friend repeated the pattern of earlier debates on the Common Market, and I am sure that we shall hear it again on many occasions in the future.

Many people will refer in these debates to the Labour Party manifesto. Those who have made up their minds already that Britain should not remain in the Common Market will then conclude that the terms which have been negotiated do not meet the requirements of the manifesto. Those who believe that we should remain in the Common Market will conclude that they do. It will surprise no one to hear that my own view is that, so far as it can be judged at present, the corrective mechanism now proposed will meet the conditions laid down in the manifesto.

I want to quote three sentences on the subject appearing in the manifesto. The first says that we are seeking to obtain New and fairer methods of financing the Community budget. No one can contend that, if it is introduced, this mechanism will not represent a new method of financing the Community budget; or that it will not be a fairer method. It must be a fairer method because its object is to provide compensation for countries like ourselves who, in the present situation, find themselves contributing a larger share of their GNP and who may find themselves in difficult economic circumstances. Those countries will be able to pay less than they would otherwise.

The second sentence in the manifesto is crucial and it has been quoted a number of times, for example, by the right hon. Member for Down, South (Mr. Powell). It reads: Neither the taxes that form the so-called 'own resources' of the Communities … are acceptable to us. At first sight, it may seem that this condition has not been met. But let us look at it in detail. The words Neither the taxes that form the so-called ' own resources' of the Communities … clearly imply that we have not been demanding the total abandonment of the "own resources" system. That would have been an unrealistic demand to make because there was no chance that the Common Market countries would have been prepared to abandon the system. What we said was that we did not like the taxes that formed the so-called "own resources"' system.

We have not achieved a complete change in those taxes. They will still consist basically of the levies, the tariffs and the VAT. But the precedent that we have established by getting agreement to a corrective mechanism is that they will not consist exclusively of those existing taxes. That is a basic change in the principle so far adopted in the Common Market.

I accept that alone it is not enough. I should prefer an altogether better system provided in the Common Market for obtaining the resources which it requires for agricultural support, social policy, regional policy, and so on. But, for the reason that I have stated—the fact that the great majority of the Common Market countries support the present system because they believe it to be one which provides automatic financing and which is appropriate to a single market—it would not have been possible to obtain a change of this kind within the short space of time required for our renegotiation.

Mr. Spearing

Can my hon. Friend identify the alternative method of raising money to which he has referred? Is not it analogous to someone saying that we have changed the rating system because we have introduced a system of rate relief for people with low means? It may ease its application, but surely it does not change the basic pattern.

Mr. Luard

It changes the total effect of the taxation system.

Mr. Spearing

That is another matter.

Mr. Luard

That is my point. The reason why we wished to change the system was that we recognised that it could in certain circumstances act very unfairly, in the sense that a country might be obliged to pay more than in logic it should pay in terms of its national income per head. That is why we objected to the system, and that is why the system is being improved.

The second half of the sentence which I was quoting from the manifesto says that we also do not find acceptable … the purposes, mainly agricultural support, on which the funds are mainly to be spent". Again it cannot be said that we have yet brought about a fundamental change in the expenditure of the Common Market. It would have been absurd to expect to be able to achieve that. But all the time there is a shift in the emphasis of expenditure. For example, more may be given to the regional fund or to the social fund at any one time.

In the area of agricultural support, which is by far the largest single element in the expenditure of the Common Market, there are important changes in the direction of expenditure. Only this morning we read of an agreement about to be reached concerning agricultural support, the result of the review of the common agricultural policy. One of the results of that review is that much less money will be needed in future to finance the enormous stockpiles of agricultural produce we have had, such as the butter mountain. We have contributed to this in our negotiations. There has been thus an important change in the whole expenditure of the Community within the last few months.

I come to the last sentence of the three I quoted from the Labour Party manifesto: We would be ready to contribute to Community finances only such sums as were fair in relation to what is paid and what is received by other member countries. That is precisely the effect which this mechanism will bring about and which it is designed to bring about. [HON. MEMBERS: "No."] That obviously depends on the definition of "fair". We are all entitled to make our own judgment as to what is fair. The manifesto refers to only such sums as were fair in relation to what is paid and received by other member countries". The purpose of this mechanism is to make our contribution fairer in relation to what is paid by other member countries, taking account of their national income and their income per head and our national income and income per head. It will create a much fairer and equitable system than the one we have today. To that extent, we should be satisfied with it.

I admit that there are details of the proposals in this document, of which the final result is not yet known, which I should like to see improved. One of them is the reference to the balance of payments situation. There is no logical reason why the Community, in deciding whether one country is paying more than its fair share, should take account of the balance of payments situation of that country. Ideally the Community needs only to take account of one factor, the 85 per cent. of GNP per head. That is by far the most important consideration.

Mr. Powell

While the hon. Member is referring to fairness, will he direct his attention to one brief sentence in the document before us? At the bottom of page 4, paragraph 4, it says: The correction should not apply to the whole of the disparity but should be limited to two-thirds of it What comment has the hon. Member to make on that?

Mr. Luard

I was just about to mention that point. This is one of several features of the document which I regard as either unsatisfactory or obscure. If taken literally, a number of references in this document would quite significantly limit the effect of the mechanism. This is one of them. The reference to a payment out of VAT revenues is another, and the reference to the three-year moving average is another. It is difficult to see exactly how this is to be interpreted. I hope that the Secretary of State will take up these points in his discussions in Brussels next week. Even if he does not receive full satisfaction on those points, there is no doubt whatsoever that they—

Mr. James Callaghan

Do not say that.

Mr. Luard

I will give my right hon. Friend every possible support. I hope that he will take with him the views of all hon. Members that we should receive a more satisfactory deal.

I personally would like to congratulate my right hon. Friend. Those of us who are reasonably familiar with the workings of the Common Market were doubtful about how far the Secretary of State would be able to obtain satisfaction on this element of our renegotiation terms. I think he has done extraordinarily well so far, especially in overcoming the deep objections and reservations that the French Government had to making any kind of concession to us. I hope that he will do better still in the future, and will be able in Brussels to clear up some of these minor points raised during the course of the debate.

5.35 p.m.

Mr. Douglas Hurd (Mid-Oxon)

These debates are valuable, not just because of the intrinsic importance of the documents and proposals involved but because they shed an improving light on the nature of the Community to which we belong.

