The reaction to An Bord Snip Nua’s proposed spending cuts in the agriculture, forestry and fishing (AFF) area has been predictably intense. The overall savings proposed are €305 million, out of total voted expenditure of €1,985 million (or €1,655 if EU receipts under the Rural Development Programme which count against this expenditure are excluded), amounting to a reduction of 15.4% on voted expenditure (18.4% on the national contribution to this voted expenditure). Taking all of public expenditure, An Bord Snip Nua identified potential savings of €5.3 billion or 9.3% of relevant expenditure. It therefore seems as if the AFF area will be asked to take a disproportionate share of the overall cuts. However, while I have some quibbles with the details, it is hard to disagree with the overall thrust of the proposals, and indeed I think some expenditure schemes were lucky to survive. I look at the details of the proposals with respect to agriculture in this post.
The key proposals are set out below
- Terminate Suckler Cow Welfare scheme, saving €44m
- 30% cut in Disadvantaged Area Compensatory Allowance saving €66m.
- Close REPS4 and no roll over from REPS2 and REPS3 to REPS4, saving €80m.
- Reduce Teagasc research funding by €14m as part of the centralisation and reduction of all public research spending on a pro-rata basis. Reduce Teagasc advisory, education and training functions and close some locations.
- Increase disease levies to self funding level (€5m) and reduce reactor compensation to 75% of market value and consider mandatory insurance for balance
- Review Coillte’s future, possibly privatise
- Elimination and rationalisation of the state agencies An Bord Bia and Bord Iascaigh Mhara (BIM)
- 1,140 job cuts across Department of Agriculture and Teagasc (18% of current 6,264)
We should remember that these proposals are in addition to reductions introduced in the Supplementary Budget earlier this year
- REPS – The budget for REPS was reduced by €25m from €355m to €330m. Payment rates under REPS 4 were reduced by 17%. The level of REPS 3 payments to farmers to be reviewed based on the number that apply for the REPS 4 Scheme.
- Fallen Animal Scheme – the Fallen Animal Scheme was abolished, involving a saving of €14 million.
- Forestry – The Forestry premium was cut by 8%, or up to €7.5 million. This applies to existing and new applicants premium.
- Suckler Cow Welfare Scheme – the payment rate for the Suckler Cow Welfare Scheme in 2009 but paid in 2010 was halved to €40/head.
Disadvantaged Areas payments
This is a scheme of payments introduced to ‘compensate’ farmers who are located in more marginal farming areas for their higher costs of production. However, the scheme is not targeted on delivering tangible outputs. When the scheme was first introduced in Ireland in 1975, 4.0 million acres or 57.8% of land area was classified as disadvantaged; by 1996 this had increased to 5.2 million acres or 74.8% of land area. In addition, the area classified as Most Severely Handicapped (which gives eligibility for higher payment rates) had increased from 66% to 79% of the total. There is, in principle, a case for a targeted scheme to maintain farming where it is necessary for the maintenance of high-value nature areas, but it is clear that the Irish scheme is little more than income support, making it an easy target for An Bord Snip.
The difficulty for REPS is that it never managed to decide whether it was an income support scheme or an environmental scheme. There is no doubt that it provides a huge income support particularly to drystock farmers – 75% of REPS farmers are in drystock, and last year REPS payments provided on average half of the income from cattle farming on these farms. However, the justification for EU agri-environmental programmes (which is the EU framework legislation for REPS) is to encourage farmers to go beyond the basic environmental requirements they must follow to be eligible for the Single Payment Scheme and to produce positive public environmental externalities in terms of increased bio-diversity and landscape amenity. Because the scheme did not sufficiently focus on this environmental value added, it was an easy target for An Bord Snip Nua.
Last week, the Minister pre-empted this recommendation by announcing that REPS 4 has now closed to new entrants, but also announcing the introduction of a much smaller scheme in which farmers now in REPS 3 could enroll from next year. This new scheme is costed at €45m a year. If it is targeted solely on biodiversity, the Irish taxpayer could get as much environmental value from it as the scheme it replaces. However, from the point of view of the public finances, it reduces the estimated savings of €80m from ceasing all new enrolment in agri-environment schemes as recommended by the McCarthy report.
