EEC BUDGET AND FINANCE PAPERS

HL Deb 09 July 1979 vol 401 cc702-41

5.6 p.m.

Lord COBBOLD rose to call attention to the United Kingdom contribution to the EEC budget, to the recent Commission Papers Financing the Community—the Way Ahead (R/3185/78) and a global appraisal of the Budgetary Problems of the Community (5528/79), and to the first annual report of the Court of Auditors (R/3279/78) with reference to the Second Report of the European Communities Committee (H.L.17); and to move for Papers. The noble Lord said: My Lords, I rise to move the Motion standing in my name on the Order Paper, with particular reference to the Second Report of the Select Committee on the European Communities.

The report has been delayed by the various interruptions in parliamentary time. We started taking evidence in January and should normally have liked to report in April or May; but what with Easter, elections, Whitsun and more elections, it only saw the light of day late in June. This explains why the report does not take account of most recent developments or deal with the draft budget for 1980 which is already under discussion and which will be considered by the committee in due course. These interruptions and delays have put an even heavier burden than usual on parliamentary staff and on their secretaries. The committee are most grateful to them and to the two specialist advisers, Mr. Denton and Dr. Helen Wallace, and to our witnesses. The committee also much appreciated the help given informally by Mr. Tugendhat and representatives of the Commission and by Sir Norman Price of the Court of Auditors.

My Lords, this rather long and complicated report is divided into four parts. Part I gives an introduction and a brief summary of the committee's comments and recommendations, avoiding too many figures or details. It first refers to the EEC budget for 1979 which is dealt with In Part II and also, so far as the legal implications of the dispute between Parliament and Council are concerned, in paragraph 11 and in Annex I. Next it welcomes the establishment of the Court of Auditors which is dealt with in Part IV.

We then come to the main conclusion of the report. Although its present size was not unforeseen and does not exceed 1 per cent. of the total United Kingdom public expenditure, it is clear that the net contribution of the United Kingdom to the EEC budget is disproportionately high. We set out the problems needing consideration in coming years, stressing the committee's view that, if the Community is to develop successfully, a more equitable and generally acceptable distribution of benefits and burdens must be achieved. The committee draw particular attention to a paper by Professor Holt of Bradford University which was printed as Appendix 1. They also express appreciation of the two interesting papers produced by the Commission—The Way Ahead and subsequently the Global Appraisement. The committee suggest that the United Kingdom Government will need to be tenacious in putting forward constructive suggestions to reconcile Community and United Kingdom interests, and they go on to indicate five general headings under which progress might be made. These complicated and controversial matters are dealt with in some detail in Part III of the report.

So much for the introduction and summary. Passing on to the more detailed sections, Part II deals with the 1979 budget. It recalls comments made in two earlier reports in 1978 in which the committee called attention, among other things, to the excessive expenditure on Common Agricultural Policy, but concluded that there were not enough novel factors to justify a debate. The report goes on to deal in some detail with the confrontation which arose at the end of the year between the two budgetary authorities, the European Parliament and the Council of Ministers, which was not resolved until April this year. The committee stress the importance of ensuring that this sort of impasse does not recur in future years. Last minute differences on so fundamental a matter as approval of the budget must be harmful to relations within the Community and to its public standing. I will leave it to the noble Lord, Lord Fraser of Tullybelton, to explain the legal implications which are discussed in Annex 1. I am certainly not qualified to comment on them myself. I will, if I may, come back later to Part III.

Part IV deals with the first report of the Court of Auditors and with the formation and nature of the court's work. The committee attach great importance to this new institution and believe that it has a very important contribution to make. Although it is early days, the committee have been much impressed by the court's initial activities and by their considerable impact. They have been surprised to note how little attention has been given to this development by commentators in this country. The noble Lord, Lord Plowden, has taken a great interest in this part of the report and I am sure he will refer to it when he comes to speak.

Part III attempts to set out, ambitiously but I hope not too unintelligibly, the present problem of the United Kingdom contribution, and, bearing in mind the Commission's proposals in The Way Ahead, to examine possible ways of improving the position. It must be stressed that it is extremely difficult, for reasons which we have tried to make clear, to estimate contributions and receipts with precision. There is room for argument about very many of the statistics involved. But I repeat that, whatever statistics are used, the contribution, and more particularly the net contribution, of this country to the budget is disproportionately high and that effective action will be needed in coming years to bring it into better balance.

We set out the reasons why this has come about, despite the fact that the present cost was not unforeseen on accession, and despite the hopes that the financial mechanism agreed in 1975 during renegotiation would provide a solution. It has come about for a variety of reasons, affecting both the expenditure and the revenue sides of the account. Among the principal reasons are the way in which the Common Agricultural Policy has developed, the slow growth of the United Kingdom economy, and the fact that we are in a less favourable position than most member-States on the three main revenue sources. Our share of levies and duties is comparatively high because of our continuing import from outside the Community of a large proportion of food supplies and a relatively high proportion of dutiable goods generally. And our relatively high proportion of consumer expenditure puts us to disadvantage on value added tax contributions. With the ending of transitional arrangements and the prospect of increase in the Community budget in the early 1980s the real situation has become more obvious and more acute.

The report goes on to deal with comparisons with other member-States. Then in paragraphs 40 to 51 we deal with the various difficulties in estimating the statistics, in areas such as food costs to the United Kingdom in addition to import levies, the treatment of monetary compensatory amounts, an extremely complicated and controversial subject, the " own resources " doctrine, and the use of market exchange rates. I will not endeavour to go into any detail on these subjects, several of which have been covered in earlier reports by the committee. I hope, however, that your Lordships may find that these paragraphs give a reasonably clear exposition of what are admittedly complicated and controversial figures and lines of argument.

We then go on to discuss the proposals in the Commission's paper The Way Ahead, reaching the same conclusion as the Commission that the most probable source of an increase in revenue would be an increase in the rate of VAT. Finally, in paragraphs 54 to 73 the committee put forward five ways in which they think progress might be made towards lightening the disproportionate burden on the United Kingdom. It will perhaps be convenient to the House if I quote these five headings from the report. First, the balance could be altered by a reduction in the proportion of duties and levies in the budget. Secondly, the proportion of agricultural spending could be reduced by deliberate policy decisions on common price levels, green rates and agricultural policy generally. Thirdly, the proportion of the budget spent on regional, social and industrial policies could be increased. Fourthly, the suggestion included in The Way Ahead that a " progressive key " to be applied to the VAT contributions could adjust the balance on the revenue side of the budget. Finally, though the financial mechanism may affect the balance only marginally in its present form it could be amended to make it a more effective means of adjusting the final outcome of the budget while leaving the structure of policies unchanged.

The first three of those headings, though complicated in detail, are self-explanatory in principle. The fourth, the Commission's main proposal in their paper The Way Ahead, could help to adjust the balance on the revenue side. Perhaps because of its somewhat obscure title, "A progressive key", which I confess I found it very difficult to understand when I first read it in the paper, this suggestion has received rather scant attention. As explained in paragraphs 69 and 70, this proposal to relate contributions more closely to ability to pay has only as yet been made in broad terms. It would need considerable adjustment to lighten substantially the disproportionate United Kingdom share. Nevertheless, it seems to the committee a proposal which should be actively pursued.

Fifthly, the Committee suggest that a more basic method of offsetting uneven distribution of burdens and benefits might lie in extension and adaptation of the financial mechanism agreed at the Dublin Summit of March 1975, which is described in detail in Annex 3 of the report. Admittedly in its present form the mechanism has not produced the results which were hoped for at that time. Admittedly, too, if it is to make a major contribution to achieving equity it would need fundamental changes, including its application to net and not only to gross contributions. But a revised financial mechanism seems to the committee to offer long-term possibilities of meeting the problems of member-States generally, not only the United Kingdom, according to changes in economic circumstances.

