Select Committee on European Union Thirty-Seventh Report


GOVERNMENT RESPONSES SESSION 2005-06

2nd REPORT: THE FUTURE FINANCING OF THE COMMON AGRICULTURAL POLICY

Letter from Lord Bach, Minister for Sustainable Farming and Food, Department for Environment, Food and Rural Affairs to the Chairman

  The Government welcomes the Report of the European Union Committee on The Future Financing of the Common Agricultural Policy (2nd Report, Session 2005-06, HL Paper 7).

  Please find the Government's response enclosed herewith.

29 September 2005

Department for Environment Food and Rural Affairs/HM Treasury's Joint Response

  The Committee's Summary of Conclusions is repeated below, with the Government's response following in indented paragraphs in italics.

FUNDING AGRICULTURAL AND RURAL POLICY—THE EU BUDGET

  The pressures on Pillar 1 will increase even as the budgetary ceiling remains static. This will place a tremendous strain on the Pillar 1 funds allocated for 2007-13. (paragraph 20) Were a reduction [to a 1% EU budget] to be agreed, it is highly unlikely that those responsible for the reduction would be prepared to accept that the necessary cuts in spending should fall only on the non-agricultural sections of the budget. (paragraph 22)

  To re-open the Brussels ceiling now would be to create further instability in an already complex negotiation. We therefore do not recommend that the agreement be re-opened. (paragraph 24) On the other hand, we acknowledge the overwhelming evidence we received that spending on the single farm payment and market support measures within the enlarged EU has the potential to exceed the Pillar 1 Brussels Ceiling. (paragraph 25)

    Response: As the Committee notes, negotiations on Future Financing are complex. The Brussels ceiling is a sensitive part of the negotiation and the Government believes the issue should be handled in the context of decisions about the EU budget as a whole, both expenditure and revenue. The October 2002 agreement was part of a package that paved the way for enlargement and for the beneficial CAP reforms which have happened since. The Government notes, however, that the ceiling was agreed as a ceiling, not a target, and was explicitly "without prejudice to future decisions on the CAP and the financing of the European Union after 2006".[1]

    The EU budget needs to be fit for purpose in the 21st century. The Government does not believe that the EU should spend 40% of its budget on the CAP, and believes Europe cannot wait 10 years or more for change. The Government has been clear that any change must take account of the legitimate needs of farming communities and happen over time. However, the Government does not believe a new Financial Perspective should be agreed that does not at least set out a process that leads to a more rational budget, and that this must allow such a budget to shape the second half of the Financial Perspective up to 2013. The Government is currently consulting other Member States on their views about the budget.

  Enlargement will be the main pressure facing the 2007-13 CAP budget. (paragraph 28). The 2004 wave of enlargement has changed the needs as well as the number of EU farmers. (paragraph 29) Enlargement will also result in increased levels of EU agricultural production, leading to further pressures on the CAP budget. (paragraph 32) The demands placed on Pillar 1 market support and intervention measures seem likely to grow significantly following accession of the CEECs. (paragraph 33)

    Response: The Government agrees that the accession of the AC10 has increased the overall level of production in the EU (although in terms of actual data, the first round of enlargement only took place 15 months ago and therefore information on production is limited) and that this has in turn placed greater pressure on the budget. However, the Government believes that the Brussels ceilings are sufficient to cover the needs of Member States, even following the accession of Bulgaria and Romania, without the need for further budgetary increases.

  The financial discipline mechanism is a welcome measure and will prevent over-run of Pillar 1 spending. We urge the European Council to ensure that the Council of Agriculture Ministers is not allowed to alter this measure. Its effectiveness in preventing any over-run of the Pillar 1 budget must not be weakened. (paragraph 36) The most foreseeable reason for the financial discipline mechanism's use will be the planned accession of Bulgaria and Romania in 2007. (paragraph 37)

    Response: The Government agrees that the financial discipline mechanism is a welcome measure and that its effectiveness in preventing any over-run of the Pillar 1 budget must not be weakened. The Government is determined to ensure it functions fairly, efficiently and simply.

