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 2007-2013. (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)

Enlargement will be the main pressure facing the 2007-2013 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)

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)

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)

It is clear to us that ceilings have been set which do not fully anticipate the demands on the 2007-2013 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)

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)

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)

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 2007-2013 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)

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)

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 2007-2013 Financial Perspective period, there will still remain a major distortion in the domestic and international markets for agricultural commodities. (paragraph 61)

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)

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)

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)

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)

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)

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 2007-2013 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)

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)

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)

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)

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 ten to fifteen years. (paragraph 105)

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)

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)

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)

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)

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)

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 2007-2013 budget period. (paragraph 124)

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 2014-2020. (paragraph 126)