Before closing, my Lords, I should like to digress for a moment and say a word about the European Monetary System, which is at this stage only marginally relevant to this debate. Your Lordships will recall the debate on the Question of the noble Lord, Lord Soames, on 28th November last, shortly before the Council agreement in principle to set up the European Monetary System. The noble Lord, Lord Roberthall, in that debate informed the House of Sub-Committee A's conclusion, which was that no useful purpose would be served by an inquiry at that indefinite stage, though the committee favoured some association with EMS from the outset if acceptable arrangements could be made. It is still the committee's view that any full inquiry would be premature, at least until the anticipated review of the working of the EMS which will take place in September. The committee propose, however, to, make a brief progress report before the Recess to inform the House of developments over the EMS during the past few months. To this end they have recently taken oral evidence from Her Majesty's Treasury and from the Bank of England. A further inquiry, perhaps leading to report and debate, may prove appropriate in the autumn.

It so happens that, from the early 1930s to the early 1960s, I was much engaged in discussion, argument and negotiation on financial and monetary matters with my European opposite numbers. The objective was always to arrive at some solution which, while protecting individual countries and individual currencies, would be generally acceptable.

It is necessary to stress, and to go on stressing, that equity, in the distribution of benefits and burdens in the EEC, is a Community interest and not only an interest of those member-States which at one time or another suffer from imbalance. Whatever the short-term interests of individual member-States, the long-term interest of the Community and therefore of all member-States, must lie in a distribution which is, and which is seen to be, fair. If the Community is to prosper, as we all hope, a reasonable degree of equity must be achieved and must be maintained. When we started the inquiry in January, discussion on this subject had, except for Mr. Callaghan's Guildhall speech in the autumn, been in a rather low key, certainly in the rest of the Community outside this country. At the last two Council meetings and in the Community generally it has moved nearer to the centre of the stage. As the Prime Minister stated last week, the Commission has been asked to formulate proposals before the next Council meeting. The Committee naturally welcomes these developments and will follow them with the closest interest. In the first months of our inquiry we had very helpful evidence from the Treasury and the Foreign Office. We await with interest what the noble Lord, Lord Cockfield, can tell us of recent Government thinking when he replies to the debate. My Lords, I beg to move for Papers.

5.22 p.m.

Baroness SEEAR

My Lords, any Member of your Lordships' House who was in any way involved in the recent Euro-elections will, I am sure, agree that, whatever else is known or not known in this country about the European Community, there is widespread conviction held in many quarters on two matters: first, that the British pay far too much to the Community; and secondly, that far too much goes to increasingly wealthy French and German farmers. A number of times I have heard it said that it is now possible to run a Mercedes on two cows!

We on these Benches certainly go along with the general conclusion brought out so clearly by the noble Lord, Lord Cobbold, that it is necessary to recognise that the British contribution is too big and that vigorous action needs to be taken to reduce the size of it. Of course, when one attempts to examine the question in detail, it becomes increasingly clear that the issue is not clear at all, that it is very hard to estimate exactly what the payment is and what the relative payment of this country is in terms of costs and benefits in relation to the contribution made by other countries. There are a variety of ways of doing the sums, but it is fair to say that, however one does the sums, the contribution that we are making is excessive, although it may not be as horrendous as some interpretations of the figures would have us believe.

After so brilliant an exposition of the report by the noble Lord, Lord Cobbold, it is suitable for the rest of us only to pick out a few points for particular emphasis. One point that I should very much like to make is that, in pressing the British case, we should be sure that we do not advance arguments which must look less than creditable in the eyes of some of those to whom we shall be speaking. For instance, I cannot think that it is a good argument to say that, of course, our growth rates are so poor in comparison with the growth rates of other members of the Community. They would surely respond, " Whose fault is that ? " It can hardly be blamed on the other members of the Community that our growth rates are inadequate. Moreover, to plead poverty is not necessarily the best way in which to attempt to get a revision of what is an inequitable distribution of costs.

Similarly, it seems a little odd to make too much of the argument that, in this country, a higher percentage of GNP goes on consumption than on investment. Once again, I should think that our partners in the Community might say, " Well, is it not perhaps time that you did something about reversing the emphasis on consumption in relation to the emphasis on investment, rather than expecting that because you tend to consume a perhaps disproportionately high proportion of your GNP that somehow gives you a particular case for arguing that the contribution to the Community is too great ".

I should also like to make the point that we in the Liberal Party do not believe that the objective should be to reduce the size of the total Community budget. Our concern is, first, with that proportion of budget which is contributed by this country and, secondly, how that budget is distributed to the various funds and activities of the Community. In some quarters, no doubt, the feeling is that just too much money is being spent by the Community. Those of us who want to see the Community a really strong force in world affairs and feel ourselves very much part of a Community which we hope will be increasingly influential both in the world and in helping member countries to deal with problems which can only be dealt with on a Community basis, want funds to be adequate.

The plea for a revision of the British contribution is in no way a plea for cutting down expenditure. On the other hand, in areas of industrial and social policy we would like to see the Community's expenditure increased rather than reduced. That point needs to be made now because there is no shadow of doubt that, with the enlargement of the Community—as Greece Spain, and Portugal join—the demands or resources for industrial and social policies must grow. Moreover, from the purely British point of view, we shall not be in the position of being one of the least well off of the Community countries, because the countries that will be joining will have, on social and industrial development grounds, a very strong claim on resources. If we are to have the type of continuing and increased assistance for industrial and social matters that we would like to have in competition with these unquestionably much less wealthy countries, then it is extremely important that a move should be made now to ensure that the use of the resources moves in that direction.

When it comes to a revision of the CAP—which of course is very closely linked with the problem of the size of the British contribution, although it is a separate problem—we would strongly favour the approach, which the noble Lord, Lord Cobbold, has also commended, put forward in the brilliantly clear annex written by Professor Holt from Bradford University. He makes the point that the attack on the CAP should not be a root-and-branch attack, but should be an argument for rational reform of the CAP recognising the extremely useful things that have been contributed by the CAP in the long overdue restructuring of agriculture in a number of member countries, and in creating a single agricultural market—a market and an area of production now able virtually to feed the member countries of the Community. This is a very considerable achievement and it fails sometimes to get the appreciation that is due to it because of the other more obvious defects of the CAP.

Can we not stress once again that what is needed is another look at that element of the CAP which deals with the social aspects of the reform of agriculture in the member countries, and ask whether it is time that that part of the burden, which has been the subsidisation of farmers unable to compete—the very small, peasent-type farmer unable to hold his own in any kind of economic competition—should not be borne from the CAP; indeed, it seems not unreasonable to suggest that were the French and German peasant farmers to need subsidisation for social reasons, that might well come from their domestic budgets rather than from the CAP.

Finally, in approaching the reform of the CAP, I should like to suggest that we stress, not so much the British interest but the general Community consumer interest to ensure that the balance is adjusted in favour of consumers rather than in favour of agricultural producers. I should have thought that this would strengthen our case considerably, because it is surely in the interests of all consumers in the EEC that the excessive prices of agricultural produce—which are a direct result of the way in which agriculture is being financed—are harmful not just to British consumers (although it affects them in a particular way), but harmful throughout the Community. This is the point which, in speaking for consumers in general and not solely for the British interests, would surely greatly strengthen our case. It would also strengthen the case to make the point that the money should go to the industrial and social policies, which have a general beneficial effect throughout the Community, so that it is not simply a point being made exclusively in favour of British interests.

5.31 p.m.

Lord PLOWDEN

My Lords, first, I begin with an apology to noble Lords and particularly to my former colleague, the noble Lord, Lord Cockfield, for not being able to stay for the end of the debate. This is due to the change in date of our debate and to a long-standing engagement. As the noble Lord, Lord Cobbold, has said, as our deliberations on the United Kingdom's contribution to the budget progressed in the sub-committee, it became increasingly clear that this was a matter of crucial importance, not simply to this country but to the future of the Community itself, and one which calls for a political solution at the highest level.

There are now indications that it is increasingly being recognised, both in the Commission and in the member-States, that our budgetary problem must be taken seriously. Indeed, unless that is done, I fear that it could actually put in jeopardy our continued membership of the EEC, because of the objections on the part of the people of this country to the inequitable burden that our net contribution imposes upon us. We must now look to the European Council meeting, which is to be held in Dublin this November, for discussion of specific proposals to lighten this country's burden.

