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Baroness Blackstone: My Lords, the noble Lord has asked quite a number of questions and I am not sure that I shall be able to do justice to all of them in the time available. I very much value the excellent work that the DIVERT Trust does in this area. I accept that the idea of

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providing learning support units is not a new one. I am very grateful to the noble Lord for the work that he has done in the past in pressing for them. But what is new is that this Government are investing money into providing them so that they are available to pupils in all schools which need this kind of help.

Most of the provision will be on site, but not all. There may well be smaller schools where pupils in need of help will have to go to other schools. The prime objective is to get the pupils back into the classroom. That is something with which everyone in your Lordships' House will agree. When they are excluded and drop out altogether, they get into trouble with the police. They can finish up filling our gaols later on, which is something we should try to avoid at all costs.

We foresee the mentors working with the voluntary sector and supporting volunteers working in their own schools. That is a very important part of their role. We can increase the numbers involved in giving their time willingly, particularly those who have experience of disaffected young people. The noble Lord also asked to whom the learning mentors would be answerable. They will be answerable to the head teacher in the schools where they are based. I cannot give the noble Lord a precise answer as to how many pupils each learning mentor will have. I doubt whether anyone can give that answer at this stage. However, if I am wrong about that I shall write to the noble Lord.

As regards funding, the £200 million will not be taken away from other schools; it will come from the extra money that the Department for Education and Employment has secured from the Treasury. Some of it will be spent through the Standards Fund and some will come from the department's reserves.

Baroness Lockwood: My Lords, is my noble friend aware that I welcome the Statement? It is an injection of new money into inner city schools. Am I right in assuming that it is not only the bright children who are the target of the new funding, but also the average children? The proportion of young people who now go into universities has vastly increased, and that growth has surely come from the children of average ability. It is important therefore to motivate those children in the inner city areas who have been demotivated in the past.

I welcome too the fact that Leeds/Bradford is to be one of the areas to form part of the initiative. Is my noble friend aware of some of the initiatives that have already taken place in that part of the world? For instance, during literacy year volunteers were brought into schools to help with literacy and the University of Bradford held a Saturday morning class for the Asian community to try to encourage more of its members to consider entering the universities. Will the initiative build on that kind of activity in those localities?

Baroness Blackstone: My Lords, on the last point, I am grateful to my noble friend for referring to the kind of scheme that exists in the Leeds/Bradford area with Saturday schools for the Asian community. Those are exactly the kind of schemes on which this initiative will want to build. Indeed, we want local education authorities to work directly with such schemes.

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I am glad that my noble friend drew attention to the fact that the extra money for these inner city schools will help average children, too. Quite a lot of the funding will go to the provision of world-class IT centres in our inner cities. We want all of our children to be computer literate; as we move into the 21st century, it will be vital that they are able to use IT. Many jobs will require them to be proficient in that area. That is one respect in which the funding will help average children.

My noble friend suggested also that these are children we need to motivate to go on to further or higher education. That is certainly the case. Many of them will want to go on to do some kind of full-time course, not necessarily in a university, but perhaps a vocational course in a further education college.

Future Financing of the European Union: ECC Report

5.53 p.m.

Lord Grenfell rose to move, That this House takes note of the Report of the European Communities Committee on Future Financing of the EU: who pays and how? (6th Report, HL Paper 36).

The noble Lord said: My Lords, with your Lordships' leave I begin by paying some well-earned tributes. The members of Sub-Committee A, whose names are listed in Appendix 1 of the report before this House, worked very hard over the five weeks available for conducting this brief inquiry into the future financing of the European Union. I thank each and every member warmly for a report which is well focused, convincingly argued and extremely timely.

It being a short inquiry, we dispensed with the services of a specialist adviser, but were excellently assisted by our Clerk, Dr. Elizabeth Hopkins, whose insights into the subject and drafting skills contributed immeasurably to the inquiry and to the writing of our report. We are very grateful to her for that.

