EEC BUDGET FOR 1980

HL Deb 02 July 1980 vol 411 cc465-504

8.10 p.m.

Lord O'HAGAN rose to ask Her Majesty's Government whether they will make a statement on the draft EEC budget for 1980 and the consequences for the United Kingdom; and whether they will state their views on Part III of the Report of the European Communities Committee on the 1980 budget (57th Report, HL 301). The noble Lord said: My Lords, the draft 1980 budget of the European Economic Communities is branded on my sub-conscious. I am a member of the European Parliament's Budgets Committee, and we seem to have been in continuous session since the Parliament first met after direct elections. Matters have reached such a pitch that the other night I awoke in a nightmare, having dreamed that I was giving a press conference in French about the latest developments on Parliament's attitude to the budget.

I hope that this evening's debate will not convince your Lordships—whether I speak in French or not—that you are reliving that nightmarish experience. I am taking the opportunity to provide a chance for this House to examine the very curious development of the draft 1980 budget, if it still is a draft, and to assess the merits and the consequences of the settlement of our own national contribution to the coffers of the European Economic Community.

The draft 1980 budget should have been a real budget by Christmas. We are discussing a baby which is six months overdue and whose final birth as a real budget is still, if only marginally, in doubt. I must say that it has been a fascinating and an educational experience to take part in the activities dealing with the budget from the Parliament's point of view. I should like to begin with that and then broaden out.

We have dealt with this budget in great detail and the first dramatic point referred to in this report from the European Communities Committee of your Lordships House—an admirable report which I wholly endorse, with one exception which I shall mention later—was the rejection by the Parliament of the budget last year. We all felt a little like the poet Wordsworth at the dawn of the French Revolution, and we dreamed for a few seconds that we were embarking on a new chapter in constitutional history, only to discover as the days and weeks drew on that the likelihood of our making a real dent in the textbooks was a little less clear than it first seemed.

But there is one fact about that budget rejection which I would bring again to the attention of your Lordships, especially as it has had very little remark made on it in the British media. The fact is that out of the 288 who voted for rejection, there were 17 Frenchmen. Seventeen Frenchmen voted against a budget designed to prolong and extend expenditure on the common agricultural policy. That is something worth noting. It is also worth noting—and, again, this is a point to which I shall refer later in more detail—that all the noises, both articulate and inarticulate, that had been made by the British about the common agricultural policy for years prior to the settlement of our contribution are now beginning to be made by the Germans.

So that when we are looking at the core of the problem of the financing of the European Community, we are approaching a state of political mobility in which the two other major contributors to the EEC budget are beginning to change the degree to which they adhere to the common agricultural policy in its present form. If the Parliament gave a little opportunity for beginning that process, and demonstrating that part of that process had already occurred in France, then that itself was no mean part in saving the finances of the European Community, which are, on present calculations, doomed to reach bankruptcy within a very short space of time—probably next year, certainly the year after and certainly pretty much at the same time as enlargement. Therefore, the road towards CAP reform has been, if not made straight, at least signposted by the actions of the European Parliament in rejecting the budget earlier in its life, late last year.

The second point I would make about the nature of this year's budget—and the analysis of its content, its defects and its advantages is very well spelled-out in the report from the sub-committee—is that the attitude of the Parliament itself to the direction of European Community expenditure was not a right-wing attitude, or a British Conservative attitude or a partisan, mono-national attitude. I mean that the Conservatives themselves, as part of a group, let alone the group strength itself, are only 60 out of a Parliament of 410.

Our Budgets Committee is chaired by a distinguished Socialist, Herr Erwin Lange, who I am sure the noble Lord, Lord Bruce of Donington, may remember, and our rapporteur on the budget was a most remarkable and quadrilingual Dutch Socialist, Piet Dankert, who guided the Parliament through all its tortuous negotiations with the Council and towards the evolution of a sensible strategy for reducing, restraining and controlling agricultural expenditure, so that other more serious new policies could be gradually elaborated.

We were guided through our activities, both as a Budgets Committee and as a Parliament, by Socialists working in co-operation with people of other parties, not only ourselves but Liberals and, indeed, a strong contingent of Italian Communists. Therefore, the pressure for reform of the Common Agricultural Policy, as expressed through the Parliament's view of the draft 1980 budget, is something that was worked on from a cross-party basis which, to me, is not only highly satisfactory but part of the purpose of the European Community. It was not only cross-party, but cross-national, and I welcome it.

What is most interesting is that the logic of that position has been reinforced by the activities of Her Majesty's Government in making sure that our own contribution is no longer as glaringly out in front of all the others as it was. Naturally, I should like to congratulate my right honourable friend the Prime Minister on her pertinacity and force of argument, and my noble friend the Foreign Secretary on his skill and charm in tying up the package.

But what is important is that their combined forces are not only something which serves the British interest. They go rather beyond that in what they have achieved, because they add to, or confirm, the two pressures that I was referring to. There is a general anxiety in other large member states at the cost of the Common Agricultural Policy, which threatens not only to fossilize the CAP as something which drains more and more of the Community's resources, but which prevents the development of new policies whether it is an energy policy, a better transport policy or whatever it may be.

So when we are assessing this budget—I hope this is the spirit which the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Brimelow, and their friends in this House will be able to share—I hope that we shall not be looking at it in the same spirit as the Opposition in another place, where I understand that they have a three-line Whip against the Government's achievements in re-jigging our contribution as a member state of the European Community. To disapprove of and vote against what has been hard won by the Government is also to disapprove of and vote against the steps towards a genuine and fundamental reform of the budgetary balance of the European Economic Community's finances and the only method by which reform of the Common Agricultural Policy is likely to be achieved in the immediate future, because it is up against that threshold of the I per cent. value added tax ceiling, against which agricultural expenditure is straining, which will provide the opportunity for an overhaul of the Common Agricultural Policy as a whole.

Far be it from me as a temporary, if unwilling, absentee from your Lordships' debates and the arduous labours which noble Lords have been going through on all the Bills which they have been discussing in recent weeks to say how this question should be dealt with by other participants. I have seen my own role as modest—one of fulfilling the purpose of a dual mandate by bringing to your Lordships a brief account of how development of the budget has seemed from the point of view of a European parliamentarian. I should like to add to the report that I believe there are serious defects in some aspects of the budgetary control procedure in the European Community. Again this is a subject of which I know the noble Lord, Lord Bruce of Donington, has made a special study. Indeed, his final report, his valedictory tone, is still being referred to very much now that the Parliament has finally established a separate control committee.

I do not think that the paragraphs of the 57th Report, which deal with the provisional twelfths, really represent the truth. I do not think that the European Com- munity has yet developed a mechanism for checking the expenditure made by the Commission if and when a budget is rejected. I would hope that our own European Communities Committee, perhaps, and the Parliament's budgetary control committee, certainly, in alliance with the auditors, could look at this particular provision. Unless the provisional twelfths system really works, rejection of the budget is a meaningless exercise, because expenditure, grossly distorted on export restitutions, on unnecessary intervention, or whatever it may be, can continue and in my opinion may well have continued, particularly in the last two or three months. So I would dissent from that aspect of the 57th Report.

The European Parliament has a role in the budgetary procedure which is going to take some time to develop fully. It is not limited merely to rejection or amendment and modification. It extends to control and to the final act of discharge which is, as yet, an unexplored power. I hope that my noble friend Lord Cockfield will be able to give us a hint on whether the Government are prepared to see the budget of the European Communities as something a little more than an accounting exercise for policy decisions already taken. This is my final point and I shall allow myself just a few minutes to elaborate it.

By and large, if you think in French or speak in French your conception of a budget is merely the conception of the man who draws up the bus timetable after higher powers have decided when the buses should start and should stop, whereas those of us who think in language derived from political experience in the House of Commons see the budget itself as a policy instrument, if not the supreme fiscal policy instrument and the supreme instrument of spending money. What has yet to be resolved is the extent to which the Council of Ministers is prepared to make a decision between these two conceptions.