As the noble Lord, Lord Cobbold, pointed out, the sub-committee made five suggestions—to be found in paragraph 54 of its report—as to what might be done It is my intention to concentrate on Part IV of the report: the Court of Auditors. The question of financial control over Community income and expenditure is not, on the surface, a matter of such immediate concern as the other aspects of the Common Market finance mentioned in our report. Nevertheless, the sub-committee believes that the court can play a vital role in improving the Community's accountability. This is particularly necessary if the budget is to expand, as it undoubtedly will, in coming years and because the misuse of funds or even fraud can bring great discredit to the institutions of the Community.

As the noble Lord, Lord Cobbold, pointed out, compared with the European Parliament and the Court of Justice, the Court of Auditors has received surprisingly little attention. It was set up in 1977 following an amending treaty of 1975. It is based in Luxembourg and has nine members, one from each member-State, with each member being responsible for a particular audit function. The United Kingdom's member is Sir Norman Price, who was good enough to come and talk on an informal basis to the sub-committee. At present the court has a staff of some 165 people and over the next few years the intention is to expand that to 250.

It is charged, broadly, with three functions: to examine the Community's accounts; to ensure that money is spent in a lawful and regular manner and to ascertain that income and expenditure are subject to sound financial management. It is required to draw up an annual report on the previous year's budget. But over and above that it has wider powers, including the right to make on-the-spot checks in member-States and to submit special reports on its own initiative. We, on the sub-committee, were greatly impressed by the impact of the early work of the court. Its first annual report was a formidable and comprehensive document. As can be expected, a large proportion of it was devoted to the various agricultural funds where, it is clear, there have been loopholes in the law and distortion. Some of these are mentioned in our report and are obviously of the greatest importance.

At a different level, the report comments on the internal administrative budgets of the institutions. The court faces some difficulties. First, it has to work under a very tight and severe timetable. It has only six weeks to make its observations on the accounts and only four weeks, after it has received the replies from the institutions, to produce its annual report. It would favour—and the sub-committee support it here—a more continuous approach to the audit. Secondly, there has been a degree of tension between the court and the Commission, which is described in our report. In brief, the Commission has resented the court commenting on the Commission's replies to the court's observations. In other words, there is a dispute about who should have the last word.

Of course, these are early days, but the sub-committee has suggested that a more continuous approach to the audit might resolve those difficulties. It would be most regrettable if continuing arguments were to direct attention away from more fundamental questions. Thirdly, audit practices vary greatly from one member-State to another. This, of course, causes considerable difficulties for the court, though we understand from the Exchequer and Audit Department, which is responsible in this country for contact with the court, that the court's practices and thoroughness have been welcomed.

Fourthly, it is clear that the establishment of really effective financial control requires active involvement of the European Parliament in pursuing points by the Court of Auditors. It is the Parliament which is finally responsible for discharging the previous year's budgets. To date the Parliament has generally been more concerned with promoting Community expenditure than with financial control. That is the habit of most Parliaments everywhere. I can well remember the late Sir Stafford Cripps, when he was Chancellor of the Exchequer, saying to me that he felt he was the only member of another place—including his own junior Ministers—who was not interested in promoting expenditure for some particular project. Thus, though both institutions appear to be willing to co-operate, there is as yet no regular pattern of liaison. We recommend that the newly-elected Parliament should, as a matter of priority, set up a procedure comparable to the Public Accounts Committee of another place. We feel that to a great extent the ultimate success of the court will depend upon the determination and consistency of the support it receives from the European Parliament.

The noble Lord, Lord Cockfield, may in his reply be able to comment on some of these difficulties facing the Court of Auditors. I hope Ministers will, when attending the Council of Ministers, stress the need not just for the forward planning of expenditure but also for retrospective assessment. The Court of Auditors can assist in this process, and its work could well prove in the long run to be just as crucial to the success of the Community as the need to distribute the benefits of Community membership more fairly.

5.41 p.m.

Viscount AMORY

My Lords, this report is primarily an attempt at a description of the current stage of development of the EEC budget, because the truth is that as regards the budget the EEC is learning as it goes along. Perhaps the first thing to be noted is that the budget expenditure is still fairly modest: 2.6 per cent. of the total national budgets of the member-States and 0.81 per cent. of their combined gross national products. I think there is no doubt that there still are serious defects of procedure and also in the results.

From the evidence we received I think it would be fair to say that the committee have some hopes that many of the defects will gradually be reduced, although not perhaps entirely eliminated. On a cheering note, the Court of Auditors seems to have made an encouraging start, as the noble Lord, Lord Plowden, has just so clearly explained. I agree with him that a continuing difficulty is going to be the narrowness of the timetable within which the Court of Auditors has to do its work. In this country in commerce and industry we have become accustomed to the report of auditors having to be attended to very seriously. I believe that there is a hope that this will increasingly be the case because we have evidence that already the Court of Auditors is earning the respect of the member nations.

By far the biggest component of expenditure is the CAP. There is something seriously wrong there. Mountains of certain products are still accumulating and proving very difficult and embarrassing to get rid of. Too much of the CAP expenditure is employed in supporting high cost and therefore relatively inefficient production. Then clearly there is also something wrong with the computation of the United Kingdom's share of the expenditure. Our gross contribution, with the ending of the transitional arrangements, is seriously out of line with our share of the combined GNP of the membership. That applies probably even more to our net contribution, as the noble Lord, Lord Cobbold, mentioned. So in the interests of equity this is something that really needs fairly urgent correction.

Noble Lords may find some of the technical terms a little difficult. The precise significance of the green rates is something I was awfully good at lecturing on when we had a debate on this some months ago, but is something on which I find myself much less ready to do so now. The same applies to the " progressive key ". My powers of exposition there seem to be waning day by day as the days elapse since we received the evidence; then there are purchasing power parities, financial mechanisms, MCAs, and all sorts of other terms like that. I believe again there is evidence that some of these may become less complicated as time goes on. I hope that that will apply to the green rates, which one hopes will, sooner or later, fade out altogether.

The persistence of obvious defects at the current stage of development really should be appraised against the immense difficulty of evolving common procedures acceptable to all members with their varying customs and techniques. We do not know what wider powers the European Parliament may claim, or achieve, in the years ahead, but I suppose it is unlikely that it will be for ever satisfied with the very limited powers it will have to start with. In the light of all these uncertainties I am sure the House will be glad to accept this report as an attempt to explain the current situation, and to call the House's attention to certain obvious defects.

I should like to join in the congratulations that all members of our sub-committee will wish to pay to the painstaking work and skill of our chairman, the noble Lord, Lord Cobbold, and to the invaluable assistance we received from our advisers and draftsmen. To a general observer the greatest defect of the budget in its present state of development is surely the proportion of its resources spent on the CAP with dubious justification and very dubious economic benefits. In this connection and others, I think noble Lords will find the submission from Professor Holt printed at Appendix 1, and to which the noble Baroness, Lady Seear, referred just now, as well worth reading. I think in its totality this will be found a valuable report and a useful contribution to the problems raised by the current stage of development of the EEC budget.

5.48 p.m.

Lord BRIMELOW

My Lords, in the first place I should like to join in the noble Viscount's tribute to our chairman, the noble Lord, Lord Cobbold, and to the special advisers and the staff who have had a difficult time in preparing this report. The only point where I might dissent a little from the noble Viscount, and from the noble Baroness, Lady Seear, is on the question of the Common Agricultural Policy as it appears in Professor Holt's annexe, but I shall come to that later.

The noble Lord, Lord Butler of Saffron Walden, speaking in a different context, once remarked that those who miss a bus may have to pay a taxi fare. We missed the Community bus. We are paying a taxi fare. The taxi fare, like so many other costs, goes up year by year. We are casting envious sidelong glances at those of our partners in the Community who are enjoying a subsidised ride. We do not like what we pay, or what we see. The question is, what can we do about it?

