sou · GLB3151 · 1998-01-01 00:00:00 — the PSE does not say anything about what would happen to prices if agricultural policy were to be deregulated. In the products for which Union has a high level of support coupled with high production, deregulation of the CAP would lead to higher world market prices, since production within Union could be expected to decrease. The PSE calculations contain 12 of the most important agricultural goods. Fruit and vegetables, wine and olive oil are, however, examples of products, which despite constituting an important part of the EUs agriculture production, are not included in the PSE calculations. Figure 3 shows the percentage PSE for various countries for the years 1986-88, 1993-95 and 1996. Figure 3 The percentage of agricultural subsidy of the total value of production in various countries for the years 1986- 88, 1993-95 and 1996 (Percentage PSE) Source: , 1997. Compared to other major food producers such as , the and , there are higher levels of support inside Union. On the other hand, support levels in Union are lower than in , and . During 1996 the level of support in Union fell, due to the high world market prices for cereals in the 1995/96 season. Reforms in recent years have not changed the total level of support. On the other hand the CAP facing the future 31 reforms have altered the ratio of financing between consumers and taxpayers. Previously market price support, i.e. chiefly export refunds, border protection and intervention measures , constituted a very large part of the support within Union. From the 1986-88 level of of agriculture support,, they were at in 1996, according to the . Direct payments over the same period have increased from to . Other support, including regional support, accounted for in 1996, compared to a mere between 1986-88 (1997). Taking a look at support levels for various products between 1993- 95, the highest are for coarse grains, milk and beef, for which the levels are over (see figure 4). For rice, sugar, oilseeds and sheepmeat, support account for more than half of revenue. For pork and eggs, however, the PSEs are low. Costs for over-priced feed have been removed. In 1996 the picture changed somewhat. The cereal sector, which was favoured by high world market prices, received considerably less support than before. In 1996 the percentage PSEs were highest for beef, milk, oilseeds, sugar and sheepmeat. Figure 4 The percentage of agricultural subsidy of the total value of production in Union for the years 1986-88, 1993-95 and 1996 (Percentage PSE) Source: , 1997. 32 CAP facing the future Other effects on producers Apart from providing prices which are higher than on the world market, the CAP naturally has other effects for producers. Various quota systems and limitations on production have become more and more common within the CAP, leading to less flexibility for producers. In some cases these systems mean severe restrictions on production capabilities, e.g. in the case of milk production, whereas they in other cases do not involve the same individual restrictions, such as the area payment for cereals. Another effect, which has become more apparent for producers in recent years, is the increased administrative burden. 3.1.3 The effects of the CAP on taxpayers Expenditure from the EU agricultural fund The common expenses of the agricultural sector are financed by the EU agricultural fund (the EAGGF) which comprises roughly half of the EUs total budget. Sources of income for the EU budget comprise tariffs and producer levies and a contribution from each based on VAT revenue and Gross National Income. contributions account for the major source of income for the budget. Figure 5 EU total expenditure between 1986-97 (billions of ECU) Agricult ural measures (EAGGF) Ot her st ructural measures (not EAGGF) Ot her measures (not EAGGF) Expenses for 1986 refer to EU10, 1987-94 EU12, 1995-97 EU15. 1997 refers to budget. Source: European Commission, (1997 (a,b). CAP facing the future 33 Figure 5 shows the EUs total expenditure for the period 1986-1997 divided into agriculture, other structural measures and other expenses. As the figure shows, EU expenditure has more than doubled during this period, from ECU 36 billion in 1986 (approx. billion) to ECU 86 billion in 1997 (approx. CAP expenditure for the same period has risen from ECU 23 to 46 billion. In 1986 CAP expenditure corresponded to of total expenditure, and in 1997 this proportion had fallen to . The part of the EU budget which goes to structural measures lying outside the agriculture fund has risen from 14 to during the period. The agriculture fund is divided into two parts: the Guarantee Section which finances export refunds, intervention measures and direct support, environmental and other accompanying measures, and the Guidance Section which finances structural and regional policy measures in the agricultural sector. Budget costs for the EU Guarantee Section (see figure 6) are estimated at ECU 42.3 billion for 1997 (approx. This can be compared to the expenditure in 1986 which amounted to ECU 22.1 billion (approx. The proportion which goes to direct payments and environmental payments has increased in recent years, whereas the part which goes to market price support has decreased. Expenditure for the Guidance Section, which is also shown in Figure 6, was ECU 0.77 billion (some billion) in 1986, which was then equivalent to of the agriculture fund. EU expenditure for structural and regional policy measures have increased by more than the expenditure of the guarantee fund and for 1997 are estimated to amount to ECU 3.7 billion (billion), equivalent to of agriculture fund expenditure. 34 CAP facing the future Figure 6 Guarantee and Guidance Section expenditure for the period 1986-1996 (billions of ECU) Expenses for 1986 refer to EU10, 1987-94 EU12, 1995-97 EU15. 