An examination of the Treaty, in my view—and in the view, I suspect, of most members of the European Parliament—shows that the original authors saw the budget as a dynamic instrument. It is not enough merely to enter something in the budget if there is no legal base. I quite agree with that criticism which is sometimes made by the Commission. Nevertheless, the powers over the budget given to the Parliament are not those which could be given to an elected body if all the policy decisions were outwith the powers of the Parliament itself. There would be no point in giving powers to a Parliament to deal with a budget which was merely a technical expression of decisions taken elsewhere.

If, therefore, for one second my noble friend Lord Cockfield could look beyond the immediate problem and the difficulties that have vexed the Treasury night and day, I am sure, just as much as Members of the European Parliament over this year's budget, which has nearly completed its birth pangs and soon is to become a proper budget, and say to which side of the argument Her Majesty's Government incline, this would provide your Lordships not only with an opportunity for hearing from the Government how they now see the 1980 budget in its wider framework but also with an indication that we in this country, after our national contribution has been dealt with, at least for the next two or three years, are now going to pick up the treaty, not hide behind it and use it as a defence, and work in it, with it and through it to construct a genuine European Community with a wide range of new policies that will make the European Community worth working for, and in, rather than merely the technical and remote bulwark against communism and extremism which it now seems to he to most people in this country and, I suspect, in other member states.

8.28 p.m.

Lord GLADWYN

My Lords, I think that we should all be very glad that this important matter has been raised by such a young, energetic and important Member of the present European Parliament as the noble Lord, Lord O'Hagan, who, I understand from his reference to the poet, was a year ago glad to be alive, but to he young was very heaven! I can only hope that the noble Lord, Lord O'Hagan, feels the same at the present time.

I propose to touch only very briefly on the second part of the Unstarred Question; namely, to ask the Government to state their views on Part Ill of the excellent report of the European Communities' Committee on the 1980 Budget. Para- graph 36, to which I hope the noble Lord, Lord Cockfield, will refer, inquires whether the Government are convinced that there is a reply to the five queries contained in that paragraph, which seem to throw certain doubts upon the expenditure solution which was agreed to in the recent compromise in Brussels on the British contribution to the Budget. There seem to be certain doubts about this, but I understand from the evidence that the Treasury officials are convinced that there is nothing in them. If that is so, perhaps the noble Lord, Lord Cockfield, will explain to us exactly why. I should be very grateful if he would.

I shall confine my brief remarks more to the future of the Community arising out of the budget debate, and the future of the Parliament and the Community as a whole. I suppose that the chief question in the chequered history of the 1980 budget was whether the European Parliament was in fact justified in rejecting it after they had refused to accept the amendments proposed by the Council of Ministers, though of course legally it was perfectly possible for them to do so. My own view, and without going into it at any great length, is that the gesture of the Parliament was justified if only because it demonstrated that the Parliament was a force to be reckoned with and that Ministers would have to take its view in future into serious consideration.

Of course, one can argue to the contrary. Those who are opposed to the European concept generally, and therefore more especially opposed to the European Parliament, undoubtedly will argue that the rejection was not justified because, in the event, the Parliament had effectively to climb down, and therefore it only showed that it had no real power, and so on. I do not believe that that is true. I believe it was justified for the reasons I have given. But clearly, apart from the overriding consideration, the gesture of the Parliament was ineffective. The approved budget—it was approved finally the other day—only gives the Parliament a very limited degree of satisfaction with regard to regional and social funds. And the chief object which the Parliament tried to achieve in rejecting the budget, namely, the freezing of agricultural prices, was rendered inoperative by the Council's decision of May of this year, when, as we all know, they accepted the 5 per cent. rise.

I suppose it can also be argued, though perhaps I would not argue it myself, that had it not been for the British veto on the rise in agricultural prices negotiation for the new United Kingdom contribuiton, which has now happily been agreed at two-thirds of what was originally asked for, would have been more difficult. As we all know, that agreement in Brussels the other day was based on an agricultural deal whereby in return for the very notable concessions made to us in regard to our contribution we had to agree, or we did agree, to a 5 per cent. increase in agricultural prices.

The Commission's proposals for the 1981 budget are, I understand, not yet formulated. I suppose they will shortly be discussed, as usual, with the Parliament in the relevant Committee. As we all know, discussions between the Commission and the Parliamentary committees are usually very fruitful and very constructive. The Parliament puts forward certain views and the Commission accepts them or not. Anyhow, there is usually a consensus which is then put up by the Parliament to the Ministers for acceptance or rejection. That, I suppose, will happen and the Ministers will then get the resulting document later in the summer. It will probably come before the Parliament in October. The Parliament will then reconsider it and before the end of the year it has again to accept it or reject it.

If a budget can be prepared in this way by the Commission and submitted to the Ministers—a budget which provides for the present expenditure in regard to the Common Agricultural Policy; that is to say, if the Commission believe that they will not be running short of cash in 1981, and I think there is some reason to suppose that they will not run short of cash in 1981 —then the European Parliament will probably have before it much the same sort of budget that it had towards the end of last year. I should have thought that it cannot differ very substantially from the 1980 budget. As we all know, the Parliament rejected that budget. Nevertheless, the Parliament will surely try to improve this document. It may do so to a certain extent, though surely only within strict legal limits.

In so far as the present recession goes on, as it probably will, the Governments will by the very force of things become increasingly niggardly from the Parliament's point of view, and therefore it is not to be expected that the Parliament will have very much success in amending the budget in accordance with its obvious wishes. I hope, therefore, that in those circumstances the European Parliament will not, if things work out in that way, repeat its gesture, not because I think it was unjustified last year but because, as I believe, it will have to reserve all its strength, as it were, for the immense debates which will naturally take place on the 1982 budget, a year later. A very significant struggle will obviously take place then. For what will happen in respect of the 1982 budget is that the Community will have run out of cash; I think there is no doubt about that. It will run out of cash and there will not be enough money to finance the Common Agricultural Policy. Therefore major decisions will obviously be necessary.

The budget, if it is eventually passed, will have to be completely restructured, involving naturally a revision of the CAP, which cannot be avoided in the circumstances. Surely there must be a re-think then about the whole purpose and future of the Community. If the Community is to go on it must be more broadly based financially than it is at present; in other words, there must be some increase in what are called "own resources" of the Community—its own money. Hence, one would have thought that in principle the 1 per cent. VAT which is now subscribed in addition to Customs receipts by all the member states will have to be increased if there is going to be any valid solution. That will have to happen if any really satisfactory solution is to be found. If the Governments have any sense at that point they will agree to increase the "own resources" because that is the only way in which one will ever work towards what is called convergence of the economies; that is to say, more money diverted perhaps from agriculture into the regional and social funds, more money circulating generally, and the only way to achieve in the long run any kind of sensible Common Agricultural Policy.

At the moment there is no prospect whatever of any such decisions. If the "own resources" are to be increased, as understand it, not only all the Nine Governments have to agree but all the Nine Parliaments, too. At the moment that is clearly out of the question. A deepening recession makes this improbable; nor is it, as I have said before, immediately necessary. But what will happen a year or a year and a half from now in the presence of perhaps a deepening recession? If they cannot agree on some such lines it seems to me that in all probability the Community will be in danger of disruption. Powerful forces will be working for protection as a result of any increasing slump. They will be working for protection in all the countries of the Community, but more especially, I think, in this country of ours. If they prevail, then inevitably we shall have separate and what are called directed economies in all the countries of the Community, and certainly here.

By the very force of things those will be run by elements hostile to NATO and who are possibly in favour of some deal with the Soviet Union. It is quite possible to imagine that these elements could be in power in 1983 or 1984. One does not have to be very imaginative to contemplate such a possibility. I do not think this is at all a flight of fancy or a prophecy of doom; it is a very real possibility which we must contemplate. If we choose the path of protection in 1983, or even 1982, which we may do—and the decision of this country will depend largely on what happens in Europe—then, as I see it, economic disintegration will inevitably imply and involve political disintegration, the one inevitably resulting from the other. In such distressing circumstances 1984 will certainly witness, if not the emergence of what Orwell called Airstrip One—a rather outdated conception, because Orwell wrongly imagined that we were going to have a nuclear war in the late 'fifties—at least the emergence and effective creation of what he called Eurasia, of which we should then be an integral part.