The noble Lord, Lord Plowden, mentioned the possibility of our leaving the Community. If we were to accept the advice of those who think that we should leave the Community we should be entering on a high-risk course, the cost of which, in my opinion, would soon exceed the present and prospective cost of our remaining in the Community. If, as I expect and as I certainly hope, we remain in the Community, it is, I fear, unlikely that any initiative which will meet our requirements in the matter of equity in our contribution to the cost of the Community will come either from the Commission or from our partners in the Community; any initiative will have to come from us.

In my opinion, the best way ahead would be a dual negotiation, a negotiation to eliminate extravagence and waste from the Community budget and a parallel negotiation to secure equity in the distribution of the cost of that budget. But to succeed in such a dual negotiation we should need the goodwill of our partners, and some of them say that we have done little to earn their goodwill. The effectiveness of our persuasion, particularly in the shorter term, may be limited. From the point of view of this country, the 1979 EEC budget was rather had, the 1980 budget may he rather worse and the Commission's prediction of the way ahead, which is reviewed in Part III of the Select Committee's report, is, frankly, disquieting.

The Select Committee's report concedes that there is room for argument about the margin by which the United Kingdom is paying more than its fair share of the cost of the EEC, and I agree with everything the noble Baroness, Lady Seear, said on that subject. Even if every argument which has been advanced to whittle down the significance of this or that part of our contribution to the total cost of the Community were valid, which I would not accept, there would still be left an excess contribution which demands remedial action, and the Select Committee has set out its views on what that remedial action could be in paragraphs 54 to 74 of its report.

If one accepts as right the contention that the best course is to work within the framework of the Community as a whole, which means accepting the totality of the agreements and practices generally referred to in French as the acqui Communotaire, it seems unlikely, I fear, that we shall secure a reduction in our contribution under the heading of duties and levies (paragraphs 55 to 57 of the Select Committee's report). Moreover, since the Common Agricultural Policy is regarded as one of the major components of the acqui Communotaire, the difficulty of securing progress under this heading (paragraphs 58 to 63 of the report) should not be underestimated. But in my opinion (this is where I dissent from the noble Baroness, Lady Seear) the concept of a Common Agricultural Policy (based originally on common prices and undistorted competition) has been destroyed—not merely undermined but completely, totally and utterly destroyed—by the development of green currencies and the monetary compensation amounts associated with them.

To speak today of a Common Agricultural Policy is an abuse of language. I think the Select Committee is right to emphasise, in paragraph 63, the importance of reducing the share of agricultural spending in the EEC budget. It is here that the elimination of waste would yield the chief economies. I would only add that the decisions of the agricultural Ministers on 21st June showed just how hard it is to move in the right direction.

It has often been argued that the United Kingdom would benefit by the expansion of the Regional Fund and the Social Fund. The Select Committee, however, point out in paragraphs 65 and 66 that once the Community has been enlarged, this argument may cease to be valid. This points to the need for caution in agreeing to increases in the Community budget, and the point is made with even sharper emphasis in paragraph 68 of the Select Committee's report in the context of spending on energy: We should only agree to such budgetary increases as will quite certainly reduce our net budgetary burden ". The Select Committee was equally sober in its assessment of the value of applying the so-called progressive key to VAT contributions to the EEC budget. The idea of arithmetical manipulation to transform VAT contributions into a progressive tax on the wealthier members of the Community is attractive, but the Select Committee points out that the key would have to be very progressive indeed completely to offset the effects of a system which at present operates so heavily to our disadvantage.

This consideration has led the Select Committee to conclude that to be effective, the progressive key would have to be applied not merely to VAT but to duties and levies as well. The idea is tempting, but it runs into the doctrinal difficulty that duties and levies are not regarded as national contributions to the EEC budget. The doctrine, however questionable, is strongly entrenched and may prove to be inexpugnable.

Its review of these possibilities and improbabilities has led the Select Committee to recommend a review of the so-called financial mechanism which was one of the fruits of our renegotiation and which is at long last coming into operation, albeit on a disappointingly small scale.

As a matter of abstract mathematics, the financial mechanism could certainly be modified in such a manner and on such a scale as to offset the inequities resulting from the present EEC budget. But why, I ask, should the other members who benefit from the present state of affairs vote for modifications disadvantageous to themselves? I suspect there is a fairly widspread feeling among our partners in the Community that we, who have the benefit of North Sea oil, can and should continue to pay. That as a proposition in economic logic may be weak; as a proposition in human covetousness it may be strong.

I imagine that Her Majesty's Government will have little difficulty in agreeing in principle that the Select Committee's recommendations are desirable, but to persuade our partners in the Community that what this country regards as desirable may also be in the general long-term interest of the Community as a whole may prove to be no easy task. The Select Committee's report in iteslf, I fear, is unlikely to achieve that aim. I wish our negotiators well in any follow-up action to which Her Majesty's Government may be inclined to give their blessing.

6 p.m.

Lord FRASER of TULLYBELTON

My Lords, I wish to make only one brief observation regarding the legal position of the 1979 budget which, as is explained in the report before your Lordships was very unsatisfactory. On 14th December 1978 the President of the Community Parliament declared, after various proceedings had been gone through, that the budget for 1979 had been finally adopted. That budget should have come into force on 1st January 1979, but on that date three of the member countries of the Community, including ourselves, took the view that the budget had not been legally adopted at all, that it was invalid, and that there was no obligation upon them to pay their contributions under the budget. Up to the first four months of 1979 they continued to pay one-twelfth of their appropriate contribution for the year 1978 because they said there was no legal budget for 1979.

That was surely a very remarkable and most unsatisfactory state of affairs to arise in a Community such as ours which is regulated very largely by elaborate legal provisions, and it is because of that that I think it right that I should say a few words as to how in the view of the committee that situation arose. I am not going into the details, which are rather complicated and which are set out at some length in the report itself. However, the difficulty arose because of two important provisions in the budgetary procedure, which is laid down in a treaty of 1975 amending the original Treaty. One of the provisions is that under Article 203 of the Treaty the Commission has to fix each year a maximum rate of increase in expenditure over the previous year. That is done after consultation with the appropriate economic bodies. For the year 1979 the Commission fixed a maximum rate which, after various complications (which I need not go into) left the Parliament, when they came to deal with the budget, the right to increase the rate of expenditure by 13.46 per cent. over the 1978 rate of expenditure.

Notwithstanding that the legal maximum increase was 13.46 per cent., Parliament proceeded to approve expenditure which increased the expenditure by no less than 52.44 per cent., which was vastly more than the legal maximum. Parliament took up the line that that was the expenditure which they wished to approve, and they adhered to it, notwithstanding protests from the Council. There is provision in the Treaty for increasing the maximum by agreement between the Parliament and the Council, subject not merely to a bare majority but to a particular, specified majority. That procedure was not adopted, and the maximum fixed by the Commission was never increased upwards before the adoption of the budget.

That was one of the two difficulties which in the view of the committee made the budget invalid when it was adopted. The other one was as follows. The budget, to be validly adopted under the Treaty, has to be approved first by the Council and then by Parliament—not by Parliament alone. That was never in fact done. The Council passed the draft budget at First Reading. The proposals for expenditure were much increased by the Parliament—up to the 52.44 per cent. It went back to the Council, and the Council refused to increase the ceiling to meet the Parliament's wishes. It went back to the Parliament for the Second Reading and Parliament then adhered to their previous decision.

There was no possible doubt that there was a disagreement between the Council and the Parliament because when the Council had dealt with the Second Reading of the budget the President wrote to the Parliament and pointed out that the Council had not agreed to increase the ceiling to provide for the increase over the previous year's expenditure. Then when the matter came before the Parliament in December 1978 for the final approval the President of the Council said to the Parliament in terms that if they proceeded to adopt the budget with a 52 per cent. increase, they would not be validly approving the budget. He said, as is quoted in the report on page xlii, that any attempt to go beyond this percentage increase"— that is the 13 per cent. increase— requires the top rate to be raised by agreement between the Council and Parliament in accordance with Article 203 [of the Treaty]. Until such agreement has been reached between the Council and the Parliament, we regard the budgetary procedure as not having been completed and the President of Parliament cannot therefore declare the Budget to be final". Notwithstanding that statement by the President of the Council, on the following day the President of the Parliament proceeded to declare that the budget had been finally adopted by the Parliament.

