Financial Management

Financial Crisis – in the House of Commons at 5:07 pm on 20th January 2009.

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means 5:07 pm, 20th January 2009

Before I call the Economic Secretary, may I say that as the Front Benchers took 63 minutes out of the 90 on the previous motion, I hope that there will be a little more awareness of the number of Back Benchers wishing to take part in this debate? I shall try to vary the cast to some extent.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 5:22 pm, 20th January 2009

I beg to move,

That this House
takes note of an unnumbered Explanatory Memorandum from HM Treasury dated 4 December 2008, European Court of Auditors 2007 Annual Report, an unnumbered Explanatory Memorandum from the Department for International Development dated 8 January 2009, European Court of Auditors Annual Report on the activities funded by the seventh, eighth and ninth European Development Funds, European Union Documents No. 12156/08 and Addenda 1 and 2: Protection of the financial interests of the Communities: Fight against fraud, No. 12471/08 and Addendum 1: Annual report to the discharge authority on internal audits carried out in 2007, and No. 12472/08: Report on the progress at 31 March 2008 on the modernisation of the accounting system, an unnumbered Explanatory Memorandum from HM Treasury dated 16 October 2008, European Anti-Fraud Office: eighth activity report for the period 1 January to 31 December 2007, and European Union Documents No. 14480/08 and Addendum 1: Commission Report to the Council on the follow-up to 2006 Discharge Decisions (Summary)—Council recommendations, and No. 14481/08 and Addendum 1: Commission Report to the European Parliament on the follow-up to 2006 Discharge Decisions (Summary)—European Parliament Resolutions;
and supports the Government's promotion of measures to improve the level of assurance given on the Community budget.

I am pleased that we are able to have this debate on EU financial management issues on the Floor of this Chamber for the first time in three years. I appreciate that there are other attractions taking place at the moment, most noticeably the inaugural address of the 44th President of the United States, but Parliament rightly attaches great importance to the protection of the financial interests of EU taxpayers. Even though this debate might be relatively sparsely attended, I am sure that there will be other opportunities to address some of the issues that have been talked about today.

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Photo of Bob Spink Bob Spink Independent, Castle Point

The Economic Secretary has started generously, and that is characteristic, but what value can we put on any of these documents, and what confidence can we have in them, when the EU is totally unable to get its accounts audited? The reasons for the lack of audit are not minor errors, but major deficits and major spending errors in each of the main heads. What confidence can we have in any of this? Is it not just nonsense?

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

It is not nonsense; it is an important part of the scrutiny process. The hon. Gentleman got to the nub of the question, and in a few moments I will address directly the issues that he raised

This is a timely debate, because on 10 February, European Finance Ministers will meet at ECOFIN to make their recommendations to the European Parliament on the discharge of the 2007 budget. I look forward to hearing hon. Members' views today; I am sure that they will be useful in helping to shape the UK's position in the run-up to those Council discussions.

Regrettably, today we are faced with the inability of the European Court of Auditors to give a positive statement of assurance on the EU's accounts for the 14th consecutive year. I want to be clear from the outset that the Government consider the situation entirely unacceptable. It is simply not good enough that the majority of the EU budget suffers from a material level of error; errors affect more than 2 per cent. of expenditure in most policy areas. On expenditure on the structural and cohesion funds, the court estimated error of 11 per cent., or approximately £4 billion. That is a particular concern, as is the Court's opinion that the member states' and the Commission's supervisory systems are only partially effective in ensuring the legality and regularity of transactions in that significant area of EU budget expenditure.

It is disappointing that the Court was unable to give a positive opinion on agricultural expenditure; last year, it anticipated that it would be able to do so. In that area, it estimates that the material level of error still lies between 2 and 5 per cent., which is between €1 billion and €2.7 billion. European Union taxpayers deserve better.

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Photo of Philip Davies Philip Davies Conservative, Shipley

It really is not good enough for the Minister to say, "It's not good enough of the European Union." Surely the problem is that each year the accounts are not signed off, but the following year the UK Government give even more money to the European Union. In what other case would the Treasury agree to give ever more money each year to an organisation that had not had its accounts signed off properly? Surely the answer is for the UK Government to say, "We won't give you any more money until you get your accounts signed off properly."

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I certainly agree that European Union taxpayers deserve better. Before turning to some of the key actions that we believe are needed to deal with the recurrent problem, I want to mention the improvements that have taken place in recent years. In many instances, they are in large part due to the UK's continued pressure on financial management issues.

The European Court of Auditors has again been able to give a positive opinion on 40 per cent. of EU budget expenditure. That compares to 35 per cent. in 2005 and just 6 per cent. in 2003. It is not good enough, but still a significant improvement. This year, the Court for the first time gave a positive opinion on the reliability of the EU's accounts with no reservations. The accruals-based accounting system introduced by the Commission in 2005, with our support, is now fully on stream and is successfully giving the Commission greater control of its day-to-day finances, enabling it to produce more accurate financial information. The estimated level of error for agricultural transactions outside rural development programmes remains "immaterial", and the whole European agricultural guarantee fund, which makes up the majority of agriculture expenditure, has received a positive statement of assurance from the Court.

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Photo of Bob Spink Bob Spink Independent, Castle Point

When can we expect pragmatic progress on reform of the common agricultural policy, and when that progress takes place, what financial benefits will there be for the UK? What savings will be passed on to the UK? What cuts can we make to the amount of money that we are providing to subsidise agriculture in the rest of Europe?

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

As the hon. Gentleman is aware, it is a long-standing policy of the Government to seek fundamental reform of EU finances. Spend on agriculture accounts for 40 per cent. of the EU budget; we do not believe that that faces modern realities, and we will continue, through the review process that is under way, to ensure that we negotiate and make our points clear.

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Photo of Peter Bone Peter Bone Conservative, Wellingborough

When we agreed to the massive increase in contributions to the EU, was it not the Government's position that we did so only because, during the French presidency, the CAP was to be reformed and there would be a massive reduction in expenditure? That just did not happen.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

There has been reform, although in the UK's view there needs to be further reform. The hon. Gentleman will be aware that the EU budget is going to go down in this financial year, compared to the previous financial year. I would have thought that he would welcome that.

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Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

Will the Minister comment on page 210 of the pre-Budget report, which shows in a small footnote that our net contributions to the EU budget are increasing from £2 billion this year to £6.5 billion in two years' time? In the light of the appalling mismanagement and waste shown by the European Court of Auditors, to which he has just alluded, can he instance any other Government programme that is increasing by that magnitude?

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I do not have to hand the detailed figures that the right hon. Gentleman has quoted, so I cannot verify or comment on them. However, if I can find an opportunity to look at them during the debate, I will certainly respond to him in closing it.

