cap budget – Page 3

The great bulk of EU CAP expenditure (the Heading 2 ‘Preservation and management of natural resources’ in the 2007-2013 Multi-annual Financial Framework) is allocated to member states in the form of national ceilings under Pillar 1 and national breakdowns under Pillar 2. One of the reasons for the success of the Fischler and Health Check reforms was that they did not fundamentally alter the allocation of member state receipts.

Redistribution a central issue in CAP 2020 negotiations

The distribution of CAP funds between states is now a central issue in the CAP negotiations given the commitment to bring about greater convergence in the level of entitlement payments per hectare. There is certainly no logic in the current distribution which reflects the historical legacy of the origin of the payments as compensation for support price reductions for particular commodities, as well as the outcomes negotiated by the new member states over the size of their Pillar 1 and Pillar 2 envelopes as part of their treaties of accession.

However, altering the distribution of payments between countries is a zero-sum game in which any gains to the new member states must be reflected in losses among the old member states, and this makes a successful outcome to the negotiations much more difficult.

The Commission’s legislative proposals address this issue in two ways. For Pillar 1 payments, it proposes a ‘pragmatic’ redistribution based on average payments per hectare of eligible area. Those member states with payments below 90% of the EU average would see one-third of the gap with the 90% threshold eliminated, funded by proportional reductions on those member members with payments above 100% of the EU average.

For Pillar 2 payments, the Commission proposes to use a combination of objective criteria and past performance, but it has not yet proposed any specific figures.

The Irish proposal

Some member states argue that they cannot be expected to agree to a funding distribution in Pillar 1 without knowing what will be the distribution of funds in Pillar 2. The Irish have combined this approach with the Commission’s logic and propose the use of the pragmatic approach for the distribution of Pillar 1 and Pillar 2 funds combined, based on average payments per hectare of eligible area.

Looking at Pillar 1 and Pillar 2 together shows much smaller differences between member states than looking at Pillar 1 alone (see figure).

Redistribution between MS - Pragmatic approach using two Pillars combined

Source: Aidan O’Driscoll ASA presentation, Ireland

There is a certain self-interest in the Irish proposal; as the figure shows, Ireland which more or less holds on to its funding under Pillar 1 under the Commission’s proposal would also be able to retain its Pillar 2 funding under this option. However, the proposal is open to a number of other criticisms.

Criticisms

De facto, the proposal opts for a particular ‘objective criterion’ as the basis for Pillar 2 payments, namely, potentially eligible area. Ireland happens to do well under this criterion; it has 2.4% of the EU’s UAA but only 1.05% of its agricultural output, 1.29% of its agricultural labour and 1.73% of the area classified as rural and intermediate regions. But member states may want the Pillar 2 distribution key to reflect other criteria, such as the relative importance of environmental biodiversity.

More important, the proposal does not take account of the different origins of the two Pillars. While Pillar 1 emerged from compensation payments related to output, Pillar 2 was seen as one of the structural funds where cohesion objectives also played a role. Thus, there was always an explicitly redistributive element in the Pillar 2 allocations to acknowledge the fact that some countries were starting from a lower level of development. The Council Decision 2006/493/EC explicitly made a minimum amount of the total rural development funding in the 2007-2013 period available for regions under the Convergence Objective.

Nonetheless, the Irish proposal has the virtue of consistency and, given the difficulties in agreeing on so-called ‘objective’ criteria for the distribution of CAP funds, a pragmatic outcome may be the most likely outcome. Using the same allocation key for both Pillars also has the attraction that it may make shifting funds between the two Pillars easier in future because member state allocations would be unaffected, given that the distribution key would be the same under both Pillars.

Prospects

The new member states may not accept a further erosion of their objective of greater uniformity in Pillar 1 payments, implied by using their special cohesion treatment under Pillar 2 as an offset in their demand for greater convergence of payments under Pillar 1.

This objection could be addressed by modifying the Commission’s proposal so that, for example, one-half rather than one-third of the gap with the 90% threshold would be eliminated in the next financing period, or the threshold itself could be raised to 95% rather than 90%. [Note that differentiating the levels of required co-financing of Pillar 2 expenditures only makes it easier for the poorer member states to draw down funds, but it does not alter the overall amount of funds made available to them].

In the long-run, of course, the proposal would mean that new member states would have to forego their ‘nirvana’ of uniform payments per eligible hectare across member states plus a favourably-skewed distribution of rural development payments under the cohesion principle. But I think there are few commentators who would accept that this was ever a realistic goal.