So we are left with a budget which the President of the Parliament declared to be finally adopted. It was in excess of the legally permissible maximum and it had not attained the agreement of the Council. There are some doubts and room for argument as to whether the budget was then in a position that is called "being in existence," I understand; that is to say, whether it is a budget that should be treated as valid until it has been annulled by the court, or whether it was fundamentally null. The latter is the view that commends itself to the Select Committee, or at any rate to the legal sub-committee of the Select Committee. But whichever it is, I submit that it is intolerably unsatisfactory that this kind of situation should ever have arisen.

I note with interest that a compromise was made in, I think, March or April of this year, and I see from the report that it is thought that it will prevent any future collision of this kind occurring. However, the practical matters which I suggest have to be recorded are these. A budget cannot be regarded as finally adopted in terms of the Treaty if the Treaty procedure has not been followed out in the two respects that I have mentioned. It may be said that this is all water under the bridge now, that the budget has now been regularised—and I think that is so—and that it may never arise again. Well, it may not, and I would hope that it will not. But I suggest that we ought to record our regret at what happened, as set out in the report; and I consider that it is very clearly set out.

There is a further point. This situation may be taken as being one more example of a tendency which seems to exist to disregard the rather elaborate rules that are set out in the Treaty when they operate inconveniently. I would express the view, which I hope is not old fashioned or particularly absurd, that if one agrees to a Treaty, and agrees to have a joint budget, provided certain procedure is followed, one cannot really expect to be bound to pay on a budget which is not adopted by the procedure that has been agreed upon; and that is what happened at the beginning of this year. I would commend the report as a very clear statement in fuller terms of what I have tried, briefly, to say.

6.8 p.m.

Lord MORRIS

My Lords, someone might have written that fairy stories are stories written by adults for children and are designed so that the children fall asleep quickly and happily. Someone else might have observed that writings on economics are more often than not fairy stories written by adults for adults, which send them to sleep both quickly and in a most unhappy state of mind. It is very much to the credit of the committee, of which I am proud to serve as a very junior and minor Member, and particularly to the credit of the noble Lord, Lord Cobbold, that a mass of none too digestible material should have been transformed, as if by magic, into what is by comparison a delicate literary soufflé. Much is owed to the expert advice given to the committee and to those who gave evidence to the committee. Similarly, my conviction that your Lordships' House benefits from the help and advice of the best secretariat to any House in any Parliament is constantly being reaffirmed. I commend this report most highly. Indeed. I believe that anyone interested in Europe—in particular, those serving in the European Parliament—should carry a copy of this report in their understanding, for it is worth reminding oneself that the power to amend the EEC budget, albeit marginally, is one of only two formal powers enjoyed by the European Parliament.

I wish to restrict my very brief remarks to what I believe to be one of the two most important means of creating equity in the EEC budget; namely, by amending the financial mechanism for adjusting the final outcome of the budget, referred to in subparagraph (e) of paragraph 54 and developed in paragraphs 71 to 74 as well as in Appendix 3 to the report. I believe that this restructuring of the financial mechanism deserves very close attention indeed, for it could provide in great measure the means of ensuring that the present inequitable effect of the budget could be righted without having to tamper with the existing structure of the budget. As the report states in the fourth line of paragraph 72: If a well constructed financial mechanism automatically corrected any disproportionate burdens, the United Kingdom would be able to discuss agricultural prices and Community spending on other programmes without such an overriding concern for their budgetary effects ". Any means which can assist the United Kingdom's negotiating position, particularly in view of the Dublin meeting in November, is worthy of consideration. As your Lordships are aware, the lines upon which the existing financial mechanism could be revised are set out in paragraph 73. Serious consideration of these means, together with a change in the proportion of agricultural spending in the budget, takes on an even greater significance when one bears in mind the probable economic and budgetary effect of the future enlargement of the EEC.

Finally, I wish to draw your Lordships' attention to a newspaper article on this report which was published in the Guardian on 29th June. It referred to the Select Committee on the European Communities, with a capital " E ", as … the Lords Elect Committee ". In the light of this report, I believe that the implication has certain merit.

6.13 p.m.

Lord ROBERTHALL

My Lords, I should like to begin by associating myself with the tributes paid, particularly to our chairman. Most of us, I suppose, have had a good deal of committee experience, and all are aware how essential it is that the chairman should have a thorough grasp of the agenda. In the case of Sub-Committee A, of which I have the honour to be a member, the subject matter is extremely complex and difficult, as anyone who cares to read this report will see. This is only a sample of the kind of thing we have to deal with; and the fact that we are steered so well, with that sense of timing, the ability to say " Snap! ", which is so important to a committee and which requires this complete understanding, is a great tribute to the ability with which our chairman has had to do his very excessive homework.

My Lords, I hope to follow the very good example of all the other speakers and keep this debate so agreeably short. Compared with most of our economic debates, it has been a great pleasure to be here this afternoon. I want to confine my remarks to a subject already touched on by the noble Baroness, Lady Seear, by the noble Viscount, Lord Amory, and by the noble Lord, Lord Brimelow, in different ways, and that is the Common Agricultural Policy. It is crucial to the central problem touched on in this report; that is, the excessive contribution of the United Kingdom. Behind that, I think it is crucial in a much more important and basic way; that is, that, as everyone knows, the feeling in this country at present against the Common Market is much stronger than it was at the time of the referendum, and in my view the development of the Common Agricultural Policy is making it much more difficult for people like myself, who were strong advocates of the Community, to go on supporting it.

I think there are three points that have to be looked at here. The Common Agricultural Policy is, of course, a system for the protection of agriculture, and almost all advanced countries have had to protect their agriculture in one way or another. We did it before we joined the Community. We did it in a very economical way, by subsidising our own producers but letting the consumer have the advantage of world prices, so that we got cheap food though we had to pay taxes. When we joined the Community we shifted over to the present system. We did it with our eyes open. There is something to be said for being reasonably self-supporting in agriculture; and, with a larger Community, the argument for doing that is stronger. But the fact is that, as almost all consumers in this country know, it has meant that food prices have gone up considerably. They have gone up because, instead of paying world prices and paying through taxes, we now have to pay the producers' prices, and the levies that bring up world prices to EEC prices constitute a tax paid by the consumer on food imported from other places. The advantage of that is that these levies provide part of the income of the Community, and we could argue that, as long as the system was an economical one, that it was not doing more than it needed to do, the benefit that came to us from belonging to the Community was a greater offset than the cost that it inflicted on us of having to pay for dearer food.

My next point is that that is no longer a defensible position. One cannot argue today that the Common Agricultural Policy is run in an economical manner; and this is a point of great political importance, because everyone knows that the housewife is sensitive to claims that food is getting dearer. So anybody who wants to attack the Community now starts off from a good point—" It has made your food dearer "—and it is difficult to argue that the benefits accruing are worth having. Why is that so? The reason, already referred to by the noble Baroness and by the noble Viscount, Lord Amory, is that the Common Agricultural Policy is generating large surpluses which have to be stored at great expense and often have to he sold off to other countries at low prices. That, too, is an easy argument to get across to people when you are attacking the Community, and it is a very difficult one to refute. You can see the surpluses; and, although there is a strong argument—at least, I and many economists would be prepared to make an argument—for being self-supporting, it is much more difficult to make an argument for supporting agriculture in a way which generates these surpluses.

