Unrevised

Members present

Baroness Falkner of Margravine (Chairman)

Lord Boswell of Aynho

Lord Butler of Brockwell

Earl of Caithness

Lord Davies of Stamford

Lord Haskins

Lord Lawson of Blaby

Earl of Lindsay

Lord McFall of Alcluith

Lord Skidelsky

_________________________

Examination of Witnesses

David Gauke MP, Financial Secretary to HM Treasury, Jonathan Black, HM Treasury, and Ian Ginsberg, HM Treasury

Q1 The Chairman: Good morning, Chief Secretary.

Lord Lawson of Blaby: Financial Secretary.

The Chairman: Forgive me, I have promoted you inadvertently. It is very good to have you here. Before we start the session, I should tell the Committee that we will hear a Division bell at 11.30 am for a minute’s silence for the victims of 7/7. A second Division bell will denote that we start our proceedings again.

Financial Secretary, you have a list of Members’ interests. This is a formal evidence-taking session of the Committee, and a full transcript will be taken, which will be put on the public record and be sent to you. You will, of course, be able to revise any errors you may find. The session is on the record and it is being televised today. Notwithstanding the pause for a minute or so at 11.30, we hope to conclude the session in a bit over an hour. You have alongside you Mr Jonathan Black and Mr Ian Ginsberg, who are very welcome. Financial Secretary, would you like to start with some opening remarks?

David Gauke MP: Thank you, Chairman. I will, if I may, and I thank you for inviting me here today to discuss the annual EU budget proposals for 2016. As members of the Committee will be aware, we remain in the midst of one of the biggest debt crises to hit Europe. In response, this Government and Governments across the EU have taken difficult but necessary decisions to consolidate their public finances and implement structural reforms. We have been clear that the EU budget, which is funded by EU taxpayers, cannot be immune to reform, and this Government have delivered upon this in Brussels, not least through the MFF deal secured by the Prime Minister that delivered a real-terms cut to the EU budget across the seven-year period beginning last year. Negotiations on the annual budget for 2015 were trying, but I am pleased to say that the current proposals for the Commission for the 2016 annual budget are consistent with the MFF annual ceilings. It proposes €143.5 billion in payments and €153.8 billion in commitments, with the recently agreed EFSI deal, which is below the annual MFF ceilings by €1.2 billion on payments and €2.1 billion on commitments, making it a more reasonable proposal than those of the last two years. The cash increase of 1.6% is smaller than previous year-on-year increases, showing the impact of the MFF deal.

Nevertheless, the UK, along with like-minded member states, will continue to push for savings to reduce waste and inefficiency. Ensuring maximum fiscal restraint and the best possible deal for UK and other EU taxpayers, we will look to ensure that EU spend is focused on areas that provide real growth, for example in areas such as high-value research and development and tertiary education, from which Britain’s universities are particularly well placed to benefit. On the other hand, we will push the Commission to find savings in areas that do not reflect the EU’s current priorities of growth and jobs, and responding to new foreign policy and security developments.

I look forward to responding to the Committee’s more detailed questions in the course of this session. The Government take its parliamentary scrutiny obligations very seriously, and we will endeavour to keep this Committee informed on the progress of the negotiations. As you may be aware, it is possible that in-principle agreement on a Council position will be sought as soon as 9 July. We will take a formal position in that discussion only when we have received your clearance—so if possible and if you are content, it would be very helpful to hear back from the Committee before then.

Before moving on to the Committee’s questions, I would also like to highlight that the Government intend to engage very heavily with Vice-President Georgieva’s budget for results initiative and are supporting the Commission as it considers all the options. The UK itself has taken significant steps to make improvements to the application of its national budget. We have experience in areas such as value for money, spending area objectives and improving budgetary performance, for example by removing adverse incentives and improving accountability and transparency. We see Vice-President Georgieva’s new initiative as an important opportunity to help to improve the value of EU spending. That means spending less and better and focusing on results achieved rather than total spend. With those opening remarks, I look forward to your questions.

Q2 The Chairman: Thank you very much. As you suggested, the COREPER meeting is on 9 July, this coming Thursday. Would you propose any major changes to the Commission’s proposals for that meeting?

David Gauke MP: The first point to make, as I mentioned in my remarks, is that the Commission’s proposals are consistent with the Prime Minister’s MFF deal, so we are encouraged by that. What I can say is limited in the sense that the outcome of the Council’s negotiations is not yet public. However, we hope that that can be resolved in the next 48 hours or so, and we are fairly confident that we can achieve a Council position and some cuts on the Commission’s proposal. This has been the result of tough negotiations because, within the Council, there are member states that take a budget disciplinarian view, such as us, and those who are net recipients, who would perhaps be more inclined to increase the budget. But we are fairly confident that the Council position will result in cuts on the Commission’s proposals.

I should also make it clear that that is by no means the end of the process, because the European Parliament will then have a say on the matter. The Budget Committee in the European Parliament has issued its opinion on the annual budget, and it is clear that it will ask for increases in the autumn negotiations. So it is impossible to say how much the Commission’s proposal may change when the budget is finally adopted in November, but obviously we will continue to negotiate in a way that maximises our influence in pursuing a 2016 budget that delivers the overall MFF deal.

