Appendix II - The Distributional Pattern of Direct Payments to Farm Households

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Introduction

To date, the distributional impact of direct payments to farm households has not been adequately explored. The aim is to see if the distributional impact 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. There are several ways of measuring this. One way is to express the subsidy as a share of income, a progressive subsidy is then one which contributes a higher share to low-income households than to households with higher incomes. Another measure of the distributional impact is the comparison of the absolute level of subsidy going to a low-income household with that going to a high-income household. A third measure is simply the calculation of where most of the funds disbursed go, giving the split between those going to upper and lower income groups. In this assessment of the distributional impact of direct payments, we will be using all these measures.

Only partial studies have been undertaken to date. Expressed as a share of income, some components of the direct payments (the Sheep and Cattle Headage Payments, i.e. the Compensatory Allowances) were found to be broadly progressive but in a rather arbitrary manner. This was measured in relation only to “Family Farm Income” of farm households, that is, in relation to the income that was derived merely from the farm. As the data stood, this was the only analysis possible. However, on almost two thirds of farms, the farm holder and/or spouse has some off-farm income derived from another source and, on over a third of farms, the holder and/or spouse has an off-farm job (Teagasc, 1995). Therefore farm income is exceeded by total income, to a considerable degree in some cases, and it is in relation to this total income that progressiveness of direct payments should be judged.

This study aims to rectify the shortcomings of previous analyses by investigating the distribution of direct payments relative to total income of farm households. The following section outlines some of the main items of total income. Next, the distribution of direct payments to different income groups (or deciles, defined below) is presented, both in value terms and as shares of income. A further breakdown by farm type follows, after which a yardstick is used for judging the distributional pattern of direct payments. Finally some conclusions are drawn.

All figures in this chapter relating to money flows are expressed per household per week, unless otherwise stated.

The Total Income of Farm Households

A summary of the elements making up total income of farm households is given in Table 1. The data were compiled by the Central Statistics Office (CSO) and Teagasc - the CSO having selected from its Household Budget Survey the sample that Teagasc uses in its National Farm Survey. However, only in the latter survey is detailed information on receipts of direct payments sought so that the results of the two surveys had to be merged.

Having seen that total income is the item of interest, there is in fact a choice of two measures of total income, one being Gross Income, the other being Disposable Income (which is Gross Income less direct taxes). While Disposable Income is the most relevant measure, Gross Income is perhaps the more reliable one. Table 1 shows the components of these measures of income, in £ per week. The right hand column expresses items as percentages of Disposable Income, which is shown at the bottom of the table. Some 34 per cent of disposable income is earned from non-farm sources, as wages/salaries in off-farm jobs or as self employed non-farm income (item nos. 57 and 58). Earned income from Self-Employed - Farming (item no. 59, Family Farm Income) accounts for 57 per cent of disposable income. Retirement pensions (non-State), investment, property and other direct income, and own produce valued at retail prices account for 7 per cent. The addition of Total State Transfers (B) gives Gross Income. Finally, subtraction of Total Direct Taxation (C) gives Disposable Income. Given that Gross Income is nearly twice Family Farm Income and Disposable Income exceeds it by three quarters, the shortcomings of analysing direct payments merely in relation to Family Farm Income are evident.

Direct payments can be broadly grouped into two categories. First there are those that aim to maintain viable incomes , thereby preventing further depopulation and conserving the countryside. They can be classed as mainly distributional measures. These are Cattle Headage, Sheep Headage (both of which are Compensatory Headage Allowances: part of the Structural Funds) and the Suckler Cow Premium. To the extent that the Ewe Premium favours disadvantaged areas, by means of the higher limits on eligible numbers, it is somewhat distributional in character also. Secondly, the remainder includes those measures which effectively compensate farmers for a change of policy regime. In particular, Set Aside and Crop Compensation were designed to make up for price reductions. Though this second group is not strictly distributional in design, this chapter judges all the direct payments by distributional standards.

Value of Direct Payments by Decile of Total Income

In the breakdowns that follow, both measures of total income will generally be used in turn, that is Gross Income and Disposable Income, where they happen to be available. It should be remembered that income of farmers tends to vary from year to year and that these results all refer to the years 1994-5.

Figure 1 gives the value of direct payments per week per farm household, broken down by decile of (a) Gross Income and (b) Disposable Income. It should be borne in mind that the results reported here are based on a survey of 736 households, so that there are in fact 73 or 74 households in each decile.

Despite a few reversals, the pattern shows direct payments per household rising with income, from about £45 per week to households in the lowest decile to £160 in the highest. The large payments to high-income deciles comprise Crop Compensation, and Beef, Slaughtering and Ewe Premium payments. Low-income deciles benefit largely from the Suckler Cow Premium, Cattle Headage and the Ewe Premium.

It is worth noting in Figure 1 (a and b) that the sum of subsidies per household from Cattle Headage, Ewe Premium and Sheep Headage (the three top portions of each vertical bar) and the Suckler Cow Premium combined increases somewhat over the decile range. As already mentioned, these are the measures that are generally viewed as being distributional in character, though the Ewe Premium only to some extent. Each of them increases in value per household with higher incomes, except Sheep Headage, which is one of the smallest components of direct payments.

From the data, the distributional characteristic of direct payments as a whole can be summarised by looking at the five lower and five upper deciles. The total value of receipts of direct payments splits 37/63 per cent respectively, when using Gross Income deciles. The proportions are similar, 38/62 per cent, when using Disposable Income deciles. In other words the low-income half of farm households receive a little over a third of the funds that are disbursed as direct payments, and the upper income half of households receive just under two thirds.

On the basis of the study so far, not only do the total direct payments give significantly more per household to the well off but, Sheep Headage payments apart, even the intentionally distributional schemes do also.

