EU farm subsidies - the mother of all misallocations

Its been a busy few days on the EU budget front with the inconclusive EU leaders’ summit on the EU’s long term budget, and the Commission’s new proposal for the 2013 annual budget (largely unchanged from the version MEPs and member states were unable to agree on). Much of the attention in the talks were given to absolute numbers over substance, which is why Tuesday's Court of Auditors' report on the 'single farm payment' – accounting for roughly one third of the EU budget – is very interesting. The CAP as a whole (comprising the rural development component and the remaining market distorting subsidies) accounts for around 40% of expenditure - €56.8bn this year alone.

Specifically, the report looks at the effectiveness of the ‘Single Area Payment Scheme’ (SAPS) which is just EU jargon for the bulk of farm subsidies to most of the new EU12 member states under the CAP (The EU15 states plus Malta and Slovenia have a different support scheme called the Single Payment Scheme. A unified scheme for all 27 states is due to be introduced in 2014. The generic terms for both is usually 'the single farm payment').

The language is, as usual, cautious but it's quite clear that by EU standards, the Court of Auditors absolutely slams these subsidies. In the report’s executive summary we read that:

• The definition of ‘farmers’ is inadequate leading to subsidies being paid out to "beneficiaries not or only marginally involved in farming". In some of the Member States concerned, SAPS aid was paid to organisations not involved in farming, including public entities managing state land, hunting associations, fishing clubs and ski clubs. So the farce continues.
• The subsidies fail to take into consideration either the specific regional characteristics of farming activity, nor the contribution of farmers to the production of public goods. 
• The payments disproportionately benefit large landowners (who are more likely to be relatively wealthy) while the majority of farmers receive very small amounts of aid. 
• There is no option to differentiate payments within member states to take into account the agricultural potential of regions or environmental criteria. In other words, those who say the CAP in its current form is the best tool for delivering 'food security' or environmental objectives (including bio-diversity) don't know what they're talking about.
• The Commission has not analysed the effects of SAPS aid on the restructuring of the farming sector - a huge 'blind spot' given that modernising agriculture is one of the stated objectives of the CAP, and given that by giving people income support irrespective of the economic activity their engaged in (if any) is usually an active disincentive for reform. 
• The Commission has also not yet analysed the effects of the subsidies on land prices. Again a massive blind spot given that the regime is effectively subsidising landowners. 

So in other words, the single farm payment is a ill-targeted subsidy with no clear links to either the delivery of public goods or economic reform. In today's economic climate, to maintain such a fundamentally irrational policy must be considered something of an accomplishment.

What should we have instead? As we argue in our dedicated report on this issue, there could be a broad rationale for having a publicly subsidised system for delivering public goods in the countryside such as bio-diversity. One way of achieving something at least remotely sensible, would be for the CAP to be slimmed down (we proposed a 30% to the direct subsidies which would have saved over €12bn this year) and refocused to deliver a range of environmental benefit through a system of transferable agri-allowances (if intrigued, check out the full study).

But the current system just has to go. 

Cameron should veto the EU budget unless he gets a better deal

On the Telegraph blog, we argue:

At a meeting of Europe ministers today, the UK government is set to be outvoted on the size of the EU’s 2013 budget. Having pushed for a freeze without a last-minute deal, Britain will be forced to accept a 2.8 per cent increase. This is a compromise position that gives scant consolation to UK taxpayers who will have to fork out an additional £350 million for no good reason whatsoever. Unbelievably, the Commission and some member states were pushing for a 6.8 per cent increase.

