The value of SFP payment entitlements (and the SAPS payment in the new member states) that farmers will receive later this year will be based on current eligibility rules (as set out in Council Regulation (EC) 73/2009 agreed following the CAP Health Check) but on the budgetary amounts set aside for 2014 under the new Multiannual Financial Framework (MFF) regulation for the coming period 2014-2020. This is because the 2013 direct payments are paid out of the 2014 EU budget which runs from 1 October this year.
This means that, even without the new CAP regulations agreed in June 2013 coming into force (which are now delayed to 1 January 2015), what farmers will receive in direct payments in 2013 will differ from what they were paid in 2012 for two main reasons:
• The overall budget for direct payments agreed for 2014, taking into account the additional demands on this budget arising from the phasing in direct payments in the new member states plus the provision for the new crisis reserve, is lower than before.
• The reallocation of the total budget for direct payments between member states as a result of the first step towards external convergence, leading to an increase in the national ceiling for direct payments in some member states and a decrease in others. Correction 9 September 2013. In fact, the conclusions of the European Council in February 2013 provide that the external convergence mechanism will be implemented progressively over 6 years from financial year 2015 to financial year 2020, so there will be no impact on the 2013 payment funded from the 2014 financial year under this mechanism. So only the first bullet point is relevant in determining any change in the 2013 payment
A further potential source of change could have been the ending of compulsory modulation whereby payments over €5,000 to farmers were reduced and the funds saved were transferred to the Pillar 2 rural development budget. However, a transition regulation (671/2012) amending regulation 73/2009 provided that direct payments over €5,000 would be reduced by the same percentages in 2013 as under compulsory modulation (i.e. by 10% for payments over €5,000 and by 14% for payments over €300,000), with member states’ net ceilings adjusted to reflect these reductions.
While the impact of the second bullet point is now known and the impact on individual farm payments can be calculated (update, see correction above), this is not yet the case for the first bullet point. For the first time ever, in March this year the Commission tabled a proposal under the financial discipline mechanism for CAP direct payments in the 2014 financial year intended to address the insufficiency of funds.
However, the reduction percentage to be applied to direct payments under financial discipline has not yet been finally decided and probably will not be known until towards the end of November. A feature of the debate has been the inconsistent position of the European Parliament, which does not seem to be able to make up its mind on how to apply this instrument, although it is not clear what influence it will have on the final outcome.
Why financial discipline now?
“Financial discipline” is part of the Pillar 1 CAP regulation introduced in the Mid-Term Review in 2003. It is used to limit the level of expenditure on CAP Pillar 1 schemes (which includes the single farm payment) if the expected budget is going to exceed the funds available.
The Commission proposal would reduce direct payments over €5,000 by 5% (the exact figure is 4.981759%) but it has yet to be approved by the Council and Parliament. The proposal is linked to the MFF political agreement reached in June 2013, which must still be ratified by the Parliament, and to the negotiations on the 2014 annual budget, the first draft of which was presented by the Commission on 26 June.
The financial discipline mechanism, although established in 2003, has never been triggered until now. Buoyant agricultural markets meant that the funds available under the current MFF Heading 2 ceiling were sufficient to cover direct payments and other Pillar 1 budgetary requirements.
This position has been under increasing pressure for a number of reasons:
• During the period 2007-2013 there has been a phasing in of direct payments for the 10 new member states that joined the EU in 2004. They are set to receive the full 100% of the Single Area Payment Scheme (SAPS) rates they have been allocated in the coming financial year. In addition, Bulgaria and Romania (which joined in the EU in 2007 and will reach full SAPS payment levels in 2017) and Croatia which joined the EU on 1st July 2013 add further pressure onto the budget.
• The 2014 budget is the first to be agreed under the new MFF agreed between the Council and the Parliament in June 2013. The budget ceilings included in this agreement were lower than the Commission’s original proposal and also include within the pillar 1 ceiling the creation of a crisis fund of €424.5 million to cover unforeseen emergency expenditure. According to the Commission, the first estimates of budget appropriations for direct aids and market related expenditure showed the need to reduce the total amount of direct payments that can be granted to farmers in respect of calendar year 2013 by €1,471.4 million in order to respect the 2014 sub-ceiling in the new MFF agreement.
These factors explain why the financial discipline mechanism has now been triggered and will impact on 2013 SPS payments.