Direct Payments as percentages of Total Income.

We next view direct payments as percentages of total income, to see whether the percentage declines with higher deciles. Figure 2 shows the percentages, in relation again to (a) Gross Income and (b) Disposable Income. There is indeed a steep decline from the lowest to highest decile, from 80 per cent down to 16 per cent for (a), and from 96 per cent down to 18 per cent for (b). This indicates that direct payments are progressive when expressed in relative terms.

That said, the shares are still high at high incomes. Direct payments constitute some 20% of disposable income for households in the top three deciles, for example.

However, while the descent to the second decile is very steep, from there on the descent is rather gentle, indeed the fourth through sixth deciles are almost flat and the seventh through tenth are barely less so. The pattern is more erratic in (b), where disposable income is used. This may be due to unreliability of the data, or to the fact that households in the third decile of disposable income, in particular, do indeed receive more payments than the pattern for the remainder would lead one to expect.
Turning again to the four measures that are viewed as having distributional features, that is the Cattle Headage, Ewe Premium (to some extent), Sheep Headage, and Suckler Cow Premium, these are indeed seen in Figure 2 to decline steeply over the decile range. These include the top three segments of the vertical bars (the Suckler Cow Premium is lower down), and indeed they decline much more steeply than the other segments of the bars, which decline rather little.

Direct Payments as percentages of Disposable Income by Farm Type

It has been possible to derive direct payments as percentages of disposable income by Farm Type. Unfortunately, however, some of the numbers of households of certain farm types in the sample are quite small. In particular, farms involved in Dairying and Field Crops (Farm Type 5) are under-represented with only three farms (seven before adjustment), and Pig and Poultry farms (Farm Type 8) with only four farms. Results for these two categories are therefore not reliable. A further category called “Unclassified”, which is separate from “Other” (Farm Type 0), has been omitted here for lack of numbers. By consequence, the other seven farm types are correspondingly well represented.

Figure 3 shows the value of Direct Payments (a) by Farm Type and (b) as a percentage of Disposable Income by Farm Type. Farms involved in growing Field Crops, that is the categories called:

• Dairy and field crops
• Cattle, sheep and field crops
• Field Crops

which received Set-Aside and Crop Compensation, have the highest direct payments

The low direct payments to Dairying illustrate the fact that direct payments are but the visible part of support to farmers. As pointed out elsewhere virtually all support to this sector comes via price-raising mechanisms and not through direct payments.

The Distributional Pattern of Direct Payments seen in Context

We have seen that direct payments, while declining as percentages of income overall, nevertheless appear to decline steeply after the first decile but then seem to be quite generous towards high-income households. The questions remain: how steep and how generous? If one were assessing them purely in distributional terms, is there a yardstick with which to compare the slopes of the percentage lines in Figure 2?

There is a yardstick, which is arguably the result of a conscious choice made via the democratic process. This yardstick is the pattern of Social Welfare Benefits, voted annually by the Oireachtas. These Benefits are summed under the heading “State Transfers”, and are published, broken down by Gross Income, in the Household Budget Survey 1994-95. It is therefore possible for us to compare direct payments per farm household with Transfers per average household in the State by graphing them both against Gross Income. This is shown in Figure 4, (a) in £ per week per household and (b) in percentages of Gross Income.

 Figure 4a highlights the difference between the two series: the value of direct payments generally rises with Gross Income while State Transfers fall. Incidentally, the low values of State Transfers at the low end of the Gross Income scale (on the left hand side) may reflect the fact that take-up of payments by low-income households is sometimes poor, as well as perhaps the fact that some of these households have low incomes that are temporary. These considerations beset figures on direct payments also. A more important explanation of the low State Transfers at low incomes is the fact that these would tend to be households with few inhabitants, as the figures here are not adjusted for household size.

Figure 4b shows the contribution to Gross Income of direct payments per farm household and State Transfers per average household in the State. There are two major contrasts. Direct payments are much more generous to households on higher incomes. State Transfers, which decline much more steeply, are more supportive of households with low incomes.

In fact farm households receive State Transfers in addition to direct payments. Information on receipts of State Transfers by farm households broken down by decile of income is not immediately to hand to supplement the data here on direct payments. From information published in the Household Budget Survey, one can say that the average farm household receives £41.72 per week compared with the average for all households in the State which receive £57.54. As Table 1 showed, the average farm household’s direct payments and State Transfers added together accounted for about 40 per cent of Disposable Income.

Summary and Conclusions

To date, analyses of direct payments have only been able to view them in relation to Family Farm Income, which we saw to be 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. The main findings are:

(i) 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% of funds disbursed as direct payments, the upper half receiving the remaining 62%.
• 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% of Disposable Income, but the decline slackens so that for the top three deciles the share is still some 20%.

(ii) 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% 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.

(iii) Other observations

• 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 (Figure 4a). 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.

Central Statistics Office (1997): Household Budget Survey 1994-95, Volume 1, Detailed Results for All Households. Stationery Office, Dublin.
Fitzpatrick Associates (1997): Operational Programme for Agriculture, Rural Development and Forestry 1994-1999, Mid-Term Review Report. Report to the Community Support Framework Evaluation Unit.
Honohan, P., ed. (1997): EU Structural Funds in Ireland - A Mid-Term Evaluation of the CSF 1994-99, ESRI, PRS No. 31, Dublin.
Keeney, M., A. Matthews and J. Frawley (1997). “The Distribution of Direct Payments in Irish Agriculture”, paper read to the Economic Policy conference, Dublin Economic Workshop, at Kenmare, October 17-19.
Stationery Office (1994): Operational Programme for Agriculture, Rural Development and Forestry, 1994-1999. Dublin.
Teagasc (1996): National Farm Survey 1995. R. Power and M. Roche, Dublin.