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The 2015 EU budget and agricultural spending

A provisional agreement has now been reached on the 2015 EU budget between the Council and Parliament following their inability to reach an agreement on the Commission’s first draft budget proposal in November (read here the reactions to the deal of the Commission, of the Council and of the Parliament). In terms of the headline figures for overall EU spending, the agreement is closer to the Council’s position, particularly in terms of payment appropriations, an outcome which was predicted as a consequence of the Lisbon Treaty changes in a series of papers by Giacomo Benedetto of the University of London.
The Parliament’s main demand was not so much adjustments to the 2015 figures but rather addressing the increasing backlog of unpaid bills (the result of a rising gap between commitment and payment appropriations in recent budgets). The amount of unpaid bills rose from €5 billion in 2010 to €23.4 billion at the start of 2014 and without an increase in 2014 payment appropriations would have risen further in 2015.
As part of the agreement, the three institutions will endeavour to agree on a maximum target level of unpaid bills which can be considered sustainable. They have further agreed to work on reducing the level of unpaid bills although the details here seem to be of a ‘best endeavour’ nature. As the Commission describes it in its press release above: “The Commission will … in its draft budget every year provide a document showing the level of unpaid bills and making a suggestion to reduce this level, for which the three institutions agree to consider any possible means”. I guess you can make what you like out of that.
The Parliament has claimed that it secured an additional €4.8 billion more to pay bills for 2014-2015. However, it appears just €3.53 billion has been added to 2014 payment appropriations as a result of mobilising the Contingency Margin in the MFF (the first time this new instrument agreed as part of the 2014-2020 MFF has been used) as well as using some of the unallocated margin in 2014. Although the extra payments in 2014 will be financed by additional revenue from fines (mostly competition fines), using the Contingency Margin means that payment appropriations are brought forward from later years and the overall payment appropriations ceiling for the seven-year MFF must still be met.
The positions of the various actors on the 2015 budget are set out in the table below (Commission figures are taken from the budget documents on the DG Financial Programming and Budget website, the Council’s figures from this press release, and the Parliament’s figures from its resolution of 22 October). The figures for the 2014 budget have been a movable feast depending on whether the Commission’s various draft amending budgets were included or not. The 2014 figures in the table are assumed to represent the projected outcome in the light of the political agreement to add €3.53 billion to 2014 payment appropriations this week.

The Commission’s first 2015 draft budget (DB), as amended by the Amending Letter No. 1, proposed increases of 1.7% in commitment appropriations (CA) and 2.2% in payment appropriations (PA) on the eventual 2014 outcome (for the significance of the Amending Letter No. 1, see this earlier post). When the original DB was presented last June, the Commission reported that the amounts represented a 2.1% increase in CA and a 1.4% increase in PA given the status of the projected 2014 budget outturn at that time.
The Council’s position accepted the Commission’s CA figure but sharply cut its PA provision. The Parliament in its initial position wanted a further increase in CA and a substantial increase in PA, much of the latter intended to pay off previous unpaid bills. In the event, the conciliation period expired on 17 November without the Council and Parliament being able to reach agreement.
In line with the Lisbon Treaty the Commission presented a new draft budget on 28 November. Its CA figure was largely unchanged but its PA figure was closer to the Council position and in the final negotiations was slightly reduced further. There is still a difference of over €4 billion between CA and PA indicating that unpaid bills will continue to rise, although the Council argues that the difference is much smaller than in some previous years.
CAP appropriations in the 2015 budget

How appropriations for Pillar 1 and Pillar 2 of the CAP evolved in successive phases of the 2015 budget process is shown in the table below. Details of the CAP budget in the final political agreement are not yet published, but are not likely to differ from the DB2 figures shown in the table.