Member states would then simply negotiate on one, or at most two, parameters which would determine the degree of redistribution between member states under both Pillars. However, even if sounds simple, it will not make it easier to reach agreement, particularly if the overall budget allocated to the CAP in the MFF is reduced as a result of the ongoing economic crisis.

An implication of the Irish proposal is that the relative shares of Pillar 1 and Pillar 2 allocations would be the same in each member state. This does not appear sensible a priori. In particular, it would lead to a further shift from rural development funding in the new member states to direct payments, directly opposite to what the Europe 2020 strategy requires.

The Commission proposal already provides that member states can modulate up to 5% of their Pillar 1 payments to Pillar 2. Less justifiably, it would also allow member states receiving less than 90% of the average payment per hectare of eligible area in Pillar 1 to shift up to 10% of their Pillar 2 funds to Pillar 1. Building on this flexibility might allow the kind of side-payments which will be necessary to get a deal done.

Of course, as is made abundantly clear in other posts on this blog, the wider issue of the purpose of direct payments and how to make them more targeted and effective is not addressed in this debate.

This post is written by Alan Matthews

As Valentin’s blog post yesterday explains, the CAP is not only a European agriculture policy, it’s a European income redistribution policy. The centrepiece of the CAP is the €42 billion a year in ‘direct aids’ or income support to farmers, funded entirely from the pooled EU budget. Valentin points out that in an era of fiscal austerity, the idea of billions of euros moving from one country’s taxpayers to another country’s farmers is likely to be politically controversial. Particularly when the biggest payouts go to Europe’s wealthiest citizens and most profitable companies.

As national governments decide by how much they are going to pay of nurses and school teachers, how many university places they will cut and which taxes they are going to have to increase, the idea that aids to farmers are ringfenced from cuts will come as a surprise to many. But this is exactly what European leaders agreed to in 2002, in a deal devised by Jacques Chirac and Gerhard Schroeder that fixed the CAP’s direct aids budget at a constant level until the end of 2013.

The result is that the German Chancellor Angela Merkel remains committed to the deal agreed by her predecessor, in which Germany will this year put €2.4 billion more into the CAP direct aids budget than it will get out, while Greece will get €1.2 billion more than it puts in. France will remain a net beneficiary although its gains this year of €868 million are set to halve by 2013 to €409 million.

When the protection of the CAP direct aids budget does finally expire, it seems certain that something will have to be put in its place. As the CAP2020 blog reports, a new study on subsidies and farm viability finds that in the absence of subsidies 83% of farms would continue to have a positive farm income but only 18% have a positive farm income once the costs of their own labour and assets are taken into account. Previous studies have suggested that the major impact of removing direct aids is that farm asset values will fall, especially land values. From the point of view of the general public there is no harm in lower land prices, though a young farmer who has taken out a hefty bank loan to buy land or an older farmer who plans to sell his land to provide for a retirement income would be entitled to think otherwise. It doesn’t take a genius to see that the upheavals – political and economical – of an overnight abolition of the current €42 billion a year that goes into the pockets of Europe’s farmers would be such that this is a very unlikely scenario.

There is no shortage of studies pointing failings of the current system of direct aids. Two of the best are the study by Jorge Nuñez Ferrer for the European Parliament and a short paper by the academics David Harvey and Attila Jambor. An excellent new report commissioned by European Parliament looks beyond the problems of current direct aids and considers how they might be replaced by a system that is politically viable but economically rational. A hard task, you might say. The study’s lead authors are Jean-Christophe Bureau, an occasional contributor to this blog, and Heinz-Peter Witzke. I was invited in an informal advisory role along with capreform.eu blogger Alan Matthews and a handful of others.

The report is among the best contributions to the debate on the future of the CAP. It contains a very useful overview of how the various member states line up on key issues and also surveys the various proposals tabled by farm unions and environmental and other civil society organisations. As far as conclusions go, the authors back the ‘public money for public goods’ mantra that was endorsed in a joint statement by Birdlife International and the European Landowners Organisation.

Bureau and Witzke argue there needs to be a gradual transition away from the current distribution of direct aids to one which more accurately reflects the contribution of different farm types towards a variety of public goods. A flat rate per hectare income support payment would remain but should be co-financed, the authors argue, and payment limits should be introduced to very large farms, according to the number of people employed. Member states would be free to shift money from income support into public goods-type schemes. The effect of the proposed system would be considerable redistribution among current winners and losers with the general theme being more support for extensive farming systems, generally to be found in upland regions such as the alpine pasture pictured (above, right).

You can read the 167 page report in full here.

Photo credit: dr3wie // Flickr.com Creative Commons

Tag: cap budget

Agreeing the allocation of CAP funds between Member States

The future of direct payments