I must emphasise that the disappointing error rates highlighted in this year's report should not be mistaken for widespread fraud in the European Union budget. As the 2007 "Fight Against Fraud" report makes clear, overall levels of estimated fraud remain relatively low, at approximately 0.2 per cent. across the 2007 budget, affecting 0.1 per cent. of agriculture spending and 0.3 per cent. of structural and cohesion fund spending. No level of fraud or corruption can be tolerated, and I welcome the increased activities of the European Anti-Fraud Office to stamp out the fraud that exists.

However, fraud is not the main issue that we face; it is administrative errors that lead to payments that do not fully conform to the regulations in place. It is clear that much more still needs to be done by all actors involved, across the European Community, to reduce the number of irregular payments made each year. We will keep pressing the Commission to do three things. First, it should continue to seek opportunities to simplify the procedures and regulations governing expenditure, the complex nature of which is repeatedly highlighted in the Court's report as the cause of so many errors. Secondly, we want more done to ensure that effective internal control standards are rolled out across the board. Thirdly, we want the Commission to work with programme co-ordinators and the ECA to agree a common interpretation of programme requirements early in an expenditure period.

Equally important, however, is the crucial role that member states have to play in the process. Agricultural and cohesion fund spending make up more than 80 per cent. of EU expenditure, most of which is managed at the member state level. Only when member states take full responsibility and act to reduce the number of errors in the transactions that they manage will a positive statement of assurance be obtained. The UK will continue to keep up the pressure and to lead by example on that front. We did so recently, in July, by publishing the first annual consolidated statement on the use of EU funds in the UK, along with the National Audit Office's full audit report, which gave an unqualified opinion on the regularity of transactions in the United Kingdom.

That initiative will improve the accountability to Parliament of the use of EU funds in the UK and help to provide increased assurance on our use of such funds to the UK taxpayer. It will also highlight any weaknesses in our control and management systems, helping us continually to improve our management of EU funds. The UK's statement, along with those published by Denmark and the Netherlands, has been welcomed by the Commission and the ECA, and we will continue to encourage other member states to follow suit.

Finally, it is important that we continue to make the case for more effective and efficient expenditure. As well as having to be spent properly, taxpayers' money must be spent well. We believe that some measures could be taken immediately to improve matters. Better use should be made of the European Court of Auditors' performance reports, to inform the budget-setting process and to ensure that money is allocated where it will deliver results. We also believe that a clearer link is needed between high-level priorities and the budgetary implications in the Commission's annual policy strategy, to enable more effective scrutiny of allocations proposed by the Commission.

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Photo of Bill Cash Bill Cash Conservative, Stone

The Minister might be aware that I am the chairman or vice-chairman of several all-party parliamentary groups dealing with Africa, in particular the all-party group on water and sanitation in the third world. Does he accept that the increase in the number of cases in Africa in which OLAF has had serious difficulties is a matter of grave concern? Effectively, when the external aid is itself subject to fraud on the scale that appears to be evident in Africa, it means that people there are not getting water and are dying of cholera. Does the Minister not agree that the necessity to link up with the Department for International Development is essential?

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I certainly agree that links with DFID are very important, and of course fraud is simply unacceptable, wherever it takes place. The hon. Gentleman referred to the budget for Africa. The EU's international budget has been the subject of substantial discussion, and the European Court of Auditors looks at it just as it looks at the other elements of EU expenditure. The United Kingdom's objective is to ensure that we continue to make progress on ensuring that the Commission is spending money in the right areas, spending it efficiently and effectively, and cutting down on error. Also, as I said earlier, we must ensure that the individual member states that co-manage much of the European funding spend that money in the right directions, take full responsibility and cut down on error.

More fundamentally, we need to continue to work tirelessly to refocus spending—a point made earlier by Bob Spink—to meet the challenges of the 21st century, through the review of the budget process that is now under way. In our view, a budget that devotes such a high proportion of spending to the common agricultural policy clearly remains in need of far-reaching reform, and we will continue to make those points very strongly.

Before I finish, I want to address the point about the depreciation of sterling that a number of hon. Members raised during the previous debate.

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Photo of John Reid John Reid Labour, Airdrie and Shotts

I have waited until my hon. Friend reached his final remarks before asking him a question that is pertinent to the intrinsic message that he has been sending out today, which is that the efficient working of the European Union depends on three things: oversight; transparency; and proper regulation and efficiency. Are the Government considering taking the burden of the lessons relating to the internal regulation of the European Union and applying it to external institutions at European level, including the banks? Are there not lessons to be learned from the documents that we have been reading today, on the subject of this debate, which would encourage us to move towards some kind of controlled exchange—at European level as well as in regard to sterling—incorporating oversight, regulation and, essentially, transparency? Will he consider looking at that proposal at Government level?

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I know that my right hon. Friend has done a lot of work in this area, and that he has strong views on these matters, which he is putting forward across other parts of the Government at the moment. Clearly, what we are talking about here is the financial management of the EU budget and its spending. He rightly made a point about the banking system, and he will have seen the announcement that the Government made only yesterday on further support to ensure the stability of the banking system and the continued lending that we believe to be absolutely necessary. Clearly, there are lessons to be learned internationally as well as nationally from the financial crisis, but as they were touched on in the preceding debate, I will not deal with them substantially here. Nevertheless, my right hon. Friend makes an important point.

I said that I wanted to speak about the depreciation of sterling and its effect on EU budget contributions. I think that there is perhaps some misunderstanding among some Members as well as among people outside about the impact of sterling's recent depreciation on our contributions to the EU budget. That depreciation will lead to a small increase in UK gross contributions, but it is likely to be more than offset by an increase in the sterling value of UK receipts, which will mean that the UK benefits rather than loses out in net terms.

It is not the case that if the pound depreciates by 20 per cent., UK contributions increase by 20 per cent. The actual effect is much smaller. Let me explain why. UK and other member state contributions are not fixed in cash amounts, but are based on country contributions, largely made as a fixed proportion of their gross national income as measured in euros. Depreciation of sterling therefore acts to reduce our budget contributions in euros, creating a budget shortfall that all member states must make up in proportion to their GNI. While the UK incurs some costs, they are offset considerably by the remaining member states. We pay our GNI share of the shortfall—not 2 per cent., but our GNI share, which is likely to be roughly 12 per cent. of the total budget, so it amounts to a 2.5 per cent. additional contribution. On the other hand, there is generally a one-to-one effect on receipts, so a 20 per cent. depreciation of sterling will see UK receipts rise by 20 per cent. Although contributions are larger than receipts, the net effect will be far less than 20 per cent., meaning that we are likely to gain overall. I hope that that is helpful in explaining the overall budgetary position.

