Chapter 5: Withdrawing from CAP financial support
Financial support
208.The CAP provides direct financial support to farmers in the UK through the Basic Payment Scheme (BPS), also known as Pillar I, and to the wider rural economy through Pillar II funding for Rural Development Programmes.331
|
Pillar I support, also known as direct payments or the Basic Payment Scheme (BPS), consists of payments made directly to farmers. They are mainly granted in the form of an area-based basic income support, which is decoupled from agricultural production. The aim of the payment is to stabilise farmers’ income in a market subject to volatility. Direct payments also contribute to the provision of public goods, with 30% of each EU country’s direct payment budget being directed towards greening measures.332 Farmers must meet so-called Cross Compliance rules on animal husbandry and farm management to receive direct payments. Pillar II support, also known as Rural Development Programmes, supports agri-environment schemes and rural growth. Pillar II funding is co-financed by national governments. At least 30% of Member State rural development funding must be spent on measures related to land management and climate change. |
Source: House of Commons Library “EU Referendum: impact on UK Agriculture Policy”, Briefing paper 7602, 2016, p 7: http://researchbriefings.files.parliament.uk/documents/CBP–7602/CBP–7602.pdf
209.The total CAP represents over 36% of the EU budget over the Multiannual Financial Framework (MFF) for 2014–2020.333 The UK is expected to receive €25.1 billion in direct payments (Pillar I) and €2.6 billion in rural development funds (Pillar II) for rural development and the environment over the course of that MFF period.334
210.The Chancellor of the Exchequer, Rt Hon Philip Hammond MP, has guaranteed that “all structural and investment fund projects, including agri-environment schemes, signed before the Autumn Statement will be fully funded, even when these projects continue beyond the UK’s departure from the EU”.335 The Chancellor has also guaranteed that the current levels of Pillar I funding will be upheld until 2020.
Reliance on funding
211.Dr Alan Greer, Associate Professor in Politics and Public Policy at UWE Bristol, outlined UK farmers’ reliance upon CAP payments:
“It has been estimated that EU subsidies make up between 50 and 60 per cent of farm income in the UK as a whole. However it is estimated that 87 per cent of total farming income in Northern Ireland, 80 per cent in Wales, and three quarters of total income from farming in Scotland is contributed by CAP payments.”336
Table 1: CAP allocations in the UK 2014–2020
Pillar I€ million (approximate number, non-inflation adjusted) |
% share |
Pillar II€ million (approximate number, non-inflation adjusted) |
% share |
|
|
England |
16,421 |
65.5 |
1,520 |
58.9 |
|
Northern Ireland |
2,299 |
9.2 |
227 |
8.8 |
|
Scotland |
4,096 |
16.3 |
478 |
18.5 |
|
Wales |
2,245 |
8.96 |
355 |
13.7 |
|
Total UK |
25.1 billion |
2.6 billion |
Source: House of Commons Library, Brexit: impact across policy areas, Briefing Paper 07213, August 2016, p 54
212.As well as varying between the nations of the UK, reliance on financial support varies across farming sectors. According to the Wildfowl and Wetlands Trust, the pig, poultry and horticulture sectors earn income from farming alone, whereas “Arable farms, grazing livestock and mixed farms all relied on subsidy for 90–166% of their farm business income”.337 NFU Scotland stated: “In the [Scottish] dairy sector, CAP support payments made up 55 per cent of Farm Business Income (FBI)338 in 2016; whereas for the non-specialist Less Favoured Area cattle and sheep sector, CAP support was 231 per cent of FBI.”339
213.Financial support is particularly salient in those regions regarded as “less favoured” areas.340 The Wildlife Trust stated that “In most upland areas farm subsidies represent over half of farm income and farming businesses would be unlikely to survive in their current form without continued direct support”.341 Richard Hebditch, External Affairs Director at the National Trust, told us that “The end of CAP will be a very significant change … particularly [for] those upland farmers or coastal farmers in less favourable areas, where they are very reliant on farming”.342