The committee felt that it was important that this inquiry be conducted, and the report produced and then debated in your Lordships' House, before the Berlin European Council which begins the day after tomorrow. That meant that we had to act fast and I am pleased that the Government, in their written response, told us that the report has been taken into account in formulating the UK's position for the forthcoming council.

Because of the short timeframe, we were unable to take account of developments in negotiations on the Agenda 2000 package occurring after 21st February. But nothing which has happened, including the resignation of the Commission, renders this report obsolete. Many of the problems it discusses are those with which the new Commission, when it is put in place, not to mention current governments, will still have to grapple even if agreement on Agenda 2000 is reached in Berlin.

We had first-class witnesses in London and Brussels; their names appear in Appendix 2. We thank them for their enlightening and authoritative contributions. We are grateful also for the excellent briefing given to us

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by Britain's Permanent Representative in Brussels-- Sir Stephen Wall--and by his embassy staff. We are equally grateful to Her Majesty's Treasury and in particular to my honourable friend the Economic Secretary for providing the Government's response to this report in the unavoidably short time between its publication and this debate. We look forward to hearing more of the Government's views on this when my noble friend the Minister replies.

I should add that the report was agreed unanimously and I congratulate my colleagues on that. But I hope that where there were differing shades of opinion, which eventually merged into a consensus, no one will hesitate to ventilate them in this debate.

Our inquiry was prompted by a Commission report published last October which took a hard look at the revenue side of the EU budget and at the impact of expenditures on member states' net contributions. The Commission's broad conclusion was that all was not well and that there would have to be changes made if the expenditure proposals put forward in Agenda 2000 in July 1997 were to be successfully implemented. At 719 billion euros over the next seven years--the equivalent of just under £500 billion--the Commission's proposals for EU expenditure are modest compared to total public sector expenditure in most member states. Nevertheless, as my honourable friend the Economic Secretary reminded us, the UK's contribution to EU expenditure this year amounts, after abatement, to 1 per cent. of our GNP or 4p on our standard rate of income tax.

That is what we pay now, and it worried our committee members from the very outset of our inquiry that the British people at large have virtually no knowledge of what they are paying and what they are paying for. Enshrined therefore in two of our opinions is a call for greater transparency in funding and even closer national scrutiny of EU spending than at present, and on a continuous basis. With that in mind, our inquiry focused on the potential sources of funding and the problem of budgetary imbalance; that is to say, the issue of inequity among member states' net contributions. I will certainly not weary your Lordships with a recital of the 24 opinions we reached; they are set down and summarised in Part 2 of the report. But let me rather draw attention to some of our more important conclusions and how we reached them.

As your Lordships will know, the 1995 "own resources" decision, described in paragraphs 26 and 27 of our report, set a ceiling of 1.27 per cent. of the EU's GNP on the amount of resources that could be raised from EU member states which, since the EU cannot borrow, also sets the ceiling on expenditures. That ceiling must be reached in steps by 1999 and remain at that level thereafter.

Though we in the committee were aware of the effects of lower growth rates now forecast for both existing members and candidate members, our report agrees with the Treasury's view that the 1.27 per cent. should be sufficient up to the end of the Agenda 2000 period, including therefore funding enlargement, as the evidence of the Economic Secretary said,

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    "provided we get stabilisation and the reform of the Common Agricultural Policy".
But whether that ceiling will give sufficient headroom after 2006 struck us as highly uncertain, depending as it would on the future growth of an enlarged Union and the extent to which it had proved possible to reform existing spending programmes. Consequently, we did not share the Government's implied expectation that the ceiling would not have to rise after 2006. Although gross contributions to the EU budget are roughly proportional to members' GNP, some consider that under the present arrangements they are contributing too much to the EU in relation to the benefits they receive in return.

In a union of richer and poorer countries, equity would never demand equality of net contributions but there is no disputing that the present system of contributions does not produce equitable results. Germany, currently financing some 28 per cent. of the EU budget and paying a net contribution equivalent to 0.6 per cent. of its GNP, says that it will not go on paying such a disproportionate share. The Netherlands, at 0.7 per cent., is worse off and Sweden and Austria are not far behind--slightly worse off than the United Kingdom at 0.16 per cent., and lying in fifth place among the five biggest net contributors.

