The CAP in the 2021 budget negotiations

The CAP in the 2021 budget negotiations

The Council Presidency, European Parliament negotiators and the Commission have had several trilateral meetings during August and September to try to reach agreement on the seven-year Multi-annual Financial Framework (MFF) following the European Council conclusions in July. The aim is to reach agreement by the end of October, but according to the Parliament’s negotiators, these discussions are not going well. The Parliament is pointing to the safety net procedure in the Treaty which, in the event of no agreement, provides for a contingency plan which would allow sectoral programmes to start functioning on 1 January 2021 on the basis of the 2020 amounts.

In parallel, the procedure is under way for approval of the EU’s 2021 annual budget which is the first year of the new MFF. This process is greatly complicated by the absence of an over-arching agreement on the new MFF. However, it is important because it will determine, inter alia, the funding available for CAP direct payments in 2020 and rural development spending in 2021. The most recent review of the status of the negotiations on the Draft Budget 2021 (DB 2021) is this Working Document prepared by the Budget Committee rapporteur which also explains the position taken by the Council on 8 September.

The Commission proposed its DB 2021 last July. It is the first budget proposed by President von der Leyen’s Commission. It is intended to reflect the six political priorities set out by von der Leyen: the European Green Deal; a  Europe fit for the digital age; an economy that works for all; promoting our European way of life; a stronger Europe in the world and a new push for democracy. The circumstances of its preparation have been highly unusual. The coronavirus pandemic has overturned all previous assumptions about economic activity and public spending. The Commission’s Summer Economic Forecast prepared in July 2020 forecast that EU GDP would contract by 8.3% in 2020, and rebound by less than 6% in 2021.

The Commission’s proposal for the 2021 budget sets appropriations at €166.7 billion in commitments, and €163.5 billion in payments. The Next Generation EU recovery instrument is expected to reinforce key programmes by an additional €211 billion in commitment appropriations as assigned revenue to the 2021 budget. Overall, in 2021 €378 billion is expected to be implemented through the budget, complemented by up to €133 billion in loans to Member States.

Because the Commission is obliged by the Treaty to present its draft budget before 1 July, and since there was no agreement on the 2021-2027 MFF by that date, the Commission based its draft budget on its proposal for a reinforced MFF issued on 27 May 2020. The final European Council conclusions were reached later in July 2020 so are not reflected in the Commission’s draft. These EUCO conclusions have altered the CAP figures from those proposed by the Commission. The Commission is expected to present a letter of amendment to adapt the DB 2021 to the state of play on the MFF before the end of October.

Key figures in the Commission 2021 budget proposal

The following table shows the key figures in the Commission’s DB 2021 based on its May 2020 MFF proposal. The CAP is part of Heading 3 Natural resources and the environment in the MFF. This heading is expected to make a substantial contribution to the new Green Deal and includes the funding for the Just Transition Fund (JTF). Specifically, the heading is set to provide around half of the total 2021-2027 budget dedicated to fighting climate change, although the way the Commission proposes to calculate this contribution has been heavily criticised.

Source:  Commission, Statement of Estimates for the European Commission for the Financial Year 2021, SEC(2020) 250, June 2020. These estimates were drawn up on the basis of the Commission’s reinforced MFF proposal in May 2020.

Only a limited margin for contingencies remains. The overall CAP budget in the Commission’s DB 2021 has been allocated €55.8 billion for commitments, of which €40.8 billion will be spent on EAGF interventions and €15.0 billion on EAFRD rural development commitments. The Council has prepared its position on the 2021 Draft Budget based on the more recent European Council conclusions. This has been done in a purely technical manner (pending the Commission’s letter of amendment due in October) by applying an arithmetic adjustment to all MFF headings where the European Council made a change to the Commission proposal. It has thus added €164.32 million to the EAGF sub-ceiling for market related expenditure and direct payments and €421.34 million to the EAFRD budget to these figures.  

Another point to notice is that the voted appropriations under this Heading are very close to the MFF ceiling, leaving a very small unused margin in case of contingencies. The margin for contingencies is €215 million. This would hardly be adequate in the event of significant disruption to agricultural markets if there is a ‘no-deal’ Brexit at the end of this year. However, the European Council in its MFF conclusions included a Brexit Adjustment Reserve of €5 billion as a Special Instrument outside of the MFF. This would be used to counter unforeseen and adverse consequences in Member States and sectors that are worst affected and would be a source of funding to support farmers should that prove necessary. The General Council has called on the Commission to submit a proposal for the relevant instrument necessary to operationalise the Brexit Adjustment Reserve without delay, in view of ensuring that a sufficient amount of appropriations can be made available for mobilisation as from the beginning of the financial year 2021.