214.It is not surprising therefore that the financial support given to the agricultural sector is vital to rural economies. The National Sheep Association told us: “There is a ‘multiplier effect’ created by farmers in receipt of CAP payments, as they support a wide range of other rural businesses … providing rural employment and positively impacting on socio- economic factors.”343 Mr Fenwick agreed: “We are looking at complete rural collapse if funding is not maintained.”344
Funding in the context of Brexit
215.Given the significance of financial support to the agricultural industry, farmers’ unions were particularly emphatic about the need to clarify the post-CAP future of that support. Wesley Aston, Chief Executive of the Ulster Farmers’ Union, told us: “We have a commitment on funding from the UK Government for the year post Brexit as such, but it is beyond that that is the real issue.”345 The FUW agreed:
“A major impact for FUW members in the short and medium term is the inability to adequately plan and prepare for the future in terms of decisions relating to changes to business models, finance, borrowing and succession. Such problems are compounded by the periods over which farmers need to plan, given, for instance, gestation and maturation periods of livestock.”346
Devon County Council reflected the same concern: “This uncertainty has left farmers unable to plan for the future and has put increased strain on farming families and businesses who are finding it difficult to stay afloat even with the support of the BPS.”347
216.The Minister responded: “We will make sure that we make our intentions clear to farmers well in advance of the end of the current schemes, so that they know where we are heading.”348
Level of funding
217.Tim Breitmeyer, Deputy President of the CLA, told us that a future policy for agriculture should be “fully funded”.349 George Dunn, Chief Executive of the TFA, agreed that “We … would certainly be arguing for the budget to be maintained.”350
218.Some witnesses questioned whether the UK Government would match the current levels of financial support to farmers after Brexit.351 Mr Hebditch reflected this concern: “It is very tempting for the Treasury every year where there is a funding shortfall to look at taking a bit out of whatever replaces the Common Agricultural Policy in England.”352 Addressing support for environmental protection in particular, Tom Lancaster, Agricultural Policy Officer at the RSPB, told us it would be important to “construct a case that we can sell to the Treasury and other government departments we need to convince of the case for investing in this area”.353
Funding objectives
219.As we have noted, a key opportunity arising from Brexit is that of designing an agricultural policy, including support measures, tailored to the UK.354 While many believed the quantum of funding should remain at current levels, views on the future objectives of that funding differed.
220.For instance, witnesses differed on the merits of Pillar I-style direct payments, as opposed to Pillar II-style rural development programmes. Dr Greer noted that “the devolved governments and farmers’ organisations like direct payments and advocate their retention”,355 while Mr Lancaster stated:
“I think there is a lot to learn from Pillar II-type measures, in that they are contractual, targeted, and outcome-focused—the expenditure is related to those outcomes, typically through a proxy of actions. When you compare that to Pillar I, which is entitlement-based, untargeted, inefficient, and there is no link between outcomes and payments, clearly Pillar II is the model we would want to adopt.”356
221.In our 2016 report Responding to price volatility: creating a more resilient agricultural sector we concluded: “Given that the agricultural sector is often expected to provide public goods, there is a case for financial support in certain circumstances. However, policy should display much more explicit links between the expected outcomes and the use of public funds.”357 We see no reason to change that view in the wake of the referendum.
Environmental public goods and ecosystems services
222.Public goods are those which are non-excludable (if the good is available to one person, others are not thereby excluded from its benefits) and non-rival (if the good is consumed by one person it does not reduce the amount available to others).358 These characteristics mean that their supply cannot be secured through markets, because users have no incentive to pay for them: as a result, public intervention is needed to achieve their provision. Many of the public goods provided by agriculture are environmental.