Paragraph 54 incorporates an analysis by Professor Iain Begg of South Bank University of the 11 remaining states, explaining why some are net contributors and others net recipients. It would be simple to conclude that some relatively prosperous states contribute fairer shares. We considered the principle of the juste retour--getting back from the EU in financial terms what one puts into it, and we agreed with Senor Colom I Naval of the European Parliament and rapporteur of its Committee on Budgets, that many benefits of membership had nothing to do with the budget.

In London, the Economic Secretary to the Treasury told us that


    "membership of the European Union is immensely valuable to the United Kingdom as well as to other Member States".
Nevertheless, our report notes that however great the benefits, financing the EU on the present basis can continue only if all members are content--and they are not.

Remedies to perceived imbalances will not be found simply through changing the pattern of gross contributions. Remedies will also have to be found on the expenditure side, through changes to the amounts spent overall and/or their distribution among individual member states.

On the revenue side, we looked at the three options for change proposed in the Commission's October 1997 report--revision of the own resources system; modification of the UK's abatement; and the introduction of a generalised correction mechanism in the form of a general reassessment of contributions. One member of our sub-committee doggedly and absolutely rightly insisted throughout that there must be a simpler way of raising the required revenue from member states. With that in mind, we looked first at the four own resources--the two traditional own resources of

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agricultural levies and customs duties; the third resource of contributions based on VAT; and the fourth resource of contributions collected from states on the basis of their GNP.

Paragraphs 61 to 70 set out how we reached the view that the two traditional own resources and VAT-based resource, which are all declining as a proportion of revenue raised, are not only generators of bureaucracy and highly prone to fraud, but are arguably systematic sources of inequitable burdens on member states. We felt that they should be abolished, which would certainly help some large net contributors.

That left the GNP-based resource and we had much sympathy with Commissioner Erkki Liikanen's view that exclusive reliance on that resource would improve the fairness of the system as the most objective criterion for national capacity to contribute. The Economic Secretary agreed that that would bring an improvement in equity, if only small. Therefore, we considered how that equity could be improved further. We concluded that the revenue raised from each state should be based on GNP per capita rather than straight total GNP--and that gross domestic product might be a better proxy for the contributory capacity of states than GNP.

We grant that relying solely on per capita GNP or GDP-based resources is not so popular with people such as Senor Colom I Naval, who argued strongly that unless the EU obtains through taxation some real own resources that do not transit through national budgets, the financial autonomy of the EU is bound to be undermined further. The Economic Secretary told us that the Government do not see more financial autonomy for the EU as desirable. In any case it was the Treasury's hunch that there probably would not be a consensus for renegotiating the existing own resources decision. Neither did Commissioner Liikanen see the need for modification at an early stage.

The committee remains strongly convinced that renegotiation of the own resources system would be necessary in due course and that should be sooner rather than later.

That brought us to the difficult question of the UK abatement--an arrangement which has brought significant benefits to a country which is the fifth highest net contributor to the total budget but only the tenth or eleventh most prosperous state among the 15, depending on the measurement used.

The abatement is based on the decision made at the 1984 Fontainebleau Council that any member state bearing excessive budgetary costs in relation to its relative prosperity could benefit from a correction. Paragraphs 85 to 91 set out why the Government feel strongly that the abatement, currently worth £2.1 billion a year, remains fully justified on the ground of fairness under the present system of contributions to the EU budget and why the Commission thinks otherwise.

Commissioner Liikanen says that the world has changed since 1984 and Britain's abatement is not an easy case to defend. We readily accept, in Opinion 16, that without abatement the UK would remain one of the largest net contributors, but we could not ignore that whereas in 1984 the UK was the only member state

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making a substantial net contribution in terms of percentage of GNP--as seen in graph 3 on page 4--four states are now making larger net contributions. They are the Netherlands, Germany, Sweden and Austria. In the same opinion, we agreed that some way of remedying the situation would need to be found, given that those four countries are dissatisfied--to say the least--that they are not accorded similar relief.

