Select Committee on European Union Fortieth Report


Letter from the Chairman to Barry Gardiner MP, Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs

  Thank you for your Explanatory Memorandum of 9 June 2006 which Sub Committee D (Environment and Agriculture) considered at its meeting yesterday.

  We consider it unsatisfactory that the Committee was asked to consider the proposal a matter of days before the June Council at which it is due to be adopted. Analysis of the role that will be played by rural development funding during the next Financial Perspective was a key part of our report The Future Financing of the Common Agricultural Policy (HL 7, Session 2005-06). The Committee therefore considers it extremely important to scrutinise carefully the revised rural development budget which has been proposed for 2007-13.

  We stated in our report that the lack of fixed ceilings for the rural development budget (unlike the ceilings set for Pillar 1 under the 2002 Brussels Agreement) means that it is vulnerable to bearing any cuts required from the CAP budget as a whole. This view has proved to be accurate as the proposal indicates that actual rural development funding will be cut from the Commission's proposed figure of €88.8 billion to the European Council's agreed amount of €69.75 billion. Given that the Government made clear to us in their evidence to the inquiry that they consider the future of European agriculture to lie within the growth of Pillar 2 (Future Financing, vol 2, p 30), it is particularly disappointing that it will be Pillar 2 which will bear the brunt of cuts in CAP spending.

  The Committee agreed to clear the proposal ahead of the Council meeting. However, we intend to scrutinise the impact the reduced budget figures will have on rural development spending. In order to aid this scrutiny, we ask for answers to the following questions:

    —    From 2007-13, automatic modulation of 5% of Pillar 1 to Pillar 2 funds will operate. Do the figures in the proposal take account of this; how much in euros will be modulated each year; and how will the mechanism operate?

    —    Matched funding arrangements exist whereby the EU provides half the funding and national funds make up the rest. Do the figures in the proposal take account of this; and how much in euros is estimated to be matched during 2007-13 in (i) the EU-15 and (ii) the UK?

    —    Will the revision of the UK rebate have any impact upon the amount of CAP funding that will be allocated to the UK, or the mechanism through which the level of funding will be agreed?

15 June 2006

Letter from Barry Gardiner MP to the Chairman

  Thank you for your letter of 15 June 2006 regarding the above proposal and accompanying explanatory memorandum.

  I welcome the importance the Scrutiny Committee has attached to this proposal, and regret that we were unable to submit the explanatory memorandum for your consideration any earlier. As you may know, the proposal implements the specific rural development budget amounts for 2007-13 agreed in the December 2005 European Council by the Heads of State and Government for the 25 Members of the European Union. However, the Commission could not issue a formal proposal for a Council Decision until after the conclusion of a new Inter-Institutional Agreement with the European Parliament. This meant that the proposal did not issue until the end of May. It was then necessary for it to be formally adopted promptly by the Council in order to facilitate planning for the new programming period.

  During the June Agriculture Council the proposal was adopted by all Member States without further amendment. On behalf of the UK, David Miliband made clear that the UK supported the proposal which correctly implemented the December settlement but was disappointed with the methodology established by the Commission for determining Member States' share of the Rural Development Budget, which continued to be based on historic performance.

  The Government shares the Committee's disappointment that the overall amount agreed in December for rural development support in the forthcoming financial perspective was reduced from the proposed €88.8 billion to €69.75 billion. However, the December budget negotiation was a complex, multi-faceted discussion and reaching agreement was a difficult and protracted process for the UK Presidency. Achieving a higher ring-fenced amount for rural development would have required reductions in other budget headings, such as Pillar 1, which other Member States refused to contemplate.

  I hope that you would agree though, that having an agreement in place is preferable to the uncertainty that would have existed had there been no agreement. We could have been faced with annual, rather than 7-year, budgets which would have made strategic planning of rural development programmes practically impossible. it is also important to remember that the provisions from the December agreement relating to voluntary modulation allow Member States the flexibility to top up their rural development spending through transfers from Pillar 1 budgets to Pillar 2 if they choose to. The Commission have also now issued a draft proposal covering the detailed rules for the operation of voluntary modulation, which is the subject of Explanatory Memorandum 10014-06.

  You asked three specific questions in your letter. The first concerned mandatory (or compulsory) modulation. The budget figures contained in the Commission's proposal do not include the 5% mandatory transfers from pillar 1 to pillar 2 under the compulsory modulation mechanism. Approximately €7 billion will be transferred into EU15 rural development spending under this mechanism during 2007-13, and this must be match-funded by Member States in accordance with the co-financing ceilings established in the Rural Development Council Regulation (No 1698 of 2005).

  Compulsory modulation is managed at European budget level, with the Commission calculating the value of receipts to be taken from Pillar 1 for each Member State after the application of the franchise arrangements (which exempts from modulation the first €5,000 of each direct payment). These receipts are then shared out amongst the EU15 Member States according to an objective allocation key based on agricultural area, employment and GDP per capita indicators. The UK qualifies for 9.9% of these receipts, although this allocation is increased to around 11% because of the rule that no Member State can receive back less than 80% of what they put in. The Commission increase Member States' annual rural development budgets by way of a formal decision, and the funds from compulsory modulation are made available for use on rural development in the year after they are deducted from Pillar 1 budgets. Based on current ceilings for direct payments (as set out in regulation 1782/2003), approximately €965 million Euros per year will be generated by 5% compulsory modulation across EU15 for expenditure on rural development.

