2Agricultural funding
5.The UK currently receives around €4 billion from the European Union each year to deliver the Common Agricultural Policy (CAP).5 As agriculture is devolved, this money is distributed amongst the devolved administrations by the UK Government for them to implement agricultural policy in their respective jurisdictions. CAP funds can be split between two strands of payments:
- Pillar I: Direct payments to stabilise farmers’ income from market volatility. Payments are based upon the number of hectares farmed rather than production or income
- Pillar II: Payments to support rural development activity and tackle environmental and societal challenges.6
For the current round of CAP funding (2014–2020), Scotland has been allocated over €500 million a year, 17% of the UK’s CAP budget.7
6.The level of CAP funding that each devolved administration receives is based on historic values, reflecting what each nation received in previous allocations dating back to the early 2000s.8 NFU Scotland have been a longstanding critic of this method, arguing that historical allocations have failed to reflect the different agricultural conditions within the four UK nations, such as their proportion of Less Favoured Areas or the socio-economic challenges their agricultural community faces.9 The disparity over the UK’s LFA split is shown in the following table.10
|
UK Nation |
Total agricultural land area (000ha) |
Percentage of land designated as LFA (%) |
Total percentage of UK LFA |
|
Scotland |
6,184 |
86% |
56% |
|
Wales |
1,903 |
81% |
16% |
|
Northern Ireland |
1,058 |
69% |
8% |
|
England |
9,575 |
18% |
18% |
Some of the challenges of allocating farm support on the current historical basis can be seen in the on-going dispute between the UK and Scottish Governments over the convergence uplift.
Convergence uplift and the Bew review
7.The convergence dispute arose from the EU decision in 2013 to introduce a new method to distribute CAP funding across Member States - the external convergence mechanism. Its aim is to support countries with low agricultural output, by awarding countries with low average payments per hectare additional funding.11 The UK qualified for a £190 million uplift in funding because Scotland had one of the lowest payment rates per hectare in the EU, which brought the UK below the qualifying threshold. However, as the Government allocated the 2014–20 CAP budget the same way as it had in previous budgets, between all four nations. Scotland was allocated £30 million.12
8.At the time, the UK Government explained this on the basis that Scotland already received more funding per farm than other part of the UK.13 The Scottish Government however argued that the money was intended solely for Scotland, and that it is owed £160 million.14 When we heard from Fergus Ewing MSP, Cabinet Secretary for the Rural Economy, he said this equated to a deficit of £14,000 for every hill farmer and crofter in Scotland.15 National Sheep Association Scotland share this view, telling us that Scotland had been “tragically” underfunded as a consequence.16
9.Most of our witnesses agreed that this dispute highlighted the need for a clearer and more objective allocation of funding within the UK post-Brexit. The Royal Society of Edinburgh said a new funding arrangement needed to be developed at the “earliest” opportunity, be fair and transparent and consider a number of factors including the “distinctive” regional and local needs of each devolved nation.17 Professor Michael Keating, Centre on Constitutional Change, said that this would need political agreement within government and amongst the devolved administrations which he felt would be difficult given the current impasse between the UK and Scottish Governments.18
10.Allocating CAP funding within the UK on historic values does not reflect Scotland’s unique agricultural conditions and practices. This has resulted in Scotland losing out on much needed funds and led to criticism of the UK Government’s handling of the EU convergence uplift. We recommend that the Government work with the devolved administrations to develop a new fair and transparent funding arrangement which meets the needs and individual circumstances of all the UK nations post-Brexit.
