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| I. | The scheme seems to have made a significant contribution to maintaining relative farm incomes per farm in Disadvantaged Areas. |
| II. | Although the scheme may have helped to slow down the rate of population decline, this decline in Disadvantaged Areas continues. The population is ageing and younger people continue to look for work in urban centres outside Disadvantaged Areas. |
| III. | The scheme had positive and negative environmental effects: to the extent that it slowed down the rate of population decline, it contributed to maintaining farming practices and farms which are valued by society as a whole; on the other hand, the scheme has contributed to widespread ecological damage through overgrazing (see Case Study 5.1). |
| IV. | In 1993, over 103,000 farmers were involved in headage schemes, costing £111 million. The vast majority of farmers received relatively small payments: about 80% of recipients of the Cattle Headage Scheme received less than £1,360 in 1993, and 60% of recipients of Sheep Headage received less than £500. |
| V. | It appears that the distribution of headage payments is relatively more equitable than premium schemes (e.g. Ewe Premium, beef premiums). |
| VI. | Cattle farmers appeared to be the most heavily dependent on headage payments, which accounted for over 40% of family farm income, while around 30% of family farm income was contributed by the scheme to sheep farmers. |
| VII. | Headage payments are relatively progressive in terms of farm size, in that on farms with low stocking rates, the contribution of headage to family farm income is much more important than on farms with high stock numbers. However, this is not so apparent when all subsidies are considered. |
| VIII. | Headage contributes more to income support than to development, and could be viewed as impeding development because it slows ‘structural adjustment’. In other words, farm sizes remain small, and relatively undeveloped because older, more conservative farmers tend not to enlarge their farms to a more economically viable size and tend not to intensify and improve their land. |
Kearney et al. recommended that :
| I. | If changes were to be made, the scheme could be biased towards younger farmers who have the capacity to develop; or that it could take the form of support for farm-related activities or activities outside mainstream agriculture so as to diversify away from core farming. |
| II. | The objective of maintaining population in rural areas needs to be amended, in favour of focusing on the ability of headage payments to support the incomes of low-income households; income support payments should be made to farmers in the greatest need, which would involve adjusting the parameters of the scheme and changing the terms of entitlement to payments. The new ceiling on headage payments of £4,000 announced by the government in 1998 appears to be an acknowledgement that the scheme needed to be better targeted. The IFA was reported to be critical of this new 'ceiling', stating that it would impact severely on 1,200 farmers who depend on headage payments for their incomes (Irish Farmers' Journal, 7 Feb. 1998). |
| III. | The consultants suggested that a threshold of total household income could be used as a cut-off point for payments, and which would encompass, among other things, the off-farm labour income of the operator and partner and could be considered as an alternative. |
| IV. | Environmental cross-compliance, in order to overcome the problem of environmental damage, and including modifications to the REPS (referred to in Chapter 4.1). This appears to be another recommendation taken on board by the Department of Agriculture. The consultants anticipated that zero stocking levels could well be the recommended management practice for severely degraded areas. |
The Economic and Social Research Institute (ESRI), a state-sponsored body, published its mid-term review of the Community Support Framework for EU Structural Funds (Honahan, 1997), in which it examined the Compensatory Headage Scheme (described in Chapter 1.3).
The Compensatory Headage Scheme accounts for almost 50% of the total EU Structural Funds allocated to the Operational Plan for Agriculture, Rural Development and Forestry (OPARDF): £448.98 million. The average annual headage payment comes to about £1,300 per farm, equivalent to 30% of the farm income for these farms. The ESRI notes that headage payments may have slowed the decline in farm population by a small amount, but found it hard to argue that they had any developmental function. ‘For the present, the scheme must be seen as a redistributional scheme, and a rather arbitrary one at that’. The ESRI report mentions the conflict in objectives between the scheme and the Early Retirement from Farming Scheme. The former is seen as having no developmental function, while the latter is viewed as encouraging more enterprising units. The ERSI states that ‘because some of the areas where income supports are needed happen to be in areas that are environmentally vulnerable, production grants evidently are not the appropriate route for delivering income support. They should be replaced by transferring some of the funds to support environmentally desirable objectives or at least decoupled from stock numbers’.
Keeney et al. (1997) observed that direct payments to farmers have become the single most important source of farm income, contributing 44% of farm income in 1996. Before the CAP reforms in 1992, direct payments were explicitly redistributive, designed to compensate low income farmers. After the CAP reforms, compensatory payments have gone largely to bigger, better-structured and higher-income farms. The authors state that the notion of farmers being compensated for price cuts in the past will wear increasingly thin, and the EU may have to find other ways to support farmers. Linking direct payments to explicit conditions on the way farming is practised (i.e. 'cross-compliance') could become an acceptable way for the EU to support farmers in the future. Keeney et al. observed that in the next World Trade Organisation round scheduled to begin in 1999, the current direct payments remain vulnerable to attack, because of the extent to which they are linked to production. If direct payments become no longer related directly to production (known as decoupling), then, they suggest, ‘the argument that they should be seen as social policy instruments financed by national governments will gather force elsewhere in the EU’.
(See full text and tables in Appendix II)
Since direct payments play such an important part in maintaining farmers’ incomes, the consultants wanted to look at how agriculture payments worked as social policy instruments. A study was undertaken by the ESRI for this report to examine the distributional pattern of direct payments to farm households. The aim was to see if the distributional impact of agriculture schemes and payments is progressive or otherwise. A subsidy scheme is said to be progressive if it leaves low-income households better off than high-income households as a result.
