HC Deb 19 July 2001 vol 372 cc470-83 2.51 pm
The Economic Secretary to the Treasury (Ruth Kelly)

I beg to move, That the clause stand part of the Bill.

The purpose of the Bill is to enable the United Kingdom to give effect to the new own resources decision amending the arrangements for financing the Community budget agreed at the 1999 Berlin European Council.

Clause 1 provides for the new own resources decision agreed by the Council of Ministers on 29 September 2000 to be added to the list of Community treaties in section 1(2) of the European Communities Act 1972. This addition will allow payments made by the United Kingdom, pursuant to the decision, to be charged directly on the Consolidated Fund, under section 2(3) of the 1972 Act.

The new own resources decision that we are considering is little changed from the 1994 own resources decision, and any changes made to the decision are financially neutral for the United Kingdom. Our net contribution to the EU budget will not change as result of what we are considering today.

The changes were rather technical in nature. The main change arising from the decision is to allow for an increase in the amount that member states can retain against the cost of collecting the traditional own resources. That amount was increased from 10 per cent. to 25 per cent.

Secondly, the decision allows for a staged reduction in the maximum call-up rate of the VAT-based resource, from the current 1 per cent. to 0.5 per cent. in 2004. Thirdly, it maintains the ceiling for own resources at 1.27 per cent. of EU national income. It simplifies the calculation of the UK's abatement, removing unnecessary and redundant calculations. However, as the recitals to the own resources decision make clear, this simplification has no impact on the determination on the amount of the correction"— the abatement— granted to the UK."—

Finally, the decision adjusts other member states' shares of the financing of the UK's abatement, in order to meet concerns raised by Germany, the Netherlands, Austria and Sweden, with no effect on the UK.

In line with the precedent set in previous own resources decisions, the UK agreed to forgo windfall gains arising to the UK from the changes to the financing of the EU budget and from a change in the treatment of pre-accession aid that will occur on enlargement. We achieved a position that was, as my right hon. Friend the Prime Minister described, not a euro more, not a euro less", and ensured that amounts currently abated will remain abated under the new decision.

The own resources decision implements parts of the wider reforms agreed at the Berlin Council that are an important step forward for the EU and good for the UK. That Council secured declining expenditure in the 15 EU countries over the financial planning period. It stabilised expenditure as a proportion of gross national product, thereby paving the way for a successful enlargement. It achieved no increase in the own resources ceiling. it secured the UK abatement, fully intact, and took steps in the right direction on policy reform.

The Bill shows the huge benefits of Britain's constructive engagement with the EU. It shows that by taking a leading role in reform and working together with other member states, we can achieve outcomes that are good for the UK and good for the EU.

Mr. Howard Flight (Arundel and South Downs)

Our usual complaint about financial legislation in recent years is that it has been too long, obscure, often wrong and with too much to amend. Our problem today is that the Bill is virtually impossible to amend. I had considered proposing a sunset clause to make the Bill conditional on adequate reform of the common agricultural policy in a given period of time, but I felt that that tactic would not work. However, I shall revert to the crucial question of CAP reform later.

Parliament can really only say yes or no to the Bill, because it is the Council decision of 29 September 2000, following Berlin, which, in essence, contains the detailed legislation. Before I focus on the CAP, the crucial issue that underlies clause 1, I want to speak about article 9 of the Council decision. We debated the matter at some length on Second Reading, as it enables the EU to propose the implementation of direct taxation.

The House will recall that when my right hon. Friend the Member for Wokingham (Mr. Redwood) and I objected to article 9 on Second Reading, we were advised by the Economic Secretary that there was nothing to worry about, as no such proposition would ever arise. I cannot resist pointing out that the words were scarcely out of her mouth when up popped Belgium—backed by Germany—proposing to replace EU revenues paid by national Governments with an EU-wide system of taxation. It is therefore wrong to say that such a concept is not on the agenda: it is on the agenda, and is contained in the EU decision that we are considering today.