The Bew Review
11.When it committed to maintaining the same cash total for UK farm support until the end of this Parliament, expected to be in 2022, the UK Government also commissioned an independent review into the future funding of UK agriculture.19 This will recommend factors that should be considered to ensure there is an equitable allocation of convergence funding till 2022.20 Most of our witnesses welcomed this as a sign of the Government taking a new approach to intra-UK funding.21 However, some were critical of the scope of the review and the fact it would not comment on the Government’s current CAP budget allocation or make recommendations on agricultural funding post-2022.22
12.Fergus Ewing MSP, Cabinet Secretary for the Rural Economy, told us that the Scottish Government had initially been informed that the Bew review would look back at UK funding decisions concerning the 2014–20 allocation, but that this had been “overruled” by the Treasury.23 Jonnie Hall, Director of Policy, NFU Scotland, meanwhile was concerned about the review’s legacy, saying it would be “beyond comprehension” for Lord Bew to make recommendations about funding allocated within the 2020–2022 period and then have those recommendations ignored after 2022.24
13.However, when we heard from the Rt Hon Michael Gove MP, Secretary of State for Environment, Food and Rural Affairs, in June, he stated that the review could consider previous funding decisions and that its recommendations would now apply to funding post-2022, stating:
The whole point about the review is that it is there to look at a wide variety of factors. Of course, I cannot pre-empt the outcome of future spending reviews, but the whole point about asking this group of very distinguished people to look at the past and to take account of Scotland’s unique geography […] is to make sure that we have informed basis on which to make judgements in the future.25
14.We welcome the commissioning of an independent review into intra-UK farm support post-Brexit and are pleased that the Government has clarified that the review’s conclusions will inform funding post-2022. The rest of this Chapter will set out some of the principles which we feel should underpin and manage future funding arrangements in more detail.
Future funding principles
15.While it is still unclear how much money the devolved administrations will receive post-Brexit, there was a clear consensus from witnesses that future funding not be subject to the Barnett Formula, which is used to allocate funding for many devolved services in Scotland and does so based on a nation’s population share. NFU Scotland said this would have a severe impact on agricultural support in Scotland and likely result in a substantial reduction in funding as demonstrated in the graph below.26
These concerns were shared by the Secretary of State, who assured us that future funding post-2022 would not be Barnettised.27
16.Throughout this inquiry several suggestions were made about which factors should underpin future funding arrangements. These involved having funding allocations reflect the proportions of different types of land in each nation and the benefits they provide, and other challenges nations face such as the need to encourage sustainable food production and to attract new entrants into the sector. The following land types were mentioned as possible criteria:
- Utilised agricultural area (UAA): The total area of land taken up by arable farming, permanent grassland and permanent crops. Scotland has approximately 32% of the UK’s UAA;28
- Less Favoured Area (LFA): The total area of land where agricultural production is more difficult because of natural constraints such as difficult climate conditions, mountainous terrain or low soil productivity. Scotland has over half of the UK’s LFA,29 and
- Grassland/Farm Woodland/Organic Farm Area: The total area of land consisting of either grassland, woodland or used for organic farming.30
The graph below illustrates how the UK’s current allocation of farm support would look if these criteria were used. It shows that Scotland would gain under every indicator.31
17.NFU Scotland’s Jonnie Hall, told us his preference would be for future allocations to be underpinned by the designation of LFA across the UK. This he said would be an objective criterion, ensure that farmers and crofters in the most challenging topography were appropriately recognised and secure a sizeable increase in Scotland’s share of agricultural funding.32 While UAA was also seen as a good non-historic allocation, NFU Scotland say it is a “blunt measure” in that it does not differentiate between broad land types and their ability to deliver economic, environmental and social benefits for the people working and living near that land. In addition, they say there is little rationale behind the idea that the more potential farmland there is the more support a nation should receive.33
18.Russell Smith, Scottish Crofting Federation, argued that by using LFA as an allocation criterion, funding would reflect the benefits farming LFA land provides other than agricultural output.34 One benefit is population retention, as many remote communities are dependent on income from farms and crofts to support the wider local economy.35 If the number of farms and crofts declined in these areas people would be likely to leave these communities. Such land abandonment would also have environmental consequences as LFA land is the richest source of biodiversity in Scotland and failing to manage this could see a dramatic decline in certain species.36
19.However, Russell Smith had concerns about the fact that there are only two categories of LFA, Severely Disadvantaged or Disadvantaged. Smith argued that these LFA areas were drawn too widely and took in some areas that were “less favoured or more favoured.”37 This issue was raised by crofters we met in the Outer Hebrides, who argued that poor quality crofting land was often treated the same as better quality land on the mainland.38 Scotland’s Rural College said this was not helped by the fact Scotland was operating on LFA mapping from the 1970s which was now outdated.39
20.When we heard from the Secretary of State, he confirmed that a new funding system would consider factors such as the spread of LFA land in the UK and Scotland’s high proportion of livestock and upland farming:
I have said to the Department, and indeed to the Treasury that we need to recognise that Scotland, because of its particular geography, because a high proportion of its agricultural land is in less favoured areas, because a high proportion of farming is livestock and upland farming, we do need to take specific account of that in thinking about funding in the future.40
21.The distribution of agricultural funding within the UK must be based on objective criteria that reflects each country’s conditions and situation. This should reflect the fact that Scotland has a much higher proportion of LFA land and recognise the social and environmental benefits farming this land provides. We recommend that the proportion of a nation’s LFA land be a central criterion in determining intra-UK agricultural funding. While we do not know the total amount of funding available, this should result in a significant increase in the proportion of agricultural support allocated to Scotland.
