EEC BUDGET: 43rd REPORT OF ECC

HL Deb 18 July 1977 vol 386 cc129-68

9.7 p.m.

Lord COBBOLD rose to move, That this House takes note of the Forty-third Report (H.L. 234) of the European Communities Committee on the Preliminary draft EEC Budget for 1978 (R/1541/77).

The noble Lord said: My Lords, I rise at this rather late and, I fear, somewhat inconvenient hour to your Lordships to move the Motion standing in my name and to introduce the report of the European Communities Committee on the Prelininary draft EEC Budget for 1978. The report has mainly been the responsibility of Sub-Committee A, but it has been greatly assisted by representatives of the sub-committees dealing respectively with agricultural and energy matters. Your Committee is most grateful to witnesses from Her Majesty's Treasury and from the Ministry of Agriculture, Fisheries and Food, who provided figures and information at extremely short notice owing to the timetable; to Lord Bruce of Donington and Mr. Michael Shaw; and to Sir Donald MacDougall. It is particularly indebted to its specialist adviser, Mr. Denton, and its clerk, who have burnt large quantities of midnight oil; and to secretaries who have had to deal, again at short notice, with the product.

The need to produce the report so quickly before the Council meeting on July 20th, the day after tomorrow, has also, I fear, meant that your Lordships have had little time to look at it. I must also repeat one other point which was made clear in last year's debate. The EEC draft Budget is not exactly a Budget as we in this country understand the term. It is more akin to an estimate of the likely financial consequences of Commission proposals, the final decisions on which are mostly taken in the Council of Ministers. In its final form, therefore, the Budget may vary considerably from the draft now being considered.

Nevertheless, the draft Budget presents a general picture of Community developments, and this year, in particular, it raises a number of important policy and technical issues. These include new proposals for the Regional Fund, for the Social Fund and for industrial, energy and research projects. At the technical level, they include adoption of the new "own resources" method of EEC financing and the change to the new European unit of account.

My Lords, as the House will remember, the 1977 Budget went further ahead with the system of distinguishing between "payment appropriations", dealing with payments expected to be made during the year, and "commitment appropriations", leading to expenditure likely to be incurred mainly in later years—a great improvement on earlier practice. The figures which I shall mention, and which are the general basis used in the report, relate to "payment appropriations"; that is to say, to expenditure envisaged during the year 1978. The total draft Budget estimate amounts to 11,850,000 European units of account, equivalent, at the assumed exchange rate of £1 equals 1.5 EUAs, to £7,700 million. This is an increase over 1977 of some 23 per cent. in money terms or, allowing for an overall inflation rate of some 8 per cent., an increase in real terms of some 15 per cent. "Commitment appropriations" show increases of some 22 per cent. in money terms and some 14 per cent. in real terms. I must repeat that these figures are all subject to modification by Council decisions and by unforeseen developments, particularly in agricultural expenditure.

As in earlier years, my Lords, agricultural expenditure takes the lion's share of the budget. At just under 70 per cent. of the total, it shows a slight reduction on the 1977 proportion, but this may be increased by later decisions. The report before your Lordships discusses at some length the problems raised in the field of agricultural expenditure. In particular, it underlines the impossibility of any exact estimates, bearing in mind in particular the open-ended commitment on intervention and the many uncertainties of crop yeilds, weather conditions, world price movements, et cetera. Estimation is the more difficult since the Budget timetable has been revised to bring forward these estimates earlier in the year, but your Committee agree that, on balance, this earlier timetable is an improvement, since it gives more time for debate in the European and national Parliaments and for general public comment.

The report also stresses the great difficulties in the way of any really effective control of agricultural expenditure under the present system. It suggests that ways should be considered of imposing some quantitative controls, making reference to the United Kingdom experience in this field and to the arguments for increasing the "guidance" side of agricultural expenditure so long as it is designed to reduce the "guarantee" side. Your Committee strongly recommend that the financial consequences of agri- cultural policy decisions should be given much more consideration than they are under the present system, where agriculture interests appear to dominate discussion and decision. There is a great need to integrate agricultural policy more closely with general budgetry policy.

The control of agricultural expenditure is bound up with the green money system which involves a very heavy burden of monetary compensatory amounts—amounting to some 8 per cent. of the total Budget. This complicated and difficult subject was dealt with fully in the report on green money which was recently before your Lordships and debated in this House. As the House will remember, the main conclusions in that report were that the system has been introduced as a temporary measure to deal with minor exchange fluctuations; that the present wide margins between green rates and market rates could not be justified as a permanent arrangement; but that the speed and degree of return to normality must take account of various interests in Member countries.

My Lords, proposals are made in the Budget for additional expenditure in the Regional Fund, the Social Fund, and for certain industrial energy and research projects. Both the Regional Fund and energy problems have been the subject of recent reports and debates in this House and your Committee greatly welcome these initiatives. They are, however, bound to point out that unless room can be found for them in future years by reducing agricultural costs, they will add to Budget totals which, although marginal in comparison with the aggregate of Community national Budgets, are already on the increase.

My Lords, turning to the two major technical changes in this draft Budget, the report notes the move towards the "own-resources" system for contributions to the Community Budget, by way of VAT contributions rather than direct allocations from national Budgets. This change will become fully effective in 1980 after transitional periods in 1978 and 1979. The second technical change is the decision to adopt the so-called "basket of currencies" as the basis for the budgetary unit of account. This has already been in use for other purposes and is a welcome move towards greater realism since it reflects average ruling rates of exchange instead of historical and out-of-date relations between currencies.

My Lords, the report deals, in paragraphs 9 to 12, with the effect on the United Kingdom of the draft Budget proposals and the various technical changes. So far as can at present be estimated, the gross United Kingdom contribution in 1978 would amount to £1,292 million which, provided that the Commission's interpretation of transitional arrangements is accepted, would be reduced by a repayment of £200 million in 1979 to a gross contribution of £1,092 million. Set against this are the estimated receipts of £530 million, leaving an estimated net contribution of £562 million. Although the basis of calculations and the gross figures differ markedly from the White Paper estimates published in February 1977, the estimated net contribution is not far different.

These figures for receipts and net contributions take no account of indirect benefits from monetary compensatory amounts under the green money system. Since the change of method in 1976, there are only small direct United Kingdom receipts of MCAs; but United Kingdom consumers, and, therefore, the United Kingdom economy generally, benefit indirectly because lower prices are paid for agricultural imports from other Member countries which receive direct MCA subsidies. Thus the green rates which still differ widely from market rates, although adjusted to some extent in April 1977, may be expected to continue to provide very considerable indirect offsets against the United Kingdom net contribution; although any estimate of their value is extremely difficult.

My Lords, the House will be aware that the interpretation placed by the Commission on the transitional arrangements as they affect the United Kingdom is at the moment in dispute. Certain Member States have argued that, as a result of the move to European units of account, different arrangements should apply which would involve a considerably higher United Kingdom contribution in 1978. Your Lordships may have noticed recent articles in the Press pointing out that this dispute is only a part of a more general conflict of views which has come out in various recent negotiations. However that may be, your Committee fully support Her Majesty's Government in their insistence on the Commission's interpretation.

My Lords, I turn to two other important matters which figured largely in evidence to the Commission: the control of expenditure and the relations, as they affect the Budget, between Commission, Council and European Parliament.

In their reports on the 1976 and 1977 Budget, the Committee gave particular attention to deficiencies in control, both pre-Budget and ex-post facto. In the report on the 1977 Budget, the Committee concluded that, though there were some welcome improvements, there remained much to be done before control procedures could be regarded as satisfactory.