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Photo of Peter Bone Peter Bone Conservative, Wellingborough

It is useful to hear that from the Economic Secretary, but I have here a document signed by him that says that in 2009-10, our budget in the EU will increase by €670 million, which seems somewhat at odds with what he just said.

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. I am sure that this is extremely interesting to the House, but it is actually moving outside the scope of the several documents that we are supposed to be debating.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I will therefore not pursue this matter; I am sure we will have further opportunities to do so. I felt it important to correct the misperception out there at the moment that the recent depreciation of sterling will have a significant impact meaning that we will have to pay more to the EU budget, which is not the case.

I have outlined the key points that we intend to take to ECOFIN.

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Photo of Bob Spink Bob Spink Independent, Castle Point

I was grateful to the Minister for his explanation regarding depreciation, which I thought was germane to financial management in Europe. On financial management, given that the recession will be harder and deeper in the UK than in much of the rest of Europe, and as the UK is subsidising the rest of Europe through the EU recovery plan, will the Minister remind us just how much the UK will be putting into the EU recovery plan to finance other states that are doing better than us?

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. I think that my ruling on how germane that subject was should be accepted by the House.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I am sure that the hon. Member for Castle Point raised those points in the previous debate, which dealt principally with the economic recovery plan. The issues that we have debated today are important when it comes to the effective and efficient management of EU budgets—by the Commission itself and by individual member states.

Although some improvements have been made, further major improvements—which I have described today—are clearly required. We intend to take them to ECOFIN, and to include them in the ongoing financial management discussions that we hold in the Commission and the other usual forums.

I look forward to hearing hon. Members' views today.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 5:45 pm, 20th January 2009

I shall bear your strictures in mind, Mr. Deputy Speaker. I think that a number of Members will wish to speak—those, that is, who have not been distracted by the inauguration speech of President Obama. The challenge for us, of course, is to find the words and phrases that shall resonate throughout the world and through future generations. Are we capable of doing so? I suspect that the answer is "No we can't", but none the less we have an important issue to debate, and I am grateful to the European Scrutiny Committee for enabling us to do so on the Floor of the House.

This is not the first occasion on which I have represented my party in these debates. It is, I think generally, with a degree of weariness that we address this issue—that probably applies to Labour Members as well—because yet again we are faced with the European Court of Auditors' failure to sign off the European Union's expenditure. Once again the Minister says that that is unacceptable, and once again the Opposition say that it is unacceptable. The Minister has outlined some of the ways in which the Government seek to address it, but, if we are honest, all of us expect to be here—or upstairs in Committee—in the same position next year, with the European Court of Auditors having failed to sign off the 2008 accounts.

There is that sense of weariness, but there is also a sense of frustration. I think that that applies regardless of one's views on the European Union. It is hugely frustrating that, at a time when we are all tightening our belts—households, businesses and indeed Governments, although some of us perceive greater urgency than others in that regard—huge amounts of European Union funds are still being wasted by the EU and by member states. The fact that that money is not being spent wisely is all the more significant in the light of the point made by my right hon. Friend Mr. Heathcoat-Amory about the increase in our contribution.

I have no intention of becoming involved in the debate about the impact of depreciation generally, and I am grateful to the Minister for his helpful explanation to the House, but the fact remains that—as has already been pointed out—we have seen an element of our rebate negotiated away, and it would be helpful if the Minister could update the House on that. When we discussed the value of the rebate that had been negotiated away, this time last year and in the debate on the legislation that formalised the arrangement, the cost was estimated at £7.4 billion over the next accounting period of six years. I hope that when he winds up the debate the Minister will have an opportunity to give us some idea of the updated cost of the rebate surrender, because I suspect that there is such a cost, and the fall in the pound is expensive to United Kingdom taxpayers in that context.

The first question that we must ask ourselves in relation to the European Court of Auditors is "Have things got better?" Every year some improvement is expected, but it appears that the answer is no. Since 2006-07 the value of irregularities has increased from €804 million to €1,048 million, and over the same period the value of fraud has increased from €189 million to €209 million. I take the point that, for the vast majority of the money involved, the problem is not fraud; it is irregularity, but it is not always clear when one becomes the other. Some reporting from member states simply states that something is an irregularity, and there is insufficient explanation of what constitutes fraud, so it is not always clear.

Under the individual budget headings, the number of irregularities in the structural and cohesion funds has increased by 19.2 per cent. to 3,832, and the value of those irregularities has increased by 17.7 per cent. to €828 million. On agriculture, the Minister, to be fair, highlighted that last year's Court of Auditors' report anticipated that the irregularities would be addressed. Indeed, the then Financial Secretary, Jane Kennedy, spoke about the matter last year and highlighted it as one about which we could be optimistic. But serious irregularities are found in one fifth of all payments sampled in that very sector, which was supposed to be improving.

Some people defend the Commission by saying that the problem is all the fault of member states. I, for one, acknowledge that there is an important role for those states, and that there are failures at that level, but the Commission is ultimately responsible for the legality and regularity of transactions underlying European Community accounts; it designs the paperwork that is too complex to understand; and it fails to check that the paperwork is properly completed. The European Court of Auditors is clear about that. It says that the Commission is unable to demonstrate comprehensively for 2007 that supervisory and control systems are sufficiently effective in mitigating the risk of error in certain policy areas. The Commission has a role, but is failing to perform it.

A spokesman for the Commission has said that it is not all its fault, and that blaming it is like blaming a referee for all the fouls committed in a football match. I am a football fan and that may be a fair analogy, but when players in a football match are kicking lumps out of each other and the referee fails to enforce the rules adequately, the referee is responsible and should not be allowed to continue to referee matches. The Commission is failing in its responsibilities.

When the UK held the presidency, it said that it would focus on fraud and irregularities, but years later there has been little progress. When the noble Lord Kinnock was the Commissioner responsible for such matters, he said that he would tackle the problem, but his most notable action was to sack a whistleblower who identified fraud and irregularity. A key objective of the Barroso Commission has been to address the matter, but it has failed.

The Court of Auditors, in the context of the action plan developed by the Commission, which it tried to implement and to which it points to show that progress is being made, said that

"the Commission is not able to demonstrate that its actions to improve supervisory and control systems have been effective in mitigating the risk of error in large parts of the budget. The court does not yet find evidence to support the impact of the action plan claimed by the Commission."

Indeed, one MEP estimated that it will take 20 years to obtain a statement of assurance. When does the Minister think such a statement will be delivered on European Union expenditure? How long must we wait?

