The Common Agricultural Policy is inefficient, and much of British food production is uncompetitive in the absence of tariffs. And free trade deals of the kind the UK plans to pursue outside the Single Market will hurt farmers even more than the loss of subsidies. Dieter Helm says Brexit is a chance to stop subsidising large landowners and spend more on environmental protection.
A majority of Britain’s farmers voted for Brexit in the referendum. This is perhaps surprising in the context of an industry which receives around £3 billion in subsidies from the Common Agricultural Policy (CAP), and yet comprises only about 0.7% GDP. Of all the vested interests, British farmers have more to lose from Brexit than almost any other industry.
From the public interest perspective, there is much to gain. The CAP pays the bulk of the subsidies as a payment for owning land (called Pillar I). The economic effects of Pillar I subsidies are obvious: increasing the revenues per hectare raises the price of a hectare. Land prices capitalise the subsidies, creating barriers to entry. As a result, the CAP has also now established a fund to help young farmers get into the industry, in the face of the obstacles the CAP itself creates. The rest of the subsidy goes on rural development and environmental schemes (called Pillar II). These are often poorly designed.
It would be hard to make a new British agricultural policy worse than the CAP, short of reverting to the subsidising production directly, which created the notorious wine lakes and butter mountains of the past.
There are several options for reform because of Brexit. Discounting reverting to more of the same, the first option is to shift some of the subsidy from paying to own land towards more spending on the environment – i.e. shifting the balance from Pillar I to Pillar II.
The second is more radical, switching to a system of paying public money for public goods. The second meets the economic efficiency criterion: it would start with identifying the market failures, and then use a combination of taxes and subsidies to address them. The public goods, which the market will not deliver unaided, are mostly environmental, and are concentrated on the small farms mostly, but not exclusively, in the uplands. By happy coincidence it would therefore direct subsidies to poorer and more marginal farmers, rather than large scale producers. This could be tied in with the government’s manifesto commitment to a 25-year environment plan to ensure the next generation inherits a better environment.
The farming lobby resist this more radical option for at least three reasons: they will suffer capital loses on land prices; they will face considerable international competition; and the speed of the change will be disruptive.
On the capital losses, this is a distributional impact, which would fall most heavily on the better off landowners. It is likely in any event that the 2020 reforms of the CAP in Europe will reduce the subsidy to the larger landowners in any event.
Brexit is a once in a generation opportunity to get rid of one of the EU’s most inefficient policies
On the trade issues, these are substantive, but can and should be dealt with independently of the subsidy regime, through tariffs and trade agreements. The sad fact is that almost all of British agriculture is uncompetitive in global markets in the absence of tariffs. This is especially true for sheep and other meat production, even if issue of animal welfare is taken into account. It is for the government to decide whether consumers should pay a premium through tariffs and trade barriers in order that more expensive food is produced in the UK. If, as the government has suggested, it is looking for free trade agreements with the US and others, as well as with the EU after Brexit, the trade consequences for British farmers are likely to be much more detrimental than the loss of the CAP subsidies.
On the disruptive impacts of a sudden withdrawal of Pillar I subsidies in 2020, these arise because of the time horizons in crop choice and farm management. In order to enable farmers to plan their strategy ahead, the government would need to signal now what the post 2020 regime may look like. There is however no evidence that there is any government clarity, let alone decisions, on agriculture policy yet, or indeed that there is going to be soon. Hence the case for transitionary arrangements is considerable. One possibility is to set out a clear framework from 2025 onwards, and taper a transitionary path from 2020 to 2025.
Brexit is a once in a generation opportunity to get rid of one of the most inefficient policies the EEC, and then the EU came up with upon which most of the EU’s money has been spent. There is no obvious case to spend £3 billion, given all the other calls on public expenditure. There is however a strong case for using some of the money freed up on more environmental public benefits. This should be developed as a core part of the over arching 25-year environment plan. Indeed it must be if the 25-year plan is to be delivered, since around 70% of the land is subject to agricultural use.
A remaining puzzle is why the farmers voted for Brexit. It turns out to be one of the rare cases where one of the most effective lobby groups Britain has ever seen voted for the public interest against their private ones. They cannot possibly have believed their subsidies would not be reduced as a result of the choice they made through the ballot box.
This post represents the views of the author and not those of the Brexit blog, nor the LSE. It was first published at the OUP blog.