The most important development, and one to which we attached great importance last year, has been the establishment of the Audit Court. Ratification is now complete and it only remains for members and staff to be appointed. This should provide a really effective audit body, completely independent and operating on similar lines to the Comptroller and Auditor General in the United Kingdom. It is most desirable that the final stages should be completed quickly. We have also been informed that the Audit Court will work closely with the Budget Committee of the European Parliament, which will thus have facilities similar to those enjoyed by the Public Accounts Committee here. Your Committee regard this as a most encouraging development, though control procedures in the Commission, both on administration and on expenditure generally, still need attention, and the particular difficulties of controlling agricultural expenditure, to which I referred earlier, will persist. The Committee also remain concerned about the procedures and time available for the proper scrutiny of supplementary Budgets.

Another suggestion made in the Committee's last report was that a Financial Commissioner should be appointed without other responsibilities and in a position similar to that of a Treasury Minister or senior Treasury official. While this idea has not been followed in full, the Committee note with pleasure that the new Commissioner in charge of the Budget has no responsibilities for a major spending directorate—halfway on the road, so to speak.

The Committee have been greatly assisted by evidence from the noble Lord, Lord Bruce of Donington, who was Rapporteur of the 1977 Budget in the European Parliament Budget Committee and Mr. Shaw, from the other place, who is Rapporteur for 1978, both of whom have devoted their time and abilities to these problems. In addition to evidence on many of the points on which I have touched, they laid particular stress on the importance and difficulty of ensuring a clear line of procedure on budgetary matters between European Parliament, Council and Commission. It was pointed out to us that disputes about the relative powers were only resolved last year by a special ad hoc compromise which leaves the relative roles undefined.

The report sets out various areas in which the position is unclear, including the distinction between obligatory and non-obligatory expenditure, the consequential powers of the Parliament to make modifications or amendments, and the interpretation of these powers with respect to payment and commitment appropriations. It is clearly desirable that these matters should be clarified.

The Committee summarise their views by calling particular attention to the domination of the Budget by open-ended and inadequately controlled agricultural expenditure, to the consequent desirability of a review of the Common Agricultural Policy, and, if Community expenditure is to be usefully expanded in other fields, to the necessity of a thorough reappraisal of Budget priorities. My Lords, I beg to move.

Moved, That this House takes note of the Forty-third Report (H.L. 234) of the European Communities Committee on the Preliminary draft EEC Budget for 1978 (R/1541/77).—(Lord Cobbold.)

9.24 p.m.

Lord LYELL

My Lords, the whole House is fortunate at this late hour to have the opportunity of discussing the EEC Budget proposals, which is due entirely to the noble Lord, Lord Cobbold. We are grateful to him for giving us this opportunity. Also, we have distinguished Europeans on all sides of the House, not forgetting the noble Lord, Lord McCarthy, who did so much to put political ideas into my mind at Oxford some 17 years ago,

The figure and the size of the Budget are at once confusing and detailed. There seems to be confusion when we examine the figures for the measurement against gross national product of the Member States. The figure which is given in the admirable report of the Select Committee under the chairmanship of the noble Lord, Lord Cobbold, seems to be 0.62 per cent. of the gross national product, whereas Commissioner Tugendhat in his speech introducing the draft Budget in Luxembourg 10 days ago mentioned the figure as 0.69 per cent. I wonder whether the noble and learned Lord, Lord McCluskey, might be able to enlighten us, if only briefly at this hour, because I did a considerable amount of research with what I believe are called "the bibles" as the noble Lord, Lord Bruce, would concur. I did not manage to reconcile the figures, but no doubt the noble and learned Lord, Lord McCluskey, will be able to assist us.

In further examination of these figures, we can see that the draft Budget is to rise by approximately 23.6 per cent.; that is the figure given to us by the noble Lord, Lord Cobbold, in terms of payment appropriations, which are probably the fairest and most precise yardstick. Those will be of the order of £7.7 billion in 1978. Our purpose, my Lords, must be to ask: What is going to happen to that vast sum, and is it being spent as wisely as we would wish?

There can be no doubt at all that the Common Agricultural Policy looms over any discussions of this Budget like a brooding or restless giant. It is, of course, this aspect of the Budget which is the one to which the public at large will pay the greatest attention. The CAP and all the support payments are expected to cover 69 per cent. of the budgeted total, as we heard. It was noticeable in debates held throughout the Community that every speaker drew attention to the importance of the CAP as it affects the consumers and indeed the housewives—adding that the longer the defects of the Common Agricultural Policy are allowed to continue, the more will the Community find it difficult to obtain support for all the projects that everyone desires and is prepared to assist.

This psychological mountain that glowers over any mention of Community finance, and especially the Budget, is all the more important to many of us in the House tonight in that crops and livestock cannot simply be turned on or off like automobile production. All of us who have any connection with the land want to see some sensible reforms and, indeed, possible and practical reforms, of the CAP. Such changes will require complementary action on the part of the Governments of Member States and, of course, the situation in our own agricultural industry, especially in the pigmeat sector, bears adequate testimony for the need for many kinds of reforms both in Member States and in the Community as a whole.

We cannot remain gloomy for long when we consider the enormous opportunities available to us and indeed to the Community, when we see the amount of time and effort which has been spent on the European Regional Development Fund and also on the Social Fund. To me and, I would hope, to the younger Members of the House and of the Community, the priority which has been laid on these two Funds by speaker after speaker in the European Parliament in Luxembourg will mean that the Community is going to be able to make at least some attempt to tackle the twin problems of unemployment—particularly among the young—and the problem areas in Europe. Both major obstacles concern me and most of my fellow countrymen in Scotland, but of course the whole of the United Kingdom is helped by the Social and Regional Funds.

Commissioner Tugendhat, in his speech to the European Parliament, made a plea for a measure of support for those Funds and it was very encouraging to find his insistence on the need to stop wasteful expenditure and duplication by the EEC of Member States' own budgets. The Commissioner also stressed the importance of ensuring that contributions from Member States to the EEC Budget should lead to just a reasonable and tolerable rise in public spending throughout the Community. Nothing is more encouraging to us than to see a major European figure take such a firm line in regard to the duplication of public expenditure.

Another noteworthy aspect of the speeches in Luxembourg was the reference to energy saving and the necessity to search for new sources. I think that could be more important than either the European Regional Development Fund or even the Social Fund. Certainly it is more volatile, as we have learned during the last four years. The House this evening seems more than usually occupied with energy: we have dealt with the Coal Bill and, before that, the aptly named Drax "B" project. But when the Commissioner and most of the other speakers on the Budget were debating in Luxembourg 10 days ago they shared our concern with investment into alternative sources of energy, and here the relevance of the EEC Budget is all the greater. Noble Lords who have a greater opportunity to travel abroad than I have, will agree with me when I suggest that our friends overseas are normally happy with our economic performance, but they add the rider that self-sufficiency in energy will be a greater blessing than any other attribute. When the Commissioner gives such powerful support for this view, I think that the Budget will be seen in a new light by all of us.

It is relevant to mention the regional fund again, since this fund has the potential to turn the Community, and especially an independent EEC Budget, into something akin to the development agencies which have a direct and a local effect upon a factory, a plant, a community or a town far away from Brussels and from the so-called golden triangle of the EEC. Further emphasis on the regional Fund will remove many of the criticisms of the Common Agricultural Policy, and I hope and believe that this emphasis will be added to by other speakers tonight. I am sure that, for this purpose, we consider the noble Lord, Lord Thomson of Monifieth, to be with us at least in spirit, because it is he who did so much to help the regional policy when he was in Brussels.

These two aspects of the Budget are certainly relevant, not only as an indication that the Community seeks to break free of the Common Agricultural Policy's stranglehold on the Budget, but also as a measure of a change in direction by the Commission, ably assisted by the European Parliament. At last, it seems that the Budget will commit Community funds to specific areas, instead of merely preventing financial disaster to some area of agriculture. Many of us who are involved in agriculture—and, certainly, for this purpose I note the presence of my noble neighbour, if I may so call him, Lord Mackie of Benshie—consider that our own Government's follies are quite as spectacular as the wine lakes, the butter surpluses and the beef gluts that are so much part of the United Kingdom's folklore about Europe.