I think there are already a considerable number of people in this country who would not find this solution absolutely insufferable. Quite a few even now would not object to our becoming the equivalent of the German Democratic Republic which, after all, has not done badly for a communist state, and if the recession persists into 1982 and 1983—and this is not just alarmism—they could be a majority. In those circumstances of course there would not be a nuclear war, which would be a great achievement as such, but obviously we should have lost our freedom.

So I think we can at least all agree—and I hope the Government will agree—that the budget of the EEC will become more and more important as the years go by, and perhaps we can further agree that the role of the European Parliament in the formation of the budget, in conjunction with the Commission, will become more and more significant. I do not think that at the moment there will be many in this country who would also believe that unless we can agree in the European Economic Community to a measure of supranationality we are in for the gravest trouble. But I fear that we only have to wait for a year or two before this stark choice becomes increasingly plain.

8.43 p.m.

Lord SHERFIELD

My Lords, I should like to add my thanks to the noble Lord, Lord O'Hagan, for putting down this timely question on the EEC 1980 budget and for adding to his burdens by coining here at a rather late hour this evening to give us a first hand and authoritative account and interpretation of the proceedings of the European Parliament on this issue.

This budget has survived an exceptionally rough passage and has had to weather two separate major storms: the first was its rejection by the European Parliament and the second was the controversy over the British budget contribution. I shall not deal with the former because all the speakers in this debate know much more about it than I do but I will say a few words about the budget contribution.

There has been plenty of criticism of the tactical handling of this issue in the negotiations with our European partners, but I think the result has shown that the strategy was sound. There has also been criticism of the outcome. But since this was so much better than was generally expected I feel that there is more than a trace of sour grapes here because I would wager that if the Opposition or Liberal Ministers had brought back the same amount of bacon they would have been as pleased with themselves as the Government were.

Lord GLADWYN

My Lords, did the noble Lord say that the Liberals would be just as pleased? Of course we are very pleased with the compromise arrived at in Brussels. The Liberals are delighted.

Lord SHERFIELD

My Lords, however that may be, there was of course an element of compromise in the result. It was not practicable to deal with the budget issue in isolation. It was necessary to relate it in some degree to the resolution of other issues. That was to be expected, if not inevitable. So I find the objections which have been raised to the settlement somewhat contrived. It seems to me that only a committed opponent of the European Community would insist upon getting 100 per cent. of his opening demand in this kind of deal. It was not a perfect solution. There may still be some uncertainty about some of its implications, but it was a far better outcome than seemed obtainable at any previous stage of the negotiations, and our own negotiators—and also our Common Market partners—ought in my view to be heartily congratulated on the result.

Having said that, my Lords, I now want to say something about the report of your Select Committee on the European Communities on the 1980 Budget, which was published two days ago. I do this in the lamented absence of the noble Lord. Lord Plowden, the chairman of the subcommittee concerned, who was unable to be in his place this evening. The subcommittee took evidence from Mr. Pieter Dankert, a member of the European Parliament and the rapporteur on the budget questions; from Mr. Taylor and Mr. Balfe—two more members of the European Parliament—and from Treasury officials, and it also took evidence at an earlier stage from Mr. Nigel Lawson, the Financial Secretary to the Treasury. The committee is grateful to all those who helped in the production of this report.

The report itself is in three parts. The first gives an historical account of the rejection of the budget by the European Parliament, and its consequences. The second gives a similar historical account of the negotiations about the British contribution. These are matters of record and I shall not discuss them further tonight, other than to say, with reference to my opening remarks, that the committee considered that the final agreement represented a considerable achievement in temporarily redressing the balance of the United Kingdom contribution and they particularly welcomed the commitment to a review of the structure of the budget.

The third part of the report deals with the future and gives the conclusions of the Select Committee. Those of your Lordships who have followed the question of the British contribution over the years may recall that in 1975 the Council approved the adoption of a financial mechanism designed to refund in part excessive gross contributions to the budget. Owing to a number of restrictive criteria and conditions which were written into the document setting up this mechanism, the device was not particularly effective and the first solution proposed by the Commission to meet the British problem was to remove these restrictive conditions and to enable our contribution to be reduced by £350 million in 1980. It was this proposal which was rejected at the Dublin Summit in November of last year. It was a solution which covered one year only.

The final conference at Brussels last month covers two years explicitly and makes contingent provision, on similar lines, for a third year. But it contains two elements: the "mechanism solution" and the "expenditure solution"—that is to say, the adoption of special temporary and ad hoc measures for the purpose of increasing the current low level of Community expenditure in the United Kingdom.

Your committee were assured that the required level of expenditure in the United Kingdom could he attained without difficulty even if the agreemen' covered a third year and no doubt the Government are satisfied that these expenditures will, in the event, be forthcoming. Nevertheless, the solution found for our budgetary problem is, in essence, a transitional one and your Lordships' committee emphasise that the expenditure method cannot effectively form the basis for the permanent solution that must be found when own resources" have to be incteased. The Commission had originally itself criticised the expenditure solution on a number of grounds, as the noble Lord, Lord Gladwyn, pointed out. They have now accepted it, however, as an essential in- gredient of the compromise agreement, though their criticisms still have validity. They are five-fold. They are contained in paragraph 36 of our report, and I do not think that I need read them out this evening.

When he gave evidence to our subcommittee last December the Financial Secretary to the Treasury said that the Government believed that the best solution would be a new mechanism operating on the net contribution to the budget. Such a mechanism would be more consistent with Community principles, leaving revenues to be collected in accordance with the own-resources concept instead of their being artificially arranged so as to produce a desired distribution of net budgetary contributions.

Nobody, I am sure, will doubt the extreme difficulty of finding a solution to the Community's budget problem when the existing "own resources" run out in a year or two. But it was your committee's view that the objective should be a solution based on a mechanism controlling net contributions rather than a programme of Community expenditure in member states, which would need to be negotiated year by year, and would he liable to cause uncertainty, delay and friction. I think that this report of your Select Committee is highly relevant to this debate and I commend its conclusions to the House and to the Government. I hope that the Minister will be able to take some account of it in his reply to this debate.

8.52 p.m.

Lord CAMPBELL of CROY

My Lords, I, too, thank my noble friend Lord O'Hagan for giving us this timely opportunity to discuss this question, and also for giving us his own first-hand account of the events which led up to the Brussels meeting at the end of May. I am glad also to follow the noble Lord, Lord Sherfield, who has introduced the report which is referred to in the text of the Unstarred Question which we are discussing. In particular, he referred to Part III, in which the sub-committee who worked on this put forward their ideas for the future. As a member of the sub-committee myself I am grateful to the noble Lord, and to the noble Lord, Lord Plowden, for the amount of work that they have done in the preparation of this report.

I should like to start by congratulating the Government and my noble friend Lord Carrington on the success of the Brussels meetings. Agreement was reached at the end of May and it was outlined in my noble friend Lord Carrington's Statement in this House on 2nd June. Formulae were agreed for 1980, 1981, and for 1982 if more permanent arrangements have not by then been made. I will not examine these complex formulae tonight, but they do constitute welcome and justifiable relief for the burdens which the United Kingdom has been carrying, burdens which have been increasing.

I will tonight simply make three points. First, I would point out that fortuitously this year the annual determination of farm prices and the major decisions on agriculture have taken place at the same time as decisions on the annual budget. The two Councils, one of Foreign Ministers and the other consisting of Agriculture Ministers, were meeting at the same time. This happened by chance because of the budget having been rejected by the Parliament. Could not this be repeated in future years? Could not the EEC arrange for their financial year to coincide in future with the agricultural year? This is something which many of us have been pressing and we hope that Her Majesty's Government will also press it. I trust no one in your Lordships' House will consider that I am inciting rebellion when I suggest that it might even be worth the Parliament throwing out the budget every year on the first round if it were to lead to these decisions being taken sensibly at about the same time. Certainly the additional twelfths system which enables the Community to go on ticking, although it has great shortcomings which my noble friend Lord O'Hagan pointed out, none the less enables the EEC finances to continue.