The Chairman: For clarity, when you spoke about other countries that are like-minded to us, I think that you were referring to net contributors rather than recipients.

David Gauke MP: Yes, by and large. That tends to be how it divides.

Q3 Lord Haskins: I think you have sort of answered the question, but the tone of the Government’s approach to this budget seems very different from last time round, when the Government did not vote in favour of the budget. Are you inclined generally to support the way the budget is unravelling, as it were? It would be a very big change from the Government’s tone on budgets over the years.

David Gauke MP: The first point I should make is about budgets from previous years. I was particularly involved in last year’s budget. We voted against the final deal because we did not believe that it reflected the budgetary restraint intended by the Prime Minister’s MFF deal. That was what guided us. This year, I would set out three objectives: again, to ensure that the overall MFF deal is fully respected, which is the priority; secondly, to ensure that the annual budget reflects the EU’s current priorities about jobs and growth; and, thirdly, to ensure restraint and value for money for UK and EU taxpayers. If we end up with a final annual budget deal that is consistent with these objectives, then, yes, we would like to support it. The key point is that it needs to be consistent with those objectives.

Q4 Earl of Caithness: Good morning, Minister. It is nice to see you again before the Committee. I was interested by what you said about Vice-President Georgieva’s group. That is the first update that we have had since you reported to us in February this year. Could you lift the lid a little more on what that group comprises, its timescale and what the UK’s input into it has been?

David Gauke MP: Yes, certainly. I will let Jonathan and Ian come in on this as well, as they have been very closely involved with this. We are seeing from Vice-President Georgieva and her budget for results initiative a much greater focus on a performance-orientated budget. It is about delivering results rather than just spending money, if you like, which we very much welcome. We see this as an opportunity to improve the value and efficiency of EU spending and to increase transparency around EU spending to taxpayers. The Chancellor made clear at ECOFIN earlier in the year that we welcome that. We have had a number of discussions at official level with the Commission and offered technical assistance to drive this forward.

You mentioned the likely timing specifically. There is an inter-institutional working group, which comprises representatives from the Council of Ministers, the European Parliament and the Commission. The first meeting of the working group is expected to take place in September, and we are engaged very heavily in that process. There is also a conference on the budget for results initiative on 22 September, which will be a further opportunity to engage member states on the importance of delivering a more performance-orientated budget.

Jonathan, do you want to bring in anything on this?

Jonathan Black: Thank you, Minister. The Minister has set out the main formal timetable for the group and the conference that it is holding in September, and we are engaging in that. The only thing I would add is that we are also engaging bilaterally with the Commission, with Vice-President Georgieva’s staff, to feed in UK experience. We have the Implementation Unit in the Cabinet Office, and are feeding in our experience of the use of, and greater transparency of, data for greater accountability, for example. So we are doing that bilaterally with the Commission. This is also a standing item for discussion among what we call the like-minded group, as the Lord Chairman described it earlier: the majority net recipients. We are, if you like, engaging both bilaterally and in the formal process.

Earl of Caithness: This could be a very exciting development to improve the budget process, because, as we all agreed in February, it is a process that needs reforming and clarifying. Minister, do you favour an independent scrutiny body? Do you think this is something that Madame Georgieva will be able to come up with?

David Gauke MP: Let us see. There is clearly a need for much greater transparency—let me put it that way. The UK has a slightly different system; we have bodies that can hold public spending to greater account through the PAC. I would want to reserve judgment on whether the answer is through some kind of European Parliament process, but member states’ ability to have a greater understanding of EU expenditure and so on would be beneficial and would hold spending to greater account, which I do not think has been sufficient up to now.

Earl of Caithness: When do you expect the report from the inter-institutional working group? When does the vice-president say she is going to come forward with proposals?

Ian Ginsberg: The Commission said that it will have a four-year mandate, so it will run over the course of the MFF, but our initial understanding is that some early output should inform the mid-term review of the MFF, which, under MFF regulation, is required in 2016. So the first outputs that you will see will probably be in 2016.

Lord Boswell of Aynho: When doing my general sifting for the scrutiny process, I come across quite a lot of reports from the European Court of Auditors, and I have noticed that there has been what to me seems a rather encouraging development in that more of them are thematic and about performance and outcomes rather than simply chasing where the money has gone, although that is an important function. While I appreciate that that is by definition ex-post rather than ex-ante, which is budget processes, do you see that tendency as a force for good, and do you see it having some input into the Georgieva process?

David Gauke MP: The answer is yes and yes. The question as to what the results are from the expenditure and whether this is actually delivering anything and is value for money has perhaps not been asked sufficiently rigorously until now, and your point about the Court of Auditors’ approach is similar to where Vice-President Georgieva is wanting to go in this area.

Lord Lawson of Blaby: Following on from that, may I ask a question in three parts? In your opinion—this is particularly topical, since we have our own national Budget tomorrow—is the EU budget subject to as great a degree of financial discipline as the UK Budget is? If not, why not? Finally, apart from what you have done already, what do the Government intend to do about it?

David Gauke MP: Comparing national expenditure, or the national Budget, with the EU, there is perhaps not the same institutional clarity as there is with the UK, for example. I think that everybody knows what their role is in scrutinising the role of Parliament, and the level of information—the level of transparency, if you like—has traditionally been greater at a member-state level. That would be my observation.