It became perfectly clear that if the existing rebate mechanism from which we benefit were applied to those four countries making excessive net contributions, that would--in Professor Begg's words--blow such a hole in the budget that the whole thing would collapse. Therefore, we looked for alternative remedies. A proposal by the four countries to grant budgetary corrections to all member states which qualified, but setting a threshold below which corrections could not be claimed, has support in some important quarters but is seen by the UK Government as a means of reducing the burdens of other net contributors by increasing Britain's burden and was, in the words of the Economic Secretary, grossly unjust. We agreed with her that to substitute one injustice for another will not improve matters, but a problem remains for the five net major contributors, Britain included. We felt that the rebate system, of which we are currently the sole beneficiary, may no longer be the best way of solving that particular problem.

In Opinion 18, we state our view that a realistic negotiating result for the United Kingdom would be agreement to forgo the abatement on condition that, and only when, the loss could be made up on a permanent basis through the savings of a reformed CAP and the stabilisation of expenditure overall by 2006 and, possibly, increased EU expenditure in the UK.

I stress the conditions that we set. Nothing could have been further from our minds than to recommend unconditional surrender of the abatement. That brought us naturally to the possible alternatives. We included increased expenditure in the UK tentatively because, as a net contributor, increased expenditures here, unless matched by cuts in other countries, simply add to the burden. The likely solutions lay in radical reform of the CAP, which currently accounts for 50 per cent. of the EU budget, and stabilisation of expenditures overall.

Since we closed our inquiry, negotiations on CAP reform have progressed, but there is no agreement yet at heads of state level on where to set the limit on direct payments between 2000 and 2006. The committee was in favour of the proposal to introduce co-financing by member states of agricultural spending of perhaps 25 per cent. of the total cost, provided the level of support agreed by the Council was adhered to by each member state and that savings for the EU budget would be real, not simply spent on other programmes.

While this would not have been an alternative to CAP reform, it would have reduced overall EU expenditure and, as the UK receives relatively modest amounts of CAP funds, its net contribution would have benefited somewhat from the effect of the overall savings to the budget. It is regrettable therefore that France--

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a substantial beneficiary of the CAP--has blocked the proposal, but I sincerely hope that we have not heard the last of it.

This brought us finally to the question of an overall stabilisation of EU expenditure by 2006 at the present level of 85 billion euro. As the Economic Secretary told us, the UK and the majority of member states regard stabilisation by 2006 as essential to provide the room to finance enlargement. But more than that, it would, in her words, be,


    "the most effective way of limiting net contributions to the EU budget and thus would help other states who are large net contributors".
Our report fully agrees with this and rejects the view of the Commission that stabilisation would make reform of the CAP impossible. We agree with the Government that the circle could be squared if "degressivity"--that terrible word meaning the reduction over time of compensation to farmers--was part of the reform package. At present it is not, and one can only pray that it will be by the end of the Berlin negotiations.

The other area where spending reductions could be sought is structural operations. We agreed that there is a need to continue to provide substantial funding for the most disadvantaged regions, but we also believe that cuts in funding received by existing member states are inevitable. The important point is to ensure that those cuts are manifestly fair. As to the cohesion fund, we echoed the conclusion of an earlier Select Committee report to your Lordships that continued cohesion funding cannot long continue for those member states which have attained convergence and have entered monetary union. However, as we note in Opinion 20, it is crucial that the cohesion fund be continued in some form so that new member states may be helped along the road towards convergence.

On a personal note, I feel that the chances of an agreement at Berlin are looking a little less gloomy today than they were a week ago. The seismic events in Brussels seem to have galvanised those who will be negotiating in Berlin. It now seems likely that the British rebate will survive, but with modifications which may not be attractive to the Government. Spain may get its way over continued access to cohesion funds, but for how long? Italy may recalculate and raise its contribution to the budget after the year 2000. In other words, a deal is likely to be done at the very last minute.

