Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Welcome. I think you want to explain that you are deputising for Ruth Kelly. Is that right?

  (Dawn Primarolo) I would indeed, my Lords. Perhaps I could introduce who is accompanying me this morning as officials. While it is a delight to be before you this morning, I would like to just say that my colleague, the Financial Secretary, Ruth Kelly, who is the Minister who specifically covers this area—and great expertise she has—is on maternity leave. I am sure you will all welcome the fact that she and her daughter are doing splendidly but I hope that you will also agree it would have been just a touch too much if the Government would have asked her to come back today. Therefore, as the Minister, I will appear before you this morning. Can I introduce the officials who are with me. On my right is Geoff Lloyd. Geoff is head of EU Finance in the Treasury. On my left is Steve Evans. He is the head of the budget branch in the European Finance team in the Treasury. On my far left is Andrew Olive who is head of Financial Management and Counter-fraud branch in the EUF team in the Treasury. Between us we are going to do our best at the beginning of this complicated process to answer your questions. I wonder whether it would be in order just for me to make a few comments in opening?

  2. Yes, please do.
  (Dawn Primarolo) Apart from saying how grateful I am, I would like to thank you very much for giving me the opportunity to discuss the Commission's proposals for the 2004 budget, and to set out the Government's priorities. This hearing and the forthcoming scrutiny debate in Another Place are, of course, important occasions for the Government to demonstrate to Parliament that as far as possible it is applying the same sound financial principles and expectations to the European budget as it applies to the domestic UK budget. The Government has already begun to engage in discussions on the Preliminary Draft Budget—I hope that is what makes today particularly interesting—in ECOFIN and in the Budget Working Group and is particularly pleased that the 2004 proposals are within both the overall financial perspective and own resource limits. I should point out two particular developments in 2004 which the Government strongly supports. First, this is the first budget to be presented in an activity based format allowing the full costs of economic activity to be highlighted as well as providing for spending to be linked to objectives and targets which can be bench-marked for effectiveness. Once fully implemented, the activity based budgeting will bring the EC budget process closer to that for domestic spending in the United Kingdom, where public spending agreements are a vital tool in ensuring that public money is used to the best effect. Second, and equally important, this is the first budget for an enlarged Union of 25 Member States. The Government is committed to making enlargement successful and ensuring a fair and reasonable budgetary outcome for both existing and new Member States. The EU15 have a special responsibility this year for agreeing a budget for both themselves and for the new Members though they do not yet have decision-making powers, the accession countries will be welcome participants in the budget negotiations. Your Lordships will recall the Explanatory Memorandum. Most EC spending is largely predetermined by decisions made outside the annual budget process—compulsory or treaty-based expenditure, and expenditure based on pre-agreed, multi-annual programmes, and this leaves only a limited opportunity for annual negotiations. In addition, your Lordships will recall that the budget process determines that the European Parliament has the final say on non-compulsory spending levels. This further limits the scope for Member States to decide the outcome. Nevertheless, the Government will endeavour to ensure the best possible outcome for 2004. We believe that our priorities should be external action, where enlargement changes present an opportunity to improve the overall effectiveness and focus of the budget, and where there is a strong case for ensuring a large margin rather than allocating new funds to well endowed middle income countries; and administration where we will be pressing the institutions to fully justify their proposals, particularly for staff and building increases, and where they cannot do so, we will be calling for appropriate cuts. In introducing with those brief remarks, as we move through the discussion this morning I hope your Lordships will agree that I call on my officials, particularly on the more detailed issues, to ensure that you have all the information that we are able to give you.

  3. Thank you very much. This is a new venture, in one sense, because what we decided is that if we are going to have any influence at all on this process, we should get in as early as possible. That is why we have asked to see you, and thank you very much for coming. Thank you also for stepping in instead of Ruth Kelly. Could I kick off by just asking you this. You mentioned the enlargement of the EU. Do you think that the budget is sufficient to cope with the financial demands of enlargement?
  (Dawn Primarolo) The short answer is yes. That was exactly what was agreed in detail at Copenhagen. Needless to say, we will be following it very closely, but yes, we are—I hesitate to use the word "confident"—but I think I would say we are confident that that is the case.

Lord Armstrong of Ilminster

  4. This is, of course, an interim year in that there will be no direct payments to farmers in the newly acceding countries in 2004. Is that right?

  (Mr Lloyd) That is correct, yes.

Lord Jones

  5. A general point again. You have expressed confidence as to the enlargement, that the EU can cope. Are you able in any way to confidently say that Britain gains advantage from the enlargement? Has the Treasury discussed internally what it is working to? Obviously one presumes an enhancement of our own economy.