  It is clear to us that farmers in the EU-15 are likely, from 2007 onwards, to receive reduced single farm payments, and these will dwindle further to 2013. The European Commission must make this clear to the Council of Agriculture Ministers. (paragraph 42)

    Response: The Government agrees that, with the operation of modulation, which we strongly support, and given the likelihood that the financial discipline mechanism will need to be used, EU15 farmers are likely to receive reduced single. farm payments from 2007. The Government notes the fact that the Commission is committed to making specific proposals to Council about the Financial Discipline Mechanism under the terms of Council Regulation 1290/2005.

  It is clear to us that ceilings have been set which do not fully anticipate the demands on the 2007-13 Pillar 1. (paragraph 43) We believe the Brussels ceiling represents a missed opportunity to plan fully for the enlargement of the EU. In particular, as we have shown, due thought has not been given to the future financing of the EU agriculture sector following accession of Bulgaria and Romania. Future enlargement should be planned for much more carefully when preparing the Financial Perspective for the period beyond 2013. (paragraph 44)

  We reiterate our previous recommendation that the Council should never again seek to pre-empt negotiations on the Financial Perspective by agreeing certain ceiling limits beforehand. (paragraph 45)

    Response: The Government believes that the Brussels ceilings are sufficient to accommodate the accession of Bulgaria and Romania without the need for further increases. The Government agrees that any future enlargements should be carefully planned and that the entire structure of the EU budget needs to be fundamentally reviewed in advance of the Financial Perspective for the period beyond 2013. The Government notes the Committee's recommendation about not pre-empting Financial Perspective negotiations in the future.

PILLAR 1 SPENDING—IS IT JUSTIFIED?

  The British Government are to be commended for undertaking voluntary modulation above and beyond their mandatory requirements, but it is a matter of concern that the United Kingdom is the only Member State to do this, because it is bound to raise issues of equity and distortion of the competition in the British farming community. (paragraph 48)

    Response: The Government thanks the Committee for its commendation, and is alert to the need to ensure equity whilst maximising the value for money and effectiveness of taxpayer spending. The Government will continue to argue with European partners that the best way to provide EU funding to meet rural development objectives is through transfers from the Pillar 1 budget.

  We fully acknowledge that the non-marketable services farmers provide should be recognised. Such activity justifies payment for the environmental, animal welfare and other "non production services" farmers are expected to provide to society. We are not however convinced that the single farm payment will achieve this objective in the most efficient manner. (paragraph 53)

  In the long term we believe a separate fund focussed purely on achieving environmental objectives could be a more efficient way to pay farmers for their environmental contribution. (paragraph 54) Such a payment should be considered during the 2008 review, in order to be established during the 2014+ Financial Perspective. (paragraph 54)

    Response: The Government agrees that there is a case for public support for producing environmental and other benefits which the market does not deliver and has long argued, consistent with the findings of the Curry Commission, that public money should be "used to pay for public goods that the public wants and needs". The Government would welcome consideration of the best way to deliver environmental objectives from agriculture in either or both of the 2008 review and the more fundamental review of the EU budget it has proposed, as mentioned above. Consistent with the Committee's conclusions on rural development funding below, the Government believes that a review should include consideration of whether funding for such policies is most appropriately sourced at EU or Member State level. As noted in its response to the Committee's recommendation at paragraph 79, the Government sees rural development expenditure as an effective instrument for the delivery of environmental objectives from agriculture.

  We acknowledge, however, that there are benefits to the continuation of the single farm payment in the short-term. The decoupling of financial support of the agricultural sector from agricultural production requires some transitional compensation during the period when the industry is adjusting to a liberalised market from which support is being withdrawn. The Committee believes that the single farm payment can be justified only on these grounds. (paragraph 55)

  The single farm payment has been the vehicle for the most radical reforms of the CAP and we commend the European Commission for this work. (paragraph 57) [However] we recommend the continued use of the single farm payment only for the 2007-13 period as a transitional tool to (i) provide stability and (ii) prepare farmers for the more market oriented and environmentally focussed future of European agriculture. (paragraph 58) We acknowledge that environmental payments should continue in recognition of the contribution farmers make to the environment. (paragraph 59)

    Response: The Government agrees that change is needed, and that it must take account of the legitimate needs of farming communities and happen over time. The Government also agrees that the level of single farm payment should not be regarded as permanently fixed.

