The CAP budget in the MFF agreement

Today the European Parliament approved the political agreement on the MFF reached with the Irish Presidency, thus concluding the negotiations on the EU’s medium-term financial framework until 2020. A mandatory review will be undertaken by the Commission before the end of 2016 taking account of the economic situation at that time. The actual MFF Regulation and the accompanying inter-institutional agreement including various declarations by the parties will be voted in the Parliament in the early autumn once the Council has adopted the draft MFF regulation.

The overall MFF ceiling and the allocations by heading as agreed by the European Council in February 2013 were not changed in the final agreement. So the allocation for the CAP Pillars 1 and 2 remain as agreed last February. Many commentators have tried to compare the amount of money allocated to the CAP in the next programming period with that in the current period, and various figures have been circulated. The European Parliament secretariat has just produced a Note European Council Conclusions on the Multiannual Financial Framework 2014-2020 and the CAP. Although the text was completed before the final political agreement in the trilogues and the support for this agreement today in the Parliament, this report is a hugely valuable reference and it will become the definitive work on this topic.

Apart from a very thorough reporting of the legal background and progress of the MFF negotiations, the report makes two important contributions from the perspective of those interested in the CAP:

  • It compares the overall outcomes proposed by the European Council for commitment appropriations for Pillar 1 and Pillar 2 with the Commission’s original proposal and with commitments in the 2007-13 MFF.
  • It presents the figures for each country’s receipts from Pillar 1 and Pillar 2 in the next MFF. This is the first official publication of the Pillar 2 breakdown since the agreement was concluded.

In this post, I comment on the comparisons of CAP spending between the two MFF programming periods, leaving the presentation of the Pillar 2 national allocations to another post.

The pitfalls of comparing CAP allocations across MFF periods

Comparing the amount of money allocated to the CAP in the 2014-2020 period with the CAP budget in the 2007-2013 is fraught with difficulties. Think of the following issues (for readers not interested in this technical detail, skip down to the following section):

  • What is the counterfactual to which the 2014-20 budget should be compared? Is it the expenditure actually committed to the CAP in the 2007-2013 period, or is it the expenditure which would have been incurred for the CAP in 2014-2020 if the rules and the framework had stayed the same as in 2007-2013? This is a particularly important distinction for Pillar 1 spending. Most Pillar 1 spending is allocated to direct payments which are fixed in nominal terms. This means that the counterfactual baseline for Pillar 1 spending should show a decrease; comparing the commitment appropriations for Pillar 1 to the level of spending on direct payments in the 2007-2013 period (or to the 2013 year) in 2011 constant prices makes the presumption that direct payments were intended to be inflation-proofed, which was never the case. On the other hand, working in the opposite direction is the fact that direct payments for the new member states were only being phased in during the 2007-2013 period (and will continue to be phased in for Bulgaria and Romania until 2016 and now for Croatia until 2023). A steady-state counterfactual would therefore require an increased baseline in the 2014-20 period if the CAP budget were to be held constant in real terms. It is possible these two opposing arguments cancel each other out, but they certainly complicate the comparison.
  • In making comparisons across Pillars, it makes a difference whether the compulsory modulation from Pillar 1 to Pillar 2 agreed in the 2017-2013 period is taken into account.
  • Estimates of the reduction in the CAP budget will differ depending on whether the comparison is between the total amounts committed in the two MFF periods, or whether the comparison is between the end years (2020 compared to 2013). The latter approach minimises the bias due to the phasing-in of the payments in the new member states but leaves the bias in making the assumption that direct payments are inflation-proofed in place. 2020 is also important because it will be the reference year for the succeeding MFF, as the EP Note points out. Yet another approach is to compare the 2014-2010 MFF allocation with the 2013 appropriations x 7 years to get a better estimate of what the ‘status quo’ allocation might imply (again with the caveat that this presumes that the appropriate counterfactual baseline is to assume that direct payments would be inflation-proofed).
  • The scope of the expenditure items covered by the CAP budget in the two programming periods is different. Certain sanitary and veterinary measures worth €2.2 billion are moved out of the CAP budget as well as €2.5 billion for the Fund for Aid to the Most Deprived, and farmers now have access to the European Globalisation Fund.
  • For meaningful comparisons, expenditure in both programming periods must be expressed in the same monetary units (chosen as 2011 prices). Expenditure in the 2007-2013 period is inflated/deflated by the 2% per annum deflator set out in the MFF agreement for the adjustment of the nominal ceilings. However, the actual inflation rate in the EU as a whole over the period 2007-2013 is more likely to be closer to 18% compared to 15% assumed using the MFF deflator. The real value of CAP commitments in the current MFF period in 2011 prices, and thus any reduction in the next MFF period, may be overstated using the MFF deflator.
  • Finally, it should be remembered that actual payment appropriations in the 2007-2013 period were less than commitment appropriations for a variety of reasons. In the case of market-related expenditure, generally high global food prices during the programming period meant that commitments set aside for market support expenditure were not required; in the case of Pillar 2 commitments, there can be a lag in payments of up to two years because of the nature of the programmes. Such factors can also come into play in the 2014-2020 period. However, comparing commitment appropriations is the most relevant indicator as they represent the maximum amounts that policy-makers have committed to spend on agricultural support in the two periods; they are thus the best indicator of political preferences, whereas outcomes in terms of payment appropriations are influenced in unpredictable ways by the actual course of events.