The Commission’s proposal
The Commission’s proposal for a 5% cut in direct payments using the financial discipline mechanism is based on applying the cut only to payments over €5,000 and exempting Bulgaria, Romania and Croatia where direct payments are still being phased in. The legal basis for the Commission’s proposal to exempt the first €5,000 in payments from the cut is contested and not all member states and MEPs are in agreement.
In the Council Regulation (EC) 1782/2003 following the Mid-Term Review which introduced the financial discipline mechanism and in Council Regulation (EC) 73/2009 which maintained it, there is no specific mention of a threshold and the presumption is that a linear reduction to all payments would apply.
The Commission makes three arguments to justify the inclusion of a €5,000 threshold. It argues that it stated at the time of the 2003 agreement its intention to propose this threshold in order to take account of the unequal distribution of direct payments between small and large beneficiaries. The threshold is in line with the compulsory modulation mechanism which applied in the 2007-2013 period, and it is also coherent with what the Commission proposed on direct payments in the context of the CAP reform.
The compulsory modulation mechanism is an interesting precedent because, when it was introduced in 2003, it was applied as a linear reduction to all payments but an additional payment was introduced to offset the effect of the reduction on payments under €5,000. It was only in the 2009 regulation that the threshold was integrated directly into the compulsory modulation mechanism. But there was no explicit extension of the threshold to the financial discipline mechanism.
There is another difference between the two mechanisms. In the case of the money raised from compulsory modulation which was transferred to rural development, the bulk of it (a minimum of 80%) was retained within each member state. In the case of the financial discipline mechanism, there is no such ring-fencing. Including a threshold in the mechanism will therefore hit harder those member states with a larger number of large beneficiaries, which explains why they have an incentive to oppose it.
The Parliament’s position on financial discipline
As noted above, the Parliament has been hopelessly confused over its position on the exemption threshold.
In its amendments to the Commission’s 2011 draft direct payments regulation (which proposed explicitly to limit the application of the financial discipline mechanism to payments above €5,000), the Parliament took the view that it wanted a linear reduction (i.e. no threshold).
When COMAGRI considered the Commission’s financial discipline proposal from March 2013, it was mainly concerned with the fact that the Commission had calculated the financial discipline reduction on the basis of the European Council’s MFF conclusions in February 2013 rather than the Commission’s own higher MFF proposal which the Parliament had supported. On this basis, it called for a much smaller financial discipline reduction of 0.748005%.
On the issue of the threshold, it had to choose between two options. The rapporteur Capoulas Santos went along with the idea of exempting payments under €5,000 from the cut, whereas the Budget Committee in its proposed amendment called for a linear reduction consistent with the Parliament’s plenary amendments to the Commission’s CAP reform proposals. In the end, COMAGRI and later the Parliament in its legislative first reading in June supported the maintenance of the threshold (despite the fact that it has argued against it for the 2014-2020 period in its earlier position).
Continuing uncertainty on financial discipline
The direct payment regulation requires the Commission to table a proposal to trigger financial discipline by 31 March if there was a risk of the likely expenditure exceeding funds available. Under the regulation, the proposal needs to be adopted by the European Parliament and the Council by 30 June 2013. If not, the Commission is empowered to set the adjustment rate. So far, the Council has not formally considered the proposal and must now react to the Parliament’s first reading version.
However, the rate may be adapted by the Commission itself in the light of its latest forecasts for market-related expenditure and direct payments when it presents its usual Amending Letter to the draft 2014 budget in October 2013, and the Council may further change the rate before 1 December 2013.
The explanatory memorandum to the Commission’s financial discipline proposal highlights that, if the rate is not fixed by 30 June, then ultimately it falls to the Council alone to fix the rate, thus excluding the Parliament from further involvement. If this is the case, then the Parliament’s u-turn on the question of the threshold will make no difference. However, it seems at odds with the spirit of the regulation which was proposed to be adopted by both institutions and further clarification of the future role of the Parliament in setting the adjustment rate would be helpful.
A further complication is that one of the arguments the Commission used in justifying the €5,000 threshold was that this was in line with the proposal it presented for the new CAP regulation for the coming period. However, in the CAP political agreement of June 2013 between the Council and Parliament, this figure has now been changed to a threshold of €2,000. Logic would seem to require that, when the Commission proposes its new rate in the autumn, it should be based on this political agreement, but we will have to wait and see if this will be the case.
This uncertainty will be unsettling for farmers who depend on this payment, but it must be a nightmare for the paying agencies which will be unable to determine the payments to make in the early weeks of December until the very last minute.
