COMMON AGRICULTURAL POLICY: RURAL DEVELOPMENT
FUNDING 2007-13 (10016/06)
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
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
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
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
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.
PILLAR 1 MAINTAINED
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
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