My second point is this. It is the same as the one made by the noble Lord, Lord Sherfield, so I will be brief. The Brussels agreement is in two parts; first, the financial mechanism and, secondly, the special additional expenditure for the United Kingdom. The 1975 financial mechanism, which was part of the renegotiations and therefore related to the referendum which took place in 1975, I am sure was entered into in all good faith. But it has proved to be ineffective. The United Kingdom did not fulfil all the conditions required before the mechanism could be activated, even when we were bearing a very heavy burden and that burden was increasing. So that defective system has now been put right, we hope, for at least three years. The second part of the agreement, the special expenditure for the United Kingdom, does also carry with it some examples. They are given as the financing of coal projects, transport infrastructure, special interest rates on loans connected with the EMS, and agricultural improvement schemes. Those examples, I think, will cause your Lordships to realise that these are not matters which can be put into action very quickly.

I am delighted that it has been thought possible to do this for a period of two or three years and it is welcome that plans for this are already in hand. But as stated in Part III of your Select Committee's report, it is not easy to arrange for one member country to have, for example, additional expenditure on special public works programmes, which are not really seen as necessary, because if that happens it will be unpopular with the membership as a whole in the EEC. It may be acceptable for a short period as proposed, but it is not a long-term solution; so for the longer term we must concentrate on a mechanism solution. That is my second point. The mechanism governing net contributions must be the key to a long-term solution. There is a commitment to review the patterns of expenditure and the operation of the budget". The United Kingdom will be able to press for lasting reforms which will help solve the British budgetary problem". These are extracts from the Statement made by my noble friend Lord Carrington, and they bring me to my third point.

I believe that the United Kingdom Government ought to be working now on possible solutions. If they are not they ought to start now. The Commission is due under the agreement which has been reached to submit proposals by June 1981. That is less than a year from now. The whole Commission itself is due to be replaced or reappointed during these coming months. The Commissioners themselves are in a state of uncertainty. It is in our interests in the United Kingdom to help with the groundwork and the vital quest for a satisfactory and lasting solution. Perhaps we could do this in consultation with the Germans. After all, they are now going to be the largest net contributor to the EEC budget. The formulae for a future mechanism must take into account the expected enlargement of the Community to 12 members. Greece is due to join in January, Spain and Portugal at some time from 1983 onwards. The one thing we do know is that they are to be net beneficiaries for their early years in any case, which means that their additional membership will add to the total burden being borne by existing members.

So I do urge the Government to give all the help they can to the EEC Commission in working out proposals which are likely to be acceptable for the Commission to put forward by June of next year. Those proposals may well have to be complex. That does not matter, provided they allow for all the situations that are likely to arise in the coming years. I feel sure myself that the Commission will be glad of suggestions from any interested quarter. Their task is hard enough in all conscience. Work should be started soon in preparation for this radical review which will inevitably be of the greatest importance to the United Kingdom.

9.2 p.m.

Lord ARDWICK

First, I would like to say a word of gratitude to the noble Lord, Lord O'Hagan, for arranging this debate today. I should also like to say a word about the report itself. Perhaps I ought not to do that since I am a member of the committee which produced the report, and indeed of the sub-committee which was responsible for it. Nevertheless, as an old editor I cannot resist giving my private Pulitzer prize to whoever it was who put the words on paper because they have dealt with a most difficult subject in a beautifully clear and concise manner. I am afraid that when you leave the rhetoric behind and get into the detail, many of the subjects with which the European Community deals are rather heavy going, none of them more so than the Community budget.

Even as a member of the European Parliament I was reluctant to spend my passions on it, and indeed there was no need because my noble friend, Lord Bruce, brought his political zeal together with his professional expertise. May I say for once that that word is used exactly—expertise. He led the battle of the budget. Meanwhile, he explained at every stage to us, the semi-numerate members, what the Ministers were up to and why they must be attacked. Had we followed his lead, the budget would have been thrown out by the old Parliament, and for exactly the same reasons that inspired the new one. What we learned two or three years ago under Lord Bruce's tutelage is now common knowledge: roughly three-quarters of the budget goes to agriculture, and only one-quarter to such things as the regional and social funds.

The first kind of largesse, the gift of town to country, it is generally agreed now is too lavish. It over-rewards the rich farmer and it calls forth huge surpluses of food that are costly to store and can be sold only to underserving foreigners at knock-down prices. The second largesse is inadequate. There can be no significant progress towards closer economic integration in Europe, there can be not much progress towards convergence, there cannot even be progress up the foothills beneath the summit of monetary union, without substantial transfers of resources to the poorer regions.

The present scale of redistribution effected by the regional and social funds is still so small that it is little more than a token, and the increase that Parliament asks for is a token increase, an assurance that the Community even in these dark days of world recession, of national stringency which we all find ourselves in, a sauve qui peut situation—that in spite of all this the Community has not lost all vision of the goal of closer union.

It would be reassuring to learn that this Government, despite their relentless though not unjustified pursuit of national interest in Europe, still adhere to that goal. The formula that the Government adduced to rectify the unintended fiscal injustice to this country was that of the broad balance, which meant that Community expenditures in the United Kingdom should be roughly equal to our gross contribution. It was a good formula in these special circumstances. But I hope it is a temporary formula, pending the grand reforms of the budget and of the CAP that are to be achieved over the next few years, for if it became the universal rule it would paralyse the development of the Community and end all hope of economic convergence.

This year I think we have talked too much about the budget and too little about the Community's actual works. This has been the consequences of the budget's involvement in two distinct but inseparable crises: the scandalous burden it put on Britain; and the desire of the new, elected Parliament to test its muscles by demanding larger non-compulsory spending.

The new Parliament was not only taking on where we had left off. The arguments about the CAP and the regional fund were unchanged. The only difference was that the new Parliament resolved to use its powers to the full. The powers, of course, are no different from those limited powers that we, their predecessors, had. How limited those powers are the new Parliament has now discovered. But the idea of an elected Parliament was conceived in a bed of beguiling illusions. Because a European federal government would require an elected Parliament with full legislative and budgetary powers, many people believed that an elected Parliament could demand such powers and pave the way to a federal government. Not a hope!

The next illusion was that the sheer legitimacy of an elected Parliament had such mystical force that the council would collapse before it and do its will. One blast of the legitimate trumpet and these walls of Jericho would fall. The advocates of this theory drew on a false historical comparison. Elected parliaments, they said, gained in power simply because they were the voice of the sovereign people, and so the tyrannous executives had to yield to them. It would be much nearer to the truth to say that parliaments have traditionally gained power because they, and only they, could raise the taxes from the people that were needed by the executive to run the state. The European Parliament, I am afraid, has not the power to raise one penny piece in taxation, not even for its own expenses.

As The Times pointed out the other day, this is in the hands of the national Governments responsible to their own democratically elected Parliaments. The only budgetary power that the European Parliament has is to have a say in how the money should be spent and to hold up the budget for a limited period if it disagrees with the proposed solutions. In the end, if the budget is held up too long, then the process must stultify the work of the Parliament itself. So it is a very limited power.

The six months war between the Parliament and the Council is now over. The Parliament has not gained a victory. The budget is not very much different from the one they rejected, but I do not think that they want to be too despairing on that account. After all, I think that it was Cyrano de Bergerac who said that the vain gestures are the most beautiful of all. They have not sustained a humiliating defeat. And, by what they have done as regards withholding funds in the dairy sector, they have signified their demand to be consulted when the reforms of the CAP are being discussed. I think that they can take quite a lot of pride in what they have done, even though the final result is rather disappointing.