  It would be extremely disappointing if the benefit to farmers of receiving a consolidated single payment was negated by the time and paperwork required in applying for it. Immediate thought must be given to how this can be improved. (paragraph 60)

    Response: The Government supports the notion of reducing bureaucracy for farmers and simplification of scheme operation. The UK has made full use of the flexibilities allowed in implementing the reforms and this has meant that there are many farmers who are new to the scheme, as well as existing farmers who are registering land for the first time. However, the establishing of entitlements in 2005 is a one-off exercise and it is planned that, for future applications, farmers will only be required to notify changes to their circumstances against (mostly pre-completed) forms.

  Following the decoupling of subsidy from production, current levels of Pillar 1 expenditure, even following reform, may not be necessary. It is clear that if the EU continues to pay out in excess of €38 billion a year for the single farm payment beyond the 2007-13 Financial Perspective period, there will still remain a major distortion in the domestic and international markets for agricultural commodities. (paragraph 61)

    Response: The Government agrees that tackling market distortion remains a priority and that further CAP reform is necessary. While decoupling represents a major step forward (the bulk of direct agricultural support is now WTO Green Box compatible, ie considered non or minimally trade distorting) we have nonetheless argued, and will continue to argue, that direct payments should be reduced, and for public money to be more efficiently targeted on public goods.

RURAL DEVELOPMENT—THE RISE OF PILLAR 2

  We commend the intentions of the Commission to pull the strands of rural development into a single Regulation funded with a single financial instrument. (paragraph 68)

  Response: The Government agrees.

  It is our opinion that a review of the objectives of rural development is needed in order to clarify what that policy is trying to achieve. It is not acceptable for rural development to be used as a continuing subsidy for farmers, but instead the Commission should develop a clear rural development agenda aiming to improve economic and social development. (paragraph 79)

  Response: The Government agrees that there needs to be greater clarity on the policy objectives of rural development expenditure, and to that end aims to secure Council agreement to strategic guidelines for rural development during the UK Presidency. The Government also agrees that rural development should not be used as a form of subsidy: it should be seen and used as a mechanism for paying for the delivery of public goods. The Government does not agree that the only aim of rural development should be to improve economic and social development. It has argued for a stronger focus also on the delivery of environmental objectives.

  It is essential that rural development schemes should not be allowed to develop in such a way as to damage the environment. We believe that an expert study should be carried out to find out how far agri-environment schemes and cross-compliance overlap in order to clarify rural development, environmental and agricultural objectives. (paragraph 80)

  Response: The Government agrees that rural development schemes should not have an adverse impact on the environment. The Government has established an environmental observatory to monitor the impacts of the 2003 reforms. In line with the Government's response to the Committee's conclusions above, the Government would welcome a review which considered how cross-compliance and agri-environment schemes operate in different Member States, and which offered recommendations on the best methods of delivering environmental objectives. The current principle—which the Government supports—is that cross-compliance requirements cannot be eligible for separate payments under agri-environment schemes.

  Rates of compulsory modulation were agreed under the Brussels ceilings. and will therefore exist up to 2013. The first test that is always applied to rural development measures must be that they are effective and value-for-money. Only if this test is met could we recommend a straightforward fiscal transfer into a rural development budgetary heading, without linking the funds to agricultural objectives. (paragraph 82)

  Response: The Government agrees that rural development expenditure should be effective and should deliver value for money, and looks to the Commission to examine draft programmes rigorously, against the aims and objectives set out in the EU strategic guidelines for rural development, in order to achieve this. However, the Government considers that even in cases where rural development expenditure is not fully effective in delivering public benefits, it is better for EU expenditure to be channelled towards it than to be paid in subsidies.