22.We recommend that the Government consult on increasing the number of LFA categories used to make funding decision, to reflect the diversity of LFA land across the UK. This should ensure that farmers and crofters working in the most difficult and challenging landscapes get the support they need.
Funding cycles
23.In addition to establishing the principles by which the devolved administrations will be allocated a share of the UK budget, the Government will also need to determine the length of new budget cycles. Under the CAP, funding for Member States are set in seven-year periods due to the EU’s Multi-Annual Financial Framework. We heard this had provided certainty to farmers and crofters in Scotland allowing them to make long-term investment decisions.41
24.The UK Government has not decided how long funding cycles will be post-Brexit, however we heard concern that it might choose to set agricultural funding on an annual basis.42 Scott Henderson, Vice-Chair, Scotch Beef Association, told us this would be incompatible with the beef industry which operated on a three-year production cycle.43 NFUS’ Jonnie Hall shared this concern, telling us that a yearly budget would be very difficult for farmers and crofters to plan for and would provide no long-term certainty.44 Instead he suggested that funding be set on a five-year basis, arguing that this would provide a degree of certainty to the sector in Scotland and suit most production cycles.45 This was welcomed by Willie Campbell, First Milk, who said a five-year budget would encourage more farms to invest in new farming practices and innovative technology.46
25.While all witnesses were opposed to annual budgets, there wasn’t unanimous agreement that a five-year cycle was best. John Kinnaird, National Council for Rural Advisers, argued that funding be set for longer than five years to avoid budgetary decisions coinciding with parliamentary elections and thus becoming politicised. For consistency, he proposed the UK maintain the EU’s seven-year cycle.47 Whatever length of funding was decided, John Fyall, National Sheep Association of Scotland said it was important that the Government commit to a review mid-cycle to ensure it was still meeting the needs of farmers and crofters within the devolved nations:
I understand the complications, but for [the] agriculture budget, it should be a cross-Parliament thing where there is a commitment given to help or review if changes [are needed] between Parliaments.48
26.Farming is a long-term industry, and the sector needs a financial settlement that gives farmers and crofters the certainty to make investments that will not see returns for several years. We therefore recommend that the UK Government set agricultural budgets on a seven-year basis and commit to a review half-way, to ensure it is still meeting the needs of Scottish agriculture.
Rural development funding
27.Under the current CAP framework, Scotland has been allocated €478 million via Pillar II till 2020, which can be used to support rural development activity and tackle environmental and societal challenges. Unlike Pillar I funding however, this is co-financed by the Scottish Government, who provide an additional €675 million through the Scottish Rural Development Programme, and €367 million by transferring over 9.5% of their Pillar I budget.49 The following graphic shows how this is spent across Scotland.50
28.Once the UK leaves the EU, the UK will no longer be able to use this funding mechanism. While the UK Government has pledged to maintain Pillar II till the end of this Parliament, expected to be in 2022,51 the Scottish Government told us that some rural development schemes such as forestry support and LEADER52 were set to terminate at the end of 2020.53 It is unclear if this funding will be maintained in the future. John Fyall, National Sheep Association Scotland, said this was a concern for farmers in remote areas who depended on Pillar II funding to stay in business.54 Without such support, he feared there would be a rapid decline in their numbers creating socio-economic problems for the communities they supported:
£500 million [is] the worth to Caithness and Sutherland just by having farmers in those areas. Those farmers have been penny pinching and hanging on to LEADER, hanging on to rural development grants, anything they can get to try stay in there. They are disappearing at a great rate, so in any allocation of funding going forward we need to recognise the socioeconomic but also the many other aspects of keeping people in these remote communities.55
