Examination of Witnesses (Questions 1-19)|
WEDNESDAY 11 JUNE 2003
PRIMAROLO, MP, MR
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 areaand
great expertise she hasis 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 BudgetI hope that is what makes
today particularly interestingin 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 processcompulsory 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 areI
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.
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
(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 issueseconomy, peace,
stabilityand 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 interactionwhich was very detailed in discussion and
has the Accession Countries' agreementwith 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 UnionI 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 Radicewe
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.
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
abatementthe great abatement debateand 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 abatementwhich in the 2003 budget is currently
14.1 per centwhether 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
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 increaseand I am now talking about the EU15
reallyan 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.
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,
whereif my understanding is rightthere 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
Chairman: In fact you have two budgets.
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 billionis
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
(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.