  The Committee received compelling evidence that rural development funding from the EU budget was only one contributory factor in United Kingdom and EU-15 rural development policies and agrees with the movement of funds towards the new Member States. As EU rural development funding is likely to remain relatively static for the EU-15 we recommend that, where possible, these countries should seek to supplement rural initiatives through their own national budget. (paragraph 86)

  Her Majesty's Treasury stated that funding rural development primarily from national funds need not mean a reduction in funding. While being somewhat sceptical of this approach, we would encourage it and reinforce the view that there are real needs in the rural communities in the United Kingdom which should not be neglected. The existence of co-financing means that EU funds cannot be accessed without appropriate matching at the national level. (paragraph 88)

  Response: The Government agrees that EU rural development funding is only one contributory factor in UK rural development policies. While rural development funds have been the biggest contributor to the delivery of environmental objectives from agriculture, particularly through agri-environment schemes, they have been a relatively small element in the Government's contribution to economic and social development in rural areas. Defra now contributes over £70 million a year to Regional Development Agency expenditure for the delivery of rural objectives; and Government has a policy of ensuring that all mainstream programmes and policies are rural proofed. In addition significant levels of EU funding through the Structural and Cohesion Funds are being invested in rural areas.

  It is likely that if the net contributor Member States succeed in having the global EU budget reduced, the rural development fund will be substantially diminished. (paragraph 90) If all of this reduction were to be applied to Pillar 2, the amount of money available for rural development 2007-13 would be cut from €88.6 billion to €40 billion-a reduction of 55%. We strongly recommend that such a reduction be avoided. (paragraph 91)

  Response: The Government acknowledges the importance of adequate funding for rural development, and, amongst other things, has argued for further transfers of resources from Pillar 1 to Pillar 2. The Government notes that in the context of the overall budget proposal tabled by the Commission in July 2004, the proposed rural development budget of €88 billion would have represented a substantial increase over current levels of expenditure in the EU 25.

  We were impressed by the success of rural development funding through the LEADER approach which enables very small projects to be established. We do not believe that rural development should be included in structural and cohesion funds, but that a separate rural development heading should remain to fund small projects which we feel may be lost under structural and cohesion policy. (paragraph 98) In order to align rural development funding to new Member States' needs, we recommend that the percentage of funds directed towards Axis 3 (wider rural development) should be increased. (paragraph 99)

  Response: The Government agrees that the Leader approach can be effective at unlocking ambition, energy and inventiveness at local level and notes that the principles underlying Leader are not just relevant to EU expenditure. The Government does not agree with the argument that rural projects should not be supported through structural funds expenditure; and doubts whether having separate instruments designed to deliver similar economic and social objectives in different types of area across the EU would deliver benefits in terms of policy coherence, efficiency and value for money.

  We support the British Government's position of basing spending on need rather than past expenditure because this will ensure that disadvantaged regions in all Member States will benefit fully from rural development funding. (paragraph 101)

  Response: The Government welcomes this conclusion, although, as noted by Lord Whitty in his evidence (Q 237), we need to be clear of the difference between structural funds, which should be used in the most disadvantaged areas across Europe, and Pillar 2 expenditure, which has policy objectives which include maintenance of landscape and avoiding land abandonment.

  In our judgement it is most important that, in the 2008 review the Commission identify how rural development targets will be set and reviewed. This will be necessary in order to establish local objectives, assess the success of individual projects and avoid unjustified or fraudulent spending. (paragraph 104)

  Response: The Government agrees that there should be appropriate targets for rural development expenditure, which can be effectively assessed, and that controls are in place to avoid unjustified or fraudulent spending Each rural development programme will identify specific priorities, targets and monitoring indicators, to cover the life of the programmes, from 2007 to 2013. The Community Strategic Guidelines proposed by the Commission in July (COM (2005) 10893) and on which the UK Presidency hopes to reach agreement, should also help to provide direction and coherence to rural development expenditure.

  A major conclusion of this report is that market support and direct subsidies to farmers will become of declining importance. The restructuring of rural areas on the other hand, has become of paramount importance. This is particularly true in the new Member States and in those countries likely to join the EU during the next 10 to 15 years. (paragraph 105)

  Response: The Government agrees.