I said that there is a role for member states. How does the Economic Secretary think the Government are performing with regard to irregularities in EU spending? The only cohesion spending programme sampled by the Court of Auditors showed that the UK has only a partially effective financial control system. This time last year, we debated in some detail the finding that European regional development funds in the north-west of England had not been spent appropriately, and the Commission was seeking to claw back some £20 million. The BBC and The Times reported in November last year that the Commission was seeking to claw back in total—this does not apply to just one year's expenditure—some £190 million. Can the Government confirm that that is the case? What is their estimate of the funds that may be clawed back by the Commission and how satisfied are they generally that they can spend European Union money without irregularity or fraud?

Once again, there have been significant failures by member states and the Commission, and there is a depressing lack of progress. When will something be done? The widely held view is that there is something endemic, and perhaps institutional, about the problem. Member states raise taxes, and make contributions to the European Union which are then divided among member states to be spent, but there is an essential lack of ownership of the expenditure from the European Union. No one really believes that it is theirs, and the same level of care and attention that one hopes is given to member states' own money is not applied to anything like the same extent to money from the EU. Consequently, there is failure after failure, irregularity after irregularity, and levels of fraud that shame member states and the Commission.

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Photo of David Drew David Drew Labour, Stroud

One area that the EU has signed up to do something about is tax havens and ensuring the legitimate use of money. President Obama has also made some straightforward statements about that. Is that not something that the EU should press as a matter of urgency, because it involves not just money that is spent formally through the budget, but money that works its way through the system, often through those tax havens?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful for that observation. It is right to tackle tax havens and to share information with offshore centres as much as possible. That effectively means obtaining information about what happens in those centres. Whether that is a European issue, or whether it is best done by member states, it is clearly important. I do not know how central that is to our debate today, but I am grateful to the hon. Gentleman for his observation.

We sometimes go through the motions in such debates. None the less, the issue is hugely important. British taxpayers are becoming increasingly frustrated, and look to the Government to do something about it, but year after year we return to the issue with little sign of progress and no clear sense of direction from the Government. One detects weariness on the Government's part that there is little that they can or will do. That is unacceptable. Greater efforts should be made, and there is a need for greater transparency in the system.

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Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

My hon. Friend has made the good point that reform is required. Of course, reform was mandated seven years ago in the Laeken declaration, when it was realised that Europe was too remote, bureaucratic and wasteful. Does he find it extraordinary that the Lisbon treaty and the European constitution out of which it grew have nothing to say about the matter? The acknowledged weakness, which has become a scandal, was not addressed in the very instrument—the Convention on the Future of Europe—that was told to reform Europe. Will my hon. Friend, in what are clearly his closing remarks, commit himself and our party to undertaking a genuine reform process, which goes to the root of the problem, rather than simply building stronger and more powerful institutions that are even more remote from the citizen?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to my right hon. Friend for his comments. I do not know whether he intends to make further remarks in the debate, but he makes an important point. If I may sing his praises, I understand that, when he served on the Convention, he was almost alone in arguing that any reform of the European constitutional documents should focus on the subject of our debate. Too easily, member states and the European institutions focused on closer integration and building up the institutions rather than addressing the real concerns about what the European Union currently does. I have no doubt that one of the biggest concerns of people in this country is the EU's failure to spend money wisely, and without irregularities and fraud.

Future reform and attempts to change the structures and so on must focus on bread and butter issues and address the effective working of what we have, rather than effecting some utopian—or dystopian, depending on one's point of view—vision for the European Union. I am grateful to my right hon. Friend for making that point. Serious reform is necessary, it has not happened yet and there is no sign from the Government that it will happen. It is time that the matter was taken seriously.

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Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I have got in in the nick of time. Will my hon. Friend go a little further in answering the question that my right hon. Friend Mr. Heathcoat-Amory asked? He has gone a long way, but bearing in mind that the European Union has destroyed our fishing industry and is destroying our aluminium industry—I think that I can get that in under "Financial Management"—is not my right hon. Friend's question about getting a commitment from Her Majesty's Opposition a good one? Will my hon. Friend go a little further and say, "Yes, we will include that in our manifesto"?

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I remind hon. Members that we are debating the motions before us. If Mr. Gauke wants to give a brief indication to Sir Nicholas Winterton, that would be acceptable.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to my hon. Friend and also for your guidance, Madam Deputy Speaker. I remind my hon. Friend that I am here to speak about matters to do with financial management, but I daresay that those who make such decisions will listen closely to his words, as they always do.

There is a frustration that the European Union in recent years has focused not on reform but on, for example, the treaty of Lisbon, which my party continues to oppose. The sooner the European institutions focus on the subject of our debate, the better.

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Photo of Michael Connarty Michael Connarty Chair, European Scrutiny Committee 6:04 pm, 20th January 2009

European debates are a bit like buses—we wait for one for ages, then three come along at the same time. For the first time, we are holding the debates on a Tuesday—they normally happen on a Wednesday to ensure that many members of the European Scrutiny Committee have to choose between its Committee meetings and the debates in the Chamber. Today is a Tuesday—it coincidentally happens to be the day of the inaugural address by the new President of the United States and, when I was voting, I noticed from the crowds surrounding the televisions that that seems to be the point of interest rather than European audit. However, that does not mean that European audit is not important and I am pleased to be here, given that, as Chair of the European Scrutiny Committee, I would not normally get to debate the subject on a Wednesday.

I believe that the glass is half full—indeed, it is almost three quarters full and heading in the right direction. It was interesting to read all the documents in preparation for the debate. Our report of 12 January, which deals with the implementation of the 2007 European Union budget, concludes that

"the European Court of Auditors (ECA) identifies weaknesses in the procedures for financial control and management"— that is an ongoing debate—

"such that again it is unable to give wholly unqualified Statements of Assurance for the General Budget and the European Development Funds."

In the past, the European Court of Auditors has refused to give unqualified assurances of any kind. This time, it has been slightly more positive, not by reducing rigour but by perceiving the benefits of the changes that have taken place in the past few years.

Our conclusion continues:

"The document identifies some positive developments in improving management of the Community's financial resources and we note the Ministers give relatively positive assessments of the situation."

My hon. Friend the Economic Secretary repeated that this evening. The report goes on:

"But the need for further improvements in financial management and control is still clear."

That sums up our position.

We recommended the debate because we believed that it was important

"to consider again not only the continuing weaknesses in financial management" and

"the need for further improvement identified in the ECA's Reports", but

"to examine the justification for the relative optimism about future improvements in financial management."

The document submitted by the European Union does not have a number. The reference on it is "Official Journal OJ 2008/C 286/01 Volume 51 10 November 2008". That is the best I can do to identify it. It has 10 chapters, which deal with the subject in detail, and my hon. Friend the Economic Secretary and Mr. Gauke referred to it. The general introduction includes the heading, "Chapter 1—the Statement of Assurance and supporting information", under which it clearly states:

"The ECA have given an unqualified positive Statement of Assurance on the reliability of the EU accounts for the first time".