Update: I have now digested the Minister’s press release announcing this new scheme. Funding for the new agri-environment scheme will come from modulated Single Farm Payment monies resulting from the CAP Health Check, in other words, this is a recycling of EU funds and not additional expenditure. However, in order to draw down these funds, some additional national expenditure is required because, as a Rural Development Programme scheme, national co-funding is required. The Minister has indicated that he will seek to reduce payments under the Less Favoured Areas scheme in 2010 to find the €25 million annually for this purpose. Whether this reduction in LFA payments will be additional to the 30% cut recommended by An Bord Snip Nua will become clear in the 2010 budget.
The Suckler Cow Welfare Scheme
This scheme was introduced last year allegedly as an animal welfare scheme (in order to get past EU state aid rules) but in practice it operates as an income supplement for suckler cow farmers, the most unsustainable sector of Irish farming. The recently-published Teagasc National Farm Survey 2008 showed just now dependent beef enterprises are on direct payments to survive. Average market-based returns for cattle rearing systems stood at €13,937, while production costs were €20,400. This meant that the average suckler cow herdowner subsidised his/her farm operations from direct payments by almost €6,500 last year. For some background on this scheme, read here.
Animal health schemes
Here the main changes proposed are designed to introduce cost recovery and to introduce a greater degree of farmer co-responsibility for the funding of these schemes. Animal disease outbreaks are not always the fault of individual farmers and can be the source of much heartbreak on farms. Howeve, they are an insurable event, and the report’s recommendation that the state should in future pay only 75% of the market value of slaughtered animals is designed to encourge herd ownders to seek commercial insurance for the remainder.
Increasingly the Teagasc advisory service works with commercial farmers in competition with private advisors, and it makes sense to look for reductions in this part of its activities. However, I would regret it if the government went ahead with the recommendation to reduce Teagasc research funding. Here, there is good evidence that productivity-enhancing agricultural research does yield good economic returns. The challenges facing Irish agriculture are so enormous that, if necessary, some further diversion of state funding from farm income support to productivity research is highly desirable. Simply applying the reduction coefficient for general research spending in the state pro rata to Teagasc would not be an efficient measure, in my view.
Other potential cuts
If research spending were to be maintained, it is incumbent to ask where additional savings could be found in other areas. We must remember that these proposed cutbacks would come in the wake of the most expensive infrastructural investment scheme in Irish agricultural history, the Farm Waste Management Scheme, which will cost the Irish taxpayer over €1 billion when the final payments are made. This scheme kick-started a veritable investment orgy on farms. The Teagasc National Farm Survey revealed that an incredible €4.5bn has been invested by Irish farmers over the past two years (for comparison, note that the operating surplus in all agriculture last year was €2.3 billion). Although average farm family income fell from €19,687 in 2007 to €16,993 last year, farmers still invested close to €20,000 each on their holdings in 2008, making a total of over €2bn. This was the highest annual level of investment ever recorded on Irish farms, and the vast bulk of this money was spent under the Farm Waste Management Scheme. We will still be paying for this over the next two years.
There are a range of other measures which add little to either agricultural competitiveness or public goods output and which could be reduced to help maintain Teagasc research spending. In my view, examples include the Early Retirement Scheme and the Young Farmers’ Installation Aid. A difficulty in tackling these schemes is that they are co-funded under the national Rural Development Programme. It is not so such the 50% contribution to these schemes which we get from the EU which causes the problem (even half-subsidised, the Irish taxpayer does not get good value for money). Rather it is that, under the EU Rural Development Regulation, we are obliged to spend 10% of the overall programme on so-called Axis 1 measures (which includes these schemes) as well as Axis 3 measures (where again, one might question if we would maintain some of the expenditure schemes included in the national Rural Development Programme if they were entirely under our own control). Nonetheless, some of the funding for these schemes comes from supplementary national funding which should be stopped.
It is important to recognise the difficulties these cutbacks in direct payments (particularly REPS, the Suckler Cow Scheme and the LFA payments) will cause for farmers and farm incomes, already adversely affected by the downturn in agricultural markets. This is because (as revealed in the Teagasc National Farm Survey for 2008 published last week) for tillage and drystock farmers, the entire family farm income now comes from state payments. Last year, for the first time ever, total direct payments exceeded family farm income by 2.7%. The average direct payment to farms in 2008 was €17,467, compared to €16, 993 in income derived from farming (including these payments). It is this dependence on direct payments rather than market returns which will make these reductions so painful to farmers.