One other admirable feature of the debate on the Budget in Luxembourg was the institution of a new and strengthened Audit Court, of which we have heard a considerable amount from the noble Lord, Lord Cobbold. This certainly has an odd ring to some of your Lordships. I do not know whether the noble Lord, Lord Bruce, is used to it by now, but to me it is somewhat sinister. But never mind. I am sure that it will be effective. The appointment of full-time and independent auditors who have legal powers to carry out a thorough investigation into Member States' finances, with the possibility of checking on the day-to-day financial management of Community funds and Member States' funds, as they affect the Community, will mean that the Budget is subject to the same kind of detailed scrutiny as we are lucky to enjoy in the United Kingdom.

As we have heard from the noble Lord, Lord Cobbold, we are due to contribute a net figure of £562 million to the Community Budget in 1978, and I think it important that we should discuss the Budget this evening. New emphasis on regional and social policy, together with the references to searching for new forms of energy, are of immediate importance and relevance to each of us. Of course, the Common Agricultural Policy takes up a large amount of the Budget each year, and will continue to do so. But it is intended by the Commission to reduce the proportion which is going to the Common Agricultural Policy and other associated support payments. I do not believe that this will harm agriculture in the Community, but rather that 1978 will be the start of the pre-eminence of those funds which the Community wishes to use for more immediate and local purposes. I think that all of us here tonight must be very grateful for the valuable work done by the noble Lord, Lord Cobbold, and his Committee, and for the opportunity to have a debate on this important subject this evening.

9.34 p.m.

Lord BRUCE of DONINGTON

My Lords, I should like to offer my congratulations to the Select Committee, and to the noble Lord, Lord Cobbold, in particular, for the detailed work that they have done, under very difficult conditions, on the mass of documents that comprise the Budget of the Commission of the European Communities. When I tell the House that the Budget for 1977, when completed last year, occupied no fewer than 4,000 pages, complete with supporting documents, and that those which the noble Lord, Lord Cobbold, has examined so far run into several hundred, some idea of its magnitude can be appreciated. I was very grateful, too, for the remarks which fell from the lips of the noble Lord, Lord Lyell, who put his finger on the essence of the significance of this Budget so far as the United Kingdom Parliament is concerned.

After the very long and comprehensive introduction to the EEC Budget which the noble Lord, Lord Cobbold, gave to the House, it is quite unnecessary for me to elaborate further upon it. The outline of the Budget is in the Select Committee's Report for all those who are unfortunate enough to be absent from the debate tonight to be able to appreciate. Therefore I shall not expatiate upon it. I accept very largely, with one exception to which I shall return, the very fair summary which has been given by the noble Lord, Lord Cobbold.

The noble Lord, Lord Lyell, raised the question of the United Kingdom contribution which, of course, is the nub of the matter, for £562 million net is going from this country, in cash, in the year 1978. As the noble Lord, Lord Lyell, said, we have to make quite sure that this money is well spent. I could not agree with him more. Indeed, this should be the function not only of this House but of another place, which is also considering this vitally important matter at approximately the same time. Very severe restrictions have been placed upon expenditure in this country, as a result of which a number of vital projects have had to be cut. There have been cuts in capital expenditure and in the public sector borrowing requirement, albeit the Treasury made an error of an estimated £2,600 million. These are matters of some significance. We are building neither the hospitals nor the houses that we might otherwise be able to build, nor are we making that extensive investment in the public sector which many of us, regardless of Party, consider to be desirable. Therefore the amount of £562 million is by no means chicken feed and we have to ensure that it will be well spent.

When one considers this sum of £562 million, immediately one must exclude from consideration any benefits that are received by the United Kingdom from the Regional Fund, the Social Fund and the Agricultural Fund, because those benefits have already been deducted in arriving at the net figure. The noble Lord, Lord Cobbold—in due course I shall come to the noble Lord, Lord Gladwyn, who is already audible—seemed to infer that there should be offset against this sum of £562 million, which passes in cash across the exchanges, the benefit which we receive indirectly by reason of lower food prices. I want to deal with that point and at the same time to deal with the already audible Lord Gladwyn.

Quite simply, the position is that the Monetary Compensatory Amounts are paid out in cash mainly to the Federal Republic of Germany, They do not come into our pockets. It is quite true that, very largely, the Federal Republic of Germany are paid this sum in order that their prices to us for the food we require may be lower than they would otherwise be. However, what the noble Lord, Lord Gladwyn, when he comes to have his little say on the subject—which he has already given audible notice of—has forgotten and what I regret to say the Select Committee have not taken into account, is that the total net food imports of the United Kingdom in 1976 were £3,566 million. and our net deficit with the EEC was £1,500 million. That left £2,000 million of net imports from the rest of the world, and when we say that the price of food was held down by MCAs paid to Germany, we should also take into account that the world prices of food which are much lower (in practically all commodities save one) than those in the EEC, were brought upwards to the EEC level and the consumer suffered on that account. It is no good the noble Lord, Lord Gladwyn, shaking his head because these are the facts and I am sorry to have to instruct him on them.

Lord MACKIE of BENSHIE

My Lords, would the noble Lord like to say how much he thinks that world prices are held down by the total amount of food produced because of CAP in Europe, remembering that Europe, and particularly the United Kingdom, is the largest importer of food in the world?

Lord BRUCE of DONINGTON

My Lords, I would immediately agree with the noble Lord that it is not possible to quantify the benefit that undoubtedly accrues. It is not possible to say how much this lower price which we should otherwise pay is in fact costing us, but one thing is quite certain—and the most eminent economists are already agreed upon it: there is this countervailing influence which means that over a wide area and over at least £2,000 million net of food imports in this country we are paying more because of the existence of the Common Agricultural Policy.

Lord MACKIE of BENSHIE

No, my Lords.

Lord BRUCE of DONINGTON

My Lords, the noble Lord will have an opportunity to develop his own point in his own way, but when he reads the debate in the other place he will find that, in any event, if the MCAs were tampered with in that respect there would be an extra Community cost falling upon this country by reason of the extra surpluses which would then arise, would have to be stored, and would in fact deteriorate. So what has happened to the £562 million? What benefit do we get from the £562 million? I have not the slightest doubt that there are many benefits of an intangible nature, and sometimes practical nature, that the United Kingdom receives as a result of being in the European Economic Community.

There can be no doubt, for example, that the conclusion of trade agreements between the Community as a whole, acting with all the muscle that nine united Powers can do, is undoubtedly more advantageous to the Community and to the individual countries than would otherwise be the case if we were negotiating separately. I have not the slightest doubt that when it comes to dealing with the secondary boycott, which has already been tackled by the United States of America, it will be much easier for us in the Community to deal as one body rather than as individual States. But the question we have to ask is, what benefit do we get from the £562 million we are paying out, excluding those funds to which we have already referred and which are already taken into account?

The total Budget expenditures in 1978, leaving out the items which are already taken into account for benefit, amounts to £1,162 million. They comprise the cost of administration, the expenditure of the Community on industry and on energy, the expenditure on research and investment, the expenditure on European schools, food aid, aid to non-associated countries, co-operation with non-member States. There are some provisional appropriations to provide for contingencies and there is the cost of the institutions themselves, the Council, the Commission and the Court of Justice, which amount to about £130 million a year. So expenditure outside those funds, from which we derive great benefit and which are taken into account and produced in the nett figure, amounts in total in 1978 to £1,162 million, to which we are contributing £562 million, or 48.32 per cent.