I congratulate the Chancellor on his robust opposition to that concept, and on the effective lecture that he gave to the EU, in which he urged other nations to get on with supply-side reforms of capital and labour markets. Did that lecture enjoy the full support of the Prime Minister? I should like to know. It is well known, in euroland and the City of London, that the Chancellor is strongly opposed to euro membership—indeed, he is now referred to as the Eurosceptic Chancellor. But is the policy being followed on the euro the Prime Minister's or the Chancellor's?

On Second Reading, Opposition Members made the point that there is no free lunch, and we asked the Economic Secretary what would be the cost of forgoing our windfall on Euro enlargement. She replied that the cost would be of the order of 220 million euros, but in such language that it appeared that she was saying that it would be a one-off loss. However, I am pleased to state that, in subsequent correspondence, she has made it clear that the loss will be in every year that we give up as part of the deal.

The main impact of the Council decision is the shift from VAT-based contributions to GNP-based contributions. I asked the Economic Secretary whether the definition of GNP to be used would be the official figure, or whether it would include estimates of undisclosed economies. The Economic Secretary has advised me that the official figures would be used in that context.

Why was it deemed appropriate, when considering how the Maastricht targets could be met, to take GNP figures for the different EU states that included estimates for undisclosed economies, on the basis that some countries had much larger black economies than others? Why has it been decided now that it is not necessary to calculate fair contributions where the GNP element has gone up? I point to that inconsistency, and to the fact that in terms of Maastricht, the rules result in those with larger undisclosed GNPs contributing less than they should.

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I have raised the rather fundamental issue implicit in the Council agreement that 1.27 per cent. of GNP is a sufficient transfer payment to make a common currency work. In the United States, for example, transfer payments are of the order of 11 per cent. of GNP. I have received no answer to this question, which was important in terms of the Council decision and the economic prospects for the euro. The Government must focus on this matter.

I have noted that the Chancellor has added another item to his economic tests for the euro—that of success. Clearly, the euro must be a success before the right hon. Gentleman will even think about it. However, it is important to ask whether the transfer payment arrangements—which have been set in stone by the Council decision at 1.27 per cent. —are sufficient in terms of economic analysis for a common currency to work.

Mr. Edward Davey (Kingston and Surbiton)

Has the hon. Gentleman read the European Commission's analysis that said that, within member states, there are fiscal transfers between different regions, such as in the UK between London and the south-east and Scotland? When one is analysing the importance of fiscal transfers as an adjustment mechanism to compensate for the fact that we are losing the currency as an adjustment mechanism, one must take into account the fiscal transfers within each existing member state because the differences between regions within each member state may be as big as those between member states.

Mr. Flight

I am aware of that study, which has some relevance in other parts of the world that share a currency. But one must look at the transfer payments of individual countries within the EU because this matter goes beyond Scotland versus the south-east and reaches the whole economy in terms of competitiveness and cost structure. Many costs are determined on national bases by trade union agreements and so forth. I am calling for a study of the territory, including transfers within individual economies as well as among them. I am not aware of a convincing analysis to suggest that the level of transfer payments that the Council decision has set stands up. It may do, and I am not pre-judging the situation, but it is clear as a matter of theory and practice that the euro will not be a success unless that is the case.

The main underlying issue raised by the clause is enlargement and the CAP. The discussions in Berlin, and the Council decision emerging from them, were all about changes in the financing arrangements to enable enlargement and modest reforms to the CAP to be included. Is enlargement by 2004 for real, or are we living with another politically convenient deceit? The Opposition support enlargement because a larger and more diverse EU clearly holds out the prospect of the Union's remaining an association of nation states trading freely among themselves.

Enlargement will be impossible if the CAP is not reformed significantly. Despite the fact that there are plans for further reforms in the next two years, there is insufficient time to effect those by 2004 to allow enlargement to occur. Are we dealing with a conspiracy—deliberate or otherwise—to delay enlargement, or with extremely bad management?

I wish to refer to the history of those discussions at Berlin, which led to last year's Council decision. The European Council agreed that there would be a series of reforms under Agenda 2000 in the crucial policy areas of the CAP, the budget and regional policy to pave the way for enlargement. It was clear that the 1992 reforms of the CAP, while meeting the demands of GATT, would not be sufficient to prevent further pressures at subsequent trade negotiations.