29.Post-2022, the UK Government has stated that rural development funding will be merged into a UK-wide Shared Prosperity Fund which will seek to “reduce inequalities between communities.”56 The Royal Society of Edinburgh however said there remained a lack of clarity from the Government on how this will operate in practice.57 At the moment there are still questions about:
- What the priorities and objectives of the fund will be;
- How much money will be allocated and how this will be split across the UK, and
- Who will be responsible for administering the fund in Scotland, Westminster, or the devolved administrations.58
30.We also heard additional concern about the extent to which the fund would have an impact in rural communities across Scotland, given the focus on City-Region deals as vehicles for both Government’s economic interventions. When we hosted a roundtable at the James Hutton Institute, we were told that such funding was failing to reach remote areas of Scotland, which as a result were lagging behind in terms of infrastructure and investment.59 Steven Thomson, Scotland’s Rural College, said this could be addressed by “rural proofing” the Shared Prosperity Fund, to ensure money was specifically targeted at remote communities.60
31.When we raised these concerns with the Secretary of State, he said DEFRA was working alongside the Treasury and Ministry of Housing, Communities and Local Government to make sure that the fund recognised the specific needs of Scottish Agriculture:
One of the points that I have made in discussion with Treasury is that the Shared Prosperity Fund must in particular take account of the needs of rural communities [such as] improved access to broadband […] The aim of the Shared Prosperity Fund would be to ensure that people from St Ives to Lerwick benefit.61
32.Rural communities in Scotland have benefited from the rural development funding provided by EU schemes. We therefore welcome the Government’s intention to use the Shared Prosperity Fund to help replace this valuable source of funding. However, the Government must provide more clarity on the purpose of the fund, how it will operate in practice, which existing EU funds it will replace and how much will be made available for rural development projects.
5 UK Government, Agriculture Bill Explanatory Notes, 2018
6 Institute for Government, Common Agricultural Policy Explainer, 2018
7 Scottish Parliament Information Centre, Agriculture and Brexit in Ten Charts, 2017
8 Scottish Parliament Information Centre, European Union funding in Scotland, 2018 and Q204
9 FSA0003, Q200, Q203 Scottish Government, Agriculture facts and figures, 2019
10 Scottish Government, Agriculture facts and figures, 2019
11 European Commission, Multiannual Financial Framework Conclusions, 2013
12 Scottish Parliament Information Centre, European Union funding in Scotland, 2018 and Scottish Parliament Information Centre, A review of convergence funding for Scotland, 2019
13 Scottish Parliament Information Centre, European Union funding in Scotland, 2018
14 Scottish Government, CAP Convergence review, 2018
20 FSA0022 andDefra, Domestic farm support funding: re viewing distribution across the UK from 2020 to the end of the Parliament, 2018
22 Defra, Domestic farm support funding: re viewing distribution across the UK from 2020 to the end of the Parliament, 2018
26 Scottish Parliament, Funding of EU competencies post-Brexit: NFU Scotland submission, 2018
28 NFU Scotland, Submission to the Bew review, 2019
29 House of Commons Library, CAP Reform 2014–20: EU Agreement and Implementation in the UK and in Ireland, 2014
30 Scottish Parliament Finance and Constitution Committee, Call for evidence on Funding of EU Competences: Written response from NFU Scotland, 2018
33 NFU Scotland, Submission to the Bew review, 2019
35 FSA0019
36 FSA0021, FSA0019 and Scotland’s Rural College, Farming’s Retreat from the Hills
38 Scottish Affairs Committee, Visit to the Isle of Lewis presentation, 2019
49 Scottish Parliament Information Centre, European Union funding in Scotland, 2018 and Q204
50 Scottish Parliament Information Centre, European Union funding in Scotland, 2018 and Q204
52 LEADER is an EU funding programme aimed at increasing support to local rural communities through grants. It is worth around £82 million over the 2014–2020 funding period.
56 Conservative Party, Forward Together: Our plan for a Stronger Britain and a Prosperous Future, 2017
58 House of Commons Library, The UK Shared Prosperity Fund, 2019
59 Scottish Affairs Committee, Summary notes from informal roundtable discussion on agricultural innovation, 2019
Published: 31 July 2019