The direction that we are perhaps moving in, or where I think Vice-President Georgieva wants to get to, is improving that level of transparency and accountability. There are wider arguments about the EU, which perhaps I should not be drawn towards, in terms of the overall level of scrutiny, democratic accountability and so on, but I do think that there has been scope for improvement and I think we are moving in the right direction. What are we doing about it? I would come back to the Georgieva process as a very good opportunity for us to find new ways of scrutinising expenditure and ensuring that we address waste and efficiency.

I should also make the wider point that the very process of tightening the budgets, as the Prime Minister achieved with the MFF deal, has a salutary effect on all institutions, because where budgets are tighter, clearly tougher decisions have to be made as to where expenditure is made, and that almost inevitably leads to greater scrutiny and determination to ensure that money is spent wisely. Keeping tight budgets helps to eliminate wasteful expenditure.

Lord Lawson of Blaby: Lord Boswell referred to the Court of Auditors, but my recollection is that it has never been able to approve a single European budget. That must cause you concern, does it not?

David Gauke MP: Yes, it does. That is why we as a Government refused to sign off the budgets over the last Parliament. A point can legitimately be made that much of that money is indeed under the control of member states as they spend it, but there is clearly a long-standing issue that causes concern, to use your phrase, and it is not acceptable that it is now very many years since the Court of Auditors has signed off the EU accounts.

Lord Haskins: I chair one of the local enterprise partnerships, and one of the great complaints that I get from business people is about the speed, or lack of it, with which European funds become available and the amount of post-event scrutiny that takes place. This complaint is rather different: that the system is so slow that people are not bothering, which is quite troublesome.

David Gauke MP: Clearly a balance has to be struck, and we should seek a way in which expenditure is delivered on a timely basis. Indeed, we are trying to encourage LEPs to be more involved in this process—in the context of the EFSI, that is of relevance—but it is also about ensuring that taxpayers’ money is spent wisely. Both those objectives are ones that we should seek to achieve.

Lord Davies of Stamford: Mr Gauke, I think I heard you say that much of the money in respect of which the Court of Auditors does not feel that they can sign off on the accounts is in the hands of the member states. Would it not be more accurate to say that all the money in respect of which the Court of Auditors is not willing to sign off on the accounts is in the hands of member states and administered by member states, and that all the monies that are in the hands of, and are being administered by, the Commission or other institutions of the Union have been signed off on quite satisfactorily?

David Gauke MP: The point I was making is that there is a responsibility for EU institutions and EU member states to ensure that money is spent properly.

Lord Davies of Stamford: There is indeed, and all the money which the Commission is responsible for has been signed off on, and some of the money that the member states are administering has not. So I think that it would be fairer to say “all” rather than “most”.

Ian Ginsberg: The information that I have here suggests that the error rate for funds under the direct management of the Commission is still 3.7%, which is higher than the 2% threshold for signing off the money, but we can write to you to confirm that.

Lord Davies of Stamford: What is the error rate in the United Kingdom?

Ian Ginsberg: We have an error rate for expenditure under shared management across the EU more generally, which is 5.2%, so the error rate for funds under shared management by member states is higher, certainly, than the error rate for funds administered by the Commission, but neither of them currently meets the threshold.

Lord Davies of Stamford: And what is the error rate for the British Government domestically?

Ian Ginsberg: I think, although I will have to check, that we do not currently supply the data on a UK basis, but we can write to you on that point and provide details.

David Gauke MP: I will happily write to provide details on that.

The Chairman: It would be very helpful if you could provide some clarity on that, as it is a very pertinent question.

Q5 Lord Butler of Brockwell: Financial Secretary, turning specifically to the 2016 financial budget, where do you see that adding value to national expenditure? I am not surprised by this, but you have been particularly critical of Heading 2 on agricultural support. Is that getting better, and do you see ways in which it can be further improved?

David Gauke MP: First, you are right to say that we are looking at the parts of expenditure that add the most value, and Heading 2 is not high on the list. As part of the MFF deal, it is worth pointing out that aside from cutting the CAP budget, we secured important changes to the common agricultural policy that allowed greater member state flexibility when it comes to spending decisions—so member states are now allowed to transfer funds from Pillar 1, which is essentially subsidies and which we think offers particularly poor value for money, into Pillar 2, which is rural development and is more focused on long-term investment in the agriculture sector. We have made use of that flexibility in the United Kingdom—or, more accurately, the various nations of the United Kingdom have made use of that. Indeed, other member states have followed suit. So there is some progress there.

On your question about added value, there are areas of the budget that we want to see increased as a share of the total spend. The MFF deal makes important progress in reorienting the budget towards areas of growth and investment. We believe that the EFSI and its focus on growth and jobs will build on that progress. As I say, if there was an area that was less beneficial, we would point towards the common agricultural policy, but we welcome some of the changes that have occurred.

Q6 Earl of Lindsay: Financial Secretary, I wanted to ask about the use of the contingency margin for the 2014 budget. We were told by the Commission that one reason for this was that member states’ estimates for expenditure had been unexpectedly accurate. Do you believe that what was unexpected in the past will become expected in future, and therefore are you aware that the methodology used by the Commission will be amended?