Decisions on the annual budget are decided by so-called qualified majority voting system (QMV) with the European Parliament also having to give its assent. This is the issue on which the UK is set to get stuffed this week. However, each member state has a veto over the EU’s long-term budget – known in Brussels speak as a Multiannual Framework (MFF) – which usually covers a seven-year period.  This underlines how incredibly important it is for the UK government to utilise its veto to get the EU’s long-term budget right.
Unfortunately, in talks over the EU's long-term budget (set to run between 2014 and 2020) – also up for negotiation at the moment – the UK is merely pushing for a freeze to overall spending. While this strategy has some merits, it won’t achieve anything above and beyond what could be achieved by simply vetoing the MFF. This is because under EU rules, if a new deal over the MFF can’t be reached, the previous year’s budget is carried over, adjusted to inflation – exactly the real terms freeze that the government is currently pushing for. This is not a shrewd negotiating strategy.

So what should the UK government do instead?

There is no shortage of EU spending areas to reform. For example, it’s madness that, as Europe grapples with a solvency, competitiveness and banking crisis – all at once – around one-third of the EU budget still goes towards subsidising landowners, irrespective of whether they’re engaged in any meaningful economic activity.

But the UK government would secure a hugely disproportionate benefit by one simple move: repatriating the EU’s so-called structural funds back to Britain and other wealthy states. The structural funds are meant to help poorer regions catch up with richer ones, but in reality a large portion of the money is merely being recycled between some of Europe’s richer regions and countries, and spent on projects with little, no or negative comparable impact. Of the 37 regions under the EU’s classification system, 35 pay more in to the system than what they get back. This means that many disadvantaged UK regions – such as the West Midlands and Northern Ireland – end up as net contributors.

As argued for by the previous Labour government, and as recommended by the Commons Local Government Select Committee (alas, only from 2020), the UK should push for the repatriation of these funds for member states with a GDP of 90 per cent or above the EU average. This would achieve the following:
UK taxpayers could save almost £13 billion gross, and £4 billion net over seven years and the overall size of the EU budget is reduced by 15 per cent

-23 out of 27 EU member states would pay less into the EU budget, with France gaining the most (around €12 billion over seven years)
-All post-communist member states that joined in 2004 and 2007 would do better from the funds
-By streamlining and slimming down the funds, they could become far better tailored around regions’ individual needs
-The government, and Mr Cameron in particular, would get instant credibility on Europe

Those countries that would lose out – Spain, Italy and Greece –need a different kind of financial support to that currently is offered by the funds anyway. For example, 30 per cent of the funds in Spain still go towards roads and infrastructure – the opposite of what the country with its bust construction sector needs. This would be the best opportunity of putting this right.

In terms of a simple and easy to communicate policy proposal, this is an open goal. In terms of negotiation dynamics, despite it only ever being able to deliver a freeze, as opposed to an end to UK payments, Britain’s veto is still powerful. Not having a new MFF in place would be extremely messy and most member states, including the new ones that want a new deal to benefit from phased-in farm subsidies, have huge incentives to strike a new bargain. The UK will almost certainly get something substantial in return if it sticks to its guns.
Mr Cameron would waste a perfectly good EU veto – and a chance for a massive credibility boost on Europe – by letting this one slide.

Commission's efforts to reform EU budget actually make things worse

As you may be aware, the Commission last year tabled its proposal for how the EU's budget should look like over the next long-term budget period (set to run between 2014 and 2020). With the exception of some modestly positive elements - such as a "performance reserve" for regional funding (albeit very small) to provide incentives for regions to actually deliver results and a bit more cash on R&D - the Commission's proposal is in many ways making an already irrational, wasteful and unresponsive budget even worse.

For example, through the "greening" of the so-called Pillar I of the CAP (involving 7% of farmland to be set aside to provide ‘ecological focus areas’, a requirement to rotate crops and some other elements, more here), the Commission has opted for an almighty fudge that further undermines effective production while not delivering any significant green benefits in return. Also, despite one of the claimed objectives of the Commission's proposal being to "simplify" the budget, the exact opposite has happened. And remember, direct CAP subsidies under Pillar I are already rather bizarre things. As they're based on land ownership or historical entitlement, these are subsidies to a random group of people rather than directed at any specific outcome. This is of course what the Commission is trying to correct through the "greening" proposals, but, alas, it has failed miserably.

