Financial impact of Brexit on the CAP budget of the EU Member States

The financial impact of Brexit can be explained in other words, and from the point of view of the contributions that the United Kingdom made to the CAP budget, by the challenge of absorbing:

– the loss of the UK’s net annual contributions, which is, for the EU budget,  almost €7 billion(€6.6 billion/year on average 2010-2016), and specifically 2,7 billion euros for the CAP;

– The decline in the European Union’s own resources linked to the shrinking of the EU market (less customs duties on lower imports), i.e. €2.8 billion annual average over the period 2010-2016; this fall is irrespective of what could be expected in the forthcoming post-Brexit trade agreement between the EU27 and the UK, and the UK’s possible contribution to EU market access. This contribution could compensate as a whole or partly for the smaller amount of EU own resources.

At this stage of discussions between the EU and the UK on post-Brexit relations, the actual net cost of UK departure from the EU budget is therefore at least €6.6 billion and €9,4 bn at most.

The EU’s own resources which finance 12.4% of the EU budget over the period considered, might face a decrease of €2.8 billion, which might in turn generate a funding shortfall for the CAP of €1.15 billion to be added to the € 2.7 billion mentioned above.

Through the voice of its Commissioner for Budget and Human Resources, the European Commission proposed, under the Financial Perspective 2021-2028:

– that 50% of the cost of Brexit is borne by an effort of major European policies (cohesion and CAP essentially)

– that 20% of the financing needs of the new European priorities (i.e. around €2.5 billion/year) are also financed by margins generated by the so-called major European traditional policies, i.e. some €1.2 billion that would then be earmarked on the annual CAP budget for these new challenges.

Without going into the debate about the acceptability (or not) of a reduction of the CAP budget in view of the economic and territorial challenges that the EU has to address with the leverage of this policy, Farm Europe with this analysis, endeavours to estimate, in an EU27, the cost of the different options mentioned hereafter for each MS, by integrating its contribution to the CAP budget and the financial returns received under the CAP.

In a nutshell, 3 scenarios are analysed in each of the three cases presented here below:

-Brexit net cost for the EU budget of €6.6 bn and for the CAP of €2.7 bn;

– the net cost of Brexit for the EU budget of €6.6 bn (and for the CAP of €2.7 bn) and the financing of the new EU priorities through an additional reduction of €1.2bn in the CAP budget, i.e. a total CAP reduction of €3.9 bn

– “maximum” Brexit cost (loss of own resources linked to the UK market and no compensation in a Brexit post-trade agreement), a loss of €9.4 bn for the EU budget, an uncovered requirement of €3.85 bn under the CAP (€2.7 bn as the end of the contribution of the UK to the CAP + €1.15 bn CAP share of the reduction of own resources) and a financing by the CAP of the new EU priorities for €1.2 bn/year, which amounts to a total of €5.05 bn linked to the CAP.

With regard to the CAP budget of the Member States, for each of the above mentioned three cases, in order to cope with the current challenges, the 3 scenarios presented in this document are:

• Scenario 1:increasing national contributions to maintain the same level of CAP aid received by Member States;

• Scenario 2:decreasing CAP expenditure to compensate for 50% of the net deficit due to withdrawal of the UK from the CAP budget (i.e. Case 1: €1.35 bn for the UK net contribution to the CAP budget; Case 2: €1.35 bn plus €1.2 bn to finance the new EU priorities and; Case 3: €1.35 bn + €1.2 bn + €0.575 bn for the decrease in own resources;

• Scenario 3:to decrease CAP expenditure by the total cost linked to the withdrawal of the UK from the CAP budget (i.e. Case 1: €2.7 bn, Case 2: €2.7 bn + €1.15 bn, Case 3: € 2.7 bn + €1.15 bn + €1.2 bn);

Please note that the calculated impacts are expressed in constant euros.

The relative cost for the MS will then have to be assessed in view of the expected growth rate of the EU economy and the inflation rate that can be projected, while the latest budgetary agreements have renewed the principle of aid under the first pillar of the CAP reduced by the rate of inflation as expressed in constant euros.

These scenarios are examined in terms of their consequences for each EU Member State (changes in national contributions to the EU budget and changes in CAP funds received by the MS).

The consequences can be summarized in, for each one of the scenarios:

– on the one hand, the envisaged increase or decrease in the national contribution to the CAP budget, which will be financed in proportion to the contribution of the MS to the EU budget;

– on the other hand, considering the end of the “special scheme”to finance part of the EU budget not paid by the UK and borne by the other 27 MS at present (the so-called “UK rebate”) with the “rebate on rebate”granted to certain MS – all contributions to the CAP budget are now provided by the MS according to the common definition of EU Budget funding allocation;

– lastly, the impact on CAP Budget expenditure (CAP aids received by farmers in each MS).

A last part of this note is aimed at shedding light on the impact of each of the simulations on the agricultural incomes of the various Member States.