The 1999 CAP reforms, in conjunction with the later Council order, were held at a time of crisis and preoccupation with Kosovo. As a result, they were substantially watered down and not properly pursued. If the agreement reached in Berlin was regarded here as a success, the world could be forgiven for wondering what a failure would look like. The most significant feature of the reform has been that the depth of the price cuts has been subsequently reduced.

The main impetus for reform was budgetary, and the level of the budget had been agreed before the reform negotiations on the CAP. The first reform would have exceeded the budget; the second appeared to meet it. At the time, the United Kingdom, along with Sweden, was leading calls for reform and suggested that even the original 2000 proposals did not go far enough. It is not clear how the Government can say today that all that emerged was satisfactory.

The UK was a member of what was known as the London Club or the Gang of Four, who wanted to see the quota system abolished and the milk market liberalised by 2006. However, the result was that these will be increased in 2005–06. In terms of the arable sector, the United Kingdom, along with Denmark and Sweden, wanted to end set-aside.

The irony is that, even by the admission of German Ministers, further reforms will be needed to comply with the demands of enlargement and the next world trade negotiating round. The 1990 reforms in no way met that either. The reality was that the millennium round collapsed before reaching agriculture and great pressure was removed as a result, for the time being. If enlargement goes ahead, all professional analysts have commented that extending the CAP in its present form will be unworkable. At one stage, Fischler had thought that there would be a solution, with price supports changing to income supports. Then, the new entrants would not need to cut prices and would not even have to be brought into the CAP. However, this suggestion was perverse; why should a farmer in East Anglia get subsidies while a farmer with a similar-sized farm in Poland does not?

I shall focus on the options because we rarely deal in this Chamber with the issues and how the CAP might be reformed. The first designated area of possible reform has the unpleasant euroland name, degressivity, which in simple English means the reduction of direct payments over time. It involves the replacement of price support with direct payments and then the reduction of the latter in time.

Allowing a fixed time span ensures that budget costs rise but then fall again and avoids the potential problems associated with extending CAP payments to member states, which the European Union could not afford to be given to farmers who had not experienced falling prices in the first place. Allegedly, that system would offer the best route to contain budget costs.

That approach was opposed by Germany and supported by France and the United Kingdom. France introduced it to counter the move towards co-financing, which Germany had proposed. Furthermore, France proposed the reduction of direct payments by between 1 per cent. and 3 per cent. each year, with exemptions for small farmers. The UK proposed 4 per cent. cuts across all direct payments. Estimates at the time showed that cuts of 3 per cent. a year for all payments would save about 4.5 billion euros over seven years. Cuts of 3 per cent. in arable payments and 1 per cent. in other sectors would save about 3 billion. In its most extreme form, the reduction could eliminate direct payments over a fixed time period. It would mean that, while the initial costs of enlargement would be high, in time they would be reduced.

The removal of the price supports would have had the beneficial consequence of solving the export subsidy problem. Not only do export subsidies cost the EU a substantial sum: they have caused the depression of world food prices, which has affected third-world economies particularly severely.

The second proposed approach to reform has been called co-financing or repatriation, which is sharing the CAP budget costs between EU and national budgets. That would involve removing part of the funding of agriculture from the EU budget and handing it to national Governments. It does not, therefore, necessarily reduce the overall cost and it could increase policing costs. Support for that approach went along the lines of net beneficiaries versus net contributors. Germany proposed it to try to reduce its contributions and the UK opposed it at the time because we felt that it would be likely to distort the single market.

Additionally, that approach is unpopular with farmers, who expect to get less as a result. It would solve the problem of what to do about enlargement, as it would be up to the countries concerned. Many of the central European countries do not want agricultural subsidies because they want to reduce their agricultural sectors.

Repatriation failed as an idea in 1999 and it looks as though it will fail again as the other reforms have failed sufficiently to reduce the level of prices, making the option extremely unattractive to beneficiaries such as France and Ireland.

The third approach, which again has a nasty Euro name—modulation—is about targeting support to smaller farms and limiting payments to particular farms. The concept is that total aid payable per farm could be capped or compensation above certain thresholds met at less than a full 100 per cent.