It is the first time that the ECA has said that it has all the information required to state that the accounts are reliable. That is different from saying that it is happy with what the accounts contain—major errors persist in the budget.

On the general budget, the European Scrutiny Committee states that the European Court of Justice also

"gives a positive Statement of Assurance on the legality and regularity of the underlying transactions in the areas of revenue, 'administration and other expenditure' and 'economic and financial affairs', estimating that errors in these areas have a financial impact of less than 2 per cent.".

That is a significant improvement—the glass is more than half full. We should acknowledge those improvements —our Government and our members of the Court of Auditors have called for them and for initiating a new regime. We should not always say that we cannot manage the budgetary process.

The Committee goes on:

"As for the audit of the European Development Funds the Court gives a clean opinion on the accounts but qualifies the Statement of Assurance on the legality and regularity of transactions in so far as they relate to payments."

That is where our concern should lie.

I shall refer to a letter from David Bostock, a UK member of the European Court of Auditors. He wrote to me as Chair of the ESC, and the letter was tabled at a Committee sitting. The second report in this bundle—which people may wish to read through, although it is very lengthy—is an important document on the fight against fraud. These are the two things we should wish to focus on in looking at any sets of accounts, regardless of whether they are for a private company, a Government Department, a voluntary organisation, a charity or the EU: are the accounts credible and can transactions be properly followed to find out whether payments are bogus or fraudulent?

It is clear that action is being taken by the EU. As we recently noted, it unanimously denied Bulgaria the right to spend European funds. The country had an outstanding sum of €500 million of funds, but there were questions to do with high-level fraud and corruption in that country that were so great that the EU denied it the right to spend the money. This is an important matter, which the ESC has commented on for some time.

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Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

The hon. Gentleman is Chair of that Committee, which I serve on. He is putting the best possible gloss on this, but does he not agree with the following:

"The budget headings subject to material error comprise 92.3 per cent. of total expenditure in 2007"?

That amounts to €105.2 billion out of a total budget of €114 billion. There is, therefore, an extraordinary degree of weakness, and no public company could survive such an audit—certainly not for 14 years. Although the situation may be very slightly better than in the past, it is still a catastrophic situation involving a great deal of public money. Why cannot the public sector submit itself to the same degree of discipline and accountability that it imposes on the private sector through company law?

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Photo of Michael Connarty Michael Connarty Chair, European Scrutiny Committee

I echo that absolutely; we want to have that 100 per cent. We want to establish the credibility of accounts by having the ability to follow the accounts' income and expenditure to verify that the accounts are proper according to the rules and that the sums are spent in the right area. That is what we try to achieve when we have audit discussions and when we make negative comments—we tend to make negative comments—on reports and question the optimism of those who think this can be done easily. However, we wish it to be done.

The following comments from the European Court of Auditors are interesting, so I shall read them into the record. They come from David Bostock, a UK member of the court, and it is important to recognise that he takes this matter very seriously. In his letter to me, which was tabled to the Committee, he not only discusses the positive aspects of the reports—he is positive on their regularity—but he also expresses concern about some issues.

In paragraph 8 of the letter, David Bostock writes:

"The Court gives a clean opinion on the accounts. They present fairly, in all material respects, the Communities' financial position as of 31 December 2007, and the results of their operations and cash flows for the year ended 2007. The Commission has been generally successful in implementing accruals accounting"— which is a new initiative that came in just some years ago.

In paragraph 9, he says:

"This is the first year for which the Court has delivered an unqualified opinion on the accounts. The European Commission's tendency to describe our qualified opinions on previous years' accounts as 'clean' may however obscure the novelty of this finding."

It was always a matter of dispute between both our Committee and the Government and the Commission that it used the word "clean" to mean that there were no proven frauds—that there was dubiety but not proof. This new initiative is good, and we should welcome it.

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Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I have a simple question. Why is it taking so long to have accounts cleared, because they would have to be cleared, certified and audited by professional accountants in this country if they were for a private company? Does the hon. Gentleman not accept that hundreds of millions of euros are still going walkabout every year? Is this an acceptable state of affairs?

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Photo of Michael Connarty Michael Connarty Chair, European Scrutiny Committee

I will leave the last part of the hon. Gentleman's assessment to the auditors and the fraud office, but all I can plead in my own defence is that I have been Chair of the ESC for only two years and things have improved vastly in that time. I do not claim any correlation between those two facts, however. One of the great difficulties in defending the EU is that people often look at it with a deliberate eye to seeing where they can transact dubious movements of money. There have been scandalous situations in some countries, where individuals have somehow trousered lots of money—£36 million for a single individual in one case—and Bulgaria has clearly not brought itself up to a satisfactory level of financial control and sufficiently reduced corruption to justify its spending the money to which I have referred.

I must add that our Committee can put its hands up and say that we said Romania and Bulgaria should not have been allowed into the EU in 2007; nor should we have made them the offer that if they did not come up to scratch in 2007 and even if they did nothing, they would get in in 2008. As someone said to me privately, that meant that the politicians thought that they did not have to listen to Europe any more, and that if they just waited and did not change anything, their countries would get in. There have been more than 100 contract killings in Bulgaria since it joined the EU; that is a frightening statistic. The excuse we got when we met its Foreign Secretary was, "Well, they hire Russians, and they just go back to Russia after the killings, so we can't find them." Things are going on in the world that we would all like to change, but I shall now return to the budget.

Mr. Bostock states in paragraph 11 of his letter:

"In the other areas of expenditure—agriculture and natural resources; cohesion (the Structural Funds and Cohesion Fund); research, energy and transport; external aid, development and enlargement; and education and citizenship—however, the Court concludes that payments are affected by material levels of error".

The letter continues with the observation

"that supervisory...systems are only partially effective in ensuring that payments are properly made."

Therefore, there are major identified faults.

Paragraph 12 states:

"As for 2007, the Structural and Cohesion Funds are the area of spending most affected by error...'The Court estimates that at least 11 per cent. of the total amount reimbursed should not have been reimbursed'."

Given that that is known, we think that the next thing to do would be to find out who the people involved were, get the money back and prevent that from happening in the future.

The letter continues:

"Rural development accounts for a disproportionately large part of the overall error rate estimated in agriculture and natural resources."

It is not agriculture and natural resources, but so-called rural development that is the main error area, therefore.

Many other things are worth commenting on, but I shall draw the House's attention to a point that David Bostock drew to the attention of the Committee. He wrote:

"The latter part of Chapter 1 (from 1.42 onwards) discusses the problems of ensuring that EU spending takes place properly. It leads to the conclusion (in 1.52 to 1.54)"— of the report before us today, which I find an incredible conclusion—

"that there are political choices to be made about the control of spending and what risk of mis-spending is tolerable."