The sum involved in the proposals before us is not a puny one. The Foreign Secretary gave us an illustrative figure, to which he did not want to be held, of £130 million a year. That was the approximate possible benefit to this country at a later stage in the working of the corrective mechanism. This is not nearly as large a sum as that which we discussed with much attention in the context of public expenditure when dealing with a new food subsidy, for example. Nor is it nearly so large a sum, if we are thinking in terms of the contribution across the exchanges, as the trade deficits to which we give less attention than we are giving to this document. Nevertheless, it is a sizeable sum and it is right that we should discuss it.

As the Secretary of State said, after a time the sum may not work in our favour. When North Sea oil begins to exercise its influence on our balance of payments we may be required to contribute under this scheme rather than to receive from it. That is a natural consequence of the nature of the Community to which we belong and it is on that point that I wish to speak.

This document has two possible pedigrees. It is important to decide among ourselves which is the right one—not for the purpose of scoring party points but because, according to which pedigree we believe to be the true one, we shall decide our view of the true nature of the Community. It is possible to argue, as did the Secretary of State when opening the debate, that the pedigree of this document dates back through two General Elections to the Labour Party manifesto. It is perfectly natural that Labour Members should indulge in very minute textual criticism of the different sentences of this manifesto, although it is possibly more appropriate to a meeting of the Parliamentary Labour Party than to the Floor of the House.

There is no reason why the House should take the manifesto of a particular party as the permanent and total definition of this country's interests. Therefore, Conservative Members are entitled, and the right hon. Member for Down, South (Mr. Powell) is entitled, if he so wishes, to take a broader view.

Mr. Powell

It is a question of morality.

Mr. Hurd

I am most grateful to the right hon. Gentleman. I was coming to that point. It is amazing, and flattering to the Labour Party, that the right hon. Gentleman should spend so much time on what he has just described as the morality of the situation and what, in the last debate, he described as the integrity of the situation.

During the last debate the right hon. Gentleman's settled view was that the textual integrity of a Labour Party manifesto—in that case we were talking about the import order—should prevail over this country's clear international commitment. That is a view he has consistently expressed. I find it a difficult one to accept. The right hon. Gentleman describes himself as a Tory but not a Conservative. Having imbibed Tory doctrine from my earliest days, I do not understand how anyone could describe himself as a Tory and hold the view that a party manifesto should aver-ride our international commitments.

I believe that the real pedigree of this document lies in a different direction. It goes back as my hon. Friend the Member for Saffron Walden (Mr. Kirk) said, to the 1972 declaration. As he pointed out, the summit communiqué, for which the Foreign Secretary claimed a good deal of credit, specifically stated that that was the pedigree of this document. The communiqué specifically stated that the Commission was taking this further step because in 1972 it had declared that such a step might become necessary. That is in no way to deny the pertinacity and courage with which the right hon. Gentleman and his right hon. Friend have pursued the matter and put flesh on the bones which were then established. That is the ongoing nature of the Community and with great skill they have done their best in protecting our interests.

It is natural that when particular proposals come forward, such as those in this document, right hon. and hon. Members on both sides of the House should say that they are not sufficient, that they want more information, that the passage about the balance of payments should not be included, and that the proposal that only two-thirds of the deficiency should be recouped is inadequate. That is all part of the coming and going of the Community.

The Treasury Bench were highly approving of such criticisms when they heard them a few minutes ago, because they enable them to go to Brussels fortified in the knowledge that behind them are hon. Members on both sides of the House pressing them to do better. This is of great advantage to the Foreign Secretary when he sits round the table with his colleagues. As I said, that is all part of the on-going process of the Community, and rightly so.

What is a sham and almost a tragedy for this country is that the right hon. Members for Battersea, North (Mr. Jay) and Down, South (Mr. Powell), who know much more about the details than I do, should use their energies and eloquence in this House not primarily to fortify and strengthen the Foreign Secretary's hand in his dealings with our partners, not primarily to get a better deal for this country, but to illustrate and further their own stubborn hostility to the whole notion of the Community to which we belong. It will be a great blessing to this House and to the country—I hope that it will be a blessing not far removed—when the energies and eloquence of those two right hon. Gentlemen and many other hon. Members on both sides of the House, after the referendum, are devoted fully to improving strengthening and making constructive criticisms of the Community which will enable us to play a fuller part in it.

I think that 1973 was a bad year for the Community, because it faced a terrible energy crisis. Not even its dearest friends could claim that it emerged sucessfully from that crisis. Also, 1974 and now 1975 put great burdens on the Community with the British renegotiation.

The importance of this debate, of the document, and of the speech made by the Foreign Secretary seems essentially to be that whereas at the beginning—some of us shared this view—it was widely felt in the Community that the British renegotiation demands which were put forward were a burden and an irritation, I suspect that now, as we approach the critical point of the discussions which are taking place, we are reaching a different and more hopeful conclusion. The renegotiation and its outcome, instead of being essentially a burden and an irritation, may figure in the history books as the succesful proving ground which established for ever the worth of the Community.

I think that is the essential importance of this debate, of its predecessors, and of the debates which we shall have in the next few weeks. Because I sense that feeling in the air in this House today, I am glad to have had the chance of participating in the debate.

5.44 p.m.

Mr. John Ovenden (Gravesend)

I shall attempt to be brief because my task has been made easier by the lucid manner in which my right hon. Friend the Member for Battersea, North (Mr. Jay) has put most of the points that I wished to make.

I am not surprised that some hon. Members find the document or our membership of the Common Market acceptable even without this corrective mechanism. We are fully aware that right hon. and hon. Members opposite and, indeed, some on this side of the House voted for acceptance of the original terms negotiated by the right hon. and learned Member for Hexham (Mr. Rippon. However, the vast majority of my right hon. and hon. Friends fought an election upon a Labour Party manifesto which laid down certain conditions for our continued membership of the Common Market.

I agree with my right hon. Friend the Member for Battersea, North that this document does not go far enough towards meeting those terms. It falls far short because it does not present us with a change to the permanent system of financing of the Community. All that we are given is a corrective mechanism for seven years. The documents makes clear that the Community is still committed to long-term acceptance of the "own resources" system of finance which we made clear in our manifesto was not acceptable to us.

