The annual budget is an important statement of any organisation’s strategic priorities. The EU budget is no exception, but its sheer size and complexity makes it difficult for the interested lay person to interpret and to understand.
The Commission proposed a draft budget (DB) for 2015 in June, and the figures are now under negotiation between the two legislative institutions. Since the Lisbon Treaty, the annual budget is agreed by co-decision between the Council and the Parliament, although the outcome must observe the ceilings agreed in the 2014-2020 multiannual financial framework (MFF).
Once the draft budget is proposed, the Council first adopts its position and forwards it to the European Parliament (EP). The Council’s position on the DB 2015 was agreed by its Permanent Representatives’ Committee on 15 July last. This is its mandate for the negotiations with the EP under the Italian Presidency in September.
The Parliament, meanwhile, is in the process of drawing up its own position. It can either approve the Council’s position or decline to take a position in which case the budget is deemed adopted. Or, much more likely, it can propose amendments to the Council’s position, in which case a Conciliation Committee is formed to try to reach agreement (for a fuller description of the budget procedure, see this European Parliament fact sheet on the budgetary procedure).
Until the 2015 budget is adopted, what we have to work with is the Commission’s draft proposal DB 2015. There are five important things to bear in mind when examining the Commission’s proposal for CAP spending next year.
The first is that the EU’s financial year is not the same as the calendar year. The EU’s budget year runs from 1 October of the previous year to 30 September of the budget year. The 2015 budget thus covers expenditure on 2014 direct payments to farmers as these take place after 1 October of this year.
The second is that the appropriations entered into the budget do not necessarily represent the expenditure that the EU incurs on a particular budget heading, as there can also be ‘assigned revenue’. This is ear-marked revenue which goes to offset expenditure on particular headings. There is thus a distinction between ‘Needs’ (or total budget expenditure) and ‘Appropriations’ (which is the amount entered into the budget), the difference being ‘Assigned Revenue’. In looking at the amount made available for CAP expenditure in financial year 2015, it is the ‘Needs’ amount which is relevant.
The third is that there are two kinds of appropriations, commitment appropriations and payment appropriations. For annual payments such as direct payments to farmers, these are virtually the same. However, for multi-annual programmes, such as rural development spending, where member states enter into commitments with farmers and others to pay particular amounts but these amounts are paid out over a period of years, then there can be substantial differences between these two types of appropriations in the budget. Over the years, there has been a steady build-up in the overhang of commitments in the EU budget, and the Commission and Parliament both complain that the Council fails to make adequate provision for payment appropriations to meet these commitments.
The fourth is that if it is likely that the overall commitment appropriations for the EAGF would exceed the MFF sub-ceiling, then a financial discipline mechanism kicks in. The Commission must propose a financial adjustment coefficient which is used to reduce expenditure on direct payments sufficiently to bring total EAGF commitments within the sub-ceiling. This financial discipline mechanism is also used to establish each year the reserve for crises in the agricultural sector. If the reserve is not used in any year, then that money is returned to the recipients of direct payments the following year.
The fifth is that the new direct payments regulation adopted as part of the 2013 CAP reform will mostly become applicable as from the budget year 2016 onwards. Consequently, the legal framework for direct aids in the 2015 budget remains unchanged, although adapted to some of the elements decided for the new MFF period. In particular, the 2015 budget takes account of the need for adjustment of the direct aid ceilings to the new EAGF sub-ceiling in the MFF, for the integration of the reserve for crises in the agricultural sector, and for the possibility for member states to redistribute direct aids and for the new flexibility between the two pillars of the CAP.
The Commission’s draft CAP budget 2015
The Commission’s draft CAP budget for 2015 is shown in the table below. Recall that it is the ‘Needs’ column that is relevant when discussing trends in CAP expenditure. Looking at the headline figures, total CAP expenditure is projected to fall from €59.2 billion to €58.8 billion in nominal terms, a reduction of 0.8%.
However, this is potentially misleading as it does not take full account of the operation of the financial discipline mechanism. While the draft budget takes account of the deduction for the crisis reserve for 2015, it does not yet account for the return to farmers of the unused portion of the reserve for agricultural crises from the previous year. Now, the amount unused in the 2014 financial year will not be known until 30 September. The Commission has thus not taken this into account. However, it seems highly unlikely that we will require expenditure on an agricultural crisis in the next two months. Thus, it seems virtually certain that the amount retained from farmers in 2013 to establish a crisis reserve this year under the financial discipline mechanism will be returned to them later this autumn. This means that the amount €425 million will be added to farmers’ direct payment receipts in the 2015 financial year. This would bring total CAP spending next year to €59.2 billion, or virtually the same as in this year’s budget (in fact, a drop of 0.1%).
Composition of the CAP budget
Intervention expenditure. The 2015 draft budget shows a slight decrease in needs for intervention expenditure on agricultural markets compared to the 2014 budget. Financial needs for market interventions remain rather limited as a consequence of continued favourable market conditions and prospects for most sectors. However, there is a small increase in budget appropriations for intervention, since a lower amount of assigned revenue is estimated to become available in 2015 as compared to 2014.
Direct aids. For the 2015 draft budget, the needs estimated by the Commission for direct aids, including the amount to establish the agricultural crises reserve, amount to €42.2 billion (-0.7 % or -€288,8 million compared to 2014). These lower needs are the net effect of several different elements, including the continued phasing-in of direct aids in Bulgaria, Romania and Croatia as well as the inclusion of the de-mining reserve for Croatia and the impact of the new mechanism of flexibility between the two pillars of the CAP, which allows for transfers between direct aids and rural development. However, once the return of the 2014 crisis reserve is factored in, the amount available for direct aids will actually increase.