David Gauke MP: First, we come back a bit to the Commission and a more transparent approach to the backlog of unpaid bills. You raise an important point in that part of the inter-institutional agreement to phase out the backlog while respecting existing expenditure ceilings was the Commission’s commitment to provide rolling forecasts of payments by heading. That will help us to have a better understanding here. The forecast will be updated regularly on the basis of budgetary decisions, and it may have an impact on the payment profiles of multiannual programmes. That provides an early warning system, if you like, and should help avoid a similar build-up of backlog in future. I come back to the European Court of Auditors. With our support and that of other member states, the court has continued to call for the Commission to publish long-term cash-flow forecasts. The Commission’s decision to listen and act on that is encouraging. We will continue to work with like-minded member states to urge the Commission to forecast EU budget expenditure more accurately and to seek to accommodate in-year funding pressures within the margins of existing budgets rather than turning to member states for additional funding. So I think that there are encouraging signs in that regard.

Earl of Lindsay: Cautious optimism.

David Gauke MP: Yes, cautious optimism.

The Chairman: You mentioned like-minded member states. Is there a cohesive group developing around those issues in the budget? Is there caucusing, if I can call it that, on the other side? We are always concerned about caucusing within the eurozone. On issues such as these, are there concerted efforts to talk to each other regularly and decide the key issues in advance of meetings on these positions?

David Gauke MP: The short answer is that there is co-operation between like-minded member states. I shall ask Jonathan to say a word or two about that.

The Chairman: Are there many un-like-minded ones? These are quite critical issues.

Jonathan Black: As there are on many dossiers, there are groupings of member states that take a similar, instinctive approach to the budget—in this case, as has been said, around the net contributors. We meet regularly at official level with our counterparts around Europe, and indeed it is the UK’s turn to host the next meeting. At the European Council last week, I discussed this bilaterally with my German and Dutch colleagues. So, in answer to your question, yes, there is an informal grouping, if you like. Quite often on the budget, the way in which the Council splits itself up is on whether countries are net recipients or net contributors to the budget. That is not always the case. On things such as the EFSI, there was much more unity around the Council, and the groupings were slightly different. But by and large, on the budget the grouping reflects the net contributions, one way or the other.

Q7 Lord Davies of Stamford: An awful lot of the concern and rhetoric about budgetary control, or lack of it in the European Union, is about the issue of expenditure appropriations, whereas in fact we would imagine that the important aspect of budgetary control is the spending appropriations, when at the outset you determine to spend a certain amount of money, and that is what is restricted by the long-range financial mechanism. What the expenditure appropriations tell you is how long it takes for member states to provide their additionality—when they draw on structure funds, for example—or how long it takes the recipients of EU aid in developing countries to meet the conditions of some disbursement. If they have to build a road before they build a bridge, it would not make sense to refuse to build a bridge at all. You cannot always control the speed at which these Governments take action on their account. It is obviously important to watch what is happening and make sure that delays in payments are not excessive, but surely that is not quite so important as deciding in the first place what actual amounts are to be allocated—the allocation decisions at the outset. Is that right?

David Gauke MP: In a way, the point is to set out that seven-year framework, which is why the negotiation on the MFF is so crucial.

Lord Davies of Stamford: That determines the commitment appropriations rather than expenditure appropriations—I have the right term now. The commitment appropriations are absolutely key to budgetary control, are they not? Everyone got very excited last year because the expenditure appropriations ran ahead of expectations, but it was not actually a very dramatic or disturbing event. What would have dramatic or disturbing would have been if the commitment appropriations had somehow got out of line.

David Gauke MP: There can be problems, which we have seen in a number of commitments that were made in the previous MFF, when we were left with the issue of them needing to be paid for in the next MFF, and that can cause some difficulties. There are problems if you have a backlog, which is why considerable effort is needed to address that. That was a problem that we faced at the beginning of this MFF period: that we have had this backlog of commitments that need to be paid for. So it is not a non-issue, but I accept that it is also very important to control the commitments and to ensure that they are not running at such a level that is inconsistent with the MFF.

Jonathan Black: The MFF deal sets both the so-called commitments and the payments ceiling. As the Financial Secretary and as you rightly said, the commitments set the overall envelope for what the EU budget will spend, but payments matter a lot—it is what drives our fiscal numbers. There is always some delay between the commitment being given and the payments going out. Some of that is for sensible reasons, but sometimes we are talking about programmes that could last for a number of years—an infrastructure project or some of the work with LEPs—when it is advantageous to have a bit of flexibility over time. But it is also important that they are managed in a way that is consistent with the payments ceilings. That goes back to the point that the Minister was making about transparency: the issue last year was having clarity and sufficient transparency in forecasting by both the Commission and member states, so that both ceilings can be managed. That should be, and normally is, possible.

Lord Davies of Stamford: Clearly transparency is important, because the taxpayer needs to know how the money is being spent, and you cannot have undue delays. I accept all that, but my point is that I think that the Minister and you have accepted it but it is a secondary consideration. The important consideration is with the commitment appropriations: making sure that they do not go ahead in the MFF. If you have that sort of control, you have nothing to worry about, because it does not that much matter if a particular spend comes in two or three years late.