I cannot go all the way with my hon. Friend the Member for Oxford (Mr. Luard) who claimed that that was a fairer system of finance. I might concede that it is a less unfair system of finance, but it is doubtful whether we could go that far. This document is merely a balancing mechanism to compensate for a grossly unfair system of Community financing.

My right hon. Friend the Secretary of State for Foreign and Commonwealth Affairs during a recent Question Time said that even if he came back from Brussels with a crock of gold some hon. Members would question it. I suggest that all that glistens is not gold and that this is a prime example.

We are not interested in offers of Community charity to member States in economic difficulty. We should be seeking a long-term solution to the problem of spreading fairly the Community budget. The proposals in this document offer no redress to a member State unless it is in economic difficulties. The terms that we laid down clearly insisted that we should not pay more than our fair share of the Community budget at any time. That means not just when we are hard up but at any time.

If we accept this proposal, it will mean that should we return to a position of economic strength—many of us believe and hope that we shall do so—there will be no limit to the unfairness of the contribution which we can be asked to make. Not only could we be paying an unfair contribution, but we could be asked to make a contribution towards a compensating mechanism for other countries.

Mrs. Elaine Kellett-Bowman (Lancaster)

I cannot help feeling that the hon. Gentleman has misunderstood the provision. The whole point of its being a general provision is that in no circumstances will our contribution be unfair. It will be related to our capacity to pay. [Hon. Members: "No."] Indeed, it will.

Mr. Ovenden

The hon. Lady has completely misunderstood the document, if she has read it. What the document lays down I shall come to later and I am sure that she will agree she is entirely wrong.

These proposals take no account of the income which member States receive from the Community budget. My hon. Friend the Member for Oxford referred to this matter when he said that in our manifesto we insisted that there should be a fair contribution related to the ability to pay and, I take it, to proceeds from the Community budget. This budgeting mechanism takes no account of that. All the time that the bulk of the money from the common pool is spent on agricultural support, this country is on the losing end.

Mrs. Kellett-Bowman

What about regional policy?

Mr. Ovenden

I shall be coming to the hon. Lady's first point shortly. The proposals to help us in times of hardship are far from generous. To satisfy the conditions for receiving some rebate on our contributions we must satisfy the three criteria laid down in the document. That means that we must have a relatively low standard of living, a low rate of economic growth and a balance of pyments difficulty. If all three conditions are not satisfied over a period of three years, we receive no rebate on our contribution, however unjust that contribution may be. I think that that deals with the hon. Lady's point.

I take some comfort from the point made by the Foreign Secretary that he does not accept the necessity for this condition about the balance of payments, but even assuming that we can satisfy all those three conditions and that we do bear a disproportionate share of the budget, we are still expected, I understand, to bear 10 per cent. above our fair share without seeking any compensation from the Community, and even beyond that figure we are committed to receive back only a proportion of the unjust burden that we are carrying.

I do not believe that when we set out on these renegotiations we sought a form of Community means test under which we could apply for some kind of EEC supplementary benefit if we fell upon hard times. What we set out to do, and what we told the people in the election we would seek to do, was to establish a system whereby we would pay our fair share of the Community budget—no less and no more.

5.51 p.m.

Mr. Peter Blaker (Blackpool, South)

The Foreign Secretary—I am sorry that he has left—said that it would be ungracious not to acknowledge the work that the Commission has put into preparing this document. With respect, I believe it was ungracious of him not to acknowledge the ground work which, as my hon. Friend the Member for Mid-Oxon (Mr. Hurd) said, the Conservative Party did and on which he is building. He accused us of imprudence in the arrangements that we made in the 1971 negotiations. That was unjustified.

I pass over the fact that the principal negotiators on the Labour Party side, one of whom is still in the House—the right hon. Member for Fulham (Mr. Stewart)—said that they would have recommended for acceptance the terms which we obtained. I pass over the fact that we made transitional arrangements which are embodied in the treaties of accession, under which we are still paying a smaller relative percentage of the Community budget than our relative share of the Community GNP.

But I emphasise once more the fact that we arranged for the safety net which is reported in paragraph 96 of the White Paper of July 1971, Command 4715. That safety net was itself quoted in the summit conference last December as the basis for the document which we are now considering.

I would quote also from something which has not yet been referred to today—the speech of the Foreign Secretary in the Council of Luxembourg on 4th June, in which he said: The Community declared to us during the course of the entry negotiations that if unacceptable situations should arise, 'the very survival of the Community would demand that the institutions find equitable solutions'. So right from June of last year, in this context the Government have been relying on the understanding that we obtained in our negotiations.

It was recognised in 1970 and 1971 by both the principal parties that this problem of the Community budget would be one of the most difficult in the whole negotiations—because of the methods of financing the budget, because we are big importers, because of the common agricultural policy. But it was also recognised by both parties that we could not expect to change the common agricultural policy before we got in. The Prime Minister is on record as having said that. It was also recognised that we could not change the budgetary system before we got in but that we could hope to work for change in both fields once we were a member.

What was not foreseen at that time was that the size of the gap between our relative share of the GNP and our relative budgetary contribution would be as big as the Foreign Secretary forecast on 4th June. When we raised the problem of our budgetary contribution in 1970 and 1971, the six original members argued that the situation was unpredictable and that, having provided transitional arrangements up to 1980, one would be able to review the situation after that time or indeed before that time as we went along. They argued that, as a member of the Community, our import pattern would change; they argued that new funds would be set up which would probably benefit the United Kingdom. Indeed, the regional development fund is now being set up; it will bring this country £150 million over the next three years and has a great potential for growth in future.

So we were able to obtain the transitional arrangements, and the safety net, and we are still now paying a smaller percentage of the Community budget than our relative share in the GNP.

What our partners said at that time has been amply borne out. They said that the situation was unpredictable. In a country which will soon have had three Budgets in one year, I do not think that we can now say that it could safely have been predicted in 1971 what the economic situation of this country vis-à-vis the other members would be in 1980. Agricultural prices have doubled since we entered. No one would have predicted that. Our import pattern has changed. We have heard a good deal in the last few months, from the Secretary of State for Trade in particular, about our trade deficit with the Community. The reason for it is that there has been a big shift in our import pattern, so that we buy much more from the Community.