There is a slight shift towards coupled payments for specific measures under Article 68 of Council Regulation (EC) No 73/2009, as the ceiling for coupled support under Article 68 was increased from up to 3.5% for the 2014 budget to 6.5% for the financial year 2015 in the transitional provisions laid down in Regulation (EU) No 1310/2013.
Transfers between Pillar 1 and Pillar 2. On balance, the flexibility to move resources between the two Pillars will mean a slight increase in the resources available for rural development in 2015. Three member states (France, Latvia and the United Kingdom) plan to move a total of €622.0 million from Pillar 1 to Pillar 2. On the other hand, there is a transfer from Pillar 2 to Pillar 1 amounting to €499.4 million resulting from the decision of Poland, Croatia, Malta and Slovakia to reinforce direct payments to farmers under the first pillar of the CAP.
Rural development. Despite this positive transfer from Pillar 1, overall expenditure committed to rural development in 2015 is expected to be slightly less than in 2014 (a drop of €167 million or 1.2%). This heading, however, usually has the largest discrepancy between commitment and payment appropriations, and payment appropriations are projected to decrease by -0.5 % compared to the 2014 budget (assuming the Draft Amending Budget No 3/2014 is accepted). A substantial part of the payment appropriations in 2015 is foreseen to be used to reimburse expenditure related to the 2007-2013 RD programmes.
Even without further reductions in payment appropriations (and it seems the Council position on DB 2015 might seek a further cut here), the Commission believes that the level of payment appropriations is unlikely to be sufficient to reduce the expected backlog of unpaid payment claims at the end of 2014. It warns this could limit its ability to keep the 45-day payment deadline on payment requests arriving from member states in later months of the calendar year. If this were to happen, it would result in cash-flow problems for member states and make national financing for rural development more difficult.
The financial discipline mechanism in 2015
The Commission does not project that Pillar 1 budget appropriations (EAGF) are likely to exceed the MFF sub-ceiling in 2015, so the financial discipline mechanism is only needed in order to create the reserve for agricultural crises. The proposed rate of financial discipline next year necessary to establish the crises reserve is 1.3%. This compares to 2.45% this year when there was also a need to bring EAGF projected expenditure inside the MFF sub-ceiling. The financial discipline adjustment is applied only to amounts in excess of €2,000 and not in member states that are still in the process of phasing-in direct aids.
COMAGRI draft opinion
While the Parliament’s response to the Council position on the DB 2015 has yet to be decided, a draft COMAGRI Opinion has been prepared by Peter Jahr, who is a German member of the EPP group in the Parliament, for forwarding to the EP’s Committee on Budgets which draws up the Parliament’s response. It is a bewildering document in many ways in the claims that it makes.
It opens by lamenting that major categories of CAP spending are likely, in practice, to be cut in 2015 including direct payments, market measures and rural development. As shown above, if we factor in the return of the €425 million withheld to create the financial reserve in 2014, the total CAP budget is virtually the same in 2015 as in 2014 (€59.2 billion as against €59.2 billion).
These amounts are, of course, in nominal terms, so there will be a real decline corresponding to the rate of inflation. The draft Opinion goes on to ask the Budget Committee to call for the indexation of the MFF Heading 2 (which includes the CAP budget) according to the rate of inflation. This is an extraordinary demand. The Parliament agreed to the MFF ceilings at the end of last year, and to call for these to be re-opened suggests a degree of political grand-standing.
If the intention were to ask that commitment expenditure under Heading 2 should be increased by the rate of inflation, this also is out of the question. According to the DB 2015, Heading 2 expenditure already virtually exhausts the MFF ceiling (commitment appropriations of €59.254 billion compared to the MFF ceiling of €59.599 billion, or a margin of just €345 million). As the Heading 2 budget this year was €59.267 billion, it would simply not be possible to increase this by 2% (the deflator used when calculating the MFF ceiling) without breaching the ceiling to which the Parliament itself has agreed.
The draft Opinion asserts that, due to the application of the ‘financial discipline’ mechanism, a large number of the Union’s farmers will suffer a cut in direct payments paid out in the 2015 budget. Again, when the return of the 2014 financial discipline payment is taken into account, there will actually be a slight increase in the amount available for direct payments in the 2015 budget (from €42.4 billion to €42.6 billion) and indeed, this increase would have been slightly greater if some member state governments had not voluntarily decided to transfer funds from Pillar 1 to Pillar 2.
Of course, some individual farmers will see their payments reduced later this year because of decisions made on external convergence and coupling but other farmers will see an increase for these reasons. But these changes are not due to the financial discipline mechanism. This will reduce payments to farmers by €433 million, but there will be a return of €425 million from the payment collected this year. The difference of €9 million is hardly significant in a total budget of €59.2 billion.
The draft Opinion also regrets the cut in funds to support beekeeping, given that the EP sees this as a priority for the future of agriculture. In fact, both commitment and payment appropriations are held constant at the 2014 level at €31 million, which itself was an increase over the 2013 outturn (DB Chapter 05 02 15 06 Specific aid for beekeeping).
The last day for amendments to the draft Opinion from other COMAGRI members was recently and one hopes the Committee will adopt a more serious approach to its budget responsibilities. Otherwise, it does not augur well for a sensible approach to agricultural policy-making in the new Parliament.
Alan Matthews is Professor Emeritus of European Agricultural Policy in the Department of Economics at Trinity College, Dublin, Ireland. His major research interests are agricultural policy analysis, the impact of international trade on developing countries, and computable general equilibrium analysis of trade and agricultural policy reforms.