Further, in the event of it eventually being decided that the Commission and the United Kingdom are wrong in their assessment of the effect of Article 131 of the Treaty, that amount will be increased by 200 million to 762 million. I invite those noble Lords who follow and interest themselves in budgetary affairs to contemplate what benefits they apprehend as justifying the expenditure of £562 million in 1978 at a time when there are capital expenditure cuts. It was not only I who asked the question; the noble Lord, Lord Lyell, also asked it. We have to be satisfied that we are getting good value. The question I have to ask the Government, and indeed, with respect, the noble Lords of the Opposition, is what benefit they think we are getting. It may well be that the explanation is that this is a good investment for the future. So be it. If this be so, let it be said. But let it not be said that there are countervailing benefits at this moment of time, because there are none. If proof is needed all noble Lords have to do is to read through the report itself.

The noble Lord opposite posed a query, which I shall presume to answer, in connection with the gross domestic product. The figure on page 27 of Volume 7 of the Commission's Report is in fact 0.77 of the gross domestic product. The figures of 0.62 and 0.69, come I think he will find, from varying estimates as to the annual yield required from the VAT own resources levy, which in a full year would require 0.62 on the Commission's current estimate. This was the explanation which was given to me, and which I can get again from the documents.

Considering the items in the Budget on which the noble Lord has touched, let us come to one first-class scandal—the expenditure by the Community of over 2,700 million European units of account on intervention in the milk sector. Of that, 500 million units of account, or £325 million, is wasted every year in deterioration of stocks, because the stocks of milk powder and milk products in the Community are over one million at the present time, and these products deteriorate. These are not my figures; these are figures of the Commission. £325 million is wasted every year in sheer deterioration of stocks. The storage of these mountains, the storage of both wine and indeed of skimmed milk powder amounts to some £297 million per annum. Indeed, as the Commission has said, we are no longer producing for use, under the CAP; we are producing for intervention. These are not my words; these are the words of the Commission.

I could go on to touch upon other items which are of equal importance. I will mention only, one which should be dear to noble Lords. If they go through the Budget, they will find under Article 227 of the Budget an expenditure of 5 million units of account by the Commission on propaganda for direct elections—some £3,250,000. I thought that the election was to be to the European Parliament, and that the individual Parties in the various countries would put forward their own ideas. Now we find the Commission sticking its nose in, because, of course, it knows perfectly well that one of the debates which will take place—not only in the United Kingdom but in every country in the Community—is about the effectiveness of the Community efforts so far and the steps that can be taken in redress.

Therefore, the Commission will put itself immediately on the side of those who want to retain the present system. It will use 5 million units of account on propaganda, on the assumption that the Council agrees, which it has not yet done, and on the assumption that the European Assembly will agree, which it has not yet done. It will enter directly into the political arena. That is something that I do not think it should do. I do not know what the noble Lord, Lord Lyell, thinks about this, or whether there has been any consultation within the Opposition about this, but it is certainly one of those things that Parliament should take a look at before it remotely dreams of giving approval to it.

The Community Budget is very small in total. The total expenditure of the Community is smaller than the annual budget of a medium-sized multinational company. It is, in fact, less than the corporate power in Europe spends upon its advertising propaganda in order to get consumers to buy its products. However, it is significant for us—as the noble Lord, Lord Lyell, said, £562 million of net significance to us. We should be ill-advised if we let the Budget go from this Chamber without raising a profound question mark as regards the worth of the £562 million.

Lord LYELL

My Lords, before the noble Lord, Lord Bruce of Donington, concludes his remarks, I should like to raise one matter with him. He has waxed very eloquently and strongly about what I referred to as "gluts". He said that the biggest scandal was the 2,700 million units of account on milk. Can he tell us what that is, not necessarily in figures but in terms of milk production and milk products from the EEC?

Lord BRUCE of DONINGTON

My Lords, I do not have the actual amounts in front of me. However, at page 46 of volume 7 of the Commission's Budget there is reference to the appropriation of 2,715.9 million units of account which, I have a note, amounts to about £1,850 million. I have a further note that the deterioration cost for the stock is £325 million and the storage cost of £216 million is included within that sum. I am sorry, but I do not have the quantities.

9.52 p.m.

Lord MACKIE of BENSHIE

My Lords, I have no doubt that the House will excuse me if I address myself to the report. I should like to say how disappointed I am to see such a small number of noble Lords in the House, albeit that they are of very distinguished character. However, it is symptomatic of the regard that politicians have for this very important matter—namely, the EEC Budget and its implications—that it comes on at this time of night.

Baroness LLEWELYN-DAVIES of HASTOE

My Lords, I think that that is perhaps an unworthy reflection. We do everything we can to get debates on at the right time. I think that the noble Lord, Lord Mackie of Benshie, and the House, understand that this is the end of the Summer term when everything is coming to the boil. It is extremely difficult to get these debates at an easier time, but that does not imply any disrespect for or ignorance of the maximum attention that the House gives to this matter. I should prefer that the noble Lord would not say that politicians did not think that the matter was important.

Lord MACKIE of BENSHIE

My Lords, I should be loath to disagree with the noble and charming Lady but earlier in the Session important debates on the scrutiny of EEC legislation also took place very late at night and with very small audiences. I mean no disrespect to the usual channels that are always charming, right and proper, when I say that perhaps the House, as a whole, does not appreciate the importance of the scrutiny done by the Lords Committees, which is recognised by the Press. I think that when one has distinguished people like an ex-Governor of the Bank of England chairing Committees, more attention might be paid by the House—not by the usual channels—to the hard work which is done in those Committees.

I should particularly like to say that Sub-Committee A, which is so distinguished it is not true, dealing with money and subjects which simple peasants like myself do not understand, is a prototype of what a committee should be. However, because of the importance of agriculture in the Budget, it asked that Sub-Committee D sit in on many of its discussions. That sort of co-operation is much appreciated by, and enormously sensible on the part of, the Scrutiny Committees in this House.

My noble friend Lord Gladwyn will deal with general matters of the Budget, but as agriculture takes up 70 per cent. of the Budget I want to comment on the Common Agricultural Policy. I have been given an opportunity because of the intervention by the noble Lord, Lord Bruce of Donington, which was detailed and audible but in my view almost entirely wrong. I must say that the noble Lord has a facility for having a clearer view of the trees while totally missing the wood.

This valuable and excellent report at paragraph 39 says: The Committee consider that a general review of the common agricultural policy is desirable, paying particular regard to the comments made under the three preceding paragraphs ". That is entirely true, but I should like to make one or two general remarks about the question of production of food in the world, in Britain and in particular in Europe. The noble Lord, Lord Bruce of Donington, may or may not know—I doubt whether he does—that every year there are a large number of extra people in the world. Those large numbers of extra people consume an additional 35 million tonnes of cereals each year. That is rather an important fact. As a result of one or two good harvests recently, we are now in a slightly improved position as regards world reserves, and prices have fallen slightly in comparison with prices in the EEC. However, we do not yet have anywhere near the total reserves held mainly by the United States in the 1960s.

We have 200 million extra tonnes projected only for the harvest this year, and that is nothing when there are an extra 35 million tonnes required each year. For a county like Great Britain, which imports nearly half its total food consumption, to ignore the contribution which the Common Agricultural Policy has made to total world food production is absolute nonsense. When we talk about the enormous wine lakes, beef and butter mountains and in particular the dried milk mountain, which is approaching a hill, we should have regard to what the Common Agricultural Policy has done to aid the world production of food and in keeping down the price of food in this country during the period of the 1974 shortage, together with the extra money which it may be said we would pay in the world market today.

The one thing that I have learned in many years in agriculture is that there is no industry where a 5 per cent. surplus or a 5 per cent. deficit can lead to such a rise and fall in price which can amount to 50 per cent. When it comes to looking at a settled policy for agriculture in Britain or in Europe, we should not ignore the fact that of course it costs money to have a surplus but that surplus is something which we need in order to keep the supply of food stable. I shall not dwell for too long on that, but it had to be said.