For that, there have been good reasons. In 1973, our food purchases from the Community were £291 million. In 1974, because food is cheaper now in the Community, they were £689 million—about 2½ times as much. But what I would like the House to note is this: the obverse of the coin to what the Secretary of State has been saying when complaining about the size of that deficit is that, because we are buying more from the EEC, our contribution to the budget will be less. Instead of buying goods from outside the Community, on which we would be paying levies or tariffs, we are buying goods from inside.

The hon. Member for Gravesend (Mr. Ovenden) referred to the CAP. I understand that, during 1973 and 1974, we received about £176 million from the guarantee section of the agricultural fund. According to information that the House has recently been given, we received £19 million in 1973 and the same amount in 1974 from the social fund. So here, too, the forecasts of our partners in 1971 that the situation was unpredictable and that we stood to benefit from other sources of revenue have been amply borne out.

It is interesting to see how our expenditure on the Community budget compares with what was forecast in the negotiations in 1971. The forecast for 1973 was that our net contribution would be £100 million. In the result, it was £104 million. More interesting is that the forecast for 1974 was £115 million, when in fact, as the House has recently been informed, it was only £30 million—a substantial reduction.

I was interested to hear the Foreign Secretary say today that according to his latest assessment, the gap between our relative share of the GNP and our relative share of the Community budget, instead of being 10 per cent., as he had forecast in June—I think I understood his remarks correctly—is now more likely to be 7 per cent. or 8 per cent. That represents a very significant improvement.

I was interested, too, to observe that the Prime Minister said in the House recently that, when we come into the 1980s and when there is North Sea oil and the rest of it, if the terms of renegotiation are such that we are still in the Common Market, we would feel it right that we should make a bigger contribution then, following a smaller contribution in the late 1970s."—[Official Report, 16th December 1974; Vol. 883, c. 1129.] That is very different from what the Foreign Secretary and his colleagues were saying at an earlier stage. It seems to me to reflect a realisation on the part of the Government that perhaps they took a too pessimistic view last June, that our partners were right in forecasting that things were very difficult to predict, and that perhaps the situation will be better than the Government feared at one time.

I was particularly intrigued to read in The Times of 26th February a report that the Secretary of State for Trade, who is at present in Nigeria, had said that Britain would emerge in the late 1970s and 1980s as the strongest power in Europe. I do not know whether he has been accurately reported, but perhaps the House will feel that in view of his track record we ought to rely more on what the Foreign Secretary has said this afternoon than on the ebullience of the Secretary of State for Trade. But at any rate, he also seems to be changing his view about our relative economic prospects.

I do not want to give the impression to the House that I am not supporting what the Foreign Secretary is trying to do. I believe that there is a serious point, and I support him in his efforts to obtain a mechanism which will remedy any injustices—recognising all the time, as have my hon. Friends, that this could in the end and, indeed, before very long, maen that we are having to make a contribution rather than receiving a net benefit.

What I want to point out is that our partners in this exercise—not only the Commission but the other member Governments—are being helpful to us. We do not need to take up this budgetary question now. The question is not an actual one until certainly the end of 1976, and possibly 1977. As my right hon. Friend the Member for Knutsford (Mr. Davies) has said, the sum involved is relatively small compared with other Government expenditure. Nevertheless, the Commission has produced in very quick time a document which is intended to be helpful and, indeed, is helpful.

The Community is considering a system of general application, because it will have to apply to everyone. That is something we tend to forget when looking at the progress of what the Government call their renegotiations. Every proposal that is produced by the Community to help us has to be of general application to the whole Community. The Community is making these concessions to us and going out of its way to help us without knowing whether we shall remain in the Commupnity. The Community is, therefore, taking steps which would not otherwise be taken on the chance and in the hope that we shall remain inside it. We ought to recognise what the Community is doing on our behalf.

On the substance of the documents I have one question and one comment. The question is this: when does the right hon. Gentleman expect the system proposed, once it is adopted, and however modified, to begin to be of help to us? When will it come into force?

My comment is this: as right hon. and hon. Members on both sides of the House have pointed out, there are certain hurdles to be jumped. I think that is not unreasonable, because we are asking for a very big change of principle in a system which the original six member States adopted after very long and difficult negotiations only four or five years ago. Therefore, I think it not unreasonable that the document should in effect provide that before adjustments are made, the applicant country should have to demonstrate that there is a palpable imbalance and not merely a temporary or minimal imbalance.

But I agree with those of my hon. Friends and other hon. Members who have said that it would be right for the right hon. Gentleman to look very closely at the proposal that a deficit on the balance of payments on current account should be required as one of the pre-conditions before a country becomes eligible for aid. Among other matters—I do not think that this has 'been mentioned—we are at present running very heavily into debt. We hope that in due course, and before long, we shall be running a surplus on our balance of payments on current account so that we can start to make progress towards paying off these debts. We would not want to be hampered in this process by a clause of this kind. So I fully support what has been said on that subject.

I shall not ask the right hon. Gentleman to comment further. Some hon. Members seem to think it right to press the Foreign Secretary and his colleagues to state, before negotiations begin, precisely what their sticking point is to be.

Mr. Spearing

No.

Mr. Blaker

I recall that in the debate on milk the other day, my hon. Friend the Member for Banbury (Mr. Marten) did precisely that. That is not a reasonable thing to do, because it would hamper the Foreign Secretary in his negotiations.

I believe that this document meets the tests which were laid down by the Foreign Secretary in his speech in June, that is, that it avoids a tendency to promote increasing divergence between the economies of member countries, and that it contains a self-correcting element. It seems, therefore, to be a useful basis for the coming negotiations. Indeed, if a gap of anything like the size that was foreseen by the Foreign Secretary in June—or that now foreseen, as I understand it, for the year 1980—between our relative contribution to the budget and our relative GNP were to appear, under any Government, the Community would not only have to do something about it but it would do it willingly, because that is the nature of the Community.

6.7 p.m.

Mr. Frank Hooley (Sheffield, Heeley)

This document represents primarily a cosmetic exercise designed to dress up what is an unacceptable arrangement in a way which will make it acceptable to the British public and possibly even to the Labour Party. The difficulty which the supporters of membership of the Common Market have been up against is that on every economic calculation it is disadvantageous to this country. On matters of the balance of payments, capital movements, food prices and our actual contribution, the calculation is firmly against membership. Those who advocate membership have been unable to get round these figures, however ingenious their explanations.

