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25.02.2010 General posts
 

Co-financing of public goods

Many argue that we should first agree on the objectives of the future CAP, then select the most suitable policy instruments, and talk about financing only at the very end. But financing issues cannot be delayed in the political debate - the Commission’s leaked budget review conclusions mention that ‘a larger responsibility of current CAP spending could be assigned to the Member States, or direct aid could be co-financed by national contributions’. This contribution submits four theses on co-financing, that is, the sharing of subsidy costs between the EU and the Member States.

Thesis 1: Co-financing should be applied to all CAP payments.

Co-financing has several advantages. First, their financial contribution creates an incentive for the implementing Member States to use EU funds responsibly to fulfill genuine needs (up to the point where marginal public costs equal marginal public benefits). Second, Member States can be expected to administer public funds more efficiently, attaining a greater impact for a given amount of money, if they participate in the costs. Third, co-financing provides the EU with higher leverage for its limited funds, so that it can more comprehensively shape policies in line with a European agenda.

Finally, the expansion of co-financing is desirable if one wishes to shift money away from farm income support to strengthen other objectives within or outside the CAP. If the principle of co-financing all EU expenditure is accepted, Member States that currently defend farm income support (because they expect that their subsidy receipts from the EU budget will outweigh their corresponding contributions to the EU budget) will lose much of their interest in such policies.

Thesis 2: Co-financing should be better differentiated according to public goods.

EU contributions in favor of public goods with strong cross-border effects should be higher than those for public goods where most benefits remain within the subsidizing country. The current distinction between three types of programs (Axis 1 and 3, Axis 2 and LEADER, and the New Challenges) is not sufficiently fine-grained, and the range of co-financing rates (50%-75% in general, 75%-90% in the convergence regions) is not sufficiently wide.
More differentiated co-financing may also bring about political advantages. Having one rigid co-financing rate would require possibly arbitrary decisions about which objectives and instruments receive support and which do not. By contrast, negotiations about which of say 5 co-financing rates apply to a given objective or instrument would be easier to conduct. A reasoned debate should permit to identify the two rates that could possibly be applied to a given program type, so that the negotiable stakes would be minor (not 0% vs. 50% EU co-financing but 20% vs. 30% or 50% vs. 60%).

It is true that such an approach would require serious analytical work in advance of such negotiations. A study conducted for DEFRA, the UK agriculture ministry, makes an honest attempt to put down numbers on the external costs and benefits of agriculture (see here for further information on this study: http://www.reformthecap.eu/defra-environmental-accounts-for-agriculture). But these results are far from being sufficiently comprehensive and reliable to serve as a basis for financing decisions.

Furthermore, it will have to be seen how more differentiated co-financing rates are administered best. One difficulty is that many measures serve several objectives (e.g. support to organic farming that mitigates climate change, promotes biodiversity, improves water quality etc.). Furthermore, the European interest in any objective cannot be condensed in few categories but depends on the specific aims of a given measure. Biodiversity is a good example: the European interest is great in the case of endangered migratory birds but much lower where non-migratory species are protected that are not endangered at European level. Finally, much depends on the quality of program design. Measures that are likely to deliver high value should receive enhanced EU support. Co-financing rates may thus be best determined by DG Agriculture on a case-by-case basis, drawing on a catalog of criteria. They might also be adapted over time according to performance where this is measurable.

Thesis 3: Co-financing should be better differentiated according to Member States.

Another aspect of enhanced differentiation of co-financing rates relates to the level of development of the Member State implementing the program. It is reasonable to hold that relatively poor regions are less likely to provide the optimal level of European public goods in agriculture and should therefore receive higher EU contributions. However, the current distinction between convergence and non-convergence regions is overly blunt. It does not sufficiently account for regional wealth differentials. Furthermore, it ignores that the costs of co-financed programs that are not born by the EU are generally shared between the regional and the national level. Accordingly, programs implemented in poorer Member States should receive greater EU support. It would therefore be preferable to have a more nuanced set of, or formula for, co-financing rates that is responsive to regions’ and Member States’ GDP per capita.

Thesis 4: Member states’ supposed difficulty with greater contributions to agricultural subsidies is a feeble excuse.

In many cases, the European interest in CAP payments is lower than the current EU share. A consistent application of the co-financing principle would thus lead to increased national contribution rates. This should not create a substantial financing problem for Member States. Either their contributions to the EU budget could be reduced accordingly, or the EU could use the freed-up funds on other areas on which Member States could then reduce their national expenditures. Moreover, total expenditure for agriculture is likely to decline as market interventions are removed and farm income support is phased out or diminished. This will make the financing of agricultural subsidies - whether through European on national channels - easier.

One can still doubt whether national agricultural budgets will neither be increased at the same time as the CAP budget is reduced, nor in line with the national funding necessary to match all available EU funding. However, Member States for whom agricultural subsidies are not a priority can primarily use those objectives and instruments for which national co-financing rates are low - that is, those strongly targeted at European public goods – and thus lower their financial burden.

It may nevertheless be necessary to temporarily maintain high EU co-financing rates until national budgets adapt to the new CAP. Accordingly, a sliding scale of co-financing rates could be established that arrives at its final level at some future date. It may also be desirable to offer Member States the opportunity to reduce their co-financing rates in exchange for reductions in the overall volume of their funding entitlements. A Member States could then choose to have, say, EU financing of 60% on average for € 600 million of payments instead of 45% for € 1 billion. Such a state would thus incur a certain penalty (in the case above, it would receive only € 360 million instead of € 450 million).
The main criticism against such a system where Member States’ financial priorities more strongly influence their level of payments is that this would produce unacceptable distortions of the internal market. However, many current policy instruments – such as re-coupled subsidies and farm modernization support – are much more distorting than future payments that compensate farmers for the additional cost of delivering public goods. Differences in payment levels will thus be less harmful to fair competition across borders. Besides, current payment differentials are much greater than one would expect under a reformed CAP, even if more responsibility is devolved to the Member States.

Further thoughts on the future CAP budget can be found in THE BUDGETARY ASPECTS OF THE NEW CAP PAYMENTS.