However, the impression remains that what will be brokered in Berlin will be only an incomplete reform. That is better than nothing, provided it does not further delay enlargement. But it still leaves many problems to be resolved: the continuing problem of budgetary imbalances between states; the need to reform the own resources system; the need for greater transparency in funding the budget and greater accountability in spending it; eliminating the continuing shortcomings in the CAP, to mention only the most obvious; and dare I add--although our report did not go into this--a move perhaps to zero-based budgeting in the European Union? These problems will still remain after the heads of state

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have left Berlin. That is why I humbly suggest that the report remains highly relevant and, I hope, helpful to the continuing debate.

In our report's concluding opinion, we suggest that Europe is a concept which to most goes beyond mere deal making. In relation to the security and prosperity of Europe, the budgetary costs to each member state, although not negligible, are none the less not exorbitant, but they are not yet equitable and that, they must be. That is the essential message of our report. I beg to move.

Moved, That this House take note of the report of the European Communities Committee on Future Financing of the EU: who pays and how? [6th Report, HL Paper 36].--(Lord Grenfell.)

6.14 p.m.

Lord Skidelsky: My Lords, I start by congratulating the noble Lord, Lord Grenfell, and the Select Committee on their report on the future financing of the European Union. It is a fiendishly complicated subject, which the report has reduced to exemplary clarity. However, the Select Committee's hope--just reiterated by the noble Lord, Lord Grenfell--that greater transparency can be achieved under the present system; that, in its own words, we should know,


    "what we are paying--and what we are paying for"
strikes me as being somewhat Utopian.

I doubt whether one person in a hundred understands the fiscal operations of his own government. The idea that the accounts of the European Union might become an open book seems to me to be a pipedream. It would certainly be a nightmare to all those who live off the honey pot. The recent mass resignation of the commissioners was a very belated recognition that fraud and corruption are endemic in the way the Commission uses the funds member states place at its disposal. This is always a danger when any group of people are given control over other people's money.

In national administration we take enormous care to ensure that politicians and officials are accountable to the taxpayer. Eight hundred years of our constitutional history can be read as a struggle to achieve such accountability. The officials of the European Union to whom we entrust £8 billion a year, or 5p in the pound of our taxpayers' money, are in practice, largely unaccountable to anyone for how that money is spent.

Most of the report's conclusions and recommendations are sensible, and will not give rise to political controversy. I would like to draw attention to three. First, the committee endorses the Government's view that, by the year 2006, the Union's expenditure should be stabilized, at its present level of 85 billion euros. Contrary to the Commission's own view, it concludes that with an "own resources" ceiling of 1.27 per cent. of the Union's total GNP, this will give it an adequate margin to spend on enlargement--although not necessarily thereafter--depending on what growth assumption is used. It points out rightly that this margin would be greater if the common agricultural policy were reformed, and the cohesion and structural funds more accurately targeted.

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Secondly, the committee states:


    "We do not see a directly collected own resource as a viable option at present, in either political or practical terms".
We agree with that. To give the European Union its own independent tax base is to cross the line between a confederation and a federation, and we are pleased that the committee resisted this step, despite, I think, some prodding from the noble Lord, Lord Desai, and the noble Baroness, Lady Sharp.

Thirdly, there will be a general welcome for the report's conclusion that,


    "cuts in the structural funding received by existing Member States are inevitable,"
and that,


    "continued cohesion funding cannot be justified for those Member States which have met the convergence criteria".
However, these conclusions, however sensible, fail to tackle the root problem of lack of accountability. In the long run we face a choice between two alternatives: eliminating the so-called "democratic deficit" at the Union level or handing back a large part of the Union budget to the member states. Since we in this party, and I believe most people in this country, do not want a federal Europe, we logically support the policy of budgetary repatriation.