However, what is more important about this document is this: if I have interpreted correctly what my right hon. Friend the Foreign Secretary said this afternoon, his own position has shifted on the question of renegotiation, because he is broadly accepting the propositions of this document, with some minor modifications on the balance of payments and one or two other matters. Broadly he is prepared, as I understand it, to accept the propositions as a sufficient correction of the lack of balance in our contribution to the Community budget.

There has been much reference to the Labour Party manifesto, quite properly. But the important point about that manifesto is that my right hon. Friend himself quoted it specifically at the outset of the renegotiations, in his statement on 1st April 1974. I can hardly think he would have done that unless he was taking it as the starting point of his own renegotiating stance and unless he regarded the particular words as of very special significance. One does not make that kind of statement at an important international gathering unless considerable significance is to be attached to the words. The words are that a new and fairer method of financing the Community budget is required.

I am sorry that my hon. Friend the Member for Oxford (Mr. Luard), for whom I have a great personal regard, indulged in a good deal of semantic sophistries about these words. "New methods" must mean new methods. It cannot be said that giving a small refund—or even a big one—constitutes a new method of financing the Community's budget because, candidly, it does not.

The document itself is brutally frank on this subject. It say quite clearly on page 5: Thirdly, the correcting mechanism should take account of the different nature of the three classes of Own Resources ", and it goes on to refer to VAT, customs duty and agricultural levies. Indeed, the document goes further. It excludes agricultural levies and customs duties from being taken into calculation when the refund, if any, comes to be made.

It is clear in this document that there is no intention whatsoever to go for any new methods of financing our contribution to the budget. The existing methods will remain, and what is proposed is a complex and extremely obscure formula for some sort of family income supplement, some form of rent and rate rebate, call it what one will, to try to make our contribution look tolerable, presumably, in the eyes of the British electorate.

I was somewhat disturbed by my right hon. Friend's rather wistful suggestion that food prices will remain high and food will remain scarce. I am sure he does not want that to happen and that in saying it he was making some sort of personal judgment about what might happen. I do not think that this kind of generalised personal judgment about what might happen to the trend of agricultural prices over the next few years can be a basis for policy on so important a matter as our membership of the Community.

Mr. James Callaghan

This is not a personal judgment. This is the analysis of the World Food Conference. It may or may not be right, but there has to be some assumption for future policy, and that is as good an assumption as any.

Mr. Hooley

My right hon. Friend might look at what has been happening to the prices of commodities other than food over the past two years. There has been a drastic turn-round in the general level of commodity prices, and there could equally be a substantial change in world food prices given two successive years of good harvests. One of the major factors of the current situation was the almost unprecedented disaster in world food harvests in 1972. I do not think we need argue that point in too much detail tonight because it is speculation. I am rather sorry that my right hon. Friend should have clutched at that straw to justify what otherwise is not a convincing argument.

The other curiosity about this document is that it does not deal with the unfairness as such of the British contribution to the Community budget. Talking about an unacceptable situation, the document says on page 2 that it must depend on an assessment of the simultaneous occurrence for a Member State of a certain economic situation and of a disproportionate contribution to Community financing. In other words, elaborate calculations have to be made about our economy over and above any question whether our contribution to the Community budget is inherently unfair.

It would be possible for our gross national product per capita to be above 85 per cent., for our economic growth to be above 120 per cent., for us to have no deficit on the balance of payments and still contribute to the Community budget a sum grossly disproportionate to our level of wealth within the Community. One cannot, therefore, regard these proposals, which are complex and obscure in themselves—and I have left out the question of a moving three-year average and all the fol-de-rol incorporated in them—as a serious attempt to make good a basic imbalance. It is essentially a cosmetic effort to dress up an unacceptable situation into something that may be sold as successful renegotiation.

There are other caveats in the document. The refund cannot exceed our VAT contributions and, even if it is established that we are paying too much, because of the weird standards of the document we can still recoup only two-thirds of the overpayment, which seems a curious exercise in equity.

There is the suggestion that if for three years we have the temerity to claim any refund from this overpayment, to claim two-thirds of the excess which, even by its calculations, we have paid, the Community will put in examiners and demand that we take appropriate measures to give effect to Community solidarity, and so on.

By any standards this is an unsatisfactory document. It does not represent renegotiation. It represents a cosmetic exercise to dress up a wholly unsatisfactory situation and to make it appear that an unjust imbalance arrangement in itself can be corrected by a complex formula by which I defy any Member of the House and any one in the Treasury to work out what sort of refund will be made to this country.

Public expenditure figures just published show that within a few years this country will be paying net of any return on regional fund or social fund about £280 million per year to the Community. That represents 70 per cent. of what we are proposing to give in aid to the poorer countries of the world. We are facing the situation that even on these calculations we shall probably be donating more per capita to the rich people of Western Europe than we are giving to the poorest people in the world.

6.18 p.m.

Mr. J. Enoch Powell (Down, South)

There are two distinct objectives of the fundamental renegotiation which have to be taken into account in forming a judgment on the document which is before the House. I should not say that they are not connected. They have a certain overlap but they are different, and they are different in their degree of importance.

I should like to refer first to that which features second in the celebrated and oft-repeated passage, repeated from the Labour Party manifesto in the speech of the Foreign Secretary at Luxembourg on 1st April. That is that we are to contribute to Community finances only such sums as are fair in relation to what is paid and what is received by other member countries.

I think that this debate has shown—perhaps this at any rate was not entirely distasteful to the Government Front Bench—that that objective in several respects has not yet been attained. One has already been referred to, namely, the fact that on the face of these proposals they do not propose to meet the whole of any inequity—"disparity" is the word in the document—but shall be limited to two-thirds of it.

The second, which has already been mentioned, is that there is a ceiling on the refund or allowance related to one only of the elements of contribution to the Community's own resources, namely, the yield of VAT.

But there is a third limitation, perhaps even more serious, which I do not think has yet been given adequate weight. I refer to the fact that this machinery applies only to the net sums which fall to be paid over. I cannot believe that it can be regarded as a contribution to fairness that the fairness should apply only when the calculation of plus or minus results in a net outward payment. For even if there were no net outward payment, even if the pluses exceeded the minuses, the unfairness would still be present in the computed figure whether plus or minus.