223.The Minister told us that “rewarding farmers for what they do for the environment, is, I think, a legitimate aim of public policy”.359 WWF supported this:
“The work that farmers, land managers and landowners do to sustain and restore our natural environment should be valued and rewarded. Taxpayers’ money should only be invested in producing public benefits such as clean water, a wide array of wildlife everywhere and beautiful places for people to enjoy.”360
224.On behalf of the farming sector, Mr Aston told us: “As farmers we take great pride in producing the environmental landscape and protecting it generally.”361 Guy Smith, Vice President of the NFU, stated: “We fully accept that the concept of paying farmers to deliver environmental goods or landscape, hitches and ditches, the traditional British countryside that is so loved by British people, is maybe an easier political ask than some blunt support payment.” But he added: “You would not want it to be too bureaucratic or complicated … There is an opportunity to have simpler schemes.”362
225.Wyn Grant, Emeritus Professor of Politics at the University of Warwick, focused on ecosystem services, describing them as “a complex range of services … such as preventing flooding downstream, afforestation, protecting peat land, and so on”.363 Ian Hodge, Professor of Rural Economy at the University of Cambridge, argued that “we do not really need an agricultural policy; we need an ecosystem services policy. We need to set out thinking that our aim should be to deliver the maximum social value from rural land rather than to recreate an agricultural policy”.364 The Wildfowl and Wetlands Trust agreed: “The UK’s farmed landscape provides ecosystem services worth billions of pounds.”365
Other public goods
226.Environmental protection is not the only outcome that could be rewarded with financial support. Mr Aston stated: “It is all about … trying to go back to where we started being rewarded for producing food. We would love to get a proper reward from the supply chain but it does not happen.”366 The Campaign to Protect Rural England (CPRE) reminded us that “the public benefits farming provides are broader than environmental ones; other benefits include rural social capital, access to the countryside and public understanding of food production”,367 and the RSPB suggested that “there should also be a programme of support to enable farmers to innovate”.368
227.In addition to support for public goods, the Minister supported exploring other options:
“There are two other areas that we have talked about as possible options for farm support. One would be doing a lot more by way of productivity, knowledge transfer, investment in science, good value for money by investment in technology and maybe grant aid to help farmers invest in the next generation of technology. Then, finally, there is animal health and welfare.”369
International constraints
228.As discussed above, WTO rules place constraints on the design of domestic agricultural support schemes (see Box 2). The Minister, for instance, acknowledged that while agri-environment schemes that meet the Green Box criteria are permissible under WTO rules, some of the schemes he described might require a portion of the EU’s Amber Box allowance to allow the UK to design a bespoke agricultural support scheme after Brexit.370 Given the uncertainty over the UK’s ability to secure a share of that allowance, Michael Cardwell, Professor of Agricultural Law at the University of Leeds, suggested that “Perhaps the greatest scope to secure WTO compatibility may therefore be provided by … the Green Box exemption under Annex 2 to the [Agreement on Agriculture]”.371
229.Prof Cardwell noted that, by using the Green Box exemption, the UK Government would be able to develop a financial support scheme focused on food quality, the development of robotics or drone technology, and possibly food security, in addition to supporting environmental public goods.372 However, both he and the FUW noted the limitation prescribed in Annex 2, which “states that ‘The amount of [agri-environment] payment shall be limited to the extra costs or loss of income involved in complying with the government programme’”.373
230.Prof Cardwell also cast doubt on the RSPCA’s argument that “The UK can make its subsidies for farmers trade compatible by de-linking them from production and focusing them on animal welfare outcomes e.g. by rewarding farmers for higher welfare systems”.374 He noted that “Annex 2 does not include Green Box payments to compensate farmers for adopting higher standards of animal welfare, although the possibility of introducing such payments has been raised by the EU during the course of the Doha Development Round”.375
231.Mr Lancaster pointed out that “Where you have examples where the farming is inherently uneconomic and you want to maintain that agricultural activity to secure the goods and services we have been talking about, the scope exists … to pay the total costs of production”.376 Alan Matthews, Professor Emeritus of Agricultural Economics at Trinity College Dublin, stated: “There is room for creative interpretation and that if the Government were designing a more results-based scheme it probably would not be challenged within the WTO provided that it was a legitimate agri-environment scheme.”377 We were also told there was currently unused flexibility within the WTO rules. Professor Joseph McMahon, Dean of the Sunderland School of Law at University College Dublin, told us: “There is one provision in Annex 2 that has not yet been used by any WTO member, and that is Paragraph 5, which allows you to design your own Green Box policy provided that certain conditions are met.”378
