Following Brexit, Policy Exchange plans to carry out in-depth research into the future of agricultural policy. It is one area where the Government can now try to enact a favourable change in policy that promotes the interests of the consumers, the producers and the environment in the UK.
Farming and the Common Agricultural Policy (CAP) are at the heart of the EU. It was the European Community’s first policy and is central to its history and institutions. The CAP currently absorbs around 40 per cent of the EU Budget and the EU’s insistence on protecting agriculture through domestic subsidies and the Common External Tariff has played a central part in the lack of progress in multilateral trade liberalisation over the last twenty years. Where the EU has been able to negotiate free trade agreements with other countries, such as Chile and Peru, these are not of sufficient high-quality because they exclude agriculture.
Most advanced economies support their farmers to some degree and an independent UK will probably continue to do the same in some form. However, the EU is unusual in the generosity of its support. The OECD has developed a measure to compare the relative support given to agriculture by consumers and taxpayers (total value of support as a ratio of gross farm receipts) and finds that the EU ratio was 19 per cent compared to 9 per cent in the United States and 1 per cent in Australia.
Essentially people are paying twice over. They subsidise farmers through taxation but also pay higher prices at the checkout because of the Common External Tariff, which applies tariffs and non-tariff barriers to goods from outside the EU. This is estimated to have increased EU food prices by some 20 per cent above world food prices.
Post-Brexit, there should be scope to lower food prices and lower the cost to the taxpayer of helping farmers. The economist, Sir Stephen Nickell, has pointed out that there would be scope for the UK to cut food prices by returning to the policy regime that it used before it entered the EEC in 1973. In giving evidence to the Treasury Select Committee, Sir Stephen explained that the UK had previously enjoyed lower food prices by accepting imports of food at world prices, and used a system of deficiency payments to support the incomes of farming households.
Of course, the policy prescription outlined by Sir Stephen Nickell is based on a standard economic theory that treats the world as flat. It not only assumes a high level of substitutionality for agricultural goods but also that removing trade barriers with the rest of the world will enable the factors of comparative advantage to play out in full. In other words, people will buy from the cheapest and most efficient producer irrespective of distance. This view does not consider other factors that affect trade such as changing personal taste, customs and traditions, and geography. International agriculture is however an extremely competitive sector. There are a great number of foreign producers who would like fairer access to the UK market after Brexit.
There are a number of questions related to a new British agricultural policy. For example, is there a more effective way of reallocating the subsidies provided by CAP to British farmers? Should the level of subsidy be revised? Should there be a maximum limit on the amount of subsidy that an individual farm can receive? How can we use the subsidy system to promote environmental and rural policy aims? What merit goods should the taxpayer consider subsidising such as rural landscapes? What level of tariffs and quotas, if any, should be placed on imported agricultural goods? How will all of this affect housing and planning policies? And from where should we be sourcing our food?
Our research will look at the type of market structure needed for agriculture to maximise consumer welfare; the extent to which existing market failures distorts prices; and the reforms that could be introduced to mitigate the policy failures and inefficiencies that have arisen from existing policy interventions.
To find out more, please email our Director of Research, Warwick Lightfoot: warwick.lightfoot@policyexchange.org.uk