That aspect, which has hardly been touched on in this debate, brings out the fact that what renegotiation has so far achieved is not an alteration or correction of the system which will render it fair and equitable but a sort of reserve scheme for dealing with extremes of inequity in certain defined circumstances. That perhaps is emphasised by the concluding portion of the document which makes it clear that this is a temporary and provisional arrangement.

It may be said that naturally the Community in instituting even this modified reform would wish to regard it as experimental and see how far it goes. But what the Government are engaged in, on their own profession, is a fundamental renegotiation of the terms. What comes out of that must in all conscience be as permanent in its nature, as much a part of the structure of our membership of the Community, as any of the other terms. The framework as well as the contents disqualify the result, so far from being regarded as meeting the second of the objects of renegotiation—namely, the restoration of fairness and equality in pay ments and receipts between the Government and the rest of the Community. But more far-reaching is the commitment in the first half of the celebrated passage in the speech made by the Foreign Secretary in Luxembourg.

Tribute must be paid to the hon. Member for Oxford (Mr. Luard), who had a hopeless job before him in attempting to show that the result corresponded in any way with the profession in that sentence. He did his best and it was not his fault that he failed. That objective was based on the denial that we accept the taxes that form the so-called own resources of the Communities. That is an integral part of the statement of the Government's position. … The taxes which form the so-called resources of the Communities are not acceptable to us". If we were to say that the National Health Service was financed out of income tax, we should not be moving to a new form of finance for the NHS if we introduced certain reliefs and safeguards into the system of income tax. It would still remain the form of tax on which the resources of the service were based. No kind of adjustment of the sort before us in this document, even if its blemishes and remaining inequities were removed, could possibly be regarded as rendering acceptable or replacing by others the taxes which form the so-called own resources of the Communities.

Mr. Mike Thomas

Will the right hon. Gentleman list the taxes which he finds acceptable to finance the Community, or does he not wish to see it financed at all?

Mr. Powell

That question should be addressed to the hon. Gentleman's own party. These are the words of the Labour Party. Their only meaning is that there are other taxes which are more acceptable or that the Community's own resources as a concept are not acceptable.

Mr. Luard

Will the right hon. Gentleman accept that the reason why it was suggested that the existing taxes were unacceptable was that it was believed that they did not bear fairly on the different members of the Community? Therefore, if a mechanism can be provided to make the burden of taxes fairer between members, does that not satisfy that condition?

Mr. Powell

That will not do. One can render the operation of a tax equitable, but that is a very different matter from replacing the tax by other taxes. It in no way corresponds with the statement about taxes forming the so-called own resources—namely, levies, tariffs and VAT—which were described as not acceptable. The meaning must have been considered over and again by the Labour Party and by the Foreign Secretary.

Earlier in the debate an important point was made by the right hon. Member for Knutsford (Mr. Davies) in this connection. He said that the Community's own resources were part of the essence of the Community—that it is part of the essence of the making of a Common Market that there should be common or own resources. I venture to take issue with the right hon. Gentleman. Of course, one can have a Common Market without a common budget. One can have a free trade area without any own resources. The significance of the own resources element is that the Community intends to be far more than a free trade area. It intends to have policies of its own financed by—and these are the words—"its own resources".

Mr. John Davies

I clearly specified that it was implicit in the creation of a Common Market, and I made an analogy with a market such as that in the United States where there is a common economic system. The own resources concept centres particularly on tariffs and levies and provides for a certain ability to draw on VAT within a certain limit, but this is a complementary provision in terms of the own resources concept, the basic own resources being the tariffs.

Mr. Powell

The right hon. Gentleman has made my point even better than he did originally. His analogy with the United States is correct. Of course, the United States is a "common market", as indeed every State is a common market by definition, but it is also a State. The own resources of the Community are the badge of the intention of the Community to be a State and to have purposes other than those which are implicit in being a Common Market.

The hon. Member for Mid-Oxon (Mr. Hurd), in a thoughtful speech—I personally appreciated the words he chose—missed the point. The great importance for hon. Members and for the electors in considering this element of the purposes of a fundamental renegotiation was that, according to the success or failure of this objective, light would be thrown on the kind of Community to which we were still to belong.

The Minister of State for Foreign and Commonwealth Affairs reminded the House a few days ago that I voted for these terms of renegotiation. I had it in mind that a community which neither had own resources fed by these taxes nor spent those resources on the present purposes would be a community radically different from the present Community—in other words, that it was a fundamental renegotiation. If both the taxes and the purposes can be changed, in addition to the securing of 100 per cent. equity along with the other objects of renegotiation, a very different proposition will be placed before the electorate of this country.

Therefore, it is crucial that the achievement of the Government, or at any rate their attempt, succeed or fail, should correspond not only to the second element in their policy, which I think by general agreement is still far from being achieved, but to the first.

6.30 p.m.

Dr. J. Dickson Mabon (Greenock and Port Glasgow)

It is fair of the right hon. Member for Down, South (Mr. Powell), although I would not accord the same privilege to other Opposition Members, to examine closely the Labour manifesto, since he voted for it on two occasions. What Labour voters in South Down did at the October election I do not know. But the right hon. Gentleman is right to examine the words. They are the nub of the debate.

My right hon. Friend the Foreign and Commonwealth Secretary is not arguing that this document is the end of the matter. He is seeking guidance before the final stage of renegotiation. I do not think that some of the guidance offered to him has been very helpful. Some hon. Members say "Seek terms that our partners could not possibly accept, because we do not want to stay with those partners any more." In other words, it is false guidance. Some of the speeches have not been in that tone, but there are some hon. Members who would not be content with any terms. To some of them fundamental renegotiation means that we should get out tomorrow, and that is all. Such hon. Members are here under false pretences. They might as well say "We do not want it at all. Let's leave the Common Market." As for the rest of us, we are entitled genuinely to argue whether we have a reasonable deal so far.

Each citizen is entitled to read the prospectus to which the right hon. Gentleman subscribed in February and October 1974 according to his own interpretation of events so far, not according to the interpretation of my hon. Friend the Member for Sheffield, Heeley (Mr. Hooley), or the Red Queen from South Down, telling us "If I say it three times, it's true." [Interruption.] I may have got the character wrong, but the sense is the same. No hon. Member has the right to lay down what we should all believe. We must make our own personal judgment on the matter, bearing in mind what has happened since the Labour Party announced our terms of renegotiation in 1972, I emphasise not 1974.