The UK opposed all forms of modulation essentially because of the size profile of our farms. Capping the amount that could go to any individual farm would hit the UK the most. That approach was first proposed in 1992 and again in the early stages of the 1999 reforms, but it was blocked on both occasions. To a lesser extent, under the rural development project, countries could divert a fraction of their receipts to other projects, such as agri-environmental projects and afforestation, but only a handful have taken up that option, including Britain, where it has accounted for only 2.5 per cent. of the money distributed through the CAP.

In essence, none of those proposals has got anywhere. I mentioned them to put them on the record because that is all that is on the record. It is all very well to talk of the need for CAP reform, but how is the policy to be reformed if the Council decision that we are asked to approve today is to work?

3.15 pm

The problem with the CAP is that no one knows any longer what it is for. It has outlived its original intent by many years. It was intended to increase productivity, and to ensure a fair wage for farmers and that the price of food was kept at a fair level. Now, it does almost the contrary on all three counts. Productivity has increased and there is no logic for the CAP's being converted into a social policy. Should intensive farming be encouraged? People tend to argue that, if farmers should receive special treatment, it is as custodians of the environment.

Fundamental thinking is urgently required on the matter and the UK should lead in that. If we do not undertake that, we are not serious about enlargement and the countries of eastern Europe will end up being badly let down. It is a mistake that repatriation failed as an idea in 1999 because other reforms had not reduced prices sufficiently to make it attractive enough. The present crisis in British farming, for example, needs immediate prescriptive attention, which we could provide much more effectively if we were managing our own agricultural policy rather than being forced into the inappropriate straitjacket of the CAP for British farming. By analogy, the only solution for Poland, Hungary, the Czech Republic and the other potential member countries would be for them to manage their own agricultural support policies and to have the freedom to decide what to do, within some broadly agreed cost guidelines.

Today, we are faced with the choice of a yes or no on a fundamental clause of two or three lines that concerns an EU decision which is a good decision in terms of how funding has changed but which is inadequate to meet its overall objective, which is to permit enlargement. I repeat the crucial message that, unless we have a major reform of the CAP—potentially along the lines that I suggested—well before 2004, there will be no enlargement then.

Jim Sheridan (West Renfrewshire)

I pay tribute to my predecessor, Mr. Tommy Graham, who, as many hon. Members will remember, was a colourful character both inside and outside the Chamber.

On behalf of my constituents I welcome the financial reforms to which the Bill commits us. It paves the way for the progressive enlargement of the EU. In doing so, I firmly believe that opportunities for growth, development and prosperity for all my constituents will flow from those reforms. I say that with a note of caution, however, as those objectives will be achieved by the British electorate only if there is a level playing field for worker participation and fair competition for all our businesses.

West Renfrewshire is experiencing significant job losses in the electronics and defence industries. Established companies such as Compaq and Selectron are making people redundant as we speak. Perhaps that reflects the difficulty that that industry is going through, but that is not the case with ROF Bishopton, where BAE Systems proposes the closure of its ammunition-producing facility. That is not happening because the skilled work force are resistant to change or unproductive. Their only drawback in life is that they belong to a country and are employed by a company in which consultation about factory closures and redundancies is a sham. Such companies can move production to other member and non-member countries of the EU with total impunity, at times exploiting the financial benefits that are offered from Europe. That is unfair and unacceptable to the British electorate.

I do not wish to ponder on the negatives of belonging to the EU: benefits flow from it. Tangible evidence can be found in my constituency, where European funding has helped to rejuvenate areas such as Port Glasgow, which has a high level of deprivation. Its people have been ignored for too long. The rejuvenation has been achieved without the taxpayers having to pay increased taxes and without any increase in our overall contribution to the EU budget.

The Labour Government's financial prudence, at home or in Europe, means that many of my constituents enjoy a stable standard of living, with low mortgage rates and even lower levels of unemployment. If we were to accept the Luddite approach to Europe articulated by many in the official Opposition, it would be disastrous for our country, our electorate and, more important, our businesses. Their lack of progress in Europe is consistent with the performance of our countries' national football teams, and let us hope that that will also improve.