  There is a need to build on the rural development work already undertaken by the Commission. We recommend that a new European Rural Development policy, concentrating particularly on the rural poverty problems of the least advantaged areas of the EU, should be established. At the same time, all rural development schemes should pay due attention to the protection of the rural environment. (paragraph 106)

  Response: The Government would welcome consideration of this option as part of a fundamental review of the EU budget, which would also need to consider the role of Structural and Cohesion Funds in supporting development in rural areas and of other environmental programmes in protecting and enhancing the rural environment. As noted above, the Government does not see value in having separate instruments in different types of EU area aimed at delivering essentially the same economic and social objectives.

GLOBAL PRESSURES: THE WTO

  We commend the EU for its decision to "move" on export subsidies. The EU must do all it can to build an environment where farm production is based on market demand and not subsidy entitlement. The EU should negotiate on the basis that it will firmly commit itself to phasing out its agricultural export subsidies within a specified time frame. It will be extremely difficult to secure the agreement of other developed countries to this objective, however, that should not stop the EU from making every effort to achieve it. (paragraph 110)

  Response: The Government agrees.

  The decoupling objective of the 2003 reforms is commendable. The EU must build on this to reform the CAP fully and eliminate all market support measures. (paragraph 114)

  Response: The Government agrees, recognising that such change needs to happen over the longer term.

  We recommend that the EU should push ahead to attain a successful Doha agreement. Political will to cut subsidies and create freer trade must be met with strong action to move all EU subsidies into the Green Box by a specified date. Such action must be accomplished if the CAP is to be fully reformed. (paragraph 116)

  Response: We agree that attaining a successful Doha Development Agenda agreement is a high priority and we will do everything we can to achieve this. Securing further CAP reform and ensuring that subsidies are Green Box compatible (ie, at most, minimally trade-distorting) are linked and mutually reinforcing UK priorities.

LOOKING AHEAD: THE CAP BEYOND 2013

  We recommend that the 2008 review focus on the future of the CAP after 2013. It is essential that during the 2008 review the Commission prepares further reforms for the CAP so that it is best suited to deal with the challenges it will face during the Financial Perspective of 2014-2020. (paragraph 121)

  Response: The Government agrees.

  The likely future enlargement of the Union will be the most significant pressure on the CAP post-2013 and the strongest driver of change. (paragraph 123) If Turkey does accede to the EU during the next budgetary period, it will provide a clear impetus to have completed reform of the CAP by the end of the 2007-13 budget period. (paragraph 124)

  Response: The Government agrees that the possible accession of Turkey is another compelling reason for further reform, but believes that reform is needed in any case.

  Such reform must ensure the future CAP is fully able to meet the needs and demands of the very different rural and agricultural conditions of its many Member States. A successful Doha agreement would pave the way for the end of all market support, intervention and export subsidies. The single farm payment should be phased out and a separate environmental fund established to recognise and reimburse farmers for the non-production benefits their activity brings to society. Meanwhile, the restructuring and modernising needs of new Member States' agricultural sectors should be provided for out of a single rural development fund completely separate from any other agricultural objectives. Richer Member States should fund a higher proportion of their own rural development programmes. (paragraph 125)

  Tough policy decisions will face future CAP policy-makers considering an EU of 27, 29 or even more Member States. The disparity between the agricultural needs of the EU-15 and those of new Member States is only likely to grow wider. That reason alone justifies the need for further substantial CAP reform. This must be fully considered in the 2008 review and completed in the period 2014-20. (paragraph 126)

  Response: The reforms of 2003 and 2004 have significantly reduced some of the damaging and distorting impacts of the CAP and pave the way for a more sustainable, market focussed farming industry. Nevertheless, the Government agrees that further substantial CAP reform is needed if it is to serve EU citizens most effectively. We wish to see an ambitious agreement to conclude the Doha Round, and could ourselves support an end to export subsidies by 2010. The Government believes that a fundamental review of the entire EU budget, including the CAP, is necessary, and that these recommendations would be appropriately considered in the context of such a review.



1   Brussels European Council, 24 and 25 October 2002, Presidency Conclusions, point 12. Back


 
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