1997 refers to budget. Source: European Commission, 1997 (a,b). Expressed in terms of per person per year EU budget expenditure for the EAGGF are around ECU 110 or . This, however, is not the entire cost to EU taxpayers for agricultural policy. Measures covered by the Guidance Section are only partly financed by the common EU budget. The remainder is financed by relevant Member States. The same is also true of the accompanying measures in the Guarantee Section. In addition there is also national agricultural support, e.g. support to the north of . The estimates the total transfer of funds as a result of agricultural policy in 1995 from EU taxpayers to the agricultural sector, including national contributions, was ECU 48.2 billion, the equivalent of ECU 130 (approx. ,100) per person per year (1996). 3.1.4 The CAPs effects on consumers Economic effects on consumers As mentioned previously, consumers have to pay for the CAP through higher food prices. The calculates the proportion of the consumer price at farm gate values which is the result of agricultural CAP facing the future 35 This figure is known as the CSE (Consumer Subsidy Equivalent) and, like the PSE, it contains a number of uncertainties. Figure 7 The proportion of consumer prices resulting from agricultural policy at farm gate values for the periods 1986- 88, 1993-95 and 1996 (Percentage CSE) Source: , 1997. Figure 7 shows that the percentage CSEs for Union have fallen dramatically, which reflects the increased use of direct payments. The same trend is also apparent in many other countries. Compared to consumers in other major agricultural producing countries, consumers in Union pay a higher cost for agricultural support. However, consumers in , and pay even more. During 1993-95 agricultural subsidies accounted for some of consumers expenditure. In 1996 the equivalent figure was around , which was unusually low because of the high prices for cereals on the world market in the 1995/96 season. The estimates that the additional cost for the CAP in 1995 to the average EU consumer was approximately at prevailing world market prices (1997). However, this additional cost only includes the traditional agricultural products, whereas, for instance, fruit and vegetables, which constitute a major part of consumption in certain EU countries, are not included. However, the calculations do not show how much the consumers would benefit from a deregulation of the CAP. In the event of 36 CAP facing the future a deregulation, world market prices will probably rise for a number of agricultural products, and this would mean that the gains for consumers would probably be lower given such a scenario than the CSE indicates. Figure 8 The proportion of consumer prices at farm gate values made up of agricultural subsidies for the years 1986-88, 1993-95 and 1996 (Percentage CSE) Source: , 1997. Figure 8 shows the CSE for Union. As the table shows the costs for consumers during the period 1993-95 were highest for beef (), rice (), dairy products () and sugar (). In 1996, the costs were highest for beef, sugar and dairy products. Consumer costs for cereals have decreased sharply during recent years. This is partly due to the CAP reform, and partly to high world market prices. Overall the inhabitants of Union pay for the Common Agricultural Policy through taxation and through the price of food. As shown in Figure 9, during the period 1993-95 EU taxpayers paid an average of ECU 47 billion (approx. billion) for the agricultural policy and consumers contributed by an average of ECU 61.5 billion (approx. In 1996 the corresponding figures were ECU 56.2 and 38.7 billion respectively (approx. and 340 billion respectively). However, costs to the consumer via price have decreased whereas costs via Union and budgets have gone up, chiefly due to the introduction of area and headage payments in 1992 by way of compensation for reduced market price support. CAP facing the future 37 mentioned previously the recent high world price for cereals is another reason for the reduction in consumer costs for the CAP. The fact that EU budget costs have risen is also due to the enlargement of the Union in 1995. Figure 9 Transfer of funds from taxpayers and consumers to producers in Union during the years 1986-88, 1993-95 and 1996 (billions of ECU) Source: , 1997. Information on consumer and taxpayer costs for the CAP are based on prevalent world market prices. Since deregulation of the CAP would lead to higher world market prices for the agricultural products for which Union has high levels of support and high production, the figures shown do not indicate how much the inhabitants of Union would gain from a deregulation of the CAP. It is, however, clear that within the EU food prices and budget costs would fall if there were to be a deregulation of Common Agricultural Policy Other effects for consumers Because the regulating systems are different for different products consumer choice is influenced by the CAP. For example, vegetable fats are not affected by market price support, whereas for dairy fats and olive oil the major part of the support is paid in the price of the food itself, and this naturally has an effect on consumption patterns. Union in general has common legislation covering all areas which affect peoples lives and health in relation to food. 38 CAP facing the future Veterinary legislation, in addition to legislation on animal diseases, also includes protection for human health in respect of food of animal origin. In the framework of food legislation there are also a number of stipulations regarding recipes to be followed if certain designations are to be used. These cover products which are subject of large-scale trade between Member States. 