Before we even joined the Common Market, we in the Labour Party announced what our terms of renegotiation would be. Since then the proportion of Community expenditure devoted to agriculture has been falling fast. Anyone with any intelligence studying the Market will realise that Community expenditure on agriculture will fall even more rapidly, given the circumstances in France and Germany, where there is quite a substantial change-over, with many people still moving from agriculture to other industries.

After we vote this evening we shall discuss the regional development fund. Is it not a fact that part of Community expenditure will be devoted to the regional development fund, not a ha'penny of which has been spent so far, thanks to the dog-in-the-manger attitude which some of us on the Government side have taken to it, blocking the fund, when we could have had it a year ago? I say that in criticism of my own Government. We are now to have the fund, if the proposals are implemented.

In addition, in the past year we have witnessed under Dr. Hillery the inauguration and distribution of the social fund. Many miners, steel workers and other people are benefiting today from redundancy grants, retraining grants and grants for investment in their areas for declining industries. Thank goodness we have the social fund. That must be taken into the balance as well. Those studying the terms and weighing up the document must in all fairness take into account these three changing elements.

If I were a member of the Bundestag listening to the debate I should be surprised at the cheek of some hon. Members. I say with respect to my hon. Friend the Member for Heeley that if the mechanism is a cosmetic it is one of the most expensive perfumes the Germans have ever bought. It will cost quite a lot of money to a wealthy country such as Germany, which already subscribes a substantial proportion of the Community budget, and which under the proposed arrangements is more rather than less likely to subscribe even more. Its share will become even greater and its burden heavier. It may be right that we should have fair shares for all and that the richest should carry the heaviest burden. It can hardly be complained that the mechanism is not good when it does that.

Mr. Kirk

If the hon. Gentleman were a member of the Bundestag, would he not be even more annoyed by the comparison made by one of my hon. Friends when he contemplated the unemployment figures in Germany and the unemployment figures here?

Dr. Mabon

Precisely. My hon. Friend the Member for Heeley has an awful nerve to say that he defies anyone in the Treasury or any hon. Member to put a figure to how the four variants will turn out over a three-year period. If anyone knew what the variants were, we should not be having the debate but should simply be submitting the figures. We should be congratulated if we got them right. It would be the first time in our economic history that we had been able to predict anything. The Treasury has never predicted anything of consequence for one year, never mind three.

Mr. Hooley

That is exactly what I am saying. My hon. Friend would not predict our exact balance of payments deficit over the next three years, nor the average for the next three years running. In fact, the Treasury can calculate on the existing situation, because it has done so in the public expenditure payments. Under the nonsense before us, no possible calculation can be made.

Dr. Mabon

I do accept that. I cannot tell what the figures are. I am not God, despite the views of some of my constituents. I am not in a position to predict, nor is my hon. Friend. It is conceivable that the present rich Germany, albeit with a great deal of unemployment, might not be so well off in the years ahead, and that at some stage the proposed mechanism might even work to its benefit rather than apparently to its disadvantage. The same applies to other countries in Europe, Italy, Ireland and the other countries coming within the proposals.

We have a good mechanism, and we have had a good debate on it. I hope that my right hon. Friend the Foreign and Commonwealth Secretary will be able to benefit from the advice we have offered and seek to improve on it.

6.38 p.m.

Mr. James Callaghan

We have had a good debate. I think that those who wished to speak have done so. It is only proper that I should answer some of the questions put to me before we proceed to take note of the document, as I trust the House will. What has been said generally strengthens my hand, because it puts the views of the House behind me on a number of issues that still have to be discussed.

I turn to the questions that were put to me. I cannot answer the hon. Member for Saffron Walden (Mr. Kirk), who asked whether this would be a permanent measure. It will run for seven years. I do not think that the Community is willing to look any further ahead than that at present. I would not want to press it to do so, because the economic circumstances of many of us may change in that period. What is important—I re-emphasise this—is that there has been an acknowledgment of a relationship between capacity to pay and a member's contribution. If that principle is accepted, we can build on that, even if the nature of the scheme changes from time to time.

The hon. Gentleman was right to emphasise that it is of general application. I asked for that and pressed for it, first, because I did not think that it was right that Britain alone should press for special circumstances and, secondly, because it was in accordance with our manifesto. That is, as it should be, a general principle for these new and fairer methods of financing the Community budget.

I will come back to the words of the manifesto later, but rarely have I seen anything but a scriptural text subjected to such complete exegesis. The hon. Member for Antrim, North (Rev. Ian Paisley) does this every Sunday. I will not tempt him. I will sit under him on some other occasion when he is in the pulpit. I would only say in passing that I have been only venturing an opinion on what the words mean, and perhaps I may be allowed my view because I had the prime responsibility for drafting it, something which I do not believe anybody else here can claim, as I happened to be Chairman of the Home Policy Committee at the time.

Should we use the Article 235 procedure? The hon. Gentleman preferred not. This was really one of the ways in which he was seeking to avoid asking for an amendment of the Treaty. The House will know that it was with general Government consent that I sought to renegotiate without seeking amendments to the Treaties—which, by definition, would take a very long time and require the consent of all member States and would need to go through the various Parliaments. Article 235 seemed to give perfectly good cover: If action by the Community should prove necessary to attain one of the objectives of the Community and this Treaty has not provided the necessary powers, the Council shall, acting unanimously on a proposal from the Commission and after consulting the Assembly, take the appropriate measures. We were able to convince the Commission and the Council that this was an appropriate article for the purpose. Why should we seek to get Parliament to amend the Treaty if we can operate under one of the existing clauses?

Mr. Kirk

I quite understand what the right hon. Gentleman is saying, but there are two points to be looked at here. Under the existing financial regulations this can be done anyway. I am speaking without them before me, as they are not in the Purple Book, but, nevertheless, they seem, from my own dealings with the regulations, to indicate that. Secondly, there is an amended financial treaty going through at the moment to which this could be added and which would not hold up the operative arrangements under Article 2 dealing with the main budget proposals. Article 235 is a very dangerous article and should not be activated too often.

Mr. Callaghan

I take note of the hon. Gentleman's point. I had not thought of tacking it on to the issue he has raised. It is something I will consider in the future, but at the moment the Commission is content to act under Article 235.