Most of my adult life has been spent in manufacturing industry, and I make no apology for that. I have witnessed at first hand the corrosive effect on communities of needless job losses. The hostility shown by the official Opposition to workers' rights was a significant factor in those job losses and a major reason why I entered the world of politics. It is an extremely frustrating and humbling experience to have to depend on our European colleagues in the trade union movement to argue our case in European works councils simply because our British workers cannot be represented there.

In conclusion, it would be remiss of me not to mention my party's constructive partnership not only with our European partners but with the Scottish Parliament—a partnership that, unfortunately, the Scottish National party wishes to destroy. It is unfortunate that a party that claims to want independence in Europe is not present to hear this important debate on European finance.

Many people have asked me for my assessment of my early days in this House. What has struck me most is the generosity, courtesy and advice offered by my experienced colleagues on both sides of the House. I think that I reflect the views of many of the new Members when I say thank you.

Mr. Edward Davey

I start by paying tribute to the hon. Member for West Renfrewshire (Jim Sheridan) for his maiden speech. It is clear from his first outing in the House that he will be fighting fiercely on behalf of his constituents and their interests, especially on employment in his constituency. I share concerns about job losses in the electronics sector of our economy. The imbalance in the British economy is a problem. We have regional imbalances and an imbalance between the manufacturing and service sectors. I look forward to future contributions from the hon. Member on that subject. He will bring a great deal of expertise and knowledge to bear on our deliberations.

On Second Reading we had a long debate on many issues surrounding EU budgetary reform—the cap, the need for greater accountability and the underlying issues of how the budget could develop. Clause 1 applies specifically to the details of the own resources decision. There are three elements to that decision that deserve discussion, one of which I want to focus on. The first is the change in the weightings given to the different elements of own resources and the switch away from the VAT element to the GNP element. That has been welcomed by hon. Members on both sides of the Committee, so there is probably little more to say about it except that we hope that it will continue. It is good that it has been achieved.

The second element is the ceiling of 1.27 per cent., which was agreed. Hon. Members on both sides of the Committee have generally welcomed that, in the sense that we need to ensure that before the EU takes more of the British taxpayers' hard-earned money it reforms its budget and the way in which it spends it. Therefore, putting a medium-term cap on its size is a necessary discipline, which the Liberal Democrats welcome.

The third element is the triumph that the United Kingdom Government claim for retaining the United Kingdom abatement. It may be a good thing, but there is no information before the Committee to enable it to know whether it is a good thing in the longer term. That may sound like heresy. We all remember Mrs. Thatcher coming back from Fontainebleau having achieved the abatement and claiming that it was a major success for UK diplomacy. Successive Governments have defended the abatement. It may prove that they were right to do so, but I shall ask the Minister some questions to find out whether the abatement is such a success as we have been told.

In order to retain the UK abatement, we have had to give up windfall gains that we would otherwise have achieved from the switch from VAT to GNP and other detailed changes behind the own resources decision, so the question for the Committee and the Government is whether what we have had to give up is more than we have gained from keeping the abatement.

It is clear from the Berlin summit communiqué that the amount that we had to give up was relatively small—the estimate was 220 million euros—but that was not the first time that the UK abatement was retained at the expense of windfall gains. In 1988 the Conservative Government negotiated the retention of the United Kingdom abatement. In 1988 and in 1992, windfall gains that might have accrued to the United Kingdom were given up in order to retain the abatement. The Committee will quickly see what I am implying: if by fighting to retain the abatement in 1988, 1992 and 2000 we gave up cumulatively more in windfall gains than would otherwise have accrued to us, we are losing out. That may or may not be the case because I do not have the figures.

The Library could not find in the communiqués issued after the 1998 and 1992 Councils a figure that was given in the same way as in the communiqué after the 2000 Berlin summit—in other words, the 222 million euros. There was no figure on record of the windfall gains that the UK gave up by retaining the abatement.

My question is factual. The Minister may not be able to give me an answer today, although perhaps her officials can help her out. If she cannot give me the figures, perhaps it is a good thing that the Third Reading debate will not be held until 16 October so that we can obtain the figures before we give the Bill its Third Reading. I doubt that there can be precise figures that would enable us to make judgments on the benefit of retaining the UK abatement and the successive amounts that we have forgone because we did not gain from those windfalls.