This was yesterday echoed by the EU's own Court of Auditors, which noted in an evaluation of the proposal,

"The Court considers that the legislative framework of this policy remains too complex. For example, six distinct layers of rules govern rural development expenditure. With respect to cross compliance, the Court considers that, in spite of the proposed reorganisation, the complexity of this policy continues to make it difficult for paying agencies and beneficiaries to administer.

In spite of the claim that it focuses on results, the policy remains fundamentally focussed on spending and controlling expenditure and therefore oriented more towards compliance than performance."

Pretty damning.

Another example of how the Commission's new proposal is making matters worse is the new 'intermediate' funding category proposed for distributing the EU's structural funds, for regions with a GDP between 75% and 90% of the EU average. Without reiterating all the flaws of the structural funds, this proposal would actually be a blow to focussing the funds on the genuinely poor regions, where they can have the largest comparative impact (see p. 17-18 here for a more detailed discussion). As the Swedish Europe Minister Birgitta Ohlsson has pointed out, this will mean that potentially more cash will go to the EU's richest countries, which will continue to send each other money via Brussels. "We're totally against introducing this category", Ohlsson has said. We certainly agree.

Incidentally, EU Budgetary Commissioner Janusz Lewandowski announced on Monday that there was a €1.49bn surplus left over from last year’s EU budget, which will be credited against member states’ planned contributions for next year’s budget. In other words, despite the "go for broke" nature of the EU budget (if you know of that board game - you need to spend your money as quickly as possible in order to win), member states still don't manage to fully spend all their allocated funds. And yet, next week, the Commission is expected to propose a 5% increase to the EU's 2013 budget. This links to the lack of absorption critera and performance controls in the EU budget, although its a long discussion that is worth saving for another entry.

What's clear is that there's something fundamentally wrong with the EU budget. Come to think of it, it's actually quite fascinating that this anomaly is allowed continue to exist at the heart of Europe.

PS. If you want to know how to make sense out of the CAP and the structural funds - making them help rather than hinder jobs, growth and the environment in Europe - check out our recent reports on the topic, here and here.

Government reveals £77m yearly admin cost of farm payments

Hat tip to Wyn Grant for this from his Common Agricultural Policy blog.

Just when we thought the Single Farm Payment couldn't get any more ridiculous, we now discover that the cost of administering the payments in tens of thousands of cases is far higher than the value of the subsidy itself.

A Parliamentary question from Lib Dem MP Tim Farron has revealed that the average administration cost for processing an individual claim in the UK under the EU's Single Farm Payment Scheme is a whopping £742.

A separate Ministerial statement from UK Environment Secretary, Hilary Benn, puts the number of individual claims for 2007/08 at around 104,000. This means the total cost of administering these claims is a staggering £77 million.

What's more, 14,645 of these claims were under £400 in value, and 636 of those were under £50 in value.

The total possible payout for these 636 claims is £30,315 but, according to the average cost of processing an individual claim, these could have cost £471,912 to administer!

Madness.

Isn't it lovely

Alex James, Blur basist-turned-columnist today kindly shares with us in his 'Rural Notebook' column in the Independent the news that he has spent his entire EU single farm payment on fences, "utterly transforming" his farm.

"The farm looks immaculate: post and rail, barbed wire, stock netting, the works. Everywhere I look, all the unsightly rusty wire and rotten stakes removed, hedges trimmed. Big old haircut. Feel like a new man. Invincible. The best bit of fence is the bright orange electric one around the rose garden. I've had to replant that completely and the fence is an extra precaution. Everything that went in there last year died or was eaten. I've had the man round with his ferrets, re-dug the drainage and re-fenced the entire farm. I will not be beaten. Rose garden! Battle of the Somme, more like."

Sounds delightful.

But we thought he had a cheese farm... So why the taxpayer subsidies for a pretty rose garden?

Paying celebrities/journalists to renovate their rose gardens strikes us as a fairly good illustration of how ridiculous the CAP has now become.