David Gauke MP: Clearly the commitments are very important, but, as I say, we have faced difficulties because of a payment backlog.

Lord Davies of Stamford: They are not really difficulties; they raise question marks over why it took so long for a programme to be implemented. Those are legitimate questions that need answers to do with management in the particular area concerned. But the important thing for budgetary control is to make sure that your commitments appropriations are controlling expenditure.

David Gauke MP: It is very important that the MFF deal is upheld, but that can be thrown off track. I am not saying that it is, because it is not, but one can face difficulties if one has a backlog that is out of control and is moved from one year to another.

Lord Davies of Stamford: It logically cannot be thrown off track if you stick to the commitment appropriations within the ceilings.

Jonathan Black: The MFF sets both commitment and payment appropriations.

Lord Davies of Stamford: I realise that, but the fact that it sets the limits for the commitment appropriations is sufficient to control expenditure. There are other things that need to be controlled, such as management of expenditure, which are a secondary issue. That is my point. I think that you are agreeing really.

The Chairman: Could I press you a little? You welcome the increased margins now, compared to previous years. Do you think we are now at the stage where margins are sufficient?

David Gauke MP: Sorry, where the margin is—

The Chairman: Are the commitment margins sufficient as compared to previous years, when they were rather squeezed?

David Gauke MP: It is difficult to ever be entirely confident whether they are sufficient.

The Chairman: You do not know.

David Gauke MP: You do not know. There are unexpected calls on expenditure. So I do not think it is ever possible to put a number on it and say that it is absolutely fine. Clearly, a larger margin provides us with greater protection.

The Chairman: And we are moving in that direction.

David Gauke MP: Yes, we would appear to be moving in that direction.

The Chairman: So on the whole we are in a far better place than we were.

David Gauke MP: Yes, we are in a better place than we were last year.

Earl of Caithness: I want to come back to error rates, which we discussed earlier. You were going to send us some information. Could you also add it to the information that you are going to send us? What constitutes an error could be as small as a farmer not filling in a claim form correctly, so could you benchmark the EU budget error rate against certain bigger economies, such as the error rates of the UK, Germany, France and America?

David Gauke MP: We will see what we can do.

Ian Ginsberg: I cannot promise. Member-state and individual economy accounting for such things is not necessarily directly comparable, but we will do our best.

The Chairman: That sort of answers Lord Lawson’s earlier question about whether there was an analogy between the EU and member states.

Ian Ginsberg: We do hold the EU to quite a high standard, and the NAO does not typically assess the UK economy on the same basis.

The Chairman: As much comparatively as you can send would be very helpful.

Ian Ginsberg: We will certainly see what we can dig up for you.

Q8 Lord Butler of Brockwell: We have been talking about the hangover from future budgets of the frontloading of projects and the use of the contingency fund. You have said that larger margins were being introduced to cope with that. A particular area where there may be further frontloading is the youth employment initiative—and that would be welcome. Are steps being taken to cope with that prospect?

David Gauke MP: Yes, first, on the youth employment initiative, I entirely agree with you, Lord Butler. We welcome it; it is a key programme in support of growth and jobs. It was adopted following a high-level political call for it at the European Council in February 2013 to address unprecedented levels of youth unemployment. Yes, we support that. In truth, we see no reason why the frontloading of payments would increase pressure later on in the budget. Increased pre-financing payments to the member states do not alter the already agreed overall financial profile of national allocations; it merely proposes to advance in time allocations that have already been secured in the EU budget for the youth employment initiative. Something that helps to speed up implementation is something that we welcome.

I would also come back to the issue of the contingency margin. More broadly, it is worth making the point that the contingency margin in 2014 was proposed by and large to address the backlog of unpaid bills that we discussed a moment or so ago and that relate to commitments made in the previous MFF. The Commission has identified the payment level necessary to phase out this backlog of payments by the end of 2016, which is reflected in the 2016 budget. Of course, crucially, that falls under existing ceilings, so we think this is a crucial step towards managing future payment pressures.

Q9 Lord Skidelsky: Which headings or programmes would you like to see reduced or increased in the 2016 budget in order to achieve the priorities of jobs and growth? Have the Government taken any steps to encourage the Commission to look for savings?

David Gauke MP: If I may, I will quickly run through the various headings. We would argue for a higher proportion of budget to go under Heading 1A for high-value programmes encouraging greater investment. We would also go for a proportionally larger and more flexible Heading 4, with suitable spend to respond to foreign policy needs. We have already discussed Heading 2, which we do not think represents value for money. Heading 1B should focus on the poorest regions of the poorest member states, and therefore could be proportionately smaller, and we want Heading 5, the administrative spend, to be cut. If we were starting with a blank sheet of paper and could determine the proportions, that is the approach that we would take here. We would also make the case that the size of programmes with low implementation rates should be reassessed and funds reallocated accordingly.

In terms of what we are doing about it, the Government have taken very active steps to push the Commission to look for savings by arguing strongly for cuts in negotiations. We are building robust alliances, as we have made clear, with other like-minded budget-disciplinarian member states to put pressure on the Commission. Also, as touched upon, we are engaging fully in Vice-President Georgieva’s attempt to ensure that we get a budget for results, which I think plays in with this agenda here.