I wish to say only one thing in support of the report, but I should also like to correct a general view of agricultural policy in the CAP. A number of people think that because deficiency payments worked reasonably well in this country, the whole of Europe should adopt that system. It is true that deficiency payments worked reasonably well in this country, but at various times they cost sums of money to which people in Britain objected. For example, at the end of the war we were paying nearly £500 million in food subsidies; that was approximately four times the value now at end of war prices and it makes the £562 million about which the noble Lord, Lord Bruce of Donington, was so concerned about, look like absolute sweeties in terms of an assured food supply today.

We should not be too concerned with the actual system. In my view the system of intervention prices is much simpler, and many people agree with me. What is wrong really is what is highlighted in another paragraph of the report, where it is said that decisions on agricultural prices are not reached as the result of debate between the representatives of agricultural interests on the one hand and those identified with relevant, but nevertheless legitimate, interests on the other; they are reached by the Council of Agricultural Ministers who are fighting for a specific section of the Community, and that I think is entirely wrong.

It is a curious alliance that the two countries upholding the present system are the United Kingdom and Germany. Germany uphold it because it suits them, because they are rich, earn a great deal of money, are able happily to support their quite large agricultural sector—they have 1 million more people on the land than we have—and because they earn a great deal of money they are quite happy to support them with high prices. On the other hand, the United Kingdom, the other great supporter of the present system, cannot afford to have its consumers in general pay more, or pay even the proper price, for agricultural products, and that is why we support it.

What we really need in Europe and in the EEC is a realisation that one cannot go beyond the law of supply and demand. If we have too much milk powder we must pay less for milk powder; in my view it is as simple as that. When we in this country got into trouble with deficiency payments we produced a system of standard quantities; in other words, we did not have open-ended guarantees. That is what we need in the Community. It is what they attempted to introduce with the co-responsibility payments—call the system what one likes—which suggested that milk producers should pay back the cost of marketing.

When we come to look at the reorganisation of the CAP we should look much more at the way in which it is operated rather than imagining that deficiency payments, for example, could effect a magical reform. The intervention system is simpler, but what we need is to ally the intervention system with the law of supply and demand. If we did that, I think that farmers in the Community as a whole would accept it. What they want is stability of prices. They do lot really demand the sort of high prices that the German milk producer has today. In looking at this policy we should remember two things: first, that basically supply and demand must come into it and, secondly, that in a hungry world the United Kingdom and Europe need to import food, and that therefore the more they produce at home the more likely they are to import food at reasonable prices.

10.4 p.m.

Lord McCARTHY

My Lords, I have very little to say tonight. I am taking part in the debate largely because the noble Lord, Lord Cobbold, made me believe that there would be some difficulty in maintaining the debate, but there seems to be no difficulty whatever. Indeed, it seems to be a very lively and well-informed debate, and I am greatly aware of the fact that I have very little to contribute to it. But I should like to make one or two points. First, I felt that participating in the work of Sub-Committee A on this matter was rather like being an external examiner deciding the fate of a candidate whose thesis was referred back for the third time. I should say that my recollections in this respect have nothing whatever to do with my recollections of the noble Lord, Lord Lyell. I thought that he read an excellent essay this evening.

But, for me, it was a little like that because we felt that we had to say, particularly bearing in mind the last time that the candidate was before us, that there certainly was some improvement. There now appeared to be a special Commissioner responsible for finance, and that was an improvement. He was not entirely a financial Commissioner, but he did have a special responsibility for finance. There now was an Audit Court, which is what we asked the candidate to attend to last time, and he had done so, and that must be an improvement. There were certain improvements. But basically it seemed to me that the Committee was saying that there were the same old problems, which were mentioned in previous reports of the Sub-Committee, and there was a feeling that the candidate appeared to be incapable of doing better, or at least, if he were capable of doing better, it was not going to be in the foreseeable future.

The two areas where defects were most serious, as I think has emerged in the debate, were: first, the question of the balance of expenditure in the European Budget, the balance of the expenditure pattern in the Budget, the over-concentration on expenditure on agricultural support in the agricultural element in the European Budget; and, secondly, the lack of control of expenditures in the Budget as a whole and, in particular, the defective methods of control in the largest single element in the Budget—agricultural expenditure.

These were the areas which we felt contained the most important defects in the way in which the present Budget is calculated, estimated and run, and I believe that, if we are to have a debate about the European Budget, these matters are far more important than any other transitory or passing defect in the way in which the Budget is calculated, or the impact of the Budget upon the economy of the United Kingdom in any one particular year. I consider that these features are far more important than the question as to how far, or in what way, we can accommodate the new unit of account, the fact that the administrative costs of the Community appear to be increasing at a relatively rapid rate, and all kinds of relatively marginal issues which will, I believe, be found well recorded in the report of the Committee. I consider that these two matters to which I have referred are far more important, though there are other matters which we shall be evaluating in the Budget, and in the proceedings of the Commission in respect of the Budget, in the next few years.

It seemed to me that one had to think about, and listen to, people who came before the Committee in order to see whether any of them, or, indeed, any members of the Committee, had any really significant and practical proposals for dealing with these two major defects. There were those optimists who said that these two major defects would be solved in the fullness of time; in particular, that they would all be solved when we had an elected basis for the European Parliament. I believe that the more one looks into that, the less likely it appears to be. There is no particular reason why a change in the basis of selection for the European Parliament will change the essential features of the way in which the EEC Budget is calculated and carried into effect.

There were those who did not appear before the Committee, but who appeared outside the Committee, who argued that there is nothing to be done about these two features of the Budget because they are essentially a part of the way in which the Community is run and that they relate to the primacy of the CAP in the essential way of the Community's management. There were the pessimists who would say that nothing whatever could be done. There were those who came before the Committee and who seemed to be arguing at one stage that, if there was greater readiness on the part of those who got most out of what might be called the non-agricultural aspects of the Community's Budget—for example, the Regional and Social Funds; and they included in particular the United Kingdom—to urge that a greater part of their national expenditure on these areas should be funded through the EEC Budget, then, irrespective of anything which might happen to the agricultural elements in the EEC Budget, the mere encouragement of more national expenditure spent through those aspects of the Budget would produce a realignment.

I think, again, that the more one looked into these proposals in the course of the Committee, the less there appeared to be in them. Therefore I am afraid one must say that we came back in the end to what noble Lords may feel are a spatch-cock of relatively mild and superficial proposals: the continuous scrutiny of the Budget; the review of its procedures, and proposals for the review of the ways in which we finance the agricultural section of the Budget—nothing particularly radical and nothing particularly likely to have a short-term effect.

I believe the Committee were particularly influenced by a speech of Mr. Tugendhat on the 2nd May which we actually quote in our report. Referring to the policy decisions in the Budget, he said: …the manner in which the Member States have chosen to reconcile their differences is one which will grossly distend the European Budget, and will therefore impose a severe burden upon the European taxpayers…". He went on to say: Decisions on agricultural prices are not reached as a result of a debate between the representatives of agricultural interests on the one hand and those identified with other relevant but different interests, including those of taxpayers and consumers, on the other. On the contrary, the debate takes place almost exclusively between Agricultural Ministers, who understandably conceive their primary responsibility to be to support their different national farming lobbies". Fortunately, when I sought to cross-examine Mr. Tugendhat on the precise significance of that phrase, it was, as one would expect it to be, as vague and as imprecise as was necessary. Nevertheless, though vague and imprecise, along those lines, it seems to us, is the way forward, and it is in that respect that I should like to recommend our report to the House.

10.13 p.m.