To date, analyses of direct payments have only been able to view them in relation to Family Farm Income, which is but part of the total income of farm households. By co-ordinating data gathered in the National Farm Survey 1995 and the Household Budget Survey 1994-95, direct payments can now be viewed in relation to Gross Income or Disposable Income, as was recommended in the recent report on the EU Structural Funds (Honahan, 1997). The main findings are:
Taking all direct payments together:
Looking at the value of receipts by income group of direct payments as a whole, it is seen that these payments increase strongly with higher incomes. From the lowest to the highest income group the increase is over threefold, from about £50 to over £150 per household per week.
Splitting the total number of farm households in half, with lower incomes in the one half and higher incomes in the other half, it is found that the lower half receive 38 per cent of funds disbursed as direct payments, the upper half receiving the remaining 62 per cent.
It is only when viewed as relative contributions to income that direct payments could be called progressive in distributional terms. Direct payments do indeed constitute a higher share of income of the lower income groups. This share declines steeply from the lowest income decile, where it is 80 per cent of Disposable Income, but the decline slackens so that for the top three deciles the share is still some 20 per cent.
Schemes with distributional aims:
Only a few of the schemes, however, were set up with the intention of alleviating low incomes. These are the three measures, Cattle Headage, Sheep Headage and the Suckler Cow Premium and perhaps also, to the extent that the limit on eligibility is higher in disadvantaged areas, the Ewe Premium. These four schemes give about £30 per week per household in the lowest income group, rising to about £60 per week for the highest income group.
Excluding the Ewe Premium, the three distributional measures (Cattle Headage, Sheep Headage and Suckler Cow Premium) give about £20 per week per household in the lowest income group, rising to some £30 per week in the highest income group. Hence, even these schemes give more to the better off.
Only Sheep Headage, which is one of the smallest components of direct payments at less than 4 per cent, gives more in value terms per household to the lower half of the income range.
Taking the three distributional schemes again and looking at their contributions to income expressed in relative terms, they constitute some 40 per cent of income of the lowest income group falling to some 4 per cent of income in the highest income group. Therefore they do indeed aid low-income households considerably more in relative terms. The above-mentioned report on the Structural Funds observed that the Headage payments were broadly progressive when viewed as a proportion of Family Farm Income. We can now state that this is still the case when viewed as a proportion of total income, though as mentioned the actual amount paid per household in higher income groups is higher.
Analysis by Farm Type shows that households which gain most from direct payments are those involved in producing Field Crops, through receipt of Set Aside and Crop Compensation. Next, farms in the category ‘Other’ and Sheep farms receive sizeable payments in the form of Ewe Premium (Figure 3, a and b).
A possible yardstick for measuring the extent to which direct payments can be called distributional is to compare them with ‘Total State Transfers’ which the State votes annually to correct income distribution within society. Compared with this yardstick, direct payments give lower support to low-income households, and higher support to high-income households. This applies in both value and percentage terms. However, unlike with State Transfers, the actual value of direct payments per household rises with household income while State Transfers, which are partially means-tested, decline with higher incomes.
In sum, the regime of direct payments pays more to those with high incomes. It does not exhibit a good distributional pattern by reference to society’s revealed choice of intervention to correct income distribution generally, though this of course is not the objective of many of the components of direct payments. However, even the schemes which are distributional in aim pay more to higher income groups, with the exception of the relatively small Sheep Headage scheme.
Where alleviation of need is the aim, more integration of the farming sector into the Social Welfare system might be worth considering as an option for policy. Where need is not an issue, the question which is increasingly asked in order to justify continued transfers from the rest of society (in mainland Europe or Ireland) is: what other societal benefits are being obtained in return for taxpayers’ outlays? Fair treatment of a section of society which has suffered a change of regime can be a justification, but tying the payments to output is not the only route. The incentive effects of such a route were under-estimated, as frequently happens. Incentive effects, combining taxation of harms and subsidies to societal benefits, will need to be considered in devising the solution.
The full text of this study, including supporting figures and tables, is contained in Appendix II.
| I. | The Compensatory Headage Scheme has been reviewed in two reports by or for state bodies (see Sections 7.1 and 7.2). In both reports, the scheme has been shown to contribute to environmental damage because the payments are linked to production. |
| II. | Since the 1992 CAP reforms, one report has indicated that compensatory payments have gone largely to bigger, better-structured and higher-income farms (see Section 7.3). This report also states that compensatory payments directly linked to production remain vulnerable to attack in the forthcoming World Trade Organisation round in 1999. |
| III. | The ESRI study for this report (see Section 7.4) indicates that higher income farmers receive proportionately more direct payments than lower income farmers. This does not therefore demonstrate an ideal distributional pattern. The ESRI study proposes that greater integration with the social welfare system might be worth considering, and also refers to the need to justify the spending on direct payments according to the benefits to society, including social and environmental benefits. |
| IV. | The changes proposed in Agenda 2000, if agreed, should allow the Government to tailor EU direct payments to specific social and environmental objectives in Ireland. A measure of the Government’s commitment to both these objectives would the extent to which disadvantaged farmers in areas of high natural value are supported under this proposed new regime. |
References
Honahan, P (Ed.) (1997) Mid-Term Review of the Community Support Framework.
Economic and Social Research Institute, Burlington Road, Dublin.
Kearney, B., Boyle, G., and Walsh, J. (1996) Evaluation of Compensatory
Allowances Scheme in Ireland. Final Report to the Department of Agriculture,
Food and Forestry. Unpublished.
Keeney, M., Matthews, A., and Frawley, J. (1997). The distribution
of direct payments in Irish agriculture. Paper read to the Economic
Policy Conference, Dublin Economic Workshop, at Kenmare, October 17-19,
1997.