Lord Skidelsky: I have a more specific question on the jobs and growth priority, focusing on the European Fund for Strategic Investments. As I understand it, most of the €8 billion allocated to that fund will be reshuffled from Horizon 2020 and the Connecting Europe Facility. One of the losers, as I understand it, will be the EU’s main research and innovation project. In your opening remarks, you said that you attached great importance to that function of the EU in research and innovation. What do you feel about taking money from that in order to fund the EFSI?

The Chairman: Minister, before you reply, may I stop you? This is the point where we observe one minute’s silence.

One minute’s silence was observed for the 10th anniversary of the 7 July bombings.

The Chairman: That concludes the one minute’s silence. We can recommence the evidence session.

David Gauke MP: Thank you. Turning to Horizon 2020, it is worth putting this into context. We support that programme, as I made clear earlier, and benefit from it, but it is worth pointing out that Horizontal Activities have seen a proposed increase in commitments by 130% and in payments by 687%. That is a significant increase from 2015, and it is not entirely clear whether that necessarily brings as much value as would justify those types of increases.

We think that the ESFI is good value for money. In terms of Horizon 2020, we are still seeing significant increases. As I say, if we were starting with a blank sheet of paper, there would be other areas that one could focus on, but overall we are still seeing significant increases under Heading 1A expenditure. So even with the reprioritisation towards the EFSI, this is still an expanding part of the EU budget.

Lord Skidelsky: Could I draw you on a wider question? You might not want to answer this, but do you think that more money should be allocated to the EFSI, given the fall in private investment, which has been huge?

David Gauke MP: Let us get it up and running and see what its performance is like. We think it is a step in the right direction. I suppose you can always argue that if you think something is good, why not do more of it, but there is the question of delivering what we have. It is still a pretty ambitious programme, so let us see how it performs, and if, with the benefit of more experience of it we see that it is proving to be very worth while, there is a case for expanding it. It is a pretty significant programme that is being delivered and, we would hope, at a pretty fair pace.

Earl of Lindsay: I want to go back to your comments about Heading 2, and particularly to your earlier comments about the CAP component of Heading 2. You drew a distinction in an earlier answer between Pillar 1, which I think causes you reservations about its relative value for money, and Pillar 2, which you referred to as investing in the future of agriculture. If Pillar 1 did not exist, would you be much more comfortable about that part of the CAP component of Heading 2 being a useful, value-added measure, or do you still have reservations about Pillar 2 itself?

David Gauke MP: Certainly there is a stronger case that Pillar 2 adds value than for Pillar 1. Pillar 1 represents very poor value for money. It stifles competition and lacks any clear policy rationale, so we are very critical of it. We are pleased that we have the flexibility to move more expenditure to Pillar 2, which is clearly a better use of money.

If you are asking me to assess Pillar 2 on a standalone basis, of course all areas of expenditure need to be scrutinised to see whether the money is spent wisely, but there is a clearer case, a clear policy rationale, for Pillar 2 in a way that we do not think exists for Pillar 1.

Lord Davies of Stamford: I want to ask you about EFSI. In order to get to any meaningful figure that has any macroeconomic impact at all—you would want to get to a figure of about €315 billion, I think—an awful lot of leverage will be required. Do you think that the assumption that that leverage will be there is realistic?

David Gauke MP: Yes, I think so. The question came up when I was last here. We believe that it is plausible and appropriate.

Jonathan Black: It builds on Lord Skidelsky’s question about the size of the fund. You are right that EFSI is innovative, particularly in the way it blends loans from the EIB with grants from the budget. There are parts of EIB lending, particularly in the so-called EIF, which achieve quite high levels of leverage, but it will be important that projects that go through the EFSI are rigorous and robust and can demonstrably deliver the level of extra impact, additionality, that the fund requires. That probably reinforces the point about why this is the right size for the EFSI now: so that it can prove itself in its early stages. The interaction with the EIB is critical, and the rigour which the EIB places on its project selection will be critical to the success of the EFSI.

Lord Davies of Stamford: I noticed that the Minister just said that he thought that the EFSI represented good value for money. Are we therefore going to join it? Is Great Britain going to join the EFSI?

Jonathan Black: In a sense yes. You do not bid to join; it is open to all 28 members of the EU and the projects are selected in the same way as other EIB projects.

Lord Davies of Stamford: So we will be putting some money into the fund centrally?

Jonathan Black: We contribute, as all member states do, to the guarantee in the EFSI of the €8 billion. We are eligible for projects. There are UK projects going through the EIB’s pipeline. I am confident about that. Indeed, last year, the UK had a record level of lending from the EIB itself, and we have been working very closely with them with our national infrastructure plan and our domestic pipeline for projects to ensure that the ones that best meet the eligibility criteria for the EFSI are properly put into that pipeline and selection process.

Lord Davies of Stamford: So our share in the funding is proportionate to our share of the contribution to the Union’s budget as a whole, presumably.

Jonathan Black: Yes, our contribution to the funding of EFSI is proportionate to that, and the projects are then selected on a basis of merit: which projects are best. As I said, the UK got a record level from that last year.