Assigned revenue plays a smaller role. The EAGF budget is made up of both voted appropriations and assigned revenue. Revenue originating from financial corrections under accounting or conformity clearance decisions or from irregularities are designated as revenue assigned to the financing of EAGF expenditure that are used to cover part of the needs for this fund. Because of this assigned revenue, a distinction has to be made between requested budget appropriations and estimated expenditure (‘needs’). Assigned revenue shows a drop in 2021 compared to the 2020 budget. In the Commission’s proposal, this is all assigned to offset expenditure on CAP direct payments.

The EAGF needs are dominated by the expenditure for direct payments to farmers. In the financial year 2021, the latter are determined by the national ceilings for claim year (calendar year) 2020 of the current MFF after taking into account transfers notified by Member States of transfers between the EAGF and EAFRD funds (making use either of flexibility or the proceeds of capping). Member States notified transfers of €1,172.385 million from the EAGF to the EAFRD and €418.457 million from the EAFRD to the EAGF, resulting in a net transfer from the EAGF to the EAFRD of €753.928 million. This is deducted from the 2021 EAGF sub-ceiling and reflected in the revised national ceilings for 2020 set out in Commission Delegated Regulation 2020/756 amending Annexes II and III of the 2013 Direct Payments Regulation.

Financial discipline was needed…. The 2021 EAGF sub-ceiling in the Commission’s proposal derived in this way is less than the amount of funding required for EAGF spending when the targeted national ceilings for direct payments are included. When this happens, the Commission must use the financial discipline mechanism to reduce the amounts available for direct payments. In the Commission’s budget proposal, direct payments have been reduced by around €160 million to adapt the EAGF needs to the available net balance for the EAGF. This would represent a small reduction of 0.42% in the direct payments farmers would expect to receive this year.

…until the European Council increased the EAGF sub-ceiling. As already mentioned, the European Council increased the EAGF sub-ceiling in 2021 by around €160 million in its July 2020 conclusions compared to the Commission’s May 2020 MFF proposal. This is exactly the amount of the reduction that would otherwise have been required in the direct payments received by farmers later this year. Although we must wait to see how the Commission proposes to allocate the additional EAGF resources between market-related expenditure and direct payments, we can be certain that financial discipline will not be applied to further cut payments to farmers in 2020.

Funding the agricultural reserve. Of course, according to the CAP transitional regulation prolonging the 2014-2020 rules for one further year, direct payments need to be reduced through the financial discipline mechanism to establish the ‘Reserve for crises in the agricultural sector’ for 2021 for an amount of €487.6 million. However, unused appropriations of the crisis reserve in the 2020 budget (€478 million) will be carried over to the 2021 budget and used to reimburse the beneficiaries of direct payments subject to financial discipline in 2021.

EAFRD funding increased despite cut in MFF. The commitment appropriations for the EAFRD in the Commission’s DB 2021 amounts to €15.0 billion, including the transfer from the EAGF. Surprisingly, although this is the first year of the new MFF, this is slightly more than the level of EAFRD appropriations in the 2020 budget, despite the significant reduction in EAFRD funding in current prices in the Commission’s MFF proposal in May 2020 (€84.3 billion) compared to the 2014-2020 MFF (€95.1 billion). The Commission justifies this proposal as follows.

The proposed transitional provisions for the CAP allow Member States that risk running out of EAFRD funds in 2021 to decide on an extension of their existing 2014-2020 rural development programmes to 2021. The extended programmes shall follow the existing legal framework but shall be financed by the budget allocation for the year 2021 (‘old rules – new money’ principle). For 2021, the commitment appropriations for the EAFRD are based on the assumption that all Member States will make use of the transitional provisions and accordingly extend their 2014-2020 rural development programmes for one year. The Commission therefore seems to assume that there will be a heavy uptake of EAFRD commitments in 2021 (contrary to the usual pattern at the start of an MFF) because all the schemes are already in place.

EAFRD funding does not include Next Generation EU top-up. The Commission proposed to reinforce EAFRD spending in the MFF as part of its Next Generation EU Recovery Instrument to the extent of €16.5 billion in current prices (a figure that was halved in the European Council July 2020 conclusions). However, although this funding is intended to enable rural areas to recover from the effects of the COVID-19 pandemic, the Commission has not included this in its 2021 DB. Due to the transitional year 2021, the reinforcement proposed for the EAFRD from Next Generation EU will start in 2022 under the new CAP Strategic Plans.

COMAGRI amendments to the DB2021

COMAGRI adopted its Opinion on the DB 2021 on 21 September 2020 as well as forwarding a set of specific amendments to individual budget lines to the Committee on Budgets. The main Committee amendments are shown in the following table. The voted appropriations in the 2020 budget are also shown, to underline that in many cases the Committee has proposed to restore spending to 2020 levels (though this is not a particularly relevant benchmark as it includes spending in the UK which is no longer relevant. This accounts for much of the drop particularly in direct payments between the two budgets). The Committee’s amendments mostly concern EAGF budget lines. One significant omission is any suggested increase in the budget for the Single Area Payment Scheme (SAPS) which is applied in the newer Member States. The Committee has also proposed to include an additional €€300 million for exceptional market measures. However, the Committee’s amendments are entirely symbolic and without practical significance, given the very small margin remaining under the EAGF sub-ceiling which would not accommodate the additional €2 billion in spending it has proposed.