How much has the CAP budget been reduced?

The Parliament secretariat’s Note summarises the changes in CAP allocations between 2013 and 2020 in the following graphic which takes some of the issues raised in the previous section into account. The 2013 figures are adjusted by the amounts transferred to other MFF headings and take account of the compulsory modulation of expenditure from Pillar 1 to Pillar 2 in 2013. They show that committed expenditure to direct payments and market measures in 2020 is 13% less than in 2013, while committed expenditure to rural development measures is 18% less.

The calculation can also be done in other ways, as noted above. If the ‘status quo’ expenditure is based on the 2013 commitments x 7 years and compared to the total allocation for the 2014-2020 period, then Pillar 1 expenditure falls by 6.4% and Pillar 2 expenditure by 7.5%, which is a much narrower differential (the Pillar 1 numbers are €283.1 billion compared to €302.3 billion, and the Pillar 2 numbers are €89.9 billion compared to €97.2 billion).

The total commitment allocation for 2014-2020 could also be compared to the total commitment allocation for the 2007-2013 period (all in 2011 prices). However, the figures in the EP report (Table 10) do not adjust CAP spending for the whole of the 2007-2013 period for the transfer of some items out of the CAP budget and for the effect of compulsory modulation from Pillar 1 to Pillar 2. Therefore, the result of this comparison is not particularly helpful.

For what it is worth, based on the numbers in the EP report, the figures for this comparison show a 16% reduction in Pillar 2 but only a 6% reduction in Pillar 2 expenditure in the coming MFF period (the Pillar 1 numbers are €283.1 billion compared to €336.7 billion, and the Pillar 2 numbers are €89.9 billion compared to €95.5 billion). Failing to account for the effects of compulsory modulation and for the movement of some items out of the Pillar 1 budget explains the apparent reversal in the rates of reduction between the two Pillars.

What does it all mean?

Anyone who has followed the numbers thus far will be forgiven for agreeing with Mark Twain’s aphorism that there are ‘lies, damned lies and statistics’. But the European Parliament secretariat’s approach of comparing 2020 proposed expenditure with the revised committed 2013 expenditure on the two Pillars gives the most realistic appreciation of the relative trends in expenditure in the two Pillars.

Indeed, recalling once again that the baseline for Pillar 1 expenditure should build in the gradual decline in direct payment expenditure in constant prices, then the European Council made no discretionary reduction in the Pillar 1 ceiling. Holding direct payments constant in nominal terms at the 2013 level (and adding back the market measures expenditure) would have resulted in a 2020 budget of €37.9 billion in comparison to the agreed figure of €37.6 billion, both in 2011 prices. To repeat, the next MFF contains no discretionary reduction in CAP Pillar 1 expenditure, over and above what a continuation of current rules would imply.

For comparison, the discretionary reduction in Pillar 2 is the full 18% shown in the figure above. Indeed, the use that member states make of any eventual flexibility granted to shift funds between the two Pillars could even exacerbate this disparity further.

This outcome can be interpreted either as a triumph for the Ciolos strategy of legitimising Pillar 1 payments in this CAP reform, or as a shameful capitulation to the current beneficiaries of Pillar 1 payments and to those member states opposed to any meaningful CAP reform, depending on one’s perspective. I adhere to both views.

This post was written by Alan Matthews

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2 Replies to “The CAP budget in the MFF agreement”

  1. Here we go again. The figures put in these blogs and the situation on the ground simply do not add up. There really is no point in saying thousands of pounds have been put into supporting young farmers when land costs millions to buy in the first place in Britain. What young farmer has 7 million and how would 28,000Euros or 40,000 Euros touch any interest payments let alone buy stock. Mr Matthews et al come out of your offices and get onto a farm then and only then talk about agricultural economics.You do a great disservice to this country while others similarly qualified in other countries are busy advising how much they can help their countries. Land prices and lack of support for the reduction of food production overheads levys, farm assured, TB, etc etc are all items which conspire to make food for the hard pressed family in Britain expensive. We turn to your well funded existence. Who funds that certainly you do not produce anything. How much funding do you get from the taxpayer? Your well funded existence yes that is what we ALL must concentrate on now. I will certainly start to ask questions of my MP about your funding streams. Fair is fair after all.

  2. @ dmallender

    If you think about it, you are making exactly the same point as I am making. You point out that the very large amounts of money being spent on the CAP do not seem to make any real difference to farmers in their fields. That is precisely the main point of my criticism of CAP spending – that too much of it is untargeted, unfocused, and goes to beneficiaries who do not need or deserve it. Did you ever wonder why land is so dear in Britain, and whether that has anything to do with the fact that most of the CAP transfer to farmers is linked to the ownership of land?

    Unfortunately, the figures for the CAP budget are not made up, they are those agreed by the European Council and paid for by European taxpayers. If you think that this money is not achieving its objectives, then you too should be a critic of the CAP.

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