Lord Davies of Stamford: And our contribution to the guarantees will again be proportional to our contribution to the EU budget generally.

Jonathan Black: Yes, that is correct.

Lord Davies of Stamford: And do you think that our benefit from the fund may be greater than the share of our contribution?

Jonathan Black: It is important part of how the EFSI has been set up—so that it carries the credibility of the market, particularly investors outside the EU—that the projects are selected on their own merits through a proper process. As I said, last year for example, the UK got record levels of lending from the EIB.

Lord Davies of Stamford: That is from the EIB under its classic criteria?

Jonathan Black: A potential indication is that there are some aspects of EIB lending where we are a bit below the average. The elements that take on greater risk are an area where the UK does proportionately better, and the EFSI has a stronger risk model, so we have to see what happens with the selection process, but we are confident that we have good projects that could qualify.

The Chairman: Can I pick you up briefly on that point? Do we actually co-finance projects with the EIB?

Jonathan Black: That depends on the project, but it is quite common for EIB projects to be co-financed by both other bits of the public sector, including structural funds, and by the private sector. Most of the large infrastructure projects are co-financed through the private sector, and the UK has a particularly high private-sector mix in its projects.

Ian Ginsberg: The money that goes into the EFSI fund is a guarantee fund that is paid out of the budget.

Lord Lawson of Blaby: In response to an earlier question from the Chairman, Mr Black said that a meeting will take place, which the United Kingdom will host, of like-minded member states. Can you tell us the date of the meeting and who will be present?

Jonathan Black: I forget the exact date—Ian may be able to tell me—but it is in September and it will be the usual group of member states: Germany, France, the Netherlands, Finland and Sweden—the other net contributors. That is a regular official-level meeting that we have.

Lord Lawson of Blaby: So it is at official level, not ministerial.

Jonathan Black: Yes, it is an officials meeting. We have it every three or so months and obviously use the opportunity of budget ECOFINs for Ministers to discuss. At the informal ECOFIN in Riga in April, we had a discussion on the budget, and I believe that another one is due in September.

The Chairman: Mr Gauke, you mentioned Heading 4 and global Europe in your reply about different areas of expenditure and what the views were. Do you see this as adequately funded, and given the emphasis that we now have on the EU’s borders and all the issues that arise from security and other dilemmas in that regard, do you think that the United Kingdom would wish to see further funds given to that heading? You skimmed over global Europe, but it is quite important.

David Gauke MP: No, no, that is fair enough. You ask whether it is adequately funded. There are two points to make here. First, it is important to minimise the build-up of unpaid commitments and to deal with the existing payments backlog. Secondly, it is particularly important in this area to allow for flexibility, because this is a budget heading where it is necessary to respond to unforeseen events. Considering these two objectives, we agree with a payment increase in the Heading 4 budget this year, but not necessarily to the extent that we have seen in context of this budget, and Heading 4 should be funded in a way that promotes bigger margins and greater flexibility within it and within instruments. The proposed 28.5% increase in payments under this heading in the draft 2016 budget is probably larger than required relative to the backlog of payments, but we recognise that there is a need to fund this properly.

Q10 The Chairman: The Committee engaged last week with Senator Mario Monti, who is leading the high-level group on own resources. One of the points that he made to us was how keen he was to interact with national Governments, and particularly that national Governments should share experiences because there is better practice and less good practice across the 28. Have the Government attempted to engage with Senator Monti’s group? What is your thinking on what he is doing?

David Gauke MP: At this stage, the high-level group has not produced any proposals.

The Chairman: It has produced an interim report.

David Gauke MP: Yes, but to be fair, nor has it sought out and engaged with member state Governments. So at this stage, no. It would be fair to say that the Chancellor has supported comments of others on the need to ensure what national Parliaments are expected to take into account in this review. It is also worth pointing out that when it comes to the own-resources system, the Chancellor has made clear that the UK’s position is unlikely to change, but we certainly welcome the group’s intention to engage with national Parliaments, as indeed it has done with your Committee. We want to see what its proposals are.

Lord Davies of Stamford: What is your position?

David Gauke MP: I referred to our position in terms of own resources. It is that we seek to maintain the current position on own resources, but we wait to see what proposals are made. One point that I would make in this area is that I think that Senator Monti is making the case for the Commission to have a better understanding of what member states are doing and for them to provide more information to the Commission on the timing of payment claims. We agree with the need for greater transparency there. But we also need to ensure that the Commission is more transparent in sharing information with budgetary authorities so that member states can better understand and address payment pressures. In terms of whether it is moving in the direction greater transparency and exchange of information, there is something there for us to support. But at this point, we await the group’s proposals with interest.

The Chairman: But you have not put forward any positive proposals from the UK to help inform the consultation. We have not actually been proactive in saying, “This is the direction of travel in which we think you need to go”.

David Gauke MP: We have not. It is for the group to engage. If it wishes to engage with member states’ Governments, of course we would engage with it, but at this point I think it is engaging with Parliaments, which is something that we encouraged and supported. I also want to make it clear, as I said earlier on the issue of own resources, that we have a rebate that is non-negotiable and that we would wish that to be maintained. That is a clear red line for us.