Of course, the budget itself will have little effect on Britain which will have to pay some hundreds of millions of pounds less into the Community, or on France and Germany which will have to pay some hundreds of millions more, in consequence of the stand taken by the British Government. Because, large as those sums may seem in themselves, the Community budget is a pale shadow besides the gigantic budgets of national states—I think that it is less than 1 per cent. of the gross domestic product of the Community. The changes effected by this budget will make no visible change of which we shall be aware in our standard of living.

So I hope that the new Parliament will be less obsessed by the next budget and that as a consequence the very good work which is now being done by the MEPs in the committees, of scrutinising and working out amendments to the draft legislation, will be seen by the electorate to be both important and effective.

There is work of great importance to do in preparing the Community for the day when it will be possible to plan a concerted reflation or expansion on the basis of stable currencies and stable exchange rates. There is important work to he done, too, on eliminating the non-tariff barriers to trade, on developing an industrial policy and an energy policy and a creative and enlightened role vis-à-vis the developing countries. There is, in short, plenty of work, apart from these budgetary protests, for the European Parliament to do.

I was very struck by what the noble Lord said about whether policy should follow the budget. That can never happen. It is not only a French thing—it does not happen here. The Chancellor of the Exchequer does not say, "How much money can I raise?" and then look for worthy objects on which to spend it. Anyone who has experience of the Treasury knows that it is much harder than that. No, policy must precede the Budget. Surely the Community will find the money for the policies that it wants to carry out. The most significant and powerful work that Parliament can do is to change those policies and get those policies adopted by the Council of Ministers, rather than engaging in these splendid but rather futile demonstrations.

9.12 p.m.

Lord BRIMELOW

My Lords, when I fist became a Member of your Lordships' House, the noble Lord, Lord O'Hagan, was a Member of the European Parliament and I was deeply impressed by the quality of the contributions which he made to the debates on Community affairs. His introductory speech tonight again shows the advantages which a diligent Member of both the European Parliament and this House can make to these debates. I join gladly in the tributes which have been paid to him hitherto.

After the brilliant speech by the noble Lord, Lord Ardwick, I wish my own contribution to be brief and pedestrian. In his Question, the noble Lord, Lord O'Hagan, sought to elicit a statement from the Government. I should like to elicit such clarification as the Government may be willing and able to give of that part of the Brussels agreement which is reproduced verbatim in paragraph 29 on page xii of the Select Committee's report. It deals with the 1982 budget of the Community, and the noble Lord, Lord Gladwyn, emphasised the importance of that budget. It begins by saying that the Community is pledged to resolve the problem by means of structural changes. Yet, if we turn to Part III of the Select Committee's report—as the noble Lord, Lord Sherfield, has pointed out—in paragraph 37, the Select Committee draw attention to the evidence given by the Financial Secretary on 13th December last year, stating that the Government believe the best solution will be a new mechanism operating on the net contribution.

Is there not a potential contradiction between the recommendation of the Select Committee and the Brussels statement, with its emphasis on the structural solution? Have the Government any comment to make on that? Paragraph 29 continues: The examination should concern the development of Community policies". The noble Lord, Lord Ardwick, spoke of a grand reform of the budget and the Common Agricultural Policy, not of the development of those policies: … without calling into question the common financial responsibility for these policies". The noble Lord, Lord Gladwyn, said that the Community was going to go beyond the limit of its own resources. The question was raised in evidence—I refer to the right-hand column on page 24—and the witnesses said that if we get to the ceiling we must have procedures to gain time for a solution to be negotiated. These might include some form of national financing of expenditure which at the moment is financed from the Community, or possibly the raising of a levy on the production of particular agricultural products". Is that ruled out by that part of the Brussels statement which says that there must be no: calling into question the common financial responsibility". I think that this is potentially important, because if part of the present Community expenditure were to be transferred to the financial budgets, the relief on the Community budget could he considerable.

But the Brussels statement does not envisage that. It continues: without calling into question … the basic principles of the Common Agricultural Policy …". The Treaty of Rome has nothing to say about the basic principles of the Common Agricultural Policy; it uses different language. It talks about the purposes and aims, not about the principles. It may be that this wording is intended to give the Community some freedom in its choice. I am not aware that there are agreed basic principles, but are the Government able to throw any light on what the Commission is likely to regard as the basic principles? If the answer is, "No", I shall take that as a completely satisfactory answer.

Then it says that: This examination will aim to prevent the recurrence of unacceptable situations … If this is not achieved"— and here we have a safety-net under the preceding provisions— the Commission will make proposals along the lines of the 1980–81 solution and the Council will act accordingly".

The noble Lord, Lord Campbell of Croy, quoting the noble Lord, Lord Carrington, seemed to indicate that that is the more likely outcome: that this is something on which work will have to be done, and he called for suggestions. Do the Government also think that this is a more likely line of development than the preceding part of that statement? It is on those points that I should be grateful for such elucidation as the Government feel able to give.

9.18 p.m.

Lord ROBERTHALL

My Lords, I should like to associate myself with everything that has been said about the noble Lord, Lord O'Hagan. It was most refreshing and most interesting to hear directly from someone who is a Member of the European Parliament, and although this is very far from being a maiden speech, perhaps I could use the time-honoured formula used for such speeches, and say that I hope we shall hear a great deal from the noble Lord on some other occasions. It was most interesting.

Speaking as the last of the non-official speakers, I am in the usual position in that everything I had thought of saying has already been said, and I suppose that I should sit down at once. However, I should like to mention two of the points that have been stressed. As has been pointed out by several speakers, including the noble Lord, Lord Brimelow, the second part of the Question of the noble Lord, Lord O'Hagan asks the Government for their views on Part III of the report. Essentially, Part III deals with the two methods of financial adjustment—the financial mechanism and the expenditure. I very much agree with several speakers— including both the noble Lords, Lord Brimelow and Lord Campbell of Croy—that the Committee's strong recommendation to go for the mechanism is certainly the right one.

I agree with the view that has been expressed that our own Ministers did a splendid piece of negotiation. I should like to join in the tributes to our own Lord Carrington. Nevertheless, it was somewhat disquieting that there was so much stress paid in the negotiation on the principle of getting out as much as you get in, which is quite wrong for a body like this. I feel that the Government ought to go for a mechanism which will get it properly tied up so that you do not have this financial haggling, and also so that you do not have to give away all sorts of other points in order to get a settlement about money.

The second point I want to make has been touched on by several speakers—by the noble Lord, Lord O'Hagan, at the end of his speech, expecially by the noble Lord, Lord Gladwyn, and again by the noble Lord, Lord Brimelow—and that is that the review which has been promised to us, which is mainly going to be a review of the financial mechanism, is not really going to go far enough at present. The two things which are basically wrong with the Community at present are the Common Agricultural Policy and the failure to make any progress with convergence. We had a good debate on the Common Agricultural Policy on 17th April. Three of the speakers then called attention to the fact that the CAP now has diverged a good deal from the original intentions of Article 39. I am sorry that the noble Lord, Lord Gordon-Walker, is not with us tonight. He made a splendid speech in the debate on this very question.

That is closely tied up with the question of convergence, because the problem of the Common Agricultural Policy is not only that it has moved into a bad position but that it is taking three-quarters of the budget. What it takes for that is taken away from everything else, so that the convergence question in my view—and I agree with the noble Lord, Lord Gladwyn, on this—is going to get worse and worse with the enlargement that is taking place. The strains that will be set up in the Community if, instead of converging, the disparities in wealth and social standards, and that sort of thing, go on, will be a real threat to the Community. Although I do not suppose that the noble Lord, Lord Cockfield, can go as deep as this, I feel that we ought, if possible, to take the opportunity of this review, which has to be made because the money is running out, to look at where the Community is going and where it had hoped to go.

9.24 p.m.