  Your second question concerned match-funding arrangements. The figures in the proposal concern the European funds only and so exclude any domestic match funding. The Rural Development Regulation sets limits on the amount of European funds which can be used to co-finance rural development payments. For Axis 1 and 3 measures, this limit is 50%, whilst for Axis 2 and 4 measures, this limit is 55%. The minimum contribution of European funding for rural development payments is 20%, but within these limits Member States can choose at what level to match-fund. Until all programmes have been approved it will not be possible to say how much match-funding will be provided across the EU15 as it will be, approximately, somewhere between 45% and 80% of the overall amount of planned expenditure.

  Final decisions on financing the new Rural Development Programme for England are yet to be taken, but it is likely to follow these upper limits for the EU contribution. Consequently, it will not quite be the case of half and half in terms of EU and domestic funding. Different arrangements were agreed for voluntary modulation funds as part of the December agreement whereby Member States have the flexibility to decide at what rate to match-fund.

  Your final question concerned the impact of the revision of the UK rebate. Changes to the financing of the European Union budget, including the abatement mechanism, have no impact on the allocation of expenditure to individual policy areas or member states.

28 June 2006

Letter from the Chairman to Barry Gardiner MP

  Thank you for your letter of 28 June in reply to my letter of 15 June regarding Proposal 10016/06 to lay down the amount of Community support to rural development for the period from 1 January 2007 to 31 December 2013. Your clarification on the relation of compulsory modulation, match-funding and the abatement mechanism to the budget agreed proved most helpful to Sub-Committee D (Environment and Agriculture) in its consideration of the rural development budget for 2007-13.

  We continue to be concerned at the effect the reduced budget will have on rural development policies and we ask that you take note of the views we express in this letter. We stated in our report The Future Financing of the Common Agricultural Policy (HL 7, Session 2005-06) 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" (paragraph 105); yet the agreements made by the European Council in December 2005 and the Council of Agriculture Ministers in June 2006 indicate a continuance of the traditional approach to agricultural funding with its emphasis on maintaining support of markets and direct subsidies at the expense of rural economic development.


  The European Council budget agreement of December 2005 allocated €69.75 billion for rural development funding over 2007-13. This is 21.4% (€18.95 billion) less than the European Commission's original proposal of €88.7 billion. The amount of money available for rural development spending in this period will actually decrease compared with current spending. Total rural development funding will be lower in each year of the next financial perspectives than in 2006.

  We are concerned that the reduced amounts resulting from the December 2005 budget agreement will impose serious limitations on those policies considered most essential: namely the Axis 2 and 3 and Leader+ policies designed to improve environmental protection and to encourage diversification out of agriculture and the development of the non-agricultural rural economy. The reduction will be even more severe in terms of allocation per Member State, given that the 2007-13 budget must encompass spending not only in the new Member States, but also in Bulgaria and Romania which are due to accede to the EU in 2007.


  We consider that the reduction in funds casts considerable doubt on the claimed desire of the Government, the Council of Ministers and the European Commission that a change of emphasis should take place in EU rural and agricultural policy away from the subsidised support of farmers and agricultural markets towards the economic and social development of rural areas. While spending on direct subsidies and market support will remain unscathed by the December 2005 cuts, the cash available for these important alternative policies has been reduced by over one fifth.


  Furthermore, and we note from your letter that you share our disappointment on this point, the subsequent agreement on rural development funding by the Council in June determines Member States' of the funding on an historical basis rather than according to need. This distribution follows the pattern of the past rather than directing funds to those economically most disadvantaged rural areas where the need is greatest. The UK, with 11% of the EU 15's agricultural output, 8% of its rural population and around 7% of its rural area, will receive only 3.5% of the available funds. The decision to retain the historical distribution principal therefore means the UK will continue to receive relatively small payments.


  We appreciate that there is scope to supplement rural development funds through increased modulation from Pillar 1. However, while the Council has agreed that up to 20% of the Single Farm Payment may be transferred voluntarily in this way to rural development spending, it seems likely that only the UK Government will follow this upper limit for funding. We regret the agreement of the Council to 5% compulsory modulation from Pillar 1 to Pillar 2 rather than the Commission's original draft proposal of 10% compulsory modulation. As the Regulation now stands, and as you confirm in your letter, the 5% compulsory modulation will allow the transfer of less than €1 billion to rural development funding each year.


  By allocating only 23% of the total EU Agriculture funds to rural development we consider that the Council and Commission have failed to fulfil their claimed objective of radically changing the policy emphasis from farm support to wider rural economic development. If declared policy aims are to be fulfilled the Council needs to take a conscious decision to ensure a substantial transfer of funding from traditional farm support to rural development. Given the limitations imposed by the 2002 Brussels agreement on CAP financing, the 2008 mid term review should envisage a substantial increase in compulsory modulation in order to achieve this objective.

  We concluded in our report that "a prosperous and broad-based rural economy is ... vital for the long term survival on the land of most EU farmers. Thus a meaningful budget for rural development in the EU, predominantly targeted at economically backward regions, is the most sustainable way of supporting traditional landed communities throughout the EU-25" (paragraph 97). We believe the reduction in available funds resulting from the December 2005 budget agreement will hinder this process.

  We ask that you take note of our views. We will wish to monitor the progress of the legislation to implement the 2007-13 budgetary agreement, and therefore ask that you ensure documents are deposited for consideration with the Committee well in advance of the relevant Council meeting.

20 July 2006

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