232.The Minister stated that the Green Box exemption could not be used for all support measures being considered by the Government:
“Ironically, the single farm payment, which is ultimately an area-based, distorting subsidy, technically at the moment qualifies as Green Box, whereas the types of policies that would be more modern, more progressive—payments to get animal welfare outcomes, risk management measures, those types of things—we understand, at the moment, would probably be deemed under the WTO rules as Amber Box. There is this sort of inversion that a modern, progressive policy probably requires, in the short term, some sort of Amber Box.”379
233.Even without a share of the EU’s Amber Box allowance, the UK would not be entirely prohibited from providing trade-distorting support to the agricultural sector. Under the de minimis provisions (see Box 2) the UK could potentially provide support without being challenged by other WTO members. However, witnesses disagreed on whether this approach would allow the UK to maintain its current level of support.380
Competitiveness and CAP alignment
234.The First Minister of Wales was concerned about the risk of competitive disadvantage once CAP funding ceased: “The loss of EU subsidy for our farmers—if no replacement funding is available—will put our producers at a competitive disadvantage compared with those neighbouring countries remaining in the EU.”381 Mr Smith was “wary of having to trade or compete with farmers who get greater levels of support than we do”,382 while Dairy UK argued: “The UK dairy sector will have to compete with subsidised EU farmers. Therefore, it will be important for UK dairy farmers to have a level playing field with their EU counterparts, by maintaining similar levels of financial support.”383
235.The CAP is reformed in seven-year cycles, and the next period will be 2021–2027. Preparations are already underway for this cycle, and formal negotiations are likely to start in 2018/19.384 The NFU told us: “We obviously need to observe this process and be as closely involved as possible to ensure we do not end up with something so different it either obstructs trade or puts us at a competitive disadvantage.”385
236.The Minister, in contrast, believed that “the notion of a level playing field is elusive. My view is that it is probably not the right thing to target.”386 He argued that instead “we should be targeting good, coherent policy that delivers for agriculture so that our farmers can get a competitive advantage in the world because we have good policies that support them to become profitable, competitive, productive and sustainable”.387
Conclusions and recommendations
237.Many farmers rely on Pillar I and II funding to keep their businesses viable, and any substantial reductions in the level of support would have a significant impact on both the agriculture sector and the wider rural economy. The Government should clarify its intentions regarding financial support post-2020 as soon as possible to provide the certainty required to make investment decisions.
238.Brexit provides an opportunity for the Government to evaluate not only the level, but the objectives and structure of financial support to farmers, and to design simpler support schemes which are effective in the context of UK agriculture. We note that this could include support for the rural economy or those in less favoured areas (such as hill farmers), for investment in technology to improve productivity, for environmental protection, or to ensure UK farmers are not at a competitive disadvantage compared to their EU counterparts. We encourage the Government carefully to review the needs of the agricultural sectors across the UK, and to consult with the industry, to ensure that any future support is targeted and effective.
239.There is a case for continuing to provide financial support to farmers after 2020 to correct market failures and deliver public goods, such as environmental protection and ecosystems services, which would not otherwise be paid for. We welcome the Minister’s support for this position.
240.Nevertheless, we recognise that agriculture will be competing with many other sectors for public expenditure. The agricultural sector will have to make a strong case to maintain financial support at the same or similar levels to that provided under the CAP.
241.WTO rules may hinder the design of support schemes tailored to UK objectives. The Government should factor these constraints into its post-Brexit agriculture policy, and negotiate a share of the EU’s Amber Box allowance to maximise its options for designing an effective post-CAP support scheme. It should also consider how to support the provision of public goods through agriculture in the event it does not secure such a share.