Lord BRUCE of DONINGTON

My Lords, I should like to join in the expressions of appreciation which have come from all parts of the House to the noble Lord, Lord O'Hagan, first for having brought this subject on to the Order Paper at all, and secondly for the detailed and constructive account he gave of his activities, particularly in the Budget Committee of the European Parliament, and for the account he gave of the Parliament as a whole in regard to the budget. I am one of those who most certainly welcome the noble Lord, Lord O'Hagan, back in this House again. I recall that when it was first of all my privilege to be selected to represent your Lordships' House in the European Parliament it was a matter of great regret to me that on that occasion he unfortunately left the European Parliament, happily for only a temporary period. I also confirm in general what the noble Lord indicated about the spirit that pervades the European Parliament. It is of course true—and was certainly so during the time I was there—that very often the arguments cut right across both political and national boundaries.

I would, however, enter a small word of caution here. I found—I do not know whether the noble Lord has found it yet—that at the beginning of the budget year, which normally starts about May, when the Commission's preliminary draft budget is introduced, it meets with a united hail of abuse from all sections of the Parliament and lamentations concerning the gross defects of the Common Agricultural Policy wax loud from all sections of the House. However, one finds as the year passes that the protests gradually become muted as the respective delegations become more acquainted with the views of their national parliaments as to the way the budget should develop. It was one of my disappointments, which I hope is not given to the noble Lord, that in the end all one had when the budget was finally disposed of was a very mild whimper indeed out of Parliament.

Doubtless matters have changed, and as one who voted uniquely in 1976—I think I was the only Member of the European Parliament at that time to vote for the rejection of the budget—I rejoice in the consummation that has occurred recently and which has had certain constitutional consequences, which were dealt with very adequately by the noble Lord and by my noble friend Lord Ardwick, on the position of Parliament itself.

I had hoped that the Government might have considered it wise, in view of the importance of this subject, to make a statement immediately following the introduction by the noble Lord, Lord O'Hagan. That would have given the House some opportunity of taking a considered view on an expressed standpoint taken by the Government.

There may be perfectly good constitutional and other reasons why that did not happen, and I am certainly making no accusation or imputation of any kind in the establishment of the procedure that has been adopted. That being so, however, it leaves me and some of my noble friends in a position where, after having studied the response we shall get from the noble Lord, Lord Cockfield—which of course we shall not know until the end of the discussion—we may seek an early opportunity of debating the whole matter in very great detail.

Having said that, and addressing myself to the matters which were dealt with by the noble Lord, Lord O'Hagan, we come, first, to the refund of what the right honourable lady the Prime Minister described enthusiastically as "our money", or at any rate a certain proportion of it, by the negotiations that have taken place in Brussels, Luxembourg, Dublin and elsewhere. I say straight away that on the principle that some redress is better than none at all, certainly I welcome it. It means, I trust, that the public sector borrowing requirement will be reduced, although there are certain uncertainties with which I shall deal later. It is, of course, tempered by the fact that some £450 million still remains the net contribution of the United Kingdom, and that at a time of considerable stress in this country.

For those like the noble Lord, Lord Gladwyn, who think in terms of the European dimension, the sum of £450 million out of the United Kingdom Exchequer is small beer. That could be. But when one considers the cuts that have been made in public expenditure, £450 million paid out to the EEC is a very large sum indeed. It represents money that could otherwise have been spent in the National Health Service on, for example, kidney machines, of which there is now a shortage, or on equipment to deal with infant resuscitation, which is in short supply, to the danger of infants. Such money could have avoided the hassle that we have had over the cuts in school meals and school transport. It could have avoided, had we had it available, the necessity for making economies in the provision of school books and so on. In other words, had we had this particular money, and of course on the assumption that Her Majesty's Government were willing to spend it on these items, it could have afforded us very considerable relief. So let us make no mistake; the £450 million that remains is still a very substantial drain on this country's resources.

Nevertheless I tell the noble Lord, Lord Cockfield, in advance that if he wishes to make it, I shall give him the political point that in this respect the Government have done much better than the preceding Government. In case he may be tempted to make the point, may I additionally say to him, as one who fought this question in the European Parliament over many years, that when, three years ago, I ventured to raise in your Lordships' House the question of the deficit, I was, as nearly as was decent for your Lordships' House, howled down for having suggested the possibility that there was a deficit. I am bound also to inform your Lordships that in the European Parliament itself members of the Conservative Party spent much of their time denying that there was a deficit in Britain's contribution to the European Budget. But, be that as it may, we have some money back, and I for one am very pleased indeed about it.

However, there are one or two small snags. In the first place we have the financial mechanism amendments to, I believe, Regulation 1172 of 1976—and I would ask the noble Lord whether he will kindly cause to be placed in the Library, or alternatively printed in the Official Report, the details of the manner in which this particular matter actually applies. He will recall that in Volume 4 of the Commission's preliminary draft budget there was set out on pages 513 to 517 inclusive an exact working-out, based on the then criteria, of how Britain would benefit by the application of the financial mechanism.

The financial mechanism will now be amended by the new draft regulation, and it would be of assistance to your Lordships, and I am sure of assistance in particular to the noble Lord, Lord O'Hagan, if we could have set out exactly in a paper, in accordance with the new mechanism, the calculation of the sum involved, which I believe is to produce in the region of £350 million.

I turn now to the second part of the rebate and, like the Select Committee report, referred to by the noble Lord, Lord Sherfield, to the supplementary measures under Title 5, Chapter 58 of the Community budget for 1980, in which the Regional Fund provisions—and the Regional Fund regulations themselves have been partly amended for this purpose—are to be used as a means of refunding money to the United Kingdom in respect of specific projects.

As the Select Committee of your Lordships' House pointed out, there are quite a number of snags in connection with this. The projects which are to be supported by means of this supplemental relief have got to fall into certain categories, and it is not at all easy to comply with these categories, which I shall not go into for reasons of time. I sincerely hope that Her Majesty's Government will have, as I am sure they will, a whole list of projects, together with the required particulars, to put into the Commission as soon as possible in order that these may be considered.

The hurdle I am a little bothered about is the Regional Policy Committee itself, composed of the technical representatives of the Nine, and sometimes also the ambassadors, which has to consider these proposals and then, I think, sometimes on the basis of a qualified majority but sometimes unanimously, has to give approval to the projects before they are further considered. I hope I am not being unduly cautious when I say that, in view of the remarks made by President Giscard d'Estaing on, I believe, 6th June, when he indicated that there would be difficulties with the refunds to Britain unless some understanding was reached in other fields —I believe, fish, as the noble Lord, Lord 011agan, says—I sincerely hope that account has been taken of that, because it would be quite alarming if the whole of this remaining sum, or any substantial part of it, were to be prejudiced by an obstructive action being taken by one or more member states, now that the matter has been agreed in general principle, when the matter came to be discussed in detail. As I am quite sure your Lordships are aware, whereas there is a tendency in the United Kingdom, to which I have previously drawn your Lordships' attention, to comply rigidly with EEC law and to make the appropriate enactments, there are some countries—and I have no hestitation in mentioning France —which are sometimes prone to obey just those directives and regulations which suit them, and to disregard the rest. So I sincerely hope that the Government's optimism about the recovery of these sums is well founded.

My Lords, there is one other anxiety to which I would draw your Lordships' attention, and it relates to what has been said by many noble Lords concerning the I per cent. VAT ceiling which was established under the decision of 20th April 1970. This particular budget, which has now been enlarged to somewhere in the region of £10,000 million, now represents the fact that we have achieved a rate of VAT of 0.7216. One normally allows 0.01 of a per cent. for each 100 million units of account of expenditure. This is the official method of calculation which the Commission itself uses. I venture to draw your Lordships' attention to the draft budget itself, where, if you examine the items under Chapter 41 and Chapter 58, which deal with the money to be paid out by the financial mechanism and also the money which is going to be paid to Britain by the supplemental means, you will find that there is a token entry only, which means that the total which will become due to the United Kingdom has not been allowed for in the total of the budget which produces this VAT rate of 0.7216.