The third point is: Why are these surpluses generated? Clearly it is because the prices which are offered by the Community, the guaranteed prices, are too high to produce only the amount that you need for yourself. The remedy for that ought to be to lower the prices: that is to say, not to give more protection than you need to achieve your objective of a flourishing agricultural industry. But set out extremely clearly in the appendix by Professor Stephen Holt, which has already been referred to and which I recommend that your Lordships read—if you read no other part of the report, I recommend that your Lordships read that appendix—you see what a political problem we in this country are going to run into simply because of the way the CAP works. The Community fixes prices at a point that will give a reasonable living to the marginal producers of countries which have found themselves to be very efficient manufacturing countries; so that raises the standard of living and raises costs of everything and therefore raises the cost of inefficient producers. I agree with what lay behind the remarks of the noble Lord, Lord Brimelow.

We are often told that we must not criticise the CAP because it is the one thing that works in the Community; it shows we can get together on something. But one may be forced to argue, as I feel I shall he forced to argue, that the CAP, so far from being a creditable achievement, is in some respects very far from being that. I do not dispute that it has had its achievements. As the noble Baroness said, it is doing a great deal in restructuring, but it is going to take a long time before the effects of that come through. Meanwhile, if we go on in the way we have gone on, the costs of the inefficient marginal producers will rise, and prices will rise; and that will stimulate output among efficient producers and increase surpluses. It seems to me, therefore, that if the Community is to continue to flourish, and especially if we are to defend our membership of it, it is necessary to overhaul the CAP.

I know that this will be difficult, but I think there is a good deal to be said for the view that if we approach it as a Community problem and not as a problem for ourselves we are more likely to get a hearing. Also, I think that there is something in the remedy, which has been suggested by a number of people, that these high costs of marginal producers in countries like Germany should be regarded as a social problem. You cannot let an important section of the Community have its people out of work at a time when there is a great deal of unemployment—but do so at the cost of supporting these excessive prices which produce so many of the problems to which I have been referring, especially the problem of high food prices and surpluses. The country that has this problem should treat it as a social problem and should be responsible for dealing with it with such help as the Community affords for social problems.

If we could do that—and Germany presents the worst problem because it is the most prosperous country, but also has the most inefficient farmers—if we could say to Germany, for instance, " You look after your own people and pay what you think; but do not let us do that by fixing these fantastic prices and by this complication of green money which is making a farce of the objectives of the Community ", then that would help. It is not a common market, as Lord Brimelow has said, as far as the one thing that works; it is a system which is trying to immobilise the whole structure of production; whereas you would think, when a lot of countries get together in a common market, there would be more free trade.

If we could say that, for instance, to Germany, and get a more reasonable, less emotional background for discussion of the whole problem of the Common Market and the prices, we might be able to make some progress. It would certainly be much easier for people like me who have been strong advocates of the Common Market ever since it was put forward, to be able to continue to be such an advocate. For an economist, it is very difficult to say that the CAP is a desirable thing.

Viscount AMORY

My Lords, would the noble Lord agree that the most recent meeting of the Ministers of Agriculture gives very small comfort to hopes that this will be an easy problem to deal with? That meeting seems to me to be the most disappointing performance.

Lord ROBERTHALL

My Lords, I very much agree with the noble Viscount. I am not trying to underestimate the difficulty of the task. I have sat down, but I cannot resist quoting another example which was part of the EMS negotiations. The French stuck out and wanted to have the monetary compensation amounts eliminated. The Germans did not want that, but said, " We will agree to eliminate them, so long as you agree that the amount received by the farmers will never be any less." It is a difficult problem. If we want to carry this country with us and stay in the Common Market, we must face that there are good arguments now against being in the Community, arguments of a kind that you could refute at one time but you cannot refute so easily today.

Lord BRIMELOW

My Lords, before the noble Lord sits down, and following what was said by the noble Viscount, may I ask whether he noticed in the Financial Times this morning that the German Minister for Agriculture has made a speech to the assembled German farmers which indicates a rather important development in at least his thinking, although what he said was not welcomed by the farmers.

Lord ROBERTHALL

My Lords, I read that. The assembled farmers, 8,000 of them, unanimously disagreed with him.

6.26 p.m.

Lord BRUCE of DONINGTON

My Lords, the House would wish to thank the noble Lord, Lord Cobbold, and his committee for having produced such an excellent report. The reports of the Select Committee of this House, your Lordships will not be surprised to know, are extremely well regarded in Europe. I speak as one who has had the honour to serve in the European Parliament for the past four years and I assure your Lordships that the reports of the Select Committee of this House are most eagerly read by European Members of Parliament of all countries and of all political parties. This latest report from the committee is no exception to the excellence of the previous ones. There may be occasionally points on which I shall venture to differ, but we on this side of the House would like to join in the congratulations which have been accorded to the committee.

Before I pass on to the main substance of the report, the 1979 budget, I should like, first, to associate myself with the remarks of the noble Lord, Lord Plowden, concerning the Court of Auditors. There can be no doubt that the Court of Auditors, provided that its authority and independence are maintained—and that will need continued efforts by the new European Parliament—will prove to be an invaluable institution for the purpose of allaying those very natural suspicions of people when they see reports in the Press of widespread fraud and so on, but also of the efficiency of the financial control within the Community institutions themselves.

I should like to assure the House that the discharge of the Commission budget is now no longer something that goes through " on the nod ". I was personally instrumental as a Member of the European Parliament Budget Committee for preparing the discharge report for the Commission's 1977 budget; and I succeeded in persuading my colleagues in the European Parliament Budget Committee to postpone consideration of it until the new directly-elected Parliament had had an opportunity to consider it. It is, I hope, a very thorough report, and I should like to assure the House that it is not the habit of the European Parliament now to allow these things to go through " on the nod ".

I should now like to pass to the main subject matter of the report itself, which is of course the 1979 budget. There can be no doubt—and I do not want to burden the House with too many figures—that this really is not a Community budget in the proper sense, that one has a comprehensive budget covering all forms of Community activity on anything like a significant scale. It is essentially a budget over two-thirds of which is devoted to agriculture. The House may wish to know that the total amount spent by the Community in the social sector, the whole of its regional fund allocations, the whole of its regional expenditure and expenditure on energy, industry and transport—in other words, in those spheres where it is deemed activity is together more economic than individual national activity—is approximately the same as the Commission spends in storage costs of surplus foods. A very large proportion—some two-thirds—of that storage cost, which is over 1,500 million units of account for the year under review, or approximately £1,000 million, is spent on losses on disposal. So that gives some indication of the general essence of the budget.

It is for consideration whether this can continue because when one thinks with the broad view of Europe, we are here to promote international co-operation; we are here to work together for common aims, we are here to achieve a mutual degree of prosperity, of cultural changes and the like; we are here to make a co-ordinated effort to aid developing countries and we are here in order that we might negotiate as one bloc with other great continents. The expenditure on these things in cash terms is petty cash—it is barely postage book cash—and everything is subordinated to the Common Agricultural Policy. There is this appalling sum of £1,000 million which is spent in connection with storage and disposal. This is the essence of the budget and one need not go into very great detail about it.

As to its legal validity, I am very tempted indeed to cross swords with the noble and learned Lord, Lord Fraser of Tullybelton, on the contents of his Sub-Committee's observations as to the legal interpretation of the budget proceedings. I take it that he must have read the evidence which was given by myself and my colleague, Mr. Michael Shaw, before the Select Committee, and I hope that he has read the publication which appears under our name called the Purse Strings of Europe. This is a joint cross-party effort which gives the budget procedure in some detail. I am well aware that everything depends on the construction of Article 203 as amended by the Treaty of 22nd July, 1975; but I shall not enter into an argument with the noble and learned Lord. All I shall say is that the European Parliament, comprised of Members of Parliament from all nations and from all political parties, came to the virtually unanimous view that Parliament had acted strictly within its rights.

From my own standpoint, I do not propose to depart from the observations that I made in the European Parliament. Since I personally and my committee were part of the cause of the dispute, I should like to reiterate my view here, as I reiterated it in the European Parliament: that Parliament acted strictly within its powers in adopting the budget that was handed to it in draft and amended form without any amendment. I am well aware that the matter has since been satisfactorily resolved, but I have every reason to believe that if the case did go before the European Court the verdict would come down in favour of Parliament.