The new Regulation for direct payments substantially modifies the system of direct aids to farmers but this mostly becomes applicable as from the budget year 2016 onwards. The legal framework for direct aids in the 2015 budget remains unchanged, although adapted to some of the elements decided under the new MFF, in particular the adjustment of the direct aid ceilings to the new EAGF sub-ceiling, the integration of the reserve for crises in the agricultural sector, the possibility for member states to redistribute direct aids and the new flexibility between the two pillars of the CAP.
Unlike in the 2014 budget, the Commission activated the financial mechanism for the 2015 budget only to establish the reserve for crises in the agricultural sector, given that there was a margin under the sub-ceiling for market measures and direct aids amounting to €286 million in the initial DB. A small reduction in rural development payment appropriations was foreseen compared to the 2014 budget as modified by Draft Amending Budget No 3/2014.
The Commission warned that this level of EAFRD payment appropriations was unlikely to be sufficient to reduce the expected backlog of unpaid payment claims at the end of 2014. In the commentary attached to the initial DB it noted that: “This could limit the Commission’s ability to keep the 45-day payment deadline on payment requests arriving in later months of the 2015 calendar year. In turn, this would result in cash-flow problems for Member States and make national financing for rural development more difficult.” However, the delays in approving the new rural development programmes in 2014 mean that spending in 2015 on EAFRD schemes is likely to undershoot.
The interpretation of the trend in EAGF expenditure is complicated by the fact that spending can be financed in part from assigned revenue, leaving only the balance to be financed by budget appropriations. Total EAGF needs and how they are financed are shown in the table below. Note the significant increase in assigned revenue and the almost equal reduction in budget appropriations shown in the Amending Letter No. 1, and the subsequent changes in the Commission’s DB2.

The story behind the Amending Letter No. 1 was told in this earlier post. Essentially, the Commission used the increase in assigned revenue to lower EAGF appropriations so that the money saved could be diverted to other budget headings. It proposed that the additional expenditure incurred through the support to producers adversely affected by the Russian ban would be financed, if necessary, by drawing down on the crisis reserve (while expressing its view that sufficient additional funding would become available in the agricultural budget in the course of the year to make this move unnecessary). If the crisis reserve were called upon, this would imply that the emergency aid would be financed by other farmers (more specifically, those in receipt of more than €2,000 in direct payments this year).
This galvanised the farm lobby into a very successful defensive action. Their main argument was that the Russian ban was a reaction to the general EU sanctions policy and thus that agricultural producers should not be required to contribute to the emergency aid. In the Agricultural Council, this argument was supported by 22 member states who signed a joint declaration highlighting their reservations with regard to the amending letter. The argument was taken on board by the ECOFIN Council which declared that one of its priorities in negotiating the 2015 budget was to “ensure that the agricultural crisis reserve is used for its genuine purposes only (i.e. in the case of major crisis affecting the agricultural production or distribution)”. COMAGRI also rowed in demanding that the crisis reserve should not be touched.
In its DB2 proposal, the Commission met this demand through some fancy accountancy footwork, mainly by finding a further €273.6 million of assigned revenue. Based on information on the actual uptake of the emergency measures taken since August 2014 to respond to the Russian food import ban, the final EAGF surplus for 2014 and the updated forecast of financial corrections to be collected in 2015, it concluded that the emergency measures could be financed within the appropriations requested in Amending Letter 1/2015 without having recourse to the agricultural crisis reserve, thanks to this additional assigned revenue.
This then became the basis for the political agreement on the 2015 budget.
Reimbursement of 2014 direct payment deductions

But the good news for farmers did not stop there. In late November the Commission adopted a regulation allowing member states to reimburse to farmers €868 million that had been reduced from direct payments in 2014 using the financial discipline mechanism. That reduction was made up of (a) a deduction to establish the agricultural crisis reserve and (b) a deduction to ensure that total CAP expenditure for market measures and direct aids stayed within the ceiling agreed for the 2014-2020 MFF.
However, it was eventually not necessary to use the crisis reserve in 2014 as the support measures taken from August 2014 onwards in the wake of the Russian embargo on EU agricultural products will only lead to EU expenditure for the 2015 budget. Moreover, there remained other unused amounts of the European Agricultural Guarantee Fund (EAGF) in the 2014 budget which meant that the MFF ceiling was not reached in that year. Under EU rules, these amounts are now reimbursed in 2015 to the farmers whose direct payments were reduced in 2014.
Therefore, the Commission adopted on 24 November 2014 a Regulation allowing member states (except for Bulgaria, Croatia and Romania which are still in phasing-in of the direct aids and where farmers are not yet subject to financial discipline) to reimburse, as of 1 December 2014, farmers a total of €868 million. The reimbursement should be made no later than 15 October 2015. This amount should be added to the ‘total needs’ figure of EAGF spending as the relevant budget line (Article 05 03 09 — Reimbursement of direct aids in relation to financial discipline) in DB2 contains just a token ‘p.m.’ entry.
The bottom line

The bottom line: full reimbursement of 2014 direct payment deductions and no call on the 2015 crisis reserve to pay for the emergency aid measures already introduced in response to the Russian ban. A good outcome for farmers and their lobby groups.
This post was written by Alan Matthews

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