  (Dawn Primarolo) Lord Jones, there are two questions, I think, tied up in that. There is the principal position of the Government's attitude. As you are probably aware, we are quite clearly in favour. We see it as strengthening the European Union on a whole range of issues—economy, peace, stability—and we have been very committed to that process. I think the second issues are around the delivery of that successful enlargement and they are, if you like, buttressed. The most important point, clearly, is the Copenhagen agreement. Secondly, we have the interaction—which was very detailed in discussion and has the Accession Countries' agreement—with the Berlin ceilings. What it will also enable us to do is to continue to take forward the priorities of the Government, whether it be market reform, financial market reform, or the development of an outward looking European Union embracing and engaging through reform and development with the global market. So I think on both those fronts we have the opportunity to take forward those very important debates.

Lord St John of Bletso

  6. My question is a more cynical question. That is, as a net contributor to the EC budget and bearing in mind the Chancellor's statement on Monday of entry into the single currency, I wonder what influence we would have or could have, should we have strong objections to this budget. What real influence do we have in influencing those who are the decision makers?

  (Dawn Primarolo) In any discussion in the European Union—I attend ECOFIN a great deal and my area of ministerial responsibility is more direct in those areas, and if, for a moment I could blow the Government's trumpet, Lord Radice—we have been extremely successful in the ability to persuade on detailed points as well as on broader political developments an agenda which all of our current European partners have been prepared to engage in with us. We have been confident in the past, and we are now for the future, that we will persuade them of the direction in which we need to go. In terms of the Accession Countries again, there is a great deal of agreement on the basics. The budget itself is tightly tied up with the decisions with the Accession Countries agreed at Copenhagen. Perhaps if I could counter your cynicism with optimism of the power of correct argument and debate, and that if the European Union continues to be successful, it will need to embrace change. It is the change that we have identified. Geoff, I do not know if you would like to say something?
  (Mr Lloyd) I wonder if I could just add a word specifically on the budget? Most of the budgetary decisions that are reflected in each annual budget are predetermined, if you like, by the ceilings of the financial perspective that are set in advance. At Copenhagen which was, of course, an intergovernmental negotiation in which the United Kingdom played a very full part, we secured financial perspective ceilings for the remainder of this period up to 2004-06. Those actually significantly undercut the Berlin ceilings even though we are bringing in ten Member States rather than six, and the United Kingdom was able to play a very full part in that. That, of course, will knock on to the impact of each of the budgets for each year 2004, 2005 and 2006.


  7. What about the role of the European Parliament? That comes into the budget process.

  (Mr Lloyd) The European Parliament is committed to respecting the financial perspective ceilings in the same way as the Council. Of course, we very much hope that not only for 2004 but also for 2005 and 2006 the ceilings that we have now agreed and established with the European Parliament's agreement very recently will be respected.

Lord Marlesford

  8. Minister, in Ruth Kelly's memorandum to us of May, in paragraph 26 it talks about the rather important issue of UK finance and saying that we do not yet have the details for 2004. I wondered, first of all if could you give us some indication of the timescale. When are we going to get it? Secondly with the abatement—the great abatement debate—and the ratio of 19.4, excluding some 14.1 after abatement, I am wondering whether you anticipate at the moment that the ratio will be similar or different? In other words, when we have the new 2004 budget, are we going to have proportionally the same degree of abatement as we have in 2003? And then, going back to an earlier point you made about the limited incremental nature of the budget, can you give us a sort of guide figure? The great mass of expenditure rolls on, but are we talking about 90 per cent, 85 per cent, 95 per cent or some other figure?

  (Dawn Primarolo) There are quite a number of very detailed questions there which I think, in fairness, I will ask my officials to answer. Clearly the discussion with regard to the 2004 draft budget is beginning now and the details of calculations will follow once we have all the relevant data. Perhaps I could ask Geoff whether he could give you a sense of the timetable, and then specifically to turn to the question with regard to abatement and, if possible, its proportion. Obviously, these things depend on the outcomes of the debates.
  (Mr Lloyd) The negotiations on the 2004 budget will continue through this year, and will not be finally settled until December in the normal way. At that stage we will have an adopted budget for 2004 that sets a total level of payments and a total level of commitments, and therefore a total amount of own resources to be called up from the Member States. At that point we will know what the UK's share of the gross contribution to that will be. That will be affected subsequently by the UK's abatement and the UK's abatement is calculated by reference to our net contribution and therefore by reference to the receipts that we receive offsetting the contributions that we make. We will not know in detail the level of our receipts until some time after the end of the year. That is why the abatement is updated year on year to bring an accurate figure, to give the full value of the abatement to the UK. Nevertheless, the Treasury does produce in its European Community Finances white paper estimates and forecasts on a trended basis. The latest trended forecast for 2003-04, up to 2005-06, was included in the latest White Paper. Those showed an estimated trended net contribution to the EC budget of 3.650 billion in 2004-06 and 3.975 billion in 2005-06. Those forecasts are based on an assumption that spending will be included in the budget up to the financial perspectives ceiling which, in the absence of an agreed budget, is the best we have to go on. I think the second part of your question was to ask whether we might expect the UK's financing share after abatement—which in the 2003 budget is currently 14.1 per cent—whether we might expect that to change. The essential element in calculating the abatement is, of course, the difference between the United Kingdom's gross contributions to the budget and its receipts and the UK then receives an abatement on the difference. The gross contributions, of course, depend on the overall size of the budget. Because the budget will grow to a limited extent, within the Berlin ceilings, as a result of enlargement, then we would expect our gross contributions also to grow in the same way as other Member States, but all of the receipts (with the exception of a small slice which we agreed at Berlin should not be subject to the abatement) or the vast majority of those receipts will be subject to the abatement. As a result of that, we would expect our post-abatement financing share to decline marginally as a result of that increase in the value of the abatement by the end of this financial perspective. Of course, the amount by which it does will crucially depend on the budget that is adopted for each of those years 2004, 2005 and 2006.