So much for the validity of it. There have been certain consequences of this budget for the United Kingdom. The amounts may vary, but on listening to the contributions which have been made this afternoon by the noble Baroness, Lady Seear, and noble Lords, there seemed to be a broad consensus of view that no matter how one tries to calculate it, nevertheless the United Kingdom are bearing an unacceptable proportion of the total burden.

My Lords, I pause here, if you will forgive me, to make a personal observation. When I said this some two years ago in this House, it did not exactly find favour and I was regarded at the time as being mildly eccentric. I am now reassured to find that there is agreement among all parties that the observations I then made, that there was a deficit for that year of £562 million, proved in the event to be a slight under-estimate. There is this potential net deficit of somewhere around £1,000 million—some may put it less, some may put it more. But everybody is sure that for 1980, unless something is done, it is going to get worse.

There are two consequences that flow from this: the first of course are the consequences for the Community itself. These can be best expressed in the White Paper that was issued by Mr. Heath's Government in 1971. Paragraph 96 puts forward the observation quite clearly: Thus in the Government's view neither our contribution to nor our receipts from the Community budget in the 1980s are susceptible of valid estimation at this stage ". They can say that again! It continues: And it is for this reason that the Community declared to us during the course of the negotiations that if unacceptable situations should arise the very survival of the Community would demand that the institutions find equitable solutions '. I trust that our negotiators in Brussels, or wherever the negotiations take place, for some effort to be made to redress our contribution position, will remind them of that undertaking given by the Community to the Heath Administration at that time and reproduced in the White Paper.

So there is the consequence for the Community as a whole; there is the fact that should this persist it will strike at the very vitals of the Community itself. Then there are the consequences at home. It is conventional to say—and I see that the Select Committee reproduced the point—that after all it represents only 1 per cent. of public expenditure. That may have been so in 1978. It may represent slightly more now, because the figure was given for 1978. But it is of the order of £1,000 million out of the British taxpayers' pocket direct.

It is, of course, an item which operates to increase the public sector borrowing requirement by precisely that amount, and there is very great sensitivity at this time—and quite rightly so—about the public sector borrowing requirement. When the British people see the cuts in public expenditure, which have recently been adumbrated in the budget, which are now well-advertised—meaning cuts in educational services, cuts in housing services and cuts in social services—and which are so necessary because, so it is said, we must restrict the public sector borrowing requirement, they will ask—Why? Indeed, the point was half posed by the noble Lord, Lord Roberthall, who struck a note of scepticism which would find a fairly wide echo throughout the United Kingdom at this time. So it is extremely important that the Government negotiate speedily.

It is now a matter only of the financial mechanism. I observe from the Statement which the noble Lord, Lord Soames, the Leader of the House made on this question on the return of the Prime Minister from the European Council meeting at Strasbourg. He said that: The European Council called for action by the Commission to assess the facts about how the Budget transfers are likely to affect each Member State in 1979 and 1980 and whether and how the 1975 Financial Mechanism, intended to reduce our contribution, will work ".—[Official Report, 26/6/79; cols. 1349–50.] This exhibits an astonishing complacency. The Council had no need to ask the Commission how it will work, because if the Council had perused the 1980 Budget, which was published by the time they met and ought to have been in the possession of their advisers—I refer to vol. 7A of the Commission's Preliminary Draft Budget for 1980—they would have found at pages 513 to 517 the precise calculations as to how the mechanism will work. Indeed, it shows that for the year 1980 the amount of refund due from the Community to the United Kingdom by the use of the financial mechanism will be 68 million units of account, or some £44 million—a mere drop in the ocean against the £1,000 million deficit. So I hope that these figures may be in the Government's mind—I have given them the reference—so that they will know how it works in advance of their European colleagues.

Numerous remedies have been suggested in the Select Committee's report as to how the balance may be redressed. There is the financial mechanism that I have just dealt with, there are certain adjustments in connection with VAT and there are certain adjustments that can be made in connection with Customs duties and agricultural levies. But as the noble Lord, Lord Brimelow, pointed out, in what many noble Lords would think was a very comprehensive speech indeed, it all depends on the willingness of our colleagues to part up with something out of their own national Exchequers in order to meet what we consider to be a reasonable position. It must be clear—and I venture to dissent slightly from the noble Baroness, Lady Seear, who seemed to attribute to the Common Agricultural Policy virtues which it does not possess—that radical reform of the Common Agricultural Policy is the only way of redressing Britain's financial position. The amounts of benefit received by the United Kingdom from the Common Agricultural Policy are so small in relation to our effective contributions that it is here that the problem lies.

I am very glad to be non-controversial about it, because I find that my views are shared by none other than the Prime Minister herself. The right honourable lady was speaking, as reported in the Observer of 3rd June last, at a meeting for Young Conservatives at the National Exhibition Centre. She said that the Common Agricultural Policy was " collapsing under the weight of its own surpluses " and that the Tories would require a price freeze on products now in surplus. Those are the views of the right honourable lady. Then we have the views of Mr. Douglas Hurd, the Minister of State at the Foreign Office, in a speech at Rossendale on 29th May. He said: It is not commonsense that three-quarters of the Community budget should go on agriculture. It is not commonsense that farm prices across Europe should be fixed at the level required to give the inefficient farmer a decent living when the result is a growth of surpluses at a cost which will prove deeply damaging not just to Britain but to taxpayers throughout the Community ". Those are respectable words from Government Ministers from which I find it impossible to dissent.

All that we now require is some action in that regard, and that is why I was very disappointed indeed that, notwithstanding those sentiments, it did not prove possible at the meeting in Strasbourg to insist on what the Government had previously promised and to fight for a price freeze. Instead they concluded a series of agreements for which their own officials were unprepared, so that they could not even provide them with the calculations of the profit or loss at the time of the meeting, but which in the event will increase Britain's burden by a further £85 million during the Market year 1979–80. That is the Commission's estimate. To that estimate I would add a further one, because the price increases concerned in so far as they affect butter, will enlarge the butter mountain by such an amount that the extra storage costs over the year will probably amount to another 500 million units of account. Those are matters that can be checked with the Commission. I suggest that when they have future negotiations they ought I to be a little more consistent.

Finally, our attention has been drawn to the report made by Professor Holt. This I find to be a most excellent report and I should like to join noble Lords who have advised that we study it. Its mention in the Select Committee's report is very significant and its conclusions are all the more significant. I make no apology for reading them to the House: In the event that no significant progress is made along any of these lines "— and the lines are enumerated in the document itself— … I believe any British Government in power at that time will have no alternative but to take some unilateral action. It should only do this, in my view, after it has made a series of constructive suggestions which make sense from the point of view of the interests of the Community as a whole. If these go unheeded, we should fix an internationally defensible ceiling to our budget contribution ourselves and refuse to pay any excess, pending a new agreement. This ceiling could be related either to our share of the Community's GDP or to the contribution of the wealthier large States, Germany and France ". That is unilateral action. Finally, the paragraph mentions the unilateral action which has been taken by another country. It says: Such a form of national action would be nothing like as drastic as that taken by France in the form of the boycott of 1965–66 ". That is quite right. Since we are supposed, very often, not to be entirely communitaire, I would suggest that the course of action recommended in those circumstances by Professor Holt ought to be adopted.

The House hopes that the negotiations for the redistribution of the budget burden will be successful and wishes Her Majesty's Government, provided that they pursue them determinedly, every possible success in their negotiations. If, however, these negotiations fail, the United Kingdom should not refrain from taking action, not necessarily on the lines which France took, but, if necessary, by way of withholding, contributions.

6.52 p.m.

The MINISTER of STATE, TREASURY (Lord Cockfield)

My Lords, these are difficult and complex matters, and we are singularly fortunate in having the Select Committee of your Lordships' House to examine them and report upon them with such clarity in the report which is before us. We were also singularly fortunate in having the noble Lord, Lord Cobbold, the chairman of that committee, to introduce the report in a speech which showed a great understanding of the problems, not only from the point of view of the United Kingdom but also from the point of view of the greater good of the European Community as a whole. It is in that spirit that an answer to the present difficulties can best be found.

