Baron John.ashx

John Baron is the Member of Parliament for Basildon and Billericay.

The Government is now considering proposals by the EU Commission to increase its budget to €1 trillion in the period 2014-2020. This represents an above-inflation increase on the previous period. Such proposals fly in the face of the austerity measures adopted by governments across Europe, and are further evidence – if any were required – that the Commission is living on another planet.

The Government is right in its attempts to reduce the budget proposals. Because of changes to our rebate, courtesy of the previous Labour Government, these increases will affect us more than most. In the previous Parliament, our total net contribution was around £19 billion. This is projected to rise to more than £41 billion in this Parliament. These are big numbers. This £22 billion increase could fund an extra 100,000 police officers or nurses a year over the lifetime of the budget. It could also build a further 80 hospitals. In order to encourage economic growth, it could fund a one penny cut each year in the basic rate of income tax or a six penny cut in small enterprise corporation tax.

The situation is made even worse by the fact that the European Court of Auditors has not signed off the EU’s accounts for any of the past sixteen years. We have no precise idea of how our budget contributions are spent. Such a situation is not tolerated in the private sector. It is not tolerated in Government. It should therefore not be tolerated in the EU and provides further evidence of a lack of transparency when it comes to European spending.

However, there are risks in the Government’s position. Its first preference is that there should be no budget increase at all in absolute terms. Its fallback position seems to be that we do not want any increase in real terms – in other words, that our contributions will be capped at inflation. But be careful what you wish for, for there is a real risk that inflation may rise in the near future.

This recession is unusual in that it is a deleveraging recession – as opposed to a destocking recession – caused by too much debt. One option available to Government is to reduce spending, but this is challenging in the present environment. The better long-term solution is to create growth, but again this is difficult because people and governments are paying down their debts.

A further option is to allow an element of inflation which will help erode the debt. Governments are going down this route by keeping interest rates artificially low both at the short and the long end of the curve. Furthermore, the risk of higher inflation rises with quantitative easing – the printing of money. I suggest the EU is increasingly likely to adopt this measure as it is the least worst option if they are to achieve their objective of saving the Euro.

So we should be careful what we wish for when we talk about pegging our contribution to inflation. Instead, the Government should be pressing for aggressive cuts in our projected contributions, and would have the mood of the country behind it in doing so.

Likewise, the Government ought to be careful about its substantial contribution increases to the IMF. Yes, the IMF can not direct this money into supra-national vehicles such as the EFSF. And yes, no country has ever lost money by loaning it to the IMF. But we all know that there is only one crisis in town and that this slump – being caused by high indebtedness – is unlike all previous post-war recessions. There is a real danger that money loaned to the Eurozone may be written off, given the extent of debt which exists. Just talk to the bondholders of Greek debt. Meanwhile, bond yields approaching 7.5% suggest the market may now be fast losing confidence in Italy.