Agricultural policy reform in England and the 2024 UK budget

UK farmers are preparing to protest tomorrow November 19th outside Parliament against inheritance tax changes in the new Labour Government budget announced last month. They claim these changes will have a devastating impact on family farm businesses. Perhaps surprisingly, the accelerated phase-out of direct payments also announced in that budget has not been the focus of attention. In this post, I discuss the phasing out of direct payments, leaving the inheritance tax issue to one side.

The UK has been preparing and implementing its post-Brexit agricultural policy since 2018 with the most significant changes taking place in England among the four UK countries. The broad outlines were set in the White Paper Health and Harmony: the future for food, farming and the environment in a Green Brexit published in February 2018 when Michael Gove was the Secretary of State for Environment, Food and Rural Affairs in the UK Conservative government. This formed the basis for a public consultation that eventually led to the passage of the Agriculture Act 2020 in the UK. 

The promise was that leaving the EU would allow the UK to “design a more rational, and sensitive agriculture policy which promotes environmental enhancement, supports profitable food production and contributes to a healthier society.” There was particular criticism of the EU system of area-based direct payments under the Common Agricultural Policy. “… a system of subsidy skewed towards those with the biggest landholdings has kept land prices and rents high, prevented new talent coming into farming and held back innovation.” 

Instead, the White Paper promised to ensure “that public money is spent on public goods”. A new Future Farming and Countryside Programme, focused on improving the environment, protecting the countryside, improving the productivity of the farming sector and improving animal health and welfare, has replaced the CAP in England. A principal innovation in the new Programme was an Environmental Land Management (ELM) scheme which would pay providers for delivering environmentally beneficial outcomes and provide support for farmers and land managers in the move towards a more effective application of the ‘polluter pays’ principle. 

The introduction of the ELM scheme is proving to be a rather bumpy ride for English farmers, but that is also not the topic of this post. Here I focus on the progress in phasing out area-based direct payments, highlighting in particular the acceleration in the phase-out announced by the Labour Government in its recent budget. For those of us in the EU, developments in England are extremely relevant as the direction of policy there is what many advocate for the EU. 

For those interested in the broader picture, there is a useful summary oversight of the changes in England’s agricultural policy in this House of Commons Library insight earlier this year and a more detailed review in the House of Commons Library paper Farm Funding: Implementing New Approaches published in March 2023. Although there has been interest by political scientists and lawyers in UK agricultural policy post-Brexit (for example, see the book The Governance of Agriculture in post-Brexit UK or the paper by Greer and Grant, 2023), there has been relatively little interest by agricultural economists (though see this early 2020 contribution by Berkeley Hill). I hope this post might stimulate further work on what is undoubtedly a far-reaching experiment. 

Planning for England’s agricultural policy post-Brexit

The UK withdrew from the EU on 31 January 2020 and the transition period (or implementation period as it was called in the UK) came to an end on 31 December 2020, During this period EU law continued to apply in the UK and the UK remained part of the EU’s single market and customs union. When this ended, the White Paper promised an ‘agricultural transition period’ in England to give farmers time to prepare for the new trading relationships and the new post-Brexit environment land management system.

It proposed that, in England, direct payments would continue during the ‘agricultural transition’. However, to free up funds to support farmers to prepare for change, the White Paper proposed to apply reductions to direct payments, “starting with those receiving the highest payments, to fund pilots of environmental land management schemes and to help farmers unlock their full potential for sustainable production”. As future agricultural policy intended to provide an enabling environment for farmers to improve their productivity and become profitable and competitive, the White Paper proposed to phase out direct payments completely by the end of the agricultural transition period. Defra published Farming for the future: Policy and progress update in February 2020 which provided additional detail on how it envisaged proving future financial assistance to the industry as well as setting out the plans for the reduction in direct payments in 2021.

The Agriculture Act 2020 provided further details. It directed that direct payments to farmers would be phased out starting in 2021 over a seven year period during which the new environmental land management schemes would be phased in. So the last year in which direct payments will be made is 2027. The Act did not set out the trajectory for the reduction in direct payments, which was left to Ministerial regulation. 