I have listened—as, indeed, all noble Lords will have done—to a number of speakers who have made points of great importance. We do not have to agree or disagree with what has been said to recognise the importance of those contributions. I shall be replying, so far as possible, during the course of my remarks to the individual points which have been raised, but perhaps it would be appropriate to say right away that it is a matter of encouragement to find almost universal support for our membership of the Community, coupled with a determination to ensure that our position is protected and that fairness and equity prevail. In that regard, the views expressed by your Lordships mirror very much the views expressed by the Select Committee in their report.

The main issue considered in the committee's report relates to the Community budget and in particular to the United Kingdom's contribution to that budget. But before I come to that central issue, there are two peripheral matters with which I should like to deal. They are important issues, even though they are peripheral to the main subject. They are, first, the question of the legality of the 1979 budget and, second, the establishment of the Court of Auditors.

So far as the legality of the 1979 budget is concerned, the noble and learned Lord, Lord Fraser of Tullybelton, dealt with this matter in his speech in detail, and with authority. The noble Lord, Lord Bruce of Donington, expressed a contrary view. This is, of course, essentially a legal issue, and I would suggest that in matters of law we should be wiser to be guided by the opinion of the lawyers, of great distinction in this field, even if we happen to disagree with the law that they are expounding. Fortunately, the point is academic, in the sense that the problem was ultimately resolved by agreement between the Council of Ministers and the European Parliament, and one hopes that this will avoid future conflict.

So far as the Court of Auditors is concerned, the Government regard this as a valuable development in the Community's institutions. Like your Lordships' committee, we have been impressed by the start which the court has made and we believe that it can make an increasingly valuable contribution to the management of the Community's finances. The noble Lord, Lord Plowden, referred to the need for the development of close links between the Court of Auditors and the Council and the European Parliament. The Government fully endorse this view. It was never the intention that the court should be merely an ornament, however distinguished, but that it should be an integral part of the process of financial control, the importance of which we entirely recognise. The Treaty established the court and it provides, in particular, for the Council and the Parliament to consider the court's annual report before granting the Commission its discharge. Article 85 of the Financial Regulation of 31st December 1977 also provides for the institutions to submit reports of their action on any points arising out of this consideration.

Perhaps I may now come to the main issue, which is the size of Britain's net contribution to the Community's budget. In the course of his Budget speech, my right honourable friend the Chancellor of the Exchequer referred to the present unfavourable international economic climate, and he said this: In this disturbed situation, the European Community can, and should, be a source of stability and strength for its members. In one important area, however, present EEC policies are seriously hindering our efforts to help ourselves ".—[Official Report, Commons; 12/6/79; col. 238.] The United Kingdom and Italy, which are among the poorer members of the Community, are transferring substantial resources to richer member-States, chiefly through the Community budget.

There may be difficulties in determining exactly the scale of the transfer of resources, to which my right honourable friend referred, but there can be no doubt that it is very substantial and that it is imposing a significant drain on the United Kingdom economy. Table 2 of the committee's report shows just how quickly the United Kingdom's net contribution has grown and how big it now is. By 1980, it will be of the order of £1 billion, unless something is done to reduce it. This is a major sacrifice of resources, at a time when the Government are having to make large cuts in their own public expenditure programme. It is also quite out of line with the United Kingdom's relative wealth.

The committee have included in their report figures for gross national product per head, which provide as good a guide as any to the relative prosperity of different countries. But whichever way one looks at the figures, it is plain that the United Kingdom is subsidising, through the Community budget, countries with a standard of living well above its own. That alone is surely enough to justify the committee in their conclusion, which is fully shared by the Government, that the United Kingdom's contribution to the Community budget is disproportionately high. As my right honourable friend the Chancellor of the Exchequer said in his Budget speech: It "— that is, the situation— is plainly unfair ".—[Official Report, Commons; 12/6/79; col. 238.] The Select Committee's report, as the noble Lord, Lord Cobbold, has said, lists five ways in which the disproportionate burden of the existing budget structure on the United Kingdom could be lightened. They also make a number of specific suggestions which are both interesting and valuable, but I have considerable doubts—and I suspect that the Committee may well think the same—whether the measures proposed by the Committee would, by themselves, offer the prospect of relief on the scale required within a time-scale which would be acceptable.

Like the committee, we should have been glad to see the Commission's suggestions adopted that there should be an element of progressivity in the VAT component of own resources, but not all of our Community partners feel the same. I must stress also that the question of the manner in which more resources might be provided is distinct from the prior question whether it would be right for own resources to be increased at all. On this the Government's present view is that it would be wrong to think in terms simply of more money for the Community. There should be a better use of the money already available.

On the expenditure side also we have to be cautious. Although the recent settlement has marked a considerable improvement over previous years, recent events have shown how difficult it is to stop the CAP juggernaut from rolling. There is no sign of a reduction in the absolute level of CAP spending in the immediate future and we should be unwise to pretend otherwise. It is tempting to think in terms of achieving a better balanced budget by increasing expenditure on policies within the Community other than those devoted to agriculture, but I believe other member-States would share the view that massive increases in Community expenditure do not provide a satisfactory answer. I agree, of course, that there is some scope for worthwhile Community expenditure on regional policy, industrial policy and social policy, but all of us know that the difficult problems in those areas cannot be solved simply by massive injections of Government money, whether it be national Government money or that of the Community.

I do not propose to follow in detail the very powerful attack made by the noble Lord, Lord Bruce of Donington, on the failure of the Labour Government to take any effective action to deal with these problems in the last five years, and their failure had undoubtedly exacerbated the problems we now face. I propose instead to say what the Government have done since they came into office. The Government's views can be inferred first from the Budget statement of my right honourable friend the Chancellor of the Exchequer in another place. He said in that speech that we had already made it very clear to our partners that the excessive net contribution by the United Kingdom could not be allowed to continue because it was against the interests of the Community itself, a point which has been made and emphasised by a number of noble Lords in the debate this evening. He said that we would continue to press for an agreement which would meet our case. That is what the Government have done and will continue to do but it is not for the United Kingdom to make specific proposals. That is a matter for the Community as a whole.

What my right honourable friend the Prime Minister achieved at the European Council in Strasbourg on 21st and 22nd June was an agreement among her colleagues that the Commission of the European Community should study the effect of present budgetary transfers and should bring forward proposals for solving the problem. As she reported to the other place on her return, this means that at last we have agreement to tackle the inequitably high contribution that Britain makes at present to the European budget. The Prime Minister's direct and open approach, which has been linked to a strong affirmation of our belief in the Community and our commitment to its future development is, I believe, having its effect.

The Commission has been asked to present proposals in time for decision at the next European Council which will take place in Dublin on 29th and 30th November. Meanwhile the Government will continue to take every available opportunity to press home to our Community partners the seriousness of the problem and the need for substantial, rapid and lasting relief. The thoughtful and valuable report which we have been discussing this evening and the debate we have had on it offers most welcome support to Her Majesty's Government's endeavours in this field.

7.7 p.m.

Lord COBBOLD

My Lords, I will not detain the House for more than a minute. I should like just to say " Thank you " to those who have spoken. I rather wish that, except for the last two speakers, there had been one or two who were not either members of the Select Committee or of Sub-Committee A. It was really the " home team " in one guise or another speaking, but still they made very helpful contributions. It is extremely difficult to get people from outside to speak in these debates. I made very serious attempts, but the four or five distinguished characters whom I tried to persuade had very good excuses for not coming this afternoon.

Passing to the last two speakers, I should just like to say that a compliment from the noble Lord, Lord Bruce of Donington, on the quality of a report on the EEC budget is something that is really worth having. Nobody has done more work on these budget matters in the European Parliament in the last four years and nobody has had a better grasp of the details than the noble Lord.

I also thank the noble Lord, Lord Cockfield, for the helpful speech which he made. I am extremely glad to know that he regards Her Majesty's Government as being more or less in agreement with the conclusions of the report, and one can only wish Her Majesty's Government all possible success in the very long and difficult negotiations which lie ahead of them. My Lords, I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.