Source: COMAGRI, Budget Amendments 2021 Budget, 24 September 2020

Earlier use of European Recovery Instrument support for rural development. COMAGRI is on firmer ground in calling for the implementation of the European Recovery Instrument (ERI) support for EAFRD already next year rather than waiting until 2022. Appropriations under this item are intended to cover the financing of specific recovery and resilience measures to address the unprecedented impact of the COVID-19 crisis.

Commissioner Wojciechowski supported this call in his appearance before the Committee in early September. A majority of Member States in the Council also wish to frontload the recovery funds to 2021 and 2022. The Commission’s hesitation on this may be linked to a view that the measures financed in this way should contribute to the green transition and that this requires the implementation of new schemes in the CAP Strategic Plans which will not begin until 2022. In any case, it can argue that it has already front-loaded MFF spending on the EAFRD in 2021 (see discussion above). Commissioner Wojciechowski in his appearance before COMAGRI seemed to link the early release of ERI funds to agreement that the CAP transition period should only last one year. The AGRI coordinators have now agreed to integrate provisions on the management of the NGEU/ERI-funds into the CAP Transitional Regulation. The objective is to merge the two ongoing procedures into a single and final act.

Proposals for pilot projects. The COMAGRI amendments also contain two proposals for new pilot projects to be financed from the budget. Pilot projects and preparatory actions are exceptions to the rule that any EU expenditure requires both entry into the budget and a legal act authorising the expenditure. Here, expenditure can be authorised for initiatives of an experimental nature to test the feasibility and usefulness of an action that might turn into standing EU activities with their own budget lines without a corresponding legal act.

The two pilot programmes proposed by COMAGRI concern the development of non-aversion stunning methods for pigs; and labelling on farming contribution to greenhouse gas emissions. The former would address an animal welfare issue that exposure to high concentrations of CO2 is increasingly used as a stunning method for pigs prior to slaughter, even though it causes acute and unnecessary suffering for pigs. The project is justified because research on alternative methods to allow for better pig welfare at the time of death and that can be used in industrial operations is urgently needed.

The pilot project on introducing an EU labelling highlighting the contribution of farmers to the reduction of GHG emissions through the implementation of environmental schemes supported by the CAP or through the carbon market would put in place three different levels of labelling according to the degree of farmers’ commitments: (1) “Climate-friendly farm” (transitional level towards carbon neutral); (2) “Climate-neutral farm” and (3) “Climate-positive farm”. The idea is to improve the added value of farmers’ efforts to reduce their GHG emissions.

Next steps

The budgetary procedure for the EU’s 2021 annual budget is very delayed this year. It is also greatly complicated by the absence of agreed ceilings for the different budget headings which would normally be agreed as part of the MFF. But agreement on the MFF has also been delayed, in part because of delays by the European Council in reaching conclusions, and also because of the situation created by COVID-19. The Commission made its DB 2021 proposal based on its own MFF proposal in May 2020, but the European Council altered these parameters in its MFF conclusions in July 2020.

The Council, in preparing its first reading, made a purely technical adjustment to the Commission’s figures to incorporate the European Council conclusions. It has postponed establishing its real position until the Commission presents its letter of amendment to the draft budget, which the Council has requested before the end of October. As the Parliament’s budget rapporteur noted in this recent Working Document, in this way the Council has avoided taking any political position on budget priorities (apart from making cuts in Commission staffing).

Parliament expects to adopt its budget position on 11-12 November after which there will be a three-week conciliation period until 7 December to reach agreement with the Council.

This timetable could be disrupted if the German Council Presidency and the Parliament MFF negotiators fail to reach agreement on the MFF and own resources. The European Parliament is holding out for expenditure top-ups on a variety of MFF programmes, legal commitments on the introduction of own resources, improvements on horizontal issues such as mainstreaming climate, biodiversity and gender, as well as a tougher stance on rule of law issues. At the time of writing, the Council Presidency and the Parliament negotiators still seem far apart on many of these issues.

If no political agreement on the next MFF and own resources is reached between Parliament and the Council by the end of October, then the 2021 budget will be adopted based on the automatic extension of the 2020 MFF ceilings and provisions. But the budget totals within these ceilings would still have to be agreed, adding to the uncertainty over the CAP budget in the coming year.

This post was written by Alan Matthews.

Photo credit: European Parliament, used under a Creative Commons licence.

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