 

I – United Kingdom’s position in the EU budget

1 – MS contributions to the EU budget: the net cost of Brexit (in €bn)

 

2 – Impact of the UK’s departure on the EU’s own resources

The table below shows the own resources collected in the EU28 and those collected in the UK over the period 2010-16. That is an average of 2.8 billion euros a year that has been collected via the UK.

 

II – Impact on the EU27 Member States’ contributions to the EU budget following the UK departure, in a pattern of lowering the EU budget equal to 100% of the tied loss: the impact of abandoning the specific “rebate on rebate”

In the context of a reduced budget equal to the full net cost of the UK departure, the cost for national budgets results from applying a new allocation key to fund the historic “rebate”, which will be no longer the “rebate on rebate” key but rather the usual allocation method of the MS to the EU budget.

Indeed, even without compensation by the 27 Member States of the EU for the net cost of Brexit, the distribution of allocations from the EU27 to a reduced EU budget would be modified. This change translates, logically, into a decrease in contributions for the majority of Member States, and an increase for the four MS that benefited from the “rebate on rebate”scheme.

The table below shows the impact, by Member State, in terms of its budgetary contribution to the CAP budget. The origin of the British rebate and therefore the existence of a specific scheme “rebate on rebate”being linked to the CAP, the full cost or benefit for the MS as a result of the end of the specific scheme is included in this study and fully born by the national contributions to the CAP budget.

 

III – Possible Brexit impacts on the CAP: CASE STUDIES

1 –Brexit total net cost of €6.6 bn, net cost for the CAP of €2.7 bn

A) Scenario 1: The CAP budget increases by 2.7 billion euros

Assuming a budget increase of €2.7 billion to fully offset the decline in the UK’s net contribution to the CAP budget, the cost for national budgets is the addition of the new allocation scheme to finance the “rebate” (no longer the “rebate on rebate” scheme but the normal allocation scheme of the MS to the budget cf. II) and the financing of the additional 2.7 billion by the GDP allocation key. CAP envelopes received by the 27 MS do not change from those currently allocated.

In this scenario, the CAP budget represents 38.6% of the EU budget.[1]

B) Scenario 2: The CAP budget decreases by 1.35 billion euros(50% of the UK’s net contribution to the CAP budget)

In the context of a budget decrease of €1.35 billion that is half of the UK’s net contribution to the CAP budget (according to the position put forward by the Commission), the cost for national budgets is the addition of the new allocation scheme to finance the “rebate” (no longer “the rebate on rebate” but by the usual allocation key of the MS to the budget), and national contributions to finance the other 50% of the UK net contribution to the CAP, which remains at their whole expense (€1.35 bn) and the decline in CAP aids received in the various MS due to the shrinking of the CAP budget of €1.35 billion.

In this scenario, the CAP budget represents 35.6% of the EU budget.

C) Scenario 3: The CAP budget decreases by 2.7 billion euros

In the context of a budget cut of €2.7 billion, thus the entire UK net contribution to the CAP budget, the cost for national budgets results from the addition of the new allocation criteria to finance the “rebate” (no longer “the rebate on rebate” but by the usual allocation key of the MS to the budget) and of the decrease of the CAP aids received in the different MS due to the reduction of the CAP budget of 2.7 billion.

In this scenario, the CAP budget represents 34.6% of the EU budget.

 

2 – Brexit total net cost on national contributions of €6.6 bn, Brexit net cost on national contributions to the CAP of €2.7 bn & CAP funding of new EU priorities of €1,2 bn (20% for new budget priorities) – i.e. a total of €3.9 bn in relation to the CAP

A) Scenario 4 : CAP budget increases by €3.9 billion(maintaining CAP aid)

Assuming a budget increase of €3.9 billion to the CAP budget, the cost for national budgets is the addition of the new allocation criteria to finance the “rebate” (no longer “the rebate on rebate” but by the usual allocation key of the MS to the budget cf. II), the financing of the additional 2.7 billion, by the GDP allocation key, and €1.2 bn of the CAP budget that the Commission wishes to use for new priorities. CAP envelopes received by the 27 MS do not change from those currently allocated.

In this scenario, the CAP budget represents 39.5% of the EU budget.

B) Scenario 5: The CAP budget decreases by 2.55 billion euros(€1.35 bn + €1.2 bn)

In the context of a budget decrease of €2.55 billion, half of the UK’s net contribution to the CAP budget (€1.35 bn) and funding from the CAP new EU priorities (€1.2 bn), the cost for national budgets is the addition of the new allocation key to finance the “rebate” (no longer “the rebate on rebate” but by the usual allocation key of the MS to the budget) and national contributions to finance 50% of the UK net contribution to the CAP, which remains at their expense (€1.35 bn) plus the drop in CAP aids received in the various MS due to the shrinking of the CAP budget by €2.55 billion.

