Financial Management

Part of Financial Crisis – in the House of Commons at 5:22 pm on 20 January 2009.

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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, 20 January 2009

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.