Clause 1 of the Act specifies the specific purposes for which financial assistance can be granted to farmers (Table 1). It also required that Ministers set out multi-annual plans about how they intended to use their financial assistance. The first multi-annual plan was published in 2021 for seven years, and beyond that plans must be of at least five years’ duration. Amendments to the Act during its passage included a requirement for Ministers to consider the need to encourage the production of food in England in an environmentally sustainable way, and to report on food security at least once every five years. 

As well as requiring the phasing out of direct payments by 2027, the Act introduced two further elements. The first was ‘delinking’ meaning that the link between the payment made and the area of farmland managed by the farmer would be removed. Until delinking, payments were made to English farmers under Basic Payment Scheme (BPS) rules based on a farm’s entitlements with a uniform entitlement rate and requiring eligible land to be at the farmer’s disposal. Progressive reduction rates were then applied to farm payments calculated in this way. The BPS rules applied for the years 2021-2023, while delinked payments are made in the years 2024-2027. 

Provision was also made for payments to be made in a lump sum which was available to farmers in 2022 who agreed to exit farming under the Lump Sum Exit Scheme. Farmers could receive their reference amount (based on their average BPS payments in the years 2019-2021) multiplied by 2.35. The reference amount was capped at £42,500 meaning that the maximum lump sum that a farmer could receive was £99,875. 

Greening obligations attached to direct payments were removed in 2021, while all remaining cross-compliance obligations were eliminated when payments were delinked in 2024.

Phasing-out direct payments 2021-2024

Shortly after the passage of the Agriculture Act 2020, Defra published an updated plan, The Path to Sustainable Farming: An Agricultural Transition Plan 2021 to 2024. This set out plans for a range of measures as part of the ELM scheme, including initiatives to increase biodiversity, restore landscapes, promote animal welfare and increase productivity through investment in new equipment and technology. An update to this Plan was published in January 2024 that promised to introduce premium payments for more targeted agri-environment-climate actions. The Transition Plan also set out the progressive reductions to be applied to direct payments for the following four years (Table 2). The reduction for the highest band (>£150,000) was not as dramatic as shown in the table as the existing reduction of 5% on these amounts that had applied under CAP rules was eliminated. Table 3 shows the value of payments remaining after the reductions in each year.

In addition to the progressive reduction in payments in 2024, this was also the year in which payments were delinked from land. Delinked payments are based on the average BPS payment in the reference period, which is the BPS 2020 to 2022 scheme years. This meant that a farm’s payments for 2024 to 2027 would not be affected by any change in farm size or what the land is used for after 2022 (the last year of the reference period). A farmer could also receive delinked payments for the remainder of the transition period even if they chose to stop farming.

The Health and Harmony White Paper had committed the government to maintain the same cash total funding for the sector until the end of the parliamentary term from 2020/21 to 2023/2024. This included all EU and Exchequer funding provided for farm support under both Pillar 1 and Pillar 2 of the existing CAP. This commitment applied to each part of the UK including England. For England, this amounted to an average of £2.4 billion a year over that period. Figure 1 describes the spending plans across three areas of spend from 2021/22 to 2024/25. The relative importance of direct payments in 2024 was planned to fall to 34%. which was only half its share in total payments in 2021.

Under the Agriculture Act 2020, Defra is required to provide an annual report about the financial assistance to agriculture given in the previous financial year. The most recent report covers the financial year 2023/24. This also contains information on spending since the agricultural transition began in 2021 (Table 4). 

Actual spending has fallen slightly below the committed spending in each year of the transition due to underspend on ELM schemes. To date, the increased spending on ELM schemes has mainly been allocated to the previous agri-environment schemes in place as the new offerings, particularly the Sustainable Farming Incentive, were piloted. Various improvements were made to the SFI scheme in 2024 with the latest changes in August 2024 adding further actions for which farmers could be paid. The intention is that the new and redesigned ELM schemes will be fully in place next year.

Phasing out direct payments in 2025

In the October 2024