Viscount AMORY

My Lords, my intervention will be very brief. As the noble Lord, Lord Cobbold, has said, the figures are highly complicated, and if I were to venture to put in my oar in an attempt, either to embellish the report itself or to embellish the extremely lucid exposition given by the noble Lord, Lord Cobbold, it is certain that I should succeed only in causing the utmost confusion in your Lordships' minds. I will therefore, if I may, make only three brief observations. The first one is to emphasise what the report says: that tie present degree of financial control is still clearly inadequate and unsatisfactory; and it is not certain that that would be automatically improved as the European Parliament increases its activities. However, it must be hoped that, in the light of experience, some means will be found to establish some stronger methods of financial control, so that the Budget really becomes a more effective policy document—and there is no real reason why that should not happen, I think, as more and more experience is obtained of this very difficult problem of budgeting. But it will need, I am sure, a continuing effort of willpower on the part of all concerned to see that things do move in that direction.

Secondly, I should like to express my opinion, which I think the report does, too, that the present degree of openendedness of the CAP is going to prove unmanageable, and something will have to be done about that sooner or later, either by developing some system of limiting quantities by standard quantities or maximum quantities, or perhaps in the way that the noble Lord, Lord Mackie of Benshie, suggested, by ensuring that the supports for your guaranteed prices do not get too much out of line with market considerations. But in some way or another that will have to be done. Also, I should have thought that, if the best value for money is going to be obtained, in some way the present authority of the Agriculture Ministers must be brought a little more in subjection either to the Council itself or to the Council of Finance Ministers.

I should like to say to the noble Lord, Lord Bruce of Donington, that, in one respect, I regard him as a public benefactor. My hearing is not as good as it was and I must say that his clarion calls come over to me loud and clear. For that I thank him. I am not going to attempt to follow him in his wide-ranging criticism of our membership of the EEC. He seemed to be instituting a debate on whether it is worth while our joining. Before I answer that, from my point of view, in one sentence, I do not quite accept all the arithmetical computations that he quoted. I think that the equations are in some cases more complicated than he implied. As regards the question of whether it is worth our being in the EEC, my answer, without any question, is that our membership is absolutely essential and that, as we are members, we must accept the obligations of membership using our influence, in as democratic a way as we can, to get those obligations changed if and when we consider them unfair.

The third thing that I want to say is this. The noble Lord, Lord Cobbold, paid what I thought was a very well deserved tribute to those who helped and serviced our Committee. I am sure that that is right. On behalf of the members of that Sub-Committee, I want to express our gratitude to our chairman, the noble Lord, Lord Cobbold, himself, for the leadership he gave us. He showed a very quick mastery of the technical and complicated questions with the skill that we should have expected from him with his own wide experience. He led us through mists, through bogs and past rocks with a sang froid and sureness of touch for which, I am sure, your Lordships will be as grateful to him as were the members of his Sub-Committee.

10.18 p.m.

Lord GLADWYN

My Lords, I shall not add much to this interesting debate. I have never been an expert on budgetary matters although, naturally, I followed them in a general way and I voted in the Parliament of Europe when they came up for discussion. I have also read the report of the Select Committee and, as usual, it seems to be an admirably judicious mixture of appreciation and criticism based, no doubt, on a mountain of evidence which, I believe, will shortly be made available to us—and no doubt we shall have our work cut out to read it when it is available. We are lucky to have among us noble Lords who have the time, the energy and the expertise to investigate the whole working of the European Economic Community and to make constructive suggestions on how it might be improved; for that is what they consistently do.

Before I say a few words on the general subject, I should like to say one word in relation to the speech of the noble Lord, Lord Bruce of Donington, every word of which I heard with the utmost clarity in spite of the fact that, like the noble Viscount, Lord Amory, I am slightly deaf. Indeed, I could not fail to apprehend what he meant. As I understand it, he held out as a great spectre the sum of £562 million which, the report says, is, in its opinion, our net contribution to the Budget in 1978. He said that £562 million was a dreadful sum for this unfortunate country to be saddled with; that it was beyond our means and facilities to pay. And the assumption I drew from that was that we should be better outside the Community rather than paying this portentous sum. That is more or less what he seemed to indicate.

Lord BRUCE of DONTNGTON

My Lords, will the noble Lord give way? The noble Lord is aware, of course, that I said nothing of the kind. The noble Lord will be perfectly well aware that I said it was a sum of some significance. Not at any point did I say or imply that we ought to withdraw from the Community.

Lord GLADWYN

All right; so much the better, my Lords. I am glad to hear that. The inference I drew was the wrong inference. But the noble Lord certainly laid emphasis on the fact that it was a very large sum, perhaps beyond our means. My reading of the report is not exactly that. What it says is: The estimate of receipts, however, leaves out of account the benefit derived by the UK from monetary compensatory amounts. Since the change in 1976 under which payment of MCAs is made to Member States exporting agricultural products, rather than to importers, there are only small direct UK receipts of MCAs, but the United Kingdom benefits indirectly in the form of lower prices for agricultural imports from other Member States than would have had to be paid in the absence of the MCA system. The green rates … may be expected to continue to give rise to substantial economic benefits to the UK consumer". The noble Lord, Lord Bruce of Donington, seemingly disputes that.

I should like to ask the noble Lord, Lord Cobbold, whether he continues to agree with the report of his own Committee that nevertheless the benefits we receive from the green pound are likely to be very considerable, and whether he could quantify them in some respect. Whatever sum he thinks should be made available to us by the green rate is obviously to be deducted, if he is right in so thinking, from the £562 million. Moreover, I suppose we might be expected—as I think the noble Lord, Lord Bruce of Donington, admitted—to contribute a considerable sum to the general upkeep of the Community to which, as the noble Lord has also admitted, it is very much in our interest to belong. Having made that sum, it seems a less formidable proposition that we should subscribe £562 million in 1978 than would otherwise be the case.

I do not, however, want to dispute the technicalities of that with the noble Lord. I would only ask him to take into consideration the arguments put forward on the agricultural front by my noble friend Lord Mackie of Benshie. Does he not think that we would derive some benefit from the CAP, or does he think it is purely a liability? Perhaps he does. When the noble Lord, Lord Cobbold, sums up I should like him to give some consideration to these arguments.

Now, my Lords, the Committee rightly say that this Budget is not a Budget as we know it. But then the Council of Ministers is not a Government, the Commission is not a civil service, and the Parliament is not a Parliament. The whole thing is an experiment in international relationships which is being worked out largely pragmatically, as they say, from day to day, month to month and year to year. The only guiding principle behind it is the Preamble to the Treaty of Rome which, among other specific objectives, says that the signatory countries are: determined to lay the foundations for an ever-closer union among the peoples of Europe". That is the main phrase in the Preamble of the Treaty which we signed and to which presumably we adhere.

The Treaty was hence simply a framework on which the signatory countries could build. The present structure—I have no hesitation in admitting—does not resemble what the founding fathers imagined it would be 20 years from the date of signature. There is no doubt about that. But when you come to think of it, my Lords, it is remarkable that in those 20 years we have achieved not only a customs union but also, however defective, a Common Agricultural Policy, a Common Commercial Policy, a machine, however rudimentary, for harmonising foreign policy, a Regional and a Social Fund of some significance—and it may be of increasing significance as the years go by—a totally new and successful method of assisting the development of non-industrialised countries, a court which works and a common annual expenditure of nearly £8,000 million. It is appalling to think that quite a large section of our people actually want to break all this up and to revert to the "beggar my neighbour" nationalistic tactics of the 1930s, which resulted in mass unemployment and ultimately in World War II. It does indeed sometimes look as if the gods are determined on our destruction and are therefore driving us mad.

The Select Committee very rightly draw attention to the ways in which future Budgets could be improved—and I am sure they will be. Already the influx of our compatriots into the European Parliament, including the noble Lord, Lord Bruce of Donington, during the last four years has resulted in great improvements, notably, as has already been said, in the constitution of they Audit Court and in the way in which the whole business is co-ordinated and subjected to healthy criticism.

