One potential benefit of leaving the EU is the opportunity to radically change how we spend agricultural subsidies. The Common Agricultural Policy CAP is one of the great mistakes of the EU. Given the share of EU spending on agriculture, it is their flagship policy, yet the CAP has given a very poor return regarding economic and social welfare.
Unfortunately, the EU has become caught by powerful agricultural lobbies, and it has proved very difficult to wean Europe off these very extensive subsidies. There is no other industry which receives so much subsidy (and it is similar in the US). Yet, these subsidies have a very weak justification in terms of social benefits to society. CAP costs €59 billion per year.
Also, if the EU had shifted the budget of CAP into something more productive like regional policy, the EU would have been able to make a much bigger improvement to depressed areas of the EU and would be in a much stronger position – and perhaps popular.
The original CAP
The original CAP was an attempt to stabilise farmers incomes by setting minimum prices for food. It was an economic failure. (Though it was a wonderful case-study for those wanting to teach an example of government failure.) Essentially, the original CAP:
- Minimum prices encouraged a large increase in supply, encouraging over-use of chemicals to enhance output.
- To maintain these minimum prices, the EU had to buy the surplus food, which was then stored, destroyed or sold very cheaply to developing markets.
- At the height of CAP, 70% of the EU budget was diverted into buying food we didn’t need.
- It also involved high tariffs on food imports – harming trade relations and reducing the income of farmers in other countries.
- The dumping of surplus food on world markets led to lower prices, and lower incomes for food producers and food exporters.
- It also distorted long-term economic trends, preventing the agricultural sector respond to changing demand and supply. It also encouraged farmers to expect and rely on government subsidies. Subsidies which have become politically very difficult to reduce.
- It was a classic example of a government policy which led to a deadweight welfare loss.
- Very slowly, the Common Agricultural Policy was slowly reformed. Target minimum prices have mostly been reduced or removed – allowing some reduction in tariffs and ending the food mountains. However, although CAP was reformed, the total cost of CAP continued to rise (though it did fall as a % of EU spending)
- The CAP was reformed by offering a different kind of subsidy, which included direct income payments to farmers. Essentially, people who owned agricultural land were given subsidies for having agricultural land.
- In fact, the perversity of this direct income subsidy scheme is that, in some areas, it encouraged farmers to cut down trees and make wildlife areas nominally agricultural land – to enable the farmers to be eligible for more subsidies.
- With no limit on farm subsidies, it has often been the richest landowners who have received the biggest cash handouts. With some estates receiving in the region of half a million pounds in CAP subsidies each year.
- It is one of the worst transfers of taxpayers money to wealthy landowners. It is only surprising there is not more outrage about the waste of taxpayers money.
I should add in recent years, the EU has attempted to make direct income payment supports dependent on certain criteria, e.g. ‘greening’ of farming. In 2013, the new ‘greening component of CAP’:
“rewards farmers for adopting and maintaining, as part of their everyday activities, a more sustainable use of agricultural land and caring for natural resources.” Direct payments at EU.
UK agricultural subsidies
Without having to achieve agreement with EU partners (e.g. countries with very powerful farming lobbies, like France), the UK has the opportunity to use the current £3 billion of agricultural subsidies in a much more efficient way. What principles should we have for future agricultural subsidies?
- Limit/abolish subsidies. There is no good reason for wealthy landowners to receive a very large subsidy just because they own a lot of land. The first thing is to cap any subsidy to prevent wealthy landowners gaining undue taxpayer subsidies. Currently, CAP subsidies go overwhelmingly to the largest farms.
- In the EU-15, 20% of the farms with the largest payments share 80% of the total payments.
- There is a justification for offering subsidies to rural communities, if there is a clear external benefit of the subsidy, e.g. help reduce rural poverty.
- Rural communities may need subsidies to protect local traditions, e.g. subsidising dry stone walls, rather than cheaper barbed wire fence;
or it could involve subsidies to protect areas of outstanding natural beauty from development.
- There is no reason why rural subsidies should only go to farmers. For example, there is a good case for subsidies to help young local people afford houses in the area they have grown up – rather than being priced out by demand for second-holiday homes.
- Environment. Any future subsidies should demonstrate a clear environmental benefit. Subsidies which reward farmers for cutting down trees to create more agricultural land is a negative externality. Recent flooding suggests that planting more trees by river banks can play a natural role in reducing flooding. There is a much better case for subsidies to reward landowners to plant trees in areas at risk of flooding.
- Subsidies don’t necessarily deal with the underlying problem. Many small farmers face intense financial pressure – from oversupply and monopsonist supermarkets who can put downward pressure on prices. However, giving subsidies doesn’t tackle these root problems of agriculture. In fact, agricultural subsidies could be seen as subsidising supermarkets monopsony power. Supermarkets pay low prices, farmers get low income, so the taxpayer sends subsidies to farmers to make up the difference.