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That equation is necessarily difficult, as is shown by the fact that the benefit from the UK abatement changes every year. In 1991, the abatement was worth £2,497 million at cash prices—£2.5 billion. In 1995, it was worth £1.2 billion, and in 2002 it was worth £2 billion. Its value changes every year because it contains so many variables. No doubt the calculation of what the UK would have retained, if it had kept all those cumulative windfall gains, depends on many other variables such as the base of consumer expenditure underlying the VAT element of the own resources decision or the different rates of duty and levy collected in each country. Those variable factors would be part of the calculation.

One would not expect the Minister to give precise figures in order for us to make a decision, but one could expect ranges of figures—an indication of the size we are talking about. For example, is the UK rebate worth between £1 billion and £2 billion each year—depending on those factors—and is the amount that we would have gained from the windfalls between £500 million and £1 billion? Such a range of figures would be useful. The Committee could then come to a final decision about whether successive Governments were wise to fight so hard for the UK rebate, not only at Berlin but before that in 1988 and 1992.

The Minister raises her eyebrows to the ceiling—clearly, the calculation is difficult—but if we are to hold the Government to account for their decisions on negotiations made on behalf of the UK taxpayer we need those figures. Successive Governments may cumulatively—almost unknowingly—have cost the UK taxpayer a lot of money in net terms. By defending that sacred cow of Fontainebleau and by going to the wall and saying that we will fight to retain the UK abatement, we may be doing ourselves an injustice and costing the UK taxpayer more.

It is time to examine the matter in detail, because we shall no doubt return to the reform of the EU budget and the own resources decision in five or six years, when another European Communities (Finance) Bill will appear before a successor Parliament. If we do not get the figures right—if the Treasury and the Foreign and Commonwealth Office do not start to work them out—we shall again get it wrong in future negotiations on reform of the EU budget.

Perhaps we should change our whole negotiating position. Perhaps—I do not know, because I do not have the figures—we would earn an awful lot of prestige and benefit in European diplomacy and in our standing in the European Commission if we said, "Hold on, we are prepared to look at the issue of the UK rebate, but we will only even consider giving it up if all the windfall gains that you previously asked us not to take are given back to us." We might benefit from that approach. Instead of mounting a jingoistic, nationalistic—even prejudiced—defence of the Fontainebleau agreement, we might realise that it was to our benefit to lay a certain sacred cow to rest.

In some areas of the UK, the rebate has negative effects. Hon. Members may be aware that agriculture suffers from the rebate. The argument is complicated, as European financial discussions always are. The knock-on effect of the green pound and the associated calculations is that UK agriculture does not benefit as substantially as it might from agrimonetary compensation.

Mr. Flight

I entirely support the point that the hon. Gentleman makes, but is not the reason for those effects that, under Fontainebleau, the UK is obliged to contribute 70 per cent. of the cost of the exchange rate adjustment and that, over the past few years, the Government have failed to do so?

Mr. Davey


Angus Robertson (Moray)

The Conservatives negotiated that arrangement.

Mr. Davey

The hon. Member for Arundel and South Downs (Mr. Flight) is right but, as the hon. Member for Moray (Angus Robertson) points out, the negotiations were conducted by a Conservative Government. If the UK Government pay their fair share of agrimonetary compensation under the green pound revaluation compensation mechanisms, the UK loses out in the following year when the rebate is clawed back. Her Majesty's Treasury therefore never wants to pay out as much as it should in agrimonetary compensation and UK farmers are disadvantaged.

That is a real problem. It is a particularly British problem as more and more countries adopt the euro. We shall be the only country that could receive agrimonetary compensation, so changing the nature of that agreement—only we shall have a real interest in it—will become nigh on impossible. That disbenefit for UK farmers stems from the retention of the UK rebate, so by looking again at the sacred cow of the UK rebate we might obtain a better deal not only for UK taxpayers but for UK farmers.

