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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