In this scenario, the CAP budget represents 34.7% of the EU budget.

C) Scenario 6: The CAP budget decreases by € 3.9 billion

In the context of a budget decrease of €3.9 billion, thus 100% of the UK’s net contribution to the CAP budget (€2.7 bn) and funding from the CAP new EU priorities (€1.2 bn), the cost for national budgets is the addition of the new allocation key to finance the “rebate” (no longer “the rebate on rebate” but by the usual allocation key of the MS to the budget) and the decrease in CAP aid received in the different MS due to the shrinking of the CAP budget of €3.9 billion.

In this scenario, the CAP budget represents 33.7% of the EU budget.

 

3 – Brexit total net cost of €6.6 bn on national contributions, plus a decrease in EU own resources of €2.8 bn (contraction in the EU market without the UK), i.e. €9.4 bn in total. Maximum net Brexit cost for the CAP of €3.85 bn ( 2.7 bn linked to the CAP budget + 40% of the decline in own resources) + CAP funding of new EU priorities of € 1.2 bn, thus €5,05 bn at stake for the CAP.

A) Scenario 7: The CAP budget increases by €05 billion(€3.85 bn + €1.2 bn)

In the context of a budget increase of €5.05 billion to compensate in full for the decrease in net CAP contribution (€2.7 bn) and the share of own resources (€1.15 bn) collected via the UK for the budget of the CAP, as well as the €1.2 bn of the CAP budget that the Commission wishes to use for new priorities, the cost for national budgets is the addition of the new allocation key to finance the “rebate” (no longer “the rebate on rebate” but the normal contribution key of the MS to the budget cf. II) and the financing of the additional 5.05 billion euros, by the GDP allocation key. CAP envelopes received by the 27 MS do not change from those currently collected.

In this scenario, the CAP budget represents 40.4% of the EU budget.

B) Scenario 8: The CAP budget decreases by €125 billion(€1.35 bn + €0.575 bn + €1.2 bn)

The table below shows the consequences of Brexit for the Member States at the level of the CAP budget. In the context of a budget decrease of €3.125 billion, which results from half of the UK’s net contribution to the CAP budget (€1.35 bn), 50% of the decrease in the resources from the UK to the CAP budget (€0.575 bn) and CAP funding of the new EU priorities (€1.2 bn), the cost for national budgets is the addition of the new allocation key to finance the “rebate” (no longer by the “rebate on rebate” but by the normal contribution key of the MS to the budget), additional national contributions to finance 50% of the net contribution of the UK to the CAP budget, which remains at their expense (€1.35 bn) and 50% of the UK’s own resources collected missing, plus the drop in CAP aid received in various MS due to the shrinking of the CAP budget of €3.125 billion.

In this scenario, the CAP budget represents 34.2% of the EU budget.

C) Scenario 9: The CAP budget decreases by 5.05 billion euros

The table below shows the consequences of Brexit for the Member States at the level of the CAP budget. In the context of a budget decrease of €5.05 billion, caused by the net contribution of the UK to the CAP budget (€2.7 bn), the decrease in resources from the UK to the CAP budget (€1.15 bn) and CAP funding of the new EU priorities (€1.2 bn), the cost for national budgets is the addition of the new allocation key to finance the “rebate” (no longer by the “rebate on rebate” but by the normal allocation key of the MS to the budget) and the decrease of the CAP aids received in the different MS due to the tightening of the CAP budget of €5.05 billion.

In this scenario, the CAP budget represents 32.8% of the EU budget.

IV. Impacts on farms incomes of Brexit of the 3 different cases studied

1 –Brexit total net cost of €6.6 bn, net cost for the CAP of € 2.7 bn (Scenario 1 to 3)

This table presents the impact of the scenarios on the average farm net income per Member State, in the Case n°1. This is a low approximation of impact as only the share of direct payments has been taken into account – farm income at EU level would decrease between at least around 2 and 4%– with a constant policy framework.

2 –Brexit total net cost of €6.6 bn, Brexit net cost for the CAP of €2.7 bn and CAP funding of new EU priorities of €1.2 bn (Scenario 4 to 6)

This table presents the impact of the scenarios on the average farm net income per Member State in the Case n°2 – farm income at EU level would decrease between 3,5 to 5,2%.

3 – Brexit total net cost of €6.6 bn, plus a decrease in own resources of €2.8 bn (tightening of the EU budget without the UK), which is €9.4 bn in total. Maximum net Brexit cost for the CAP of €3.85 bn. CAP funding of new EU priorities of € 1.2 bn (Scenario 7 to 9)

This table presents the impact of the scenarios on the average farm net income per Member State in the Case n°3 – farm income at EU level would decrease by 4 to nearly 7%.

 

[1]This rate is the ratio between the average 2010-16 CAP budget, UK excluded, and the new average EU budget, i.e. EU average budget 2010-16 excluding UK + 12 billion for new aids.