No level of mis-spending is tolerable for any political reason. That should be the rule by which the anti-fraud office and the EU run.

The letter states:

"Chapter 2 reports some improvements in the Commission's supervisory and control systems, notably a greater realism than in previous years in the reports by Commission Directors General about the legality and regularity of the expenditure for which they are responsible."

That would appear to imply that the directors general previously had greater laxity in what they considered to be realistically acceptable in expenditure.

The letter continues that

"the Court's conclusion is...that the Commission is not able to demonstrate that its actions to improve supervisory and control systems have been effective in mitigating the risk of error in large areas of the budget."

It is an honest and clear appraisal, and it is in the documents contained with the report before us today. It would merit everyone studying it in detail.

I wish to discuss what is said about the UK in the annual report, because we are never completely free of blame. For example, we regularly get reports that more cases have been brought against the UK over the illegal taking of fish in the EU than against most other countries —[Interruption.] Not in the past couple of years, but certainly in the past.

Paragraph 17 of David Bostock's letter states:

"There are references to the United Kingdom in chapters 5 (the CAP) and 6 (cohesion) of the annual report."

Paragraph 18 states:

"In chapter 5 criticisms are made of the establishment of the management of the CAP Single Payment Scheme. See in particular paragraphs 5.22, 5.26, 5.30 and Annex 5.1.2."

Paragraph 19 states:

"In annex 6.1 to chapter 6 the Court reports on its assessment of supervisory and control systems in 16 Structural funds programmes."

He was talking about programmes involving the UK, and he continued:

"One of these is jointly managed by the UK and Ireland."

No country, not even this country, is free from questions about the way in which people carry out their transactions. That does not mean that they are fraudulent; it just means that the accounting systems and the way people are reading the spending rules for European Union funds call the transactions into question. It does not mean that when clarified, they will end up being seen as fraudulent or improper reimbursements.

I wish to finish with an anecdote about one of my local farmers who was having problems with his sheep premium returns. When I went to help him out, he pulled out a bundle of things that were the equivalent of backs of fag packets—a number of bits of paper and backs of purchase invoices—where he had written out his various sheep numbers and so on. I could not make head nor tail of them. Of course, our people then turned up from the Ministry of Agriculture, Fisheries and Food and said that they could not make head nor tail of them. He could remember but could not prove what he had done, so he was having difficulty getting his payments. We must have systems, particularly in the A8 countries, that are disciplined, transparent and easy to understand, so that people are not accused of fraud when they are not fraudulent and so that we find fraud where it exists. In the meantime, I hope that the criticisms made in this debate will be passed on to the Government and to the European Union, and I hope that we will see further improvements in the future.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 6:22 pm, 20th January 2009

My party takes an enlightened view of the European Union. I had an opportunity during the previous debate to touch on some of these themes, so I shall not rehearse them again at length. Liberal Democrats regard the EU as having a useful role to play in bringing nation states together to co-ordinate our response to the current economic crisis effectively. We emphatically think that the EU has a role to play in trying to mitigate the effects of climate change. Most people would accept that the EU and public opinion across Europe are further ahead in the debate than anywhere else in the world—certainly further ahead than in north America and Asia. The European Union, with Britain at the forefront, has a role to play in taking that agenda even further forward.

The EU also has a key role to play in international diplomacy; we share the values of democracy, free speech and free markets, although free market economics have been challenged in the past few months. Probably the greatest foreign policy development and achievement in my adult lifetime has been the expansion of the European Union and the embracing by eastern European states that previously lived under oppression of freedom and those broad liberal values that we often take for granted in this country.

I regret the paranoia that the Conservative party typically displays towards the European Union—the sense that everything that emerges from Europe must inherently be bad or a cause for suspicion. That paranoia persuaded the Conservative party to vote unnecessarily against the Government in the previous Division. However, I and my party recognise that just as politics in the United Kingdom is broken to some extent, politics and the financial and budgetary process in the European Union need to be dramatically overhauled. My party rightly recognises and welcomes some of the limited progress that has been made, but our bottom line is that that progress is not good enough. I echo the sentiments expressed in this debate by the Conservative Front-Bench spokesman about the terrible, wearying cycle of these debates; year after year we hear that the European Union has, yet again, not met the standards that we are entitled to expect it to meet on behalf of our constituents, who pay their taxes and contribute to the UK's financial contribution to the EU budget.

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Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

The hon. Gentleman is saying that he supports financial reform in the European Union. Why, therefore, did his party's representative on the Convention on the Future of Europe take no interest whatever in this aspect of reform when he had the opportunity to do so, and why did he fail to support my efforts and those of others who attempted to table amendments that would have cleaned up and reformed the European Union budget in a way that the hon. Gentleman now says he supports?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I do not know the particular circumstances of that meeting. I do know that there is a huge range of views in the Conservative party on the European Union—indeed, the Conservative shadow Cabinet seems to be split on the Lisbon treaty, on joining the euro and on all kinds of other important questions relating to the European Union. I also know that my fellow Somerset MP, my hon. Friend Mr. Heath, takes the view—

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I wonder whether the hon. Gentleman would bring his remarks back to the motion, and not be led astray.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I regret being led astray by Mr. Heathcoat-Amory. I fear that nothing would ever be quite Eurosceptic enough for his taste, regardless of what I or his own Front-Bench team said.

This House has a duty to safeguard and champion the interests of taxpayers in the United Kingdom, who contribute to the overall budget of the European Union. Much of the money that we are discussing is spent in the individual EU member states. I take on board the points made in the previous speech about the capacity of some of those member states to have auditing or overall political processes that meet the standards that we would expect in this country, and I agree that not all the money that is misspent necessarily involves fraud. Nevertheless, member states need notify the Commission only of irregularities of more than €10,000. I am told which the estimate of the total financial impact of irregularities has increased from €804 million to €1.048 billion a year. That figure is high enough to be a cause for concern, so I would like the Minister specifically to address that growth in the estimates of fraud and to tell us what representations the British Government are making to try to address the problem.

In a debate that took place upstairs, I raised with the Minister of State, Department for Environment, Food and Rural Affairs, Jane Kennedy, who was then a Treasury Minister, the irregularities occurring in individual member states. I suggested that she might wish to identify, and thereby name and shame, the worst offenders so that we could make some progress—after all, that tactic is favoured by the Government in other areas of policy—by putting pressure on some of those member states to raise their game. She replied:

"I am not sure that the most diplomatic thing would be to name the worst offenders, as the hon. Gentleman suggests."—[ Official Report, European Standing Committee, 28 January 2008; c. 9.]