Funding and devolution
242.Notwithstanding the relative importance of funding for farmers in all less favoured areas of the UK, we heard that farmers in the devolved nations are proportionally more reliant on CAP funding. NFU Cymru informed us that “Around 80% of Welsh farmers’ incomes comes from the Common Agricultural Policy”,388 while Fergus Ewing MSP, of the Scottish Government, told us that “CAP funds and support payments account for around two-thirds of total income from farming in Scotland … Income support is therefore crucial, especially for fragile farming businesses in remote and constrained areas.”389 DAERA noted that such support was still more critical in Northern Ireland: “Without direct support, the aggregate income of the NI farming sector would have been negative in 4 out of last 7 years.”390
243.The FUW reminded us, “Under the current Common Agricultural Policy, agricultural and Rural Development spending in devolved regions is effectively ring-fenced outside the Barnett Formula.”391 Dr Greer noted that it was “unclear” how funding would be disbursed after 2020, “whether via the Barnett Formula or through some other arrangement involving ‘topping-up’”.392 Scott Walker, CEO of NFU Scotland, argued that the Barnett formula would be “inadequate to address this repatriation of powers”, and he would “be looking at … the Scottish Government, with the UK Government, agreeing a fair and reasonable budgetary settlement”.393
244.NFU Cymru calculated that “If EU funds lost to Wales upon Brexit were replaced by the UK Treasury according to a population based Barnett calculation, then compared to the current mechanism for dividing up EU funds among the home nations, it is likely that Wales would be looking at an allocation reduction of 40%”.394 Mr Ewing believed that “moving to a population share of this essential support could result in Scotland losing around half the current CAP allocation.”395
Funding and the UK’s internal market
245.Dr Viviane Gravey, Dr Brian Jack and Dr Lee McGowan from Queen’s University Belfast noted that “While England and Wales appear to favour narrow environmental goals in their use of rural development funds (principally through agri-environment-climate schemes); Scotland and Northern Ireland favour a more ‘multifunctional’ approach … encompassing social and cultural aspects as well”.396 Such differences could increase once the CAP ceases to apply, and NFU Cymru therefore argued: “In order to avoid distorting the UK’s internal market, NFU Cymru would like the governments of the UK home nations agreeing by mutual consent a common overarching agricultural framework that will determine the level of support available in each of the home nations.”397
Conclusions and recommendations
246.Farmers in the devolved nations are proportionally heavily dependent on the financial support provided by the CAP. Funding mechanisms post-Brexit, while ensuring that farmers across the UK continue to receive the support necessary to keep their industry productive and sustainable, will need to avoid distorting the UK’s internal agri-food market.
Funding transition
247.Prof Grant emphasised that, in agricultural funding as in other areas, “we need to have a transitional arrangement to ensure that farm businesses are not faced with a cliff edge.”398 Mr Breitmeyer noted that “the current funding has basically been the equivalent of the total income from farming for the last 20 years, and if we take a significant proportion of that away, we face significant structural change very early on. Transition is a very important part of it”.399 Allan Wilkinson, Head of Agrifoods at HSBC Bank plc, agreed: “I think most businesses would be ready and prepared to make that change if they had the clarity and direction and if they could see what a food and farming strategy would look like … There is no doubt about it, if we had a shock some businesses would really struggle to cope with that change.”400
248.It will be important for any transition period to reflect the working realities of the agricultural sector. According to Mr Walker, “If you look at the more traditional sector in Scotland, which is livestock-production, you are talking about, on average, a minimum of at least a three-year lifecycle for people to decide breeding patterns and for product to come to the end.”401 Prof Hodge suggested that “if farmers anticipate a reduction in direct payments, they can see that happening over a five-year or perhaps even 10-year period so they can plan for it”.402 Alan Swinbank, Emeritus Professor of Agricultural Economics at the University of Reading, suggested “a five, 10, 15-year period … That gives farmers some time to adjust”.403
249.DAERA suggested that “any change in support mechanisms or levels of support would require a period of transition—the more radical the change, the longer the necessary transition period”.404 The Minister told us: “You mentioned the point about transition. I think that depends on how different where we want to end up is from where we are now, and the length of that transition will depend on that.”405
250.As noted above, the Chancellor of the Exchequer has guaranteed CAP funding that was agreed before the 2016 Autumn Statement until 2020.406 In relation to the period 2019–20, the Minister told us: “I think there may be an option in the final year for us to leave behind some of the frustrating EU auditing requirements and pointless record-keeping … but the design of the scheme, essentially, will be the same.”407
Conclusions and recommendations
251.Farmers will need a transitional period in order to adjust to any new financial support scheme, and to provide the certainty they need to invest and adjust their business practices. The duration of the transitional period should be based on consultation with the industry and reflect the magnitude of change being implemented.