All those statements are conditional—we do not have the information before us. Even with the best will in the world, my researches before the Committee sat did not produce the relevant information. During my exchanges with the Minister on Second Reading about the definition of "windfall gain" and in her subsequent, kind letter of 16 July, copies of which were sent to the hon. Member for Arundel and South Downs and to the Library, it has become clear that the point is of some substance.

We needed those exchanges in order to be sure what a windfall gain was: whether it was a genuine, one-off gain or a cumulative gain. From the hon. Lady's letter, it appears that the gain is cumulative, which is what worries me. We have established that the gain is cumulative, so the UK could have given up an awful lot of money in order to retain its abatement.

The Economic Secretary will be glad to know that I do not expect her to give me detailed figures today, which would be quite demanding, but on Third Reading on 16 October, when the House will be asked to consider whether such agreements are really in the UK's interest, we will need that information. I hope that my contribution will set minds a-thinking in Her Majesty's Treasury and in the Foreign and Commonwealth Office about whether the UK could adopt a position at future negotiations that might save us money and might also help our farmers.

Ruth Kelly

I am glad to say that once again we have had an interesting and good-natured debate. I pay tribute to my hon. Friend the Member for West Renfrewshire (Jim Sheridan), who spoke with passion about the employment situation in his constituency, and about the need to consult workers and protect their rights. He spoke from his own experience in manufacturing. He also pointed out the need to engage constructively with Europe. I look forward to hearing from him again on this subject, and I am sure that he has a significant contribution to make to the House.

The Opposition spokesman, the hon. Member for Arundel and South Downs (Mr. Flight), referred to article 9, which we discussed on Second Reading. I thought that I had dealt with the matter fully at the time and made it absolutely clear that any taxation changes would need to be agreed by unanimity. There is no prospect of the United Kingdom endorsing such an approach. I am, however, glad that he decided to congratulate the Chancellor, and I look forward to his doing more of that.

The hon. Gentleman referred to the definition of GNP. As he said, we discussed that after Second Reading, and I am glad to be able to give him a little more detail about it. I can assure him that all member states calculate three independent measures of GNP: production, income and expenditure. Those calculations are made in accordance with worldwide guidelines on national accounting. The three measures are balanced using supply-use tables. The balancing process ensures that even though certain illegal production can filter into a measure, it will generally be picked up in one of the calculations. For example, income from selling stolen goods may be spent legally and will therefore be picked up in the expenditure measure. I hope that I have reassured the hon. Gentleman on that point.

In an interesting contribution to the debate, the hon. Gentleman also talked about the size of the transfer payments in the EU. As yet, there are no signs of economic and monetary union leading to new fiscal powers for the EU. EMU has left decisions on fiscal policy firmly with member states, and those are co-ordinated, in a non-binding way, through the broad economic guidelines.

Mr. Flight

The specific issue that I raised was not about resisting EU taxation and tax harmonisation, but about whether the euro can succeed as a currency within euroland without adequate transfer payments. I note that the Chancellor has recently attached great importance to being interested in the euro only if it is a success.

Ruth Kelly

I thank the hon. Gentleman for that clarification, but I repeat that there are no signs of such pressure arising, and fiscal authority remains with member states. The question of the euro's success is implicit in the five economic tests, and no sixth test is being introduced.

The hon. Gentleman went on to deal with the common agricultural policy and the forces at work due to enlargement. I assure him that the United Kingdom is at the forefront of the nations urging the EU 15 to expand and encouraging other states to join, as long as they meet the criteria, of course. I assure him also that 2004 is a realistic date. Although the Berlin ceiling provides for market support and rural measures, it does not include direct aid measures for farmers in the candidate countries. We hope that the EU will consider that issue in 2002, so clearly there will be pressure for further reform in the years ahead.

I disagree with the hon. Gentleman's comment that CAP reforms have been watered down by the UK's approach. We are in the vanguard of those pressing for reform of the policy. The agreement that was reached was for the most radical reform of the CAP since its creation. It will provide a benefit to the average family worth £70 a year and achieve significant price cuts for beef and cereals. Of course, we want further, deeper cuts, and we will press for those with our neighbouring countries in Europe. For the first time, funds will be transferred to rural development.