I fear that that is indicative of a less than muscular approach taken by Treasury Ministers. They could certainly express their discontent far more stridently within the EU than they currently appear to. Total UK budget contributions to the EU between 2007 and 2013 are to be £71 billion. Even spread over six years, that is a sizeable sum of public money by anyone's reckoning, and the onus is on the House and the Government to ensure that it is spent more efficiently and effectively.

We are having an interesting three-way debate on the subject of Europe. The back-to-back nature of the hour and a half that we spent discussing the financial crisis and this debate has allowed the three party positions to emerge in a way that we do not often have the advantage of seeing so clearly. The Conservative party position is to favour an inert European Union. There is a sense of fear and loathing whenever the subject of Europe comes up. To give the Conservatives credit, however, they are alert to the financial irregularities and the need to make improvements. The Labour party position is to be positive and constructive with regard to the EU, but I regret to say that, on the downside, they are insufficiently alert—indeed, somewhat complacent—when it comes to the financial irregularities in the EU.

Finally, there is the Liberal Democrat position, which is to be positive and constructive towards the EU and see that it has a role to play, as I said earlier, but also to be alert to the need to address financial irregularities. Only one party has both sides of that equation right, and that is my party, the Liberal Democrats.

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Photo of Peter Bone Peter Bone Conservative, Wellingborough 6:32 pm, 20th January 2009

It is a great pleasure to follow Mr. Browne, in whose words I found nothing whatever to agree with. His conclusion that his party is constructive towards Europe and somewhat concerned about the problem that we are discussing seems wholly unrealistic. We need only look at the two Liberal Members who are in their places—they have two very different opinions on Europe. [Interruption.] Well, on the Lisbon treaty.

We are spending billions of pounds a year on the EU. I think that today we have agreed to contribute another three quarters of a billion pounds for this year, although that has not quite been made clear in the debate. What worries me is that if I, the Government or anybody else were investing huge sums of money in any other organisation, we would expect it to have proper, audited accounts. At least, that is what I thought until this week, when I saw the Government spending billions of pounds on banks, obviously without having exercised any due diligence.

It cannot be right that the EU has not had unqualified accounts for 14 years. It would have been incredible to somebody voting in the referendum on whether to take Britain into the Common Market to think that this country would give billions of pounds to that organisation without being sure how it was being spent. We are debating not whether that money is being spent wisely and on good things, but whether it is being spent in line with the rules of this ridiculous European Union club.

The Government's argument is always that they are at the heart of Europe, and that by co-operating with Europe they get their own way. Indeed, I understand that Superman led the EU in its financial recovery, which we discussed in the previous debate. If they really are at the heart of Europe, and if they really get their message across, that must mean that they support the fact that the auditors do not give clean reports. I think that that is the case, because it is politically useful to other countries if the fine rules of the European Union club are not applied. Whether we say that it is fraud or irregular payment, it is very convenient to overpay people in one's own country. I am sure that that is how some of our EU friends look at it.

We in this country are much better at and much fairer in interpreting EU rules to the letter. Many of my constituents say that we are mad to do that. They ask why we do not do what our continental colleagues do and use flexibility when deciding how much money should be given out. If the Government were serious about the matter, after 12 years in power they would have sorted it out, but they are not serious about it. They could have solved the problem at a stroke by going to the European Council and saying, "We, as a country, are not going to pay a single penny more in contributions until we get the accounts sorted out." I think that this debate is far more important to the British people than the inauguration of the US President.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The hon. Gentleman is closer to these things than I am: is it the Conservative party's position that all payments to the EU should be suspended until the accounts are signed off as being fully proper and correct?

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Photo of Peter Bone Peter Bone Conservative, Wellingborough

I am grateful for that helpful intervention, but unfortunately I do not speak for the shadow Cabinet, which has a set and agreed policy on Europe and is united behind it. I am making a simple, practical suggestion to the Minister, who is highly regarded, that if he were serious about it he could solve the problem overnight.

Debates such as this may be put on at this hour so as to avoid publicity but, to the British people, spending billions of pounds on an organisation that cannot even get its accounts right cannot be acceptable.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North 6:37 pm, 20th January 2009

I apologise for not being able to be here for the first part of this debate, Madam Deputy Speaker, although I was here for the whole of the first debate.

I have had the misfortune to debate this nonsense for the past 12 years, often in Standing Committees and sometimes in the Chamber. I sound almost like a broken gramophone record, but I wish to repeat some sensible thoughts in the hope that they will have some impact on my hon. Friend the Minister.

There is a simple way to eliminate the fraud that is taking place, which is to change the whole European Union budget system into a new mode of operation. I add that although both Eurosceptics and Euro-enthusiasts keep talking about "Europe", the organisation is not Europe; it is the European Union. Europe is a continent which includes a lot of countries that are not in the EU, and the EU is a political construct imposed upon some of those countries. I therefore speak of the EU, not Europe. I love Europe and go there on my holidays every year, and various of its countries are absolutely wonderful.

To overcome the problem, we must completely reform the budget. It currently redistributes revenue and income across the EU in a way that is sometimes rather arbitrary. Some countries pay more than they should and some receive more than they should. A way to overcome that would be to have a budget allocated by a simple fiscal transfer system that gave to those who were poor and took from those who were rich, so that everything was proportionate to the prosperity of the member state. That is if one wants to have such a budget at all—there may be a case for not having one, but that is another debate. If we are to have one, the way to make it fair and acceptable to everybody is to ensure that everybody receives according to their needs and gives according to their ability. There would then also be a transfer of power, from the EU bureaucrats who decide where the money will be allocated to the member states. Devolving more power back to member states would be sensible and agreeable. If fraud then occurred within those member states, that would be their problem. In Britain, we would no doubt spend the money sensibly and avoid the problem of having lots of apparently generous donations from the EU to local projects with the EU logo all over them when we are massive net contributors and only part of our money is being handed back. Britain suffers more from that than most countries. As a wealthy country we would be a net contributor under the system that I am proposing, but we would not be a net contributor with France, Denmark and even Ireland being net recipients. Like us, they would be net contributors.

The cumulative figure for net contributions by Britain to the EU since we joined is £125 billion. The sums will rise substantially by 2013 because of the poor deal negotiated by Tony Blair during the British presidency. Of course, with the devaluation and depreciation of the currency, we pay substantially more each year. If contributions were a proportion of our national income rather than effectively geared to the euro, we would pay less.

A system whereby there was a budget for pooled contributions from member states, where poor countries received and rich ones gave an amount proportionate to their living standards, would be a fair system that would eliminate the problem of fraud. We would not have the massive confusion and complexity of these budget reports. Decisions about where money was spent would not be made by bureaucrats in Brussels, but by democratically elected Governments in member states.