It is a matter of elementary mathematical calculation to realise that the total number of units of account required to meet these extra payments to Britain, on the assumption that they in fact materialise, amount to 0.11 per cent., which brings the total up to 0.83. If agricultural expenditure continues at its existing rate—and the Chancellor of the Exchequer speaking in another place this afternoon seemed to indicate that it probably would—and bearing in mind that there is a supplementary budget due later this year when the harvest is complete, it is quite clear that we shall be beyond the 1 per cent. VAT (as indicated in the decision of 20th April 1970) by mid-1981; and consultations unofficially with the Commission confirm that that is the date they are expecting.

Lord O'HAGAN

My Lords, I followed the noble Lord's analysis and I agree with his conclusion. May I ask about one step in the logic? Is the case that he is putting forward dependent upon the British refund being in this year's budget or in next year's budget? My understanding is that because the budgetry years of the United Kingdom and the EEC differ, it is most likely to be in next year's.

Lord BRUCE of DONINGTON

My Lords, for all practical purposes it makes no difference. A slightly larger sum will have to be taken into account next year in any event. The short point that I am putting is that this is very likely. If the noble Lord, Lord Cockfield, has information to the contrary, I should be glad if he were to give it to the House. My information, and my mathematical conclusions on the basis of extrapolation of past statistics, is that this is highly likely. If that is so, when mid-1981 comes, what is going to give?—because something has to give unless a unanimous decision is made to amend the decision establishing the I per cent. VAT base.

I think that the noble Lord, Lord O'Hagan, will agree—and I hope that I will carry the noble Lord, Lord Cockfield with me on this—that one thing that will not give is the expenditure established under the existing agricultural regulations; because, under the admission of Mr. Gundelach, they are uncontrollable. If there is a large harvest or a poor harvest or harvests of varying qualities, it is an open-ended commitment which gives a contractual right to the individual farmers concerned. Clearly that cannot give; it will have to go on in law. If we are in the middle of 1981 and this 1 per cent. is reached, it means that other expenditure will have to fall to the ground. I trust that the noble Lord, Lord Cockfield, may be able to express his confidence that I am wrong, but one of the things which may go in the massacre of the expenditure in keeping the Community within its cashflow limits would be the refund of monies to the United Kingdom. I put that to the noble Lord as a distinct possibility and I hope that he is able to reassure me to the contrary.

It is quite clear that there is much in what the noble Lord, Lord Campbell of Croy, said, when he said that he thought that the EEC budget year ought to coincide with the agricultural year. Of course it should—because that is all that the EEC budget is about. It is only about agriculture. The rest of the items are completely peripheral. It would be far more honest to face the position that the EEC, originally conceived as a European Economic Community—and I have the articles here—is, in fact, nothing of the kind. It is an agricultural community, heavily protected, with its prices fixed with a lot of other peripheral activities surrounding it and giving it some grounds for assuming respectability.

It is like the emperor without any clothes. Everybody pretends that this is a wonderful European Economic Community. In fact, it is nothing more than an organisation for the basic protection—and I am not complaining about this—of the agricultural interests in Europe. This is its main fundamental purpose. I willingly concede that there are political advantages in the membership of the Nine. There is an advantage in political cohesion; there is an advantage in the continuous consultation that the Nine have about a whole series of matters outside the economic sphere. Why not be honest about that and say that the real impact of the EEC has very little to do with economics outside the agricultural sphere and is really all concerned with politics?

Unless we face this—and I base this on the examination of the budget itself— the people of our country are not all that dumb and there is a growing realisation that the grand vista of the Common Market, as once laid before them, is not really what they were led to believe it was. There is a growing disenchantment with it, and there is a very good reason for this because whatever political benefits it has brought—and I would agree with the noble Lord, Lord Gladwyn, and other that these have been many—if the noble Lord, Lord Cockfield, can get up and recite in net terms the economic benefits that have accrued to the United Kingdom and its population at large, then I am sure that the whole country would be most grateful.

Has not the time arrived when we look to the EEC for what it is as distinct from what a large number of people would like it to be, affect to pretend it to be or imagine it to be? Look at it starkly. When people say they are going to amend or reconstruct the CAP, let those who have any faith in those declarations of determination to alter agricultural structures without altering the principles, which I believe is the current stance taken by the Prime Minister, remember in Lord O'Hagan's experience, most certainly my experience, Lord Ardwick's and Lord Brimelow's experience; we have had these sonorous statements now for years. We have had proposals galore from the Commission for reconstructing agriculture. This time we want to know whether a really genuine effort is going to be made.

For this purpose, will the noble Lord, in his reply—and I am trying to be helpful to him in this respect—interpret to the House just what his right honourable friend the Prime Minister considers to be the basic principles of the Common Agricultural Policy in which she still believes? If they are those comprised already in the treaties, then one would be very glad to know how exactly it is proposed to alter them.

I renew my thanks to the noble Lord, Lord O'Hagan, for having raised this subject and extend also my grateful thanks to other noble Lords who have made some extremely constructive observations during the course of the debate. I hope that the Government may take the opportunity this time to make a very constructive statement as to what their intentions are.

9.49 p.m.

The MINISTER of STATE, TREASURY (Lord Cockfield)

My Lords, we are all greatly indebted to my noble friend Lord O'Hagan for giving us the opportunity of debating these important matters. It is of course of particular interest to listen to somebody who is actually involved in the budgetary process in the European Parliament telling us exactly and precisely what went on. What he has told us this evening is, of course, ample justification for the existence of the dual mandate. We look forward to hearing from him again on many occasions to keep us in close touch with what is going on in Europe. The debate also provides us with the opportunity of discussing the report of the Select Committee of your Lordships' House on the 1980 budget of the Community, and it is to this that I propose directing my remarks rather than pursuing the broad anti-European line deployed by the noble Lord, Lord Bruce of Donington. We owe a real debt of gratitude to the Select Committee and particular to Sub-Committee "A" both for their vigilance and their penetrating analysis.

Reference has been made by a number of noble Lords to the fact that the report presents the issues involved clearly, simply and intelligibly. For all practical purposes, of course, the 1980 budget has now been adopted, and now that has been done and the question of Britain's budgetary contribution has been settled, it is possible to discuss these matters in a calmer and more reflective atmosphere. Indeed, the debate in your Lordships' House pays ample testimony to that. With the risk of confrontation now removed, we should all be able in the Community to proceed with the vitally important job of permanent reform of the financial structure.

Settlement of these matters has had another important effect, and my noble friend Lord O'Hagan referred to this in a very telling passage of his speech. So long, of course, as we were the only major net contributor, and indeed one of only two net contributors, other countries could regard these matters with a degree of detachment, if not indifference; but now that other countries have also become major contributors a greater sense of realism is already being brought to bear on the problems involved.

Tribute has been paid by nearly every noble Lord who has spoken, and particularly by my noble friend Lord Campbell of Croy, by the noble Lord, Lord Ardwick, and by the noble Lord, Lord Sherfield, to the success of the negotiations conducted by my right honourable friend the Prime Minister and my noble friend the Secretary of State for Foreign and Commonwealth Affairs. There has been some criticism of the settlement on the ground that we did not get all that we originally set out to get but, as the noble Lord, Lord Sherfield, so pointedly says, in this life one never does get everything one sets out to get, and where interests conflict, as they do here, and negotiations ensue, some degree of compromise is inevitable. We did in fact get two-thirds of our original objective and by any standards that is a considerable achievement—one in which we can take real satisfaction and also one on which we ought to congratulate both my right honourable friend the Prime Minister and my noble friend the Secretary of State for Foreign Affairs.

There is a further point here, namely, that any agreement needs to be satisfactory to both sides if it is to form the basis of future co-operation, and we do need to recognise that what we have gained other people have to pay. That is very clearly brought out in the table which appears in page XIII of the Select Committee's report. If we look at the actual facts of the settlement at Brussels, for 1980 our net contribution is now agreed at £370 million instead of £1,080 million: a reduction of £710 million. For 1981, our contribution will be £440 million instead of £1,300 million—a reduction of £860 million. For 1982, if the radical review of the pattern of Community expenditure and the operation of the budget is not then complete, there will be a corresponding reduction in the level of the United Kingdom's net contribution. In addition, there is a risk-sharing formula which ensures that if net contributions exceed the present estimates, we pay only a small and modest proportion of the increase.