Lord Marlesford

  9. The post-abatement share will decline?

  (Mr Lloyd) We expect that to decline in 2004, 2005 and 2006 compared with 2003.

  10. Because of the enlargement. There was a second question. The second question was, what are we talking about when we say the steam engine rolls on with relatively marginal decisions. What is the margin roughly as a percentage of the whole, ie how much is up for grabs?
  (Mr Lloyd) I think this is a topic that we addressed in an earlier discussion about the future of scrutiny. I think we looked then at the European Community's white paper that the Treasury produces on an annual basis. We compared the figures in the Commission's Preliminary Draft Budget with the figures that the Council adopted in its draft budget with the finally adopted budget. I think we found that in fact there were very small variations between the finally adopted draft budget and the Preliminary Draft Budget. In other words, the Commission will normally propose a Preliminary Draft Budget that is getting close to the ceilings of the financial perspective and in this case it has proposed a budget with some small margins underneath the ceilings. We may well want to increase those margins in some areas. The European Parliament may well want to reduce those margins in some areas, and we end up typically fairly close to where the Commission's Preliminary Draft Budget has come out.

Lord Armstrong of Ilminster

  11. Do our receipts grow in the same sort of proportion as the growth in the budget? In other words, do we get out of the increase—and I am now talking about the EU15 really—an increase in receipts when there is an increase in the budget of this kind?

  (Mr Lloyd) I think it very much depends on what has caused the increase in the budget. In this case we are looking at an increase in the budget which takes account of the needs of the enlargement countries. Of course, they will therefore be the beneficiaries of those receipts. So in that case no, the UK will not share in the additional receipts of the new Member States, and nor should it.

Lord Sharman

  12. I am struggling a little bit with the relationship between EU15 and EU25. Perhaps you can help me. On the face of it as I understand it, and as I understand from reading the Explanatory Memorandum, EU15 is the budget as is, ie the existing Member States, and what we would have expected to see had there been no enlargement. EU25 takes account of enlargement. As a result of that, the budget goes from about a 1 per cent increase to a 12.5 per cent increase. That increase in expenditure falls in the categories of agriculture, where—if my understanding is right—there will be no direct payments to the acceding countries' farmers in 2004. Could you just tell us what the nature of that expenditure will be? It falls in structural funds, and I would like to know a little bit about the seven billion there as to why we see the need for that. The third bit is internal policies and compensation which is discretionary. Could you help me a little bit with those?

  (Mr Lloyd) First of all, on the question of EU15 versus EU25 budget in general terms, the new Member States are joining the European Union from 1 May 2004. That means we have a period at the beginning of the year where there needs to be an EU budget, but it should only be for the EU15. Of course, the new Member States will not be contributing to the EU budget until they accede, so there needs to be in place an EU15 budget. That is set for the whole of the year because at the time that it is set, we cannot be absolutely confident that the accession will take place. Of course, we very much hope that it will take place. We have every expectation that it will, but we do need to set a budget for the whole year on the basis of the EU15 to cover that. At the same time the ECOFIN Council will be discussing, and indeed the European Parliament will be discussing, the figures that need to be adopted as of 1 May 2004 for the EU25. This is a one-off. Never before has there been enlargement that has not taken place on 1 January, but this is the situation we have.

  13. But it is an annual budget nevertheless. It is not a nine month's budget?
  (Mr Lloyd) We will then have an annual budget that covers the EU25 and, of course, the new Member States' share of financing that will be based on the time(?) within which they are in the European Union but the budget will cover the EU25 for the whole year.

Lord Armstrong of Ilminster

  14. The expenditure provisions are for eight months or for twelve months in these figures?

  (Mr Lloyd) Each of the two budgets, the EU15 budget on the one hand, and the EU25 budget on the other hand will be an annual budget, but we do need to have a separate EU15 budget adopted so that it can actually enter into force on 1 January. It could not have been an EU25 budget that enters into force on 1 January because they are not going to be Members of the Union.