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury 6:41 pm, 20th January 2009

With the leave of the House, I should like to respond to the debate. First, I want to refer to the comments made by my hon. Friend Michael Connarty, who acts as Chairman of the European Scrutiny Committee. He said that he believed that the glass was more than half full and rightly pointed out that for the first time the Court has this year given a positive opinion on the reliability of the EU's accounts, with no reservations. He also suggested a number of other areas where improvements had been made. I agree with him that there have been some positive developments, but I like a full pint. We need to be relentlessly dissatisfied with the level of progress. That is why the Government will continue to press through the European Court of Auditors and other forums, in particular the February ECOFIN discussions in Britain, the need for the Commission and member states to continue to do better in the future.

I was rather surprised to hear one hon. Member suggest that we should refuse, in effect, to make future contributions to the European Union until all this was sorted out. I do not think that that is a realistic attitude. The UK is required to make its contributions under obligations imposed by the treaties, as the European Communities Act 1972, and section 2 in particular, gives effect in the UK to Community law.

We must recognise, too, the clear and demonstrable benefits of the UK's membership of the EU. EU membership has delivered and continues to deliver significant benefits to the UK and the whole EU. The EU is key to the success of business in the UK. Europe accounts for nearly 60 per cent. of our trade, 700,000 British companies have trading ties to Europe and at least 3.5 million jobs depend on Europe.

It is important that we retain membership of the EU. I am pleased to see that the Conservative party has decided to appoint a shadow Secretary of State for Business, Enterprise and Regulatory Reform who is a wholesale enthusiast for Europe. I look forward to debating the issue of Europe with him in due course in my other role as a Minister in the Department for Business, Enterprise and Regulatory Reform.

A number of Members raised the issue of the UK's abatement. I want to make it clear that the 2005 budget agreement preserved the British rebate in full on agricultural spending and all spending in the EU15. The UK abatement will be disapplied by a maximum of €10.5 billion on spending for economic development in the new member states. That will not change, but we believe that it is right that we should pay our share of the costs of EU enlargement, which benefits the UK economy. The year 2010 will be the first full year of disapplication of some spending in new member states from the calculation of the abatement, resulting in the higher net contribution that has been referred to, which was published in the pre-Budget report. It is important that the UK should pay its share of the enlargement costs.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to the Minister for confirming that the cost of the renegotiation of the rebate and the surrender of an element of the rebate is valued at €10.5 billion. When that matter was debated in the House, during our discussions of the Bill that formalised that partial surrender, the figure of £7.4 billion was used. Will the Minister update us as to what that €10.5 billion now means in sterling?

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Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

My understanding is that the €10.5 billion figure was derived from and based on 2004 prices, and that will remain the case. The hon. Gentleman will understand that exchange rates go up and down and he will be able to do the calculations himself. I want to reinforce the point that I was making earlier, however. There is a complete misconception that the recent deterioration in the euro-sterling exchange rate in the euro's favour will mean that the UK will have to pay significantly more in contributions. That is emphatically not the case, for the reasons that I outlined earlier.

I want to refer briefly to the comments made by Mr. Browne. I agree with him that it is disappointing that there has been an increase in the level of irregularities. The figures that he quotes mostly relate to the fact that there is a larger EU following the accession of Bulgaria and Romania. Overall, the levels of fraud that were found by the European Court of Auditors are, as I said earlier, around 0.2 per cent., which is a similar level to that in 2006.

We do not name and shame, but we do push for political recognition of member state responsibility as well as Commission responsibility. We also lead the way by taking the initiative and publishing our own statement on the use of EU funds in the United Kingdom. We believe that we have been instrumental in encouraging others to do the same.

A number of hon. Members specifically mentioned the UK's position. Mr. Gauke referred to the UK with particular regard to the subject of the European regional development fund in Merseyside. The Government office for the north-west sent an interim response to the European Court of Auditors in July 2007. It then sent a full response in July 2008 and a further response in September 2008. A reply from the Commission at the end of November 2008 reduced the ineligible amount from £21 million to £2.2 million. Following advice from the Department for Communities and Local Government external legal counsel, a further response rebutting the outstanding issues was sent on 9 January this year and, if accepted, would reduce the ineligible amount to about £1 million, which would be reclaimed from project applicants. I think that that gives an idea of the complexity of some of the existing rules and of how they are interpreted—another point raised by the hon. Gentleman. It also shows our rigorous approach to the recommendations and views of the European Court of Auditors, and to administering ERDF funds.

The hon. Member for South-West Hertfordshire also asked some questions about the Commission's integrated control framework. He will be aware that, during our EU presidency, the UK took significant action to create the environment that would ensure that the plan could be success. Measures have already been taken to ensure better propriety and more effective spending, but the programme needs to continue and we shall support that.

Several hon. Members asked about international development. I can tell them that the Commission is working very closely with OLAF and taking on board recommendations where fraud is found. We place particular importance on that and, where possible, we have been quick to work through the various European Council committees. We have zero tolerance in respect of fraud, and work closely with the Commission's audit department.

I want to reassure the House that we are not weary with this matter. We are certainly not satisfied with the progress that has been made, but there has been some. We believe that a clear need for action remains, and that greater efforts are required from all concerned. The Commission must implement its action plan in full and member states must take more responsibility, especially in the areas of agriculture and structural funds, and budget authority would benefit from making greater use of the ECA's performance reports. We will continue to lead on these matters, and I look forward to the upcoming publication of the second consolidated statement on the use of EU funds in the UK.

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Question put.

The House divided: Ayes 287, Noes 213.

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Division number 15 Financial Crisis — Financial Management

Aye: 287 MPs

No: 213 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

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Question accordingly agreed to.

Resolved ,

That this House takes note of an unnumbered Explanatory Memorandum from HM Treasury dated 4 December 2008, European Court of Auditors 2007 Annual Report, an unnumbered Explanatory Memorandum from the Department for International Development dated 8 January 2009, European Court of Auditors Annual Report on the activities funded by the seventh, eighth and ninth European Development Funds, European Union Documents No. 12156/08 and Addenda 1 and 2: Protection of the financial interests of the Communities: Fight against fraud, No. 12471/08 and Addendum 1: Annual report to the discharge authority on internal audits carried out in 2007, and No. 12472/08: Report on the progress at 31 March 2008 on the modernisation of the accounting system, an unnumbered Explanatory Memorandum from HM Treasury dated 16 October 2008, European Anti-Fraud Office: eighth activity report for the period 1 January to 31 December 2007, and European Union Documents No. 14480/08 and Addendum 1: Commission Report to the Council on the follow-up to 2006 Discharge Decisions (Summary)—Council recommendations, and No. 14481/08 and Addendum 1: Commission Report to the European Parliament on the follow-up to 2006 Discharge Decisions (Summary)—European Parliament Resolutions; and supports the Government's promotion of measures to improve the level of assurance given on the Community budget.

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