The report is considerably less robust when it comes to the question of Britain's rebate, negotiated by the noble Baroness, Lady Thatcher, at Fontainebleau in 1984. This rebate was made necessary by the fact that Britain's net contribution to the Community's budget--the difference between its gross contribution and its receipts--was greatly in excess of its relative prosperity.

The present financing crisis--to which the noble Lord, Lord Grenfell, alluded--has arisen because four other countries, Germany, Austria, Sweden, and the Netherlands, also believe they are paying too much relative to the benefits they receive, and have formally asked for rebates. Germany, in particular, has indicated "vociferously", as the report put it, that it no longer wants to be Europe's milch cow. In the words of one of the witnesses, Professor Begg, who has already been quoted, the request for a general rebate will, if granted,


    "blow such a whole in the budget that the whole thing would collapse".

The general principles of the matter are reasonably clear; indeed, they are relatively uncontentious. Each member state should contribute according to ability and receive according to need--where have I heard that remark before?--so the richer states should be net contributors and the poorer ones net recipients.

However, these lofty ideals are very difficult to translate into practice for two reasons. First, it is very hard to agree a formula for contributions which is generally accepted as fair. For example, the report asks: should contributions be proportional to GNP or to GNP per capita? If one were to design a proportional tax system within a single state, the obvious measure of ability to pay would be the size of an individual's income; and, by analogy, money raised from member states should be a share of that state's national income per head. On this basis Britain's gross contribution to the budget would not be the third largest but the tenth

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largest. Although of course there are different ways of measuring per capita GNP, they do not affect the rankings by much, though they are at the source of the conundrum about whether Italy is more prosperous than Britain. As my noble friend Lord Boardman--I do not know whether he is here--argued in Appendix I to the report, a per capita funding formula would make rebating unnecessary. The report had a lot of sympathy with that view. Unfortunately, that is not how it is done, and nobody seems to be in favour of doing it that way.

The other problem, as the Treasury memorandum to the Committee pointed out, is that,


    "there is no clear relationship between receipts and prosperity".
Net receipts do not necessarily go to the poorest. For example, France, the seventh most prosperous economy, receives exactly as much as it contributes, whereas Britain, the tenth most prosperous, is a net contributor, even with the rebate. That is because 50 per cent. of the EU's transfers go not towards helping the poor but to subsidising the wealthy--in this case France's farmers--through the operation of the CAP, from which Britain's relatively efficient farmers receive disproportionately little. In other words, the total pattern of net transfers fixed by the Union's history, the original deals by which the Union was constructed, is haphazard and irrational.

The report then argues that Britain's rebate should be traded for a reform of the CAP and other funds, which would also help the other large net contributors. The idea is that price support for Europe's farmers should be run down and their replacement subsidies should also be run down. Britain's gross contribution would then be reduced and its net contribution consequently cut. In this connection, I very much regret that the report has given currency to the horrible word "degressivity". We now have an unholy trinity of progressivity, regressivity and degressivity. My computer showed good judgement by underlining each one in red, telling me that it did not recognise any of them. What is the opposite of degressivity? "Gressivity", I suppose.

All the report was saying was that income support for farmers should be tapered off--a sound phrase expressing a sound idea--but how likely is that to happen? The noble Lord, Lord Grenfell, referred to "co-financing" of farm support. The French have vetoed "co-financing" and the Commission will have no truck with tapering. It was rather bad luck that when the report was written it was not implausible to suppose that,


    "the political will for CAP reform was reported to be emerging".
All one can say is that the reports of the CAP's death were premature.

The Treasury memorandum therefore argued perfectly cogently that, desirable though reform of the CAP was in the general interests of the EU consumer,


    "There is no medium-term prospect either of reform leading to a dramatic reduction in CAP expenditure or of the UK's share of that expenditure increasing substantially".

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That being so, we should go on vetoing any reduction in our rebate unless and until we have a proposition on the table to make our net contribution equitable without the rebate. I wish the report had stated that in those terms.


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