331 House of Commons Library, Brexit: impact across policy areas, Briefing Paper 07213, August 2016, p 53
332 The 2013 CAP reform redesigned the structure of direct payments by incorporating a greening component. This rewards farmers for adopting and maintaining a more sustainable use of agricultural land and aims to enhance the CAP’s environmental performance. Green direct payments account for 30% of Member States’ direct payment budgets. European Commission, ‘Greening’ (2017): https://ec.europa.eu/agriculture/direct–support/greening_en [accessed 21 April 2017]
333 HM Government, Review of the Balance of Competences between the United Kingdom and the European Union: Agriculture (2014), p 37: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/335026/agriculture–final–report.pdf [accessed 19 April 2017]
334 House of Commons Library, Brexit: impact across policy areas, Briefing Paper 07213, August 2016, p 53
335 HM Government, Chancellor Philip Hammond guarantees EU funding beyond date UK leaves the EU, 13 August 2016: https://www.gov.uk/government/news/chancellor–philip–hammond–guarantees–eu–funding–beyond–date–uk–leaves–the–eu [accessed 21 April 2017]
338 Farm Business Income is the average headline business-level measure of farm income in the UK. FBI represents the return to the whole farm business, that is, the total income available to all unpaid labour and their capital invested in the business. Returns from diversified activities (non-agricultural activities that use farm resources, for example: renting out farm cottages for tourism; income from small-medium scale wind turbines; etc.) are included in overall FBI. Scottish Government, Annual Estimates of Scottish Farm Business Income (FBI), (March 2016): http://www.gov.scot/Publications/2016/03/7764/326289 [accessed 25 April 2017]
340 In the EU, “less-favoured area” is a term used to describe an area with natural handicaps (lack of water, climate, short crop season and tendencies of depopulation), or that is mountainous or hilly, as defined by its altitude and slope.
344 Oral evidence taken before the European Union Committee, 7 February 2017 (Session 2016–17), Q 87
351 The House of Commons Library has noted that “UK governments have consistently sought to reduce the overall CAP budget and levels of direct subsidies, and to ensure that direct subsidies are linked to the delivery of wider public goods such as environmental protection to give value for money to the tax payer”. House of Commons Library, Brexit: impact across policy areas, Briefing Paper 07213, August 2016, p 53
354 See for example Q 12 (Tim Breitmeyer), written evidence from NFU Scotland (ABR0007) and Welsh Government (ABR0050)
357 European Union Committee, Responding to price volatility: creating a more resilient agricultural sector (15th Report, Session 2015–16, HL Paper 146), para 271
358 Institute for European Environmental Policy, Provision of Public Goods through Agriculture in the European Union (December 2009): http://www.ieep.eu/assets/457/final_pg_report.pdf [accessed 4 April 2017]
375 Written evidence from Prof Michael Cardwell (ABR0049). The Doha Development Round was a round of trade negotiations among the WTO membership. It was launched in 2001.
384 House of Commons Library, EU Referendum: impact on UK Agriculture Policy, Briefing paper 7602, May 2016, p 13
391 Written evidence from Farmers’ Union of Wales (ABR0045). Under the Barnett Formula, the Scottish Government, Welsh Government and Northern Ireland Executive receive a population-based proportion of changes in planned UK government spending on comparable services in England, England and Wales or Great Britain as appropriate.
393 Oral evidence taken before the European Union Select Committee, 1 February 2017 (Session 2016–17), Q 51 (Scott Walker)
398 Q 6; also written evidence from the National Sheep Association (ABR0025) and Scottish Land & Estates (ABR0032)
401 Oral evidence taken before the European Union Select Committee, 1 February 2017 (Session 2016–17), Q 47 (Scott Walker)
406 HM Government, Chancellor Philip Hammond guarantees EU funding beyond date UK leaves the EU (August 2016): https://www.gov.uk/government/news/chancellor–philip–hammond–guarantees–eu–funding–beyond–date–uk–leaves–the–eu [accessed 4 April 2017]. The Government guaranteed that the current level of agricultural funding under CAP Pillar 1 will be upheld until 2020 and any agri-environment schemes agreed before the Autumn Statement will be fully funded—even when these projects continue beyond the UK’s departure from the EU.