3.2 The CAP, the economy and employment 3.2.1 The effects of the CAP on the economy Neither the PSE nor the CSE measure the costs of agricultural support on the economy since they only measure transfer of funds between consumers and taxpayers on the one hand and producers on the other. Efficiency losses arise since agricultural policy affects the allocation of resources. Because of agricultural policy more resources are used in agriculture than would otherwise be the case without support. This makes agricultural production higher and consumption lower compared to a situation without support. Various studies which have analysed the effects of agricultural policy on the economy (as discussed by the expert group 3 in SOU 1997:74) show that support to agriculture lead to costs for other sectors of society. These studies, which are based on different assumptions and conditions, show that economic benefits to society in the form of increased GDP would be the long term effect of a deregulation of agriculture. According to the studies, deregulation would have the effect of increasing GDP by in the region of 0.7 to . However, these estimations do not take environmental effects into consideration. 3.2.2 The CAP and capitalisation in land and quotas The price of agricultural land is determined by various factors such as tax legislation and price developments in agricultural goods. The price of land is affected by the CAP in that the policy increases revenue, and this in turn leads to increased profits. In the short term a price increase in the market, for example as a result of higher subsidies, has the result of increasing compensation for work done by the farmer. In the long term, however, new farmers are willing to pay a higher price for land, a limited resource. CAP facing the future 39 arguments apply if the land is rented. Increases in income often lead to an increase in land rental prices, which in the long term means an increase in income for the passive landowner rather than the farmer. In the same way an increase in income in production where quotas apply leads in the long term to an increase in the price of quotas if they can be traded in a free market. If the quotas cannot be sold, the price increases on the factor that the quota is tied to, e.g. a certain agricultural unit. As such, an increase in revenue results in an increase for the owner of a limited asset in the form of agricultural land or production quotas. The advantage accrues to those who first held the resource. Thus anyone not owning land or production rights and wanting to establish themselves or expand production does not gain any advantage from the existing support. In there has been a marked tendency towards an increase in rental price for those tenancies re-negotiated after EU membership. High prices for milk quotas in the and the UK, where free prices are applied, are further examples of capitalisation of subsidies in a limited resource. 3.2.3 Effects of the CAP on employment The CAP market regulations stimulate agricultural production in Union via high levels of support, and this leads to a level of employment in agriculture which is higher than it would have been without the CAP. It has been mentioned previously that high levels of support to agriculture have a negative effect on other sectors. It is therefore doubtful whether total employment in society would be higher if the CAP is retained compared to a situation with deregulated agriculture. As Table 2 shows, the number of people employed in agricultural production in Union has fallen significantly. 40 CAP facing the future Table 2 The number of people employed in agriculture in Union also seen as percentage of total employment for the years 1970, 1980 and 1993 Number Percent Number Percent Number Percent *Number employed 1970 and 1980 covers agriculture, hunting, forestry and fishing. **Information not available. Source: European Commission, 1996. The number of people employed in the agricultural sector as a percentage of the total number of people employed in 1970 varied between 5 and in those countries which now belong to Union. The corresponding proportion in 1993 was an average of in Union. In 1993 the proportion employed in agriculture was highest in at 21,and , , whereas the UK had the lowest proportion at . In the proportion of people employed in agriculture during the same period has fallen from 8.1 to . In absolute figures, the largest number of people employed in agriculture in 1993 was in , 1.6 million. In , and the number employed in agriculture in each country is around 1.2-1.3 million. For industry and trade there is a lack of statistics at EU level covering developments in the number of people employed. Inside the EU 15 the total number of persons employed in the food industry was 2.4 million, as shown in Table 3. CAP facing the future 41 The percentage of people employed in the food industry in relation to industry as a whole is highest in , , and , where almost one fifth of all those working in industry in the respective countries work in the food industry. In that percentage was only , whilst in it was and in the UK . In the proportion was around , roughly the EU average. Table 3 Number of people employed in the food industry in Union 1994 employed (1000) Source: SOU 1997:25. 3.3 The CAP and the environment 3.3.1 Environmental policy relating to agriculture In recent years, environmental issues have gained in importance in Union, both on a general level and also specifically relating to agriculture, where various types of environmental measures have been introduced in the 1990s. Inside Union there is a series of general environmental objectives relating to all types of business. On the other hand the objectives of the CAP in the do not include any specific environmental objectives. 