As the Committee also point out, one of the chief continuing defects of the present system is, so to speak, compartmentalism—that is to say, the practice whereby, for instance, the Agricultural Ministers (each with a powerful farming lobby behind him) arrive at their necessarily expensive compromises without much effort apparently being made to consider the problem from the wider point of view of the whole Community. If the Community is ever to function as some kind of entity—and that, after all, is what we are committed to in the Preamble to the Treaty which we signed—surely some consideration must be given to the formulation of general economic and financial policies?

It seems to me that it is precisely here that a directly elected Parliament will have a most valuable role to play. For, by the force of things and irrespective of their various political tendencies, they will be obliged to look at the problems before them, including the Budget, from a European and not from a purely national point of view. Moreover, unlike the Ministers, they will from the outset have to take their decisions by some form of majority vote. That is not something to be feared. The Parliament will have no great powers: we know that. Even over the Budget these powers will be strictly limited. But the mere fact that it will inevitably be expressing itself in terms of democratic common sense will give it great influence. I think, as the great Scottish poet, Dunbar, said many centuries ago: The truth shall you deliver: it is no dread". So, unless our economic nationalists, and those who for various reasons want to return to the 'thirties, succeed in torpedoing direct elections—which, in the present gloomy mood of the nation, they may very well do—we can, I think, regard it as certain that, by the end of the elected Parliament's first term in 1983, most, if not all, of the Select Committee's proposals will have been met and we shall all be much happier and richer as a result. Let us hope, in any case, that in only about 18 months from now the British Members of the new Parliament will be taking some part in the work of our Select Committee and in the work of the Select Committee in another place, and that the whole Community will be entering into a new phase of constructive endeavour, an example to the world, worthy of our collective European political genius.

10.28 p.m.

The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)

My Lords, I should like to express our thanks for the work of the noble Lord, Lord Cobbold, and his Scrutiny Committee in examining the preliminary draft Budget so quickly; and, of course, especially to the noble Lord, Lord Cobbold, for drawing it to the attention of the House in a clear report and in his speech tonight. Indeed the report of the Committee is so comprehensive and lucid that it is quite unnecessary for me to try to engage in any exposition of the Budget. I can confine myself to a fairly brief statement of the Government's position on the issues which are raised. In particular, I do not propose to enter into the referendum argument which has suddenly sprung up and taken us all, including, I have no doubt, the participants themselves, by surprise.

It has been agreed that the experimental timetable adopted for the 1977 Budget, in part at the United Kingdom's request, should again be followed. That timetable has certain advantages and disadvantages, which are well known; but it is my impression that, on the whole, both the Committee and the House judge, as do the Government, that the advantages of having the timetable as it now is outweigh the disadvantages. Of course, tonight's debate, being held two days before the Budget Council meets, will enable me to draw to the Chief Secretary's attention the comments which have been made relating to the report itself.

I should like to look, as briefly as I can, at the several important developments which are heralded by the preliminary draft Budget. First, the Scrutiny Committee has rightly drawn attention to the possible and important effects of the introduction of the European unit of account on the application of Article 131 of the Treaty of Accession, and hence on the United Kingdom's contributions to the Budget in 1978 and 1979. Article 131 lays down a formula, as noble Lords will be aware, which is designed to limit the increase in the new Member States' percentage contributions to the Budget in the years between 1977 and 1980, when the full own resources arrangements apply to the United Kingdom and to the other new Member States.

It is the Commission's duty to carry out the necessary calculations, and the Commission's view, which Her Majesty's Government share, is that the purpose of Article 131 is to ensure a smooth progression in United Kingdom payments prior to payment on a full own resources basis, and that the smoothness of the progression has to be measured in national currency terms. But some Member States argue that Article 131 applies to the percentage contribution to the Budget in unit of account terms, and that the effects of any change in national currency terms are not relevant. This alternative approach, if it were adopted, could, according to the Commission's calculations, involve the United Kingdom in gross additional sterling payments of some £470 million over the two years 1978 and 1979. Such an approach is financially and politically unacceptable to the United Kingdom Government. We are in full agreement with the Scrutiny Committee's conclusion on this point, and I am happy to have in such strong terms the support that has been given to us tonight on this matter by the noble Lord, Lord Cobbold.

The United Kingdom Government have already made it clear, and repeat it, that they are not prepared to accept a solution which would so increase the United Kingdom's contribution and, in effect, overturn the transitional and safeguard arrangements which Article 131 is expressly designed to provide. A change in the unit of account would require an amendment of the Financial Regulation, which must be adopted unanimously. Without an amendment, there would be no legal basis for a Budget denominated in European units of account. Your Lordships will not expect me to speculate on the United Kingdom's approach or tactics at the Budget Council, but we certainly hope that a solution of this important issue—perhaps the most important issue arising out of the report itself—will be reached at that time.

May I say a word about another important matter—the introduction of VAT own resources. It is envisaged that the system will be completed at the beginning of 1978 by the introduction of the Community rate of value added tax, subject to a I per cent. rate limit on a harmonised base in all Member States, to be paid directly into the Budget. As your Lordships will be aware—and we had a debate about this earlier in the year—agreement on the text and field of application of a harmonised VAT base for own resources, in the VAT Sixth Directive, was reached following the Fiscal Council on 22nd March. It has been cleared with the European Parliament, but the necessary implementing measures have still to be adopted. The Danish Government is maintaining a reserve on the Commission's proposal for implementing the Sixth Directive. The Belgians also have a reserve on a technical issue, concerning the burden on tradesmen imposed by the documentation which is needed to operate VAT own resources. We and many other Member States sympathise with the Belgian view, and with the modified system which they prefer, but the Commission have so far been unable to accept this and discussions are still continuing. So it is not yet certain that agreement will be reached in time for VAT own resources to be introduced from the beginning of 1978.

Mention was made by the noble Lord, Lord Cobbold, of the role of Parliament in the budgetary process. I agree with the Scrutiny Committee that clarification of the respective roles of the Council and the European Parliament in the Budget process is highly desirable, although it is not easy to achieve quickly. Important differences of view exist on the scope for commitments and payments and the application of the maximum rate.

I have to say a word about commitments and payments appropriations because this is an important matter. The Commission have proposed a further significant extension of the area of the Budget in which separate commitments and payments appropriations will be shown. Member States will have to consider at the Budget Council whether the extensions proposed by the Commission should be adopted. In general, the United Kingdom Government consider that the wider use of separate commitments and payments is useful, since it means that the Budget gives a clearer indication of likely expenditure in the year in question. However, we need to ensure that commitments appropriations do not build up into excessive expenditure when the time comes to make payment. So these differences between the Council and the European Parliament must be settled. I cannot say much more at this stage on that particular issue.

In relation to the maximum rate to which the report also draws attention, in drawing up the 1978 preliminary draft Budget the Commission have calculated the increase in non-obligatory expenditure relevant to the maximum rate by using the totals for commitments. This is in line with the Council's view, but the Assembly contends that the rate should be calculated by reference to payments. The significance of this question is that if the latter view were accepted, the Assembly could, by writing in large commitment appropriations, force the Council to accept large increases in the size of the Budget when the commitments are due for payment. Again this is a matter which is being considered, and it is not possible to anticipate the outcome of these considerations.

Let me turn from relatively technical matters to more general matters that arise from the report and which have been mentioned in the debate. First, in relation to the size of the Budget, I think it is important that the House should recall that the preliminary draft Budget is the work of the Commission, and the Commission include in the preliminary draft Budget all items for which, in their view, expenditure might be needed, including those for which no Council decision on policy exists. The Budget Council, on the other hand, usually takes the view that all items on which no Council agreement exists should be deleted unless agreement is likely in the near future, in which case Chapter 100 on provisional appropriations may be used. This tighter estimating approach implies supplementary Budgets later which have to go through the same procedures as the Budget itself. However, in the Government's view this is preferable to a Budget containing excess provision.