The Chairman: So that is what you were referring to when you said that the UK’s position is unlikely to change: the rebate.

David Gauke MP: The rebate is non-negotiable, and that position will not change.

Lord Davies of Stamford: Have you read the high-level group’s interim report?

David Gauke MP: No, I have not read it in full.

Lord Davies of Stamford: The high-level group has identified and listed about six theoretical possible own resources. I wonder whether you have any comments. If you have not read the report, it will be difficult for you to answer the question. Perhaps Mr. Black who is nodding has read the report and can answer.

David Gauke MP: Yes, I will let Jonathan come in. I would just reiterate the point, in terms our rebate, that that is not a line that we would wish to cross.

Lord Lawson of Blaby: But the rebate relates to the net contribution. What we are talking about here is the gross funding and the levels of funding. Do the Government have no position at all on this?

David Gauke MP: I am not sure that it is possible entirely to disentangle them. If this is an area that was to be looked at again, we would need to make it very clear that our rebate is to be defended.

Jonathan Black: The Minister is right: we will need to see what the group proposes, and it is for its members to do that. It is of course a matter of unanimity in the Council on changes to the own-resources system. One of the things that the group has looked at and which we have a very strong view on is a financial transactions tax, for example. We are not the only member state to have a very strong view on that.

Lord McFall of Alcluith: Minister, you have dealt skilfully with the EU and the budget over the past few years. Do you have any frustration in your dealings? For example, is the budget sufficiently dynamic in areas such as growth, skills, productivity, jobs and even labour-market reform?

David Gauke MP: I come back to the point that I was making earlier. If we were starting with a blank sheet of paper, there are areas that would certainly have a higher share of the budget than is the case at the moment, and certain areas would have a lower share. Some progress was made on this, which I would not wish to downplay in any way, in terms of the MFF deal that the Prime Minister secured—and we have seen a fall in terms of the common agricultural policy as a proportion of the EU budget as a whole. But in an ideal world would we like to go further? The answer is yes.

Lord McFall of Alcluith: So where is the biggest deficiency at the moment?

David Gauke MP: I will run through the headings that I talked through earlier. We do not think that Pillar 1 on the common agricultural policy is good value for money and that it stifles competition, whereas Heading 1A is more about the agenda that the EU is seeking to pursue about jobs and growth, so we would like to see a higher proportion in that area.

Lord Davies of Stamford: Mr Gauke, I detect from our conversation a moment ago about the own-resources high-level working group that the Government are being extremely passive about this. You repeat endlessly the mantras about our rebate, which we all know about, and the government position on the FTT, but the FTT is only one of six or seven proposals in the interim assessment document. You do not seem to respond to any of the others. You do not seem to have taken any opportunity to try to influence the thinking of the working group or to contribute to it. Surely the best way in which to get value out of the European Union, or any other international organisation of which we are a member, is to take an active interest in the current agenda, to make our view clear, to engage with our partners and to come up with proposals ourselves if we do not think that the proposals on the table fully meet our requirements or interests. You do not seem to be doing that on this occasion. I wonder why that is.

David Gauke MP: I have made the point that we have been engaged with like-minded member states in ensuring that our position is protected. We had a very successful MFF negotiation where we saw cuts in the MFF budget.

Lord Davies of Stamford: To come back to our own resources, what about the future, not the current discussions on the budget? We are talking about the own-resources idea. The working group has been set up, there is a lot of talk about it on the continent and it is quite clear that our position is very defensive and passive. Why is that?

David Gauke MP: In 2013 we achieved our negotiating objectives on own resources by protecting our rebate and ensuring that there were no new sources of tax—for example, a financial transaction tax—that could fund EU resources. We achieved our objectives in the MFF negotiations about both revenue and expenditure.

Lord Davies of Stamford: You did on the MFF, but this is a completely different issue.

David Gauke MP: It is not completely different.

Lord Davies of Stamford: I take away from this exchange that you have had no contact with the high-level working group and do not expect to have any. Is that right?

The Chairman: Forgive me Lord Davies, I am not trying to speak for you, but this sentiment somewhat surprises us. You knew that we would be asking you about this. I think the point that Lord Davies is making is that even if there has been only an interim report—we accept that you will need to look at proposals as they come along and consider Parliament’s response—we are beginning to see the outlines of the group’s thinking and it would be extremely valuable if you sought to engage on those outlines and have some discussions with the group. You would of course reserve your right not to agree with what comes out in the end.

David Gauke MP: This is a high-level group. The first report was largely a backward-looking assessment of previous own resources reform proposals and a list of the group’s criteria for assessment. This is still relatively early days in this process. As I say, we encourage engagement with national Parliaments, which is obviously occurring.

The Chairman: I think that takes us some way down the road. The transcript of our session with Mr Monti will be released shortly and I would encourage your people to have a look at it. It was a very interesting and positive session.

David Gauke MP: I have seen the read-out of that session. We have already watched it.

The Chairman: Financial Secretary, Mr Black and Mr Ginsberg, thank you so much for attending today. We bring this session to an end. You will of course be free to follow up with any additions to the questions that we have asked, and we may well be writing to you in pursuit of some of the answers. Thank you very much indeed.