The noble Lord, Lord Bruce of Donington, suggested that the amount we were left paying was still excessive, but I feel I must remind him that in 1978 our contribution was no less than £803 million, in 1979 it was £947 million and for both of those years, of course, the Labour Government, of which he was such a distinguished supporter, were responsible. So for those two years we contributed £1,750 million, while under the new agreement for 1980 and 1981 combined we shall be paying £810 million, which is less than half.

Just as important as agreement on figures was the agreement reached that there should be a fundamental review of the pattern of Community expenditure and of the operation of the budget. This is underlined by the agreed conclusion of the Foreign Affairs Council on 29th and 30th May. What they said was that this was, to prevent the re-occurrence of unacceptable situations for any of the member states". There is, therefore, a very clear commitment to reform on these lines. But quite apart from the determination which is expressed in these agreed conclusions, as a number of noble Lords have said, the ceiling set on "own resources" by the 1 per cent. limit on the rate of VAT accruing to the Community is itself a powerful force compelling reform.

It is perhaps a matter of great significance that both the French and the German Governments made it clear that they, like ourselves, take the view that this limit must be retained. No one would disguise the fact—and this point was raised not only by the noble Lord, Lord Bruce of Donington, but by other noble Lords as well—that this presents a very considerable problem for the Community. But the Community has faced great problems before and it has found answers to them, and this is another problem to which we are confident the right answer will be found.

The comments made in the Select Committee's report about the nature of the procedure to be adopted to give effect to the agreement reached on the reduction of the United Kingdom's net contribution, are a matter of great importance. These comments appear in Part III of the report. As the Committee say, the solution is a mixture of a mechanism solution and an expenditure solution and, in a technical sense, this is perfectly right. We appreciate the anxieties which the Select Committee express and we are as much concerned as they are to avoid any untoward consequences. In particular, it is important that undertaking expenditure qualifying for assistance from EEC funds should not have the result of weakening control over the aggregate of our public spending in the United Kingdom, and we are determined that it should not do so. It is also important that the adoption of this particular mechanism should not lead to bureaucratic delays, a matter to which the Select Committee also draw attention.

Perhaps it is important in this respect to make the point that while the programmes qualifying for support under Article 235 will need to be approved by the Commission, approval will not be required for individual projects within the programmes, and this in itself should avoid the kind of delays which have been feared. But the final safeguard, and perhaps the most important point of all, is that the mechanism solution and the expenditure solution are intended as means to secure an end; namely, to give effect to a firm agreement that there should be refunds of net contributions of the agreed amounts for 1980 and 1981 and, if needed, for 1982 as well.

It is the Government's belief that the arrangements under Article 235 can be satisfactorily implemented so as to give effect to the settlement. Indeed, the Community as a whole is politically committed to this. While therefore we believe that the anxieties expressed by the Select Committee are met, so far as the present agreement spanning 1980, 1981 and 1982 is concerned, we agree that the situation is one which needs watching, and we note the reservations expressed by the Select Committee about the inclusion of an element of this kind in a permanent solution. It is certainly our intention to press for a permanent and simple solution to this problem in the course of the radical review of the budgetary arrangements to which I have referred and to which the Community is now committed.

There are perhaps one or two individual points which were raised on this that I shall endeavour to answer. Lord Brimelow suggested that there might be some conflict between the resolution or the agreement by the Council of Ministers which is reprinted on page xii of the Select Committee's report, in which it is said: For 1982, the Community is pledged to resolve the problem by means of structural changes"; and the statement by the Financial Secretary which is quoted on page xv of the report, namely: that the Government believed the best solution would be a new mechanism operating on the net contribution". The first point to which I must draw attention is that the Financial Secretary's statement which is quoted was made on 13th December 1979 before the negotiations were brought to a successful conclusion and he was stating what we felt to be the best solution which we ought to strive to achieve. In the event, it was necessary to compromise with the other member states in the Community on a mixture of both a mechanism solution and an expenditure solution. Nevertheless, it remains, as I have said, our view that the best long-term solution is a new mechanism. There is therefore no conflict between what was agreed by the Council of Ministers and what we have said, because what we have said represents the point of view that we shall press in the course of the review.

Lord Bruce of Donington asked specifically if we could supply the House with details of the calculations underlying the financial mechanism refund to which the United Kingdom will be entitled for 1980 and 1981. It is not possible to do that at this stage because the precise entitlement of the United Kingdom can only be ascertained when the Commission's accounts for the year have been closed. Nevertheless, if it is the wish of the House, we will certainly make available a model calculation of the United Kingdom's entitlement, based on the Commission's latest estimates of the various quantities involved.

My noble friend Lord Campbell of Croy raised the question of the agricultural year and he was supported in this by, I think, the noble Lord, Lord Ardwick.

Several noble Lords: No.

Lord COCKFIELD

He was supported elsewhere in your Lordships' House. The problem here is that if one changes the date of the accounting year one either has to have one very short year, in which event one has two years in the course of one calendar year, or one has to have one very long period of accounts—in this instance it would be an account for 17 months—which raises very difficult issues of forecasting. Interestingly enough, this is an issue which has been raised in this country over the last 200 years over the question of the financial year in the United Kingdom. Many people think it would be a great advantage if the financial year were made to correspond with the calendar year; but the transitional problems have always been felt to be such that the change has never been made. The same considerations apply very much in the case of the Community budget. But do not let me deter my noble friend from continuing to press on this front if he feels that this would be the right solution.

My noble friend Lord O'Hagan raised the question of the budgetary process itself and also the question almost of the division of power between the Council and the European Parliament in relation to the budget. There have, of course, been differences between the Council and the Parliament over the budget ever since 1974 when the Parliament was first given powers over it. These differences arise from different views of the functions of the budget, as my noble friend so clearly explained in the graphic illustration he used of the French approach and the British approach to budgetary matters. The Council considers that the budget should provide for the expenditure likely to result from existing policies while the Parliament considers that the budget has a policy role and should take account of future developments in other policies. As has been said in the course of this debate, these differences in view led to disputes in both 1979 and 1980.

I was greatly relieved to hear the view expressed by more than one of your Lordships that similar difficulties were not likely to be experienced over the 1981 budget—a matter of great importance, of course, because the refund to the United Kingdom arises, as my noble friend Lord O'Hagan mentioned, primarily under the 1981 budget rather than under the 1980 budget. As was mentioned in the course of the debate, there is a token entry which has been put into the 1980 budget, which is to enable advance payment to be made if there is a shortfall in expenditure in other directions and the money therefore is available. But I think the real answer is that the Community and its institutions are still in the process of development, and it is inevitable, therefore, that from time to time differences should develop. We must hope—and there are good grounds for so doing—that future differences will be solved in just the same way as were the differences in 1979 and 1980 and that in the end the Community will emerge stronger as a result.

Finally, I should just like to say this. The agreement reached on our contribution to the Community budget means that a major source of discord between the member states of the Community has been removed. It means also that in the period immediately ahead our net contribution will be held within reasonable bounds. This will allow time for the Community to complete the radical review of its policies and of the budgetary arrangements which has been agreed and which is designed to ensure that unacceptable situations of the kind we have had to face in the past do not recur either for us or, indeed, for other member states.

The commitment to this review is an integral part and a crucial element in the settlement. The necessity for this review and the determination to carry it out is buttressed by the fact that the ceiling on existing Community revenue makes such a review inescapable. The review will provide us with an opportunity which has never been available before, since we joined the Community, an opportunity to work together with other member states for lasting reforms which are to the advantage and in the interests of all the members of the Community.

Following the settlement of our contribution the member states will now be able to concentrate on ensuring that the review results in the changes to Community policies which are essential if it is to continue to develop. We have now for the first time for many years the oppor- tunity to take full advantage of all the opportunities that membership of the EEC offers us. There was never a time when we were in greater need of opportunity. It now rests with us to show the determination to take advantage of this opportunity.