42 CAP facing the future EU environmental measures can be found in various places in the (i.a. articles 2, 36, 100a and 130r-t). Where trade in goods is concerned Member States have the right under certain circumstances to apply import restrictions to protect the lives and health of human beings, animals and plants. can then take decisions on the harmonisation of such regulations. Other environmental measures which do not concern trade in goods are, on the other hand, largely a matter of national concern, which means that Member States are allowed to have stricter, but not less strict demands than the harmonised regulations, so long as this does not conflict with any other stipulation of the Treaty. Among the general environmental objectives of the EU, which as such also cover agriculture, the following may be mentioned: ·Each sector in society is to take responsibility for its own effects on the environment. ·The Union should promote a sustainable, non-inflationary growth which takes the environment into consideration. ·The EUs environmental policy shall contribute to the conservation, protection and improvement of the environment, protect human health, use natural resources rationally and with care, and promote measures at international level to solve regional and global environmental problems. Despite the lack of formal environmental objectives for agriculture in the , the Commission has presented various papers dealing with the environmental problems of agriculture, including a proposal for a programme of measures aimed at sustainable development (KOM/95/647). In the proposed programme of measures it is stated that the link between controlling instruments for the agricultural market and environmental demands should be further developed via a changeover from market price support to direct payments and a better integrated market policy, rural development and environmental policy. 3.3.2 The CAPs effects on the environment Historically agriculture has had major effects on the environment, both beneficial and harmful. Agricultural production involves major encroachments into the environment, since the very purpose of the production is to influence the environment so that it results in CAP facing the future 43 Agriculture contributes to beneficial environmental effects such as varied farming landscapes and cultural heritage. However, economic and technical development has led to higher levels of production and increased specialisation. Therefore, it is for instance no longer economically justifiable to keep livestock on more sparse pastures, and this leads to a threat to the variety of species in the farming landscape. Another significant environmental problem in agriculture is the leakage of fertilizer and pesticide remains. The majority of agricultures environmental problems in Union today are due more to general economic and technical development than to agricultural policy. There are, however, links between the CAP and the environment. High prices caused by various types of market regulation within the CAP give rise to incentives towards more intensive production than would have been the case without subsidies. This brings with it both beneficial and harmful environmental effects. A more intensive production leads to structural changes in farming landscapes and increased pressure on the environment through higher use of fertilizers and chemicals. Soil leaching and pesticide remains have also become a growing problem in the intensively cultivated areas of Union. At the same time, the high EU support leads to increases in the value of land, and this means that it pays to look after land properly. It is uncertain whether high EU support favours increased specialisation. There is also a high level of specialisation in , for example, where the support levels are very low. Area payments, which were introduced by way of compensation for the lowering of market price support, should have led to lower intensity and as such have been beneficial for the environment. Its effects, however, are not unambiguous. Whilst the land entitled to support is limited, preventing meadow lands from being converted to arable cultivation, a structure is preserved which in relative terms is favourable to cereals as feed in livestock production at the expense of ley. In , the extensive pasture lands which were under the land conversion scheme of 1990 have largely been changed over to cereal cultivation, and this is seen to be the result of the introduction of the EU area payments. Increased sales of pesticides in since entry into Union are probably due to the introduction of the CAP. On the other hand, environmental payments to Swedish agriculture have increased substantially as a result of EU membership, and this has 44 CAP facing the future among other things meant that organic production has increased significantly. It is clear that agricultural production in itself is the cause of various environmental problems. However, most of those problems are not primarily due to agricultural policy, but to economic and technical development in general. Yet there may be grounds for criticism that the CAPs measures to minimize the environmental load are insufficient. Furthermore, the CAP does lack any formal environmental objectives. 3.3.3 EU environmental payments The programme of environmental payments within the CAP is fairly recent, introduced in 1992 to supplement the commonly-financed CAP and to make it more environmentally friendly. Environmental policy in respect of agriculture is seen first and foremost as a matter of national concern. This can be explained by the fact that some of the environmental problems connected to agriculture are of a regional nature. The regulation governing EU environmental payments (2078/92/EEC) only provide the framework for environmental measures through a series of aims, whereas the details of environmental payments are worked out at national level. Levels of payment are flexible within certain determined limits. The environmental payments are intended to compensate farmers for the costs they have for various measures and for loss of income which can occur when production is changed. If it is considered especially warranted the totals can include an incentive element. Environmental payments are basically paid out half and half by Union and the respective Member States. In 1996, some of the EUs total agriculture budget or 1.4 billion ECU (approx.