  Chairman: In fact you have two budgets.

Lord Sharman

  15. Let me follow up on Lord Armstrong's question. Let us just focus on the increases between EU15 and EU25. Just take agriculture, for example. The additional 2 billion—is that expenditure on an annual basis or is it nine months' expenditure, or eight months' expenditure?

  (Mr Lloyd) That is the total expenditure that will take place in 2004 and it will take place between the 1 May and 31 December.

  16. So if we were to look forward to 2005 and extrapolate this, you would expect to see an extra four months' expenditure in the 2005 budget?
  (Mr Lloyd) Yes, you will, for market support, and you will also see the direct payments coming in in 2005. To pick up the point you asked about that, Lord Sharman, the expenditure on agriculture in the new Member States in 2004 is made up partly of market support measures in relation to the operation of the agricultural markets in the new Member States, and also rural development measures. As far as structural operations are concerned, the Copenhagen summit concluded the negotiations across all areas of spending, but in relation to structural funds in particular there was a priority for enhanced structural actions in the new Member States to bring their capacity up to those of the current Member States. Of course, the new Member States are very much lagging behind the Member States in terms of their GDP and so they have an enhanced need, particularly the cohesion fund funding but also for structural fund actions.

  17. No, just for the one. Would I be being unduly cynical if I thought that the compensation category which is introduced in EU25 is what I might call "sweetener money"?
  (Mr Lloyd) Of course the negotiations were just that.


  18. On the structural funds, I understand when the budget for 2002 was closed, it showed that there were

4.8 billion less than forecast spent on structural funds. Why was this so, and why was it not shown? We are looking at the budgets now for 2003 and 2004 on structural funds. Can we be certain that these are accurate figures?

  (Dawn Primarolo) There were particular reasons for that. The money is not lost, but it was primarily a timing and forecast issue for Member States, including the United Kingdom, about the need for forecasting and with regard to the closing of 1994-99 programmes. Obviously Member States, all of us, need to do better there. Perhaps I could ask Andrew because I understand there are new rules operating to tackle exactly that with regard to trying to press down on the forecasting and when accounts are closed, and when applications are made.
  (Mr Olive) There was a particular problem really for the 1994 and 1999 programme. Part of what the regulations state is that some of the moneys are held over until the end, until all the audits are complete. This required all of the audits to be closed. The final date for closure of that was 31 March this year. The good news is, they were all in on time, but a lot of them were right at the end. So the Government Offices did a sterling job getting those audits closed. The consequence was, we had expected most of these to be closed during 2002. In reality, most of it was in 2003. So the moneys are not lost. The money will appear. For future programmes there is this new rule called "N+2". That will tend to mean that the money is not back-loaded quite as much as it was in the 1994-99 programme. So moneys are spread far better throughout the life of the whole programme. Moneys will still be kept back just to make sure the audits are complete and so we can make sure there is no fraud, or reduce the amount of fraud. So the rules are changing.

Lord St John of Bletso

  19. There is just one matter arising from that point. You say the money is not lost and that the money will be spent in the forthcoming year. There was an additional figure for pre-accession countries. I think they spent

800 million less than forecast for pre-accession countries. It was said that the reason for this was that the countries did not have the capacity to absorb the degree of funding. Is this accurate, and what is going to happen with countries like Bulgaria, Romania and others in the forthcoming budget?

  (Dawn Primarolo) Forgive me, but I think Steve will be better able to answer the question of absorption and what happened with the budget, and what happened subsequently, rather than leaving Andrew on the spot as regards that. That is more focusing on the absorption rates and what happens with those moneys.
  (Mr Evans) Specifically on pre-accession aid, there were absorption capacity problems in the period leading up to 2002. 2002 accounts reflect payments executed in relation to multi-annual spending commitments made in earlier years. In particular the Phare programme, where there was a lower than forecast contracting rate for 1999 commitments, this was due to programme design faults and similarly for 2000 commitments where they introduced new procedures and types of activities such as twinning. Again, this led to contracting delays. Most of these problems have now been corrected and there has been a marked improvement during 2002 in the absorption capacity relating to the Phare programme. In ISPA and SAPARD, which are two of the other pre-accession programmes, spending was below forecast, largely because of delays and complications in accrediting payment agencies. Again, this is a problem which has now been resolved and we expect this to come out in better absorption, more efficient absorption, in the pre-accession category. One point to make on pre-accession is that the money allocated for pre-accession this year is not all money for Bulgaria, Romania and Turkey. It does, of course, include commitments as yet unspent on the accession ten. That money will be spent, and that is a large proportion of that. We are confident that the improvements that have been made to the pre-accession programmes will ensure that the money for Bulgaria, Romania and Turkey is more consistent with their absorption capacity.

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