On the point raised by my right hon. Friend the Member for Battersea, North (Mr. Jay), if I may address myself to the grandfather of my grandchildren, I would say to him that, of course, he is correct in indicating that the corrective mechanism would not make our contribution exactly comparable to our GNP unless we were to get 100 per cent. repayment; and it is limited to two-thirds under the Commission document at the present time. That is a feature that I find unfortunate. If my right hon. Friend wants to jog my elbow on that he will be jogging a willing elbow, and we shall have to see what we can do about it in the course of the negotiations.

Mr. John Lee (Birmingham, Handsworth)

My right hon. Friend has said that that is an unsatisfactory feature. May we then take it that an improvement to 100 per cent. is something he would regard as a sticking point in his renegotiation?

Mr. Callaghan

That seems to me to have all a lawyer's exactness and a lawyer's failure to understand how one negotiates. I would not dream of giving an answer to such a question when I am going to Brussels on Monday, but I do not regard this as satisfactory at the present time.

I also agree with my right hon. Friend the Member for Battersea, North that, as I have said earlier, the balance of payments deficit is a feature that I do not find particularly relevant to the kind of principles we are attempting to incorporate in this particular corrective mechanism.

Mr. Gould

May I attempt to strengthen my right hon. Friend's resolve on this? I am sure he would agree that if by any chance a Labour Government were able to prod the country into producing two substantial balance of payments surpluses over the next seven years that of itself could actually make the corrective mechanism inoperative.

Mr. Callaghan

That is true, and that is why I regard it as unsatisfactory as a criterion. I am not indicating the degree to which I am going, but it has been generally said on both sides of the House that people regard this as unsatisfactory. I take note of the degree of strength with which this view has been expressed in relation to the balance of payments deficit being a criteria.

Mr. Blaker

Would the right hon. Gentleman like to consider whether in fact he has given a correct answer to his hon. Friend? Could not one have a small balance of payments surplus in one year but a different figure when averaged over three years?

Mr. Callaghan

I believe that the hon. Gentleman is absolutely accurate. If the figure is averaged that could be; but I will agree with both hon. Gentlemen.

The right hon. Member for Knutsford (Mr. Davies) raised a rather tricky point, that if the repayment is to be included in the next year's budget revenue the beneficiary could well contribute to that. He asks how can we get 100 per cent. repayment since the beneficiary would pay a share of the repayment which it is getting. I do not think I have an answer to that. I do not know how much it would be. I suppose in year 3 one would get repayment of the extra amount that one had to pay in year 2, but clearly it can be only a fraction and would not be very large. It is a point on which I shall wish to consult the Treasury experts. I am sure that they will find some even more abstruse formula to deal with that particular point. I am grateful to the right hon. Member for raising it. It is certainly one that I had not considered.

I agree with my hon. Friend the Member for Oxford (Mr. Luard) who complained that this applied to only two-thirds of the disparity. Again, this is something on which, obviously we are to have some considerable discussion during the next three or four days.

I also agree with the hon. Member for Mid-Oxon (Mr. Hurd) that we may get to a point where we shall be contributing in due course, something with which my hon. Friend the Member for Gravesend (Mr. Ovenden) does not agree. He does not think we should be contributing at any time in this way. He feels that we should alter the whole system. I am bound to say I would not mind if we got ourselves into an economic position where we were able to make this contribution, because it would show that our economy was really bounding so far ahead that we could afford to look at this issue with some degree of equanimity.

Mr. Ovenden

rose—

Mr. Callaghan

I will deal with my hon. Friend's point if he will allow me. I did not think that I had disposed of him. I would not mind if we got into that position.

The hon. Member for Blackpool, South (Mr. Blaker) asked when this system would start to come into force. I believe that the answer is that presumably it starts to come into force when the articles have been agreed by the Council; and assuming Britain remains a member of the Community after the referendum, presumably the scheme would be in operation for us. It would not bring us any benefit in 1975 because our key contribution would not be as great as is our proportion of the Community's GNP per head. I do not think it would be as great either in 1976, but in 1977 we shall begin to get the benefit, because the amount we would be contributing would be greater than our proportion of the share per head of the Community's GNP. That is the best answer that I can give. That is one of the matters which will have to be tidied up in Brussels.

The right hon. Member for Down, South (Mr. Powell) and my hon. Friends the Members for Sheffield, Heeley (Mr. Hooley) and Gravesend referred to the question of new methods, saying that it is the "own resources" system which we must tackle. I wish to put my ha'porth into this exegesis of the text of the manifesto. I say with some certainty, having been one of the drafters of it, that the main issue with which we were concerned was the third sentence, which reads: We would be ready to contribute to Community finances only such sums as were fair in relation to what is paid and what is received by other member countries". We were concerned with the objective and the end result.

As a matter of theology, I agree with the right hon. Member for Down, South in what he said about the "own resources" system. I do not wholly accept the view that levies which accrue to an island where the points of entry must be through the ports are the same as levies which accrue to a whole continental economy. That must be so until we have one whole continental economy. I have used that argument in obtaining the corrective mechanism. I have argued the case on that basis. If Britain were a member of the Community and we reached the stage where there was one continental market embracing all of us, with one monetary union and a common economic policy, the theology on levies would be right, but at the moment I do not accept it.

For that reason, among others, I have pressed for the corrective mechanism which we have secured. I do not accept some of the theology underlying it and which led to the second sentence appearing in that part of the manifesto dealing with the Common Market. The question which we must ask—and my hon. Friends the Members for Sheffield, Heeley and Gravesend make this judgment in their trade union negotiations—is how much money we shall get at the end of the day. That is what the British people will ask. They will be less concerned with theology than with results.

I have attempted to answer the questions which I have been asked. No one has said that the corrective mechanism will not be beneficial. Not even the opponents of dealings with the European Community have argued that it will not benefit the British people. They have argued that it is not enough, that it is not in accordance with the manifesto, that it may run out, that it is complicated and that it will be difficult to apply. But any fair judgment, even on the basis of the document without improvements, would have to conclude that the corrective mechanism represents a substantial improvement on the present position.

It is on that basis and in that spirit that I ask the House to take note of the document and to send me forth to see what further improvements I can obtain.

Question put and agreed to.

Resolved, That this House takes note of Commission Document R340/75.