3.45 pm

As the hon. Gentleman so rightly pointed out, at the negotiations at least three approaches to reform were set out: co-financing, degressivity and modulation. The UK endorsed progressive price cuts, and we look forward to reconsidering that in the mid-term review of the CAP, Modulation would provide significant flexibility and, for the first time, countries would be able to transfer resources to rural development. The UK intends to take advantage of that facility and transfer up to 4.5 per cent. of CAP spending to rural development by 2006–07.

I was pleased that the hon. Member for Kingston and Surbiton (Mr. Davey) welcomed the switch to the GNP resource, which is of course a more progressive system. He welcomed also the ceiling of 1.27 per cent. on own resources, which, as he rightly pointed out, imposes the necessary financial discipline on EU countries. He asked detailed questions about the windfall gain and the UK rebate. Those are interesting questions, and I will attempt to answer at least some of them.

As the hon. Gentleman knows, there are three elements to the windfall gains: that relating to successive shifts from VAT to GNP financing; a new element relating to the switch to GNP as a result of an increase in the amount that member states can retain against collecting the traditional own resources; and a third element that will come into effect only after the next enlargement.

The first element is eliminated by article 4(d) of the own resources decision. That has the effect of setting our contribution at a level equal to what it would have been if the switch to GNP had not taken place. The second element will be eliminated from 2001 by article 4(e) of the own resources decision. That subtracts from the abatement the UK's net gains resulting from the increase in the percentage of traditional own resources to be retained to cover collection and related costs.

The calculation needed to eliminate the enlargement windfall gain will not, of course, arise until the year after the next enlargement. It will involve establishing the amount of pre-accession expenditure in the acceding countries in the year immediately before enlargement takes place, and excluding that amount from the expenditure on which the abatement is calculated. In subsequent years, that amount will be indexed using the euro-GNP deflator, and excluded from the expenditure on which the abatement is calculated. That ensures that, in real terms, what was unabated before enlargement will remain unabated afterwards.

The hon. Gentleman asked whether it would be possible for the Treasury to calculate the cumulative effect of windfall gains forgone. As he rightly pointed out, that is a rather complex calculation of amounts that can vary from year to year. Indeed, it is not at all clear at the moment what will be the value of the windfall gains that will be forgone on enlargement, as that will depend precisely on which countries are eligible for enlargement and on the amount of pre-accession aid that is spent in the year preceding enlargement.

The EU has come up with its own estimate, although I believe that others may come up with different estimates. It would be even more difficult to go back and calculate a cumulative total, and I can tell the hon. Gentleman that we are not even considering doing so. I assure him, as I have been assured, that the total of the windfall gains forgone is not significant compared with the size of the total UK abatement. I hope that I have reassured him and that he does not spend the recess trying to make his own calculations.

Mr. Edward Davey

I am grateful for the Minister's assurance, but it would still be useful for Members to see the figures. Even if I do not spend my summer recess calculating them, I hope that someone from Her Majesty's Treasury will. Perhaps she can confirm that they will. We clearly have historical data on the windfall gains that were forgone after the 1988 and 1992 decisions by the Conservative Government, so it would be fairly easy for the intelligent people in the Treasury to calculate the figures. If the brains exist in the Treasury to produce the formula in the first place, surely its officials can make a prediction, or a range of predictions, for the windfall gains forgone because of the 2000 decision.

Ruth Kelly

I am sure that the Treasury team is extremely flattered by the hon. Gentleman's words, and I shall consider his request. However, it is not a simple calculation and it is not clear whether it would make sense, but I shall heed his words.

The hon. Gentleman also mentioned the effect of the Fontainebleau agreement on the green pound. He rightly explained that the Conservatives introduced the system when they were in government. Their Governments did not pay out a penny of the optional money that was available for agrimonetary compensation, whereas this Government have taken advantage of it to support our farmers.

In conclusion, the deal is good for Britain and Europe. It maintains financial discipline, shifts financing to GNP and retains the UK's abatement. I hope that the arguments made on Second Reading and those that we have pursued extensively today make the clause acceptable to the Committee.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2 ordered to stand part of the Bill.

Bill reported, without amendment.

To be read the Third time tomorrow.

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