On the size of Budget, I ought to say that inevitably the final stages of the Budget as adopted will differ from the preliminary draft before us, but one cannot begin to guess by how much. The Commission's preliminary draft Budget total is 11,850 meuas, compared with the agreed Budget provision of 9,586 meuas for 1977. On the Commission's approach and on the hypothetical assumption that the preliminary draft Budget were not to be amended, the United Kingdom gross contribution would amount to some £1,290 million, or 16.6 per cent. of the Budget. But this is on the basis of full own resources payments which, for technical reasons, the Commission are asking that the three new Member States should pay in 1978, with a refund in the following year of the difference between these payments and the amounts due under Article 131. We estimate that the refund would be of the order of £200 million.

We do not favour the refund approach proposed by the Commission, and until the basis of our contribution to the 1978 Budget is settled we cannot with any precision estimate the size of our contribution. Of course, as has been said in the debate, to a considerable extent the United Kingdom contribution will be offset by receipts. But these, as again the debate tonight has made plain, are notoriously difficult to estimate, as the Scrutiny Committee recognises. If one had to make a guess at this stage I think it would be difficult to differ substantially from what the Committee said in its report in paragraph 12, on page 7.

On the basis of the figures I have just quoted the preliminary draft Budget is 23.6 per cent. up on last year. Of course, as I have said, the preliminary draft Budget figures tend to be larger than those eventually agreed. None the less, the increase is a large one and agriculture constitutes the largest absolute increase in the Budget, reflecting the impact of the price review in April. Large increases are also proposed for the Regional and Social Funds, for expenditure on industry to assist structural changes and on the development of energy independence. I shall have to say something—but I can keep it fairly brief—on the provision for agriculture.

Before saying that, I should like to say that our general approach—and I can summarise it very shortly—is in line with our approach to domestic expenditure. It will be to seek to restrain increases in expenditure so far as possible and to ensure that provision in the Budget represents a realistic assessment of the cost of carrying out agreed Community policies. Most other Member States face similar constraints and are likely to take a similar line. Along with the need for restraint we shall aim to ensure that when resources are allocated Budget priorities should reflect more general economic priorities, of the kind mentioned by the noble Lord, Lord Lyell. I need not perhaps go into those in any detail.

I can perhaps pass over the Regional Development Fund in one sentence, because we debated that matter in March and I do not feel that at this stage it can be carried any further forward. The report mentions the possibility of Community borrowing and again, with all respect, I cannot improve on what the report has said in paragraph 22, except to acid the piece of information that at the end of last month the European Council asked Finance Ministers to examine the borrowing proposals as soon as possible, and that will be done.

On the absolutely vital matter of agriculture: as has been said in this debate, agriculture accounts for about 70 per cent. of total expenditure proposed in the Preliminary Draft Budget and the Committee's report devotes a good deal of space to it. The reason for this preponderance of agricultural expenditure is well known, and indeed has been mentioned in the debate. It is, of course, that price support for agricultural commodities is the one area in which the EEC has taken over virtually all expenditure which would otherwise fall on national Governments. Whatever view one may take of the Common Agricultural Policy, it is certainly the case that the surpluses of milk products which are the major cause of the huge figure for agricultural expenditure cannot be the subject of admiration. The Government entirely accept that, whatever special reasons there may be for the big increase expected in 1978, the figure for agriculture is too large and should be reduced. Given that farm support prices and other elements of the CAP are fixed for a year at a time, it follows that the adoption of the Budget cannot really be an opportunity for a thorough review of the policy. This is principally a matter for the Agriculture Ministers of the Member States under the present system, particularly at their annual series of discussions in the spring to settle farm prices for the coming year.

Perhaps I should say just something about the recommendations in the Committee's report, some of which have been mentioned. One of the points that the Committee makes is that the institutional framework for agricultural policy decisions should be reformed to give proper weight to "non-agricultural interests". I hesitate to question this conclusion, especially since I see that the Budget Commissioner, Mr. Tugendhat, evidently takes the same view. The Government obviously agree that more weight should be given to the consequences for taxpayers and also for consumers when agricultural decisions are taken. But procedural changes may not in themselves be the answer. We have to face also the fact that to a large extent the other Member States may take a different view from ours of the respective claims of agriculture and the rest of the economy.

On the particular point of the open-ended commitment, the Committee rightly points out that, under the CAP as it stands at present, the financial commitment is open-ended and they recommend that it should be reformed by limiting the quantities of production to which the guarantees apply. Both the noble Viscount, Lord Amory, and the noble Lord, Lord Mackie of Benshie, have referred to that tonight. I can assure the House that the Government will give close attention to this recommendation. Perhaps I should mention that such a system does already apply to one commodity—namely, sugar—which nevertheless still constitutes a large and unpredictable charge on the Budget.

Without wishing to reject the idea of extending the system to other products, one important consideration should be mentioned. Quotas are fully effective only if they ultimately apply at the level of the individual farmer. They are complex and tend to fossilise production patterns in favour of the less efficient. They could therefore put United Kingdom farmers, who are regarded as among the most efficient in the Community, at a disadvantage. So, if the Community is to go down this road, it would have to find some way of overcoming that kind of problem.

Lord MACKIE of BENSHIE

My Lords, may I ask the noble and learned Lord whether he does not agree that standard quantities in relation to our own efficiency pattern system work quite well in this country?

Lord McCLUSKEY

My Lords, I have not suggested that they did not work. What I suggested was that, while they have advantages—and the fact that they work indicates that they have some advantages—they have a disadvantage in that they tend to protect the inefficient farmer, and in so far as we are more efficient we would tend to be disadvantaged.

Lord MACKIE of BENSHIE

My Lords, they do not apply to the individual farmer; they apply to the total amount produced.

Lord McCLUSKEY

Well, my Lords, at this late hour I do not propose to enter any further into that argument with the noble Lord.

I need not deal with the Committee's comments on MCA; they have not been gone into deeply in this debate. I should however, like to say to my noble friend Lord Bruce of Donington that I will not attempt to reply to the matters of underlying principle which he raised. I do not seek to underrate the value of discussing these matters, but in the context of this debate on this report, rather than on the policies which it seeks to provide for, I do not think the Government should elaborate a view. That can be done on a more suitable occasion when the issue is policy.

In conclusion, my Lords, I would thank the Scrutiny Committee for a thoughtful report, and thank noble Lords who have spoken for their contributions. I hope I have given, at not undue length, a sufficiently proper indication of the Government's attitude to the preliminary draft Budget, and to the Committee's report, to satisfy your Lordships. I am grateful to all who have taken part in this debate on a complex subject which has important implications for us all.

10.48 p.m.

Lord COBBOLD

My Lords, I will not detain your Lordships for many minutes. I should like to thank those who have spoken and made the debate very interesting. In particular, I would thank my colleagues on the Sub-Committee, Lord Amory and Lord McCarthy, for their interventions, and Lord Mackie, who was a sort of honorary member of the Committee. Lord Lyell made some very interesting and apposite observations. I will not enter the lists between the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Gladwyn. In reply to Lord Gladwyn, I would just say that I stand by what I said: that there should be a considerable offset from the MCA green rates arrangements against the net deficit. I know Lord Bruce and I have a little disagreement about that, and I am not going to risk quantifying those figures.

The noble and learned Lord, Lord McCluskey, kindly gave us some very interesting and helpful comments at the end. I would make one comment on one word he used, when he said that the "procedural" is not what is important. Of course, the Committee were not thinking at all in procedural terms about the Agricultural Council meeting; we were thinking in terms of the reality of integrating agricultural policy with budgetary policy. Finally, perhaps I might thank the noble Baroness, Lady Llewelyn-Davies, who represents the usual channels, for sitting through the debate. I hope that the noble Baroness has found it interesting. I assure her that, although we might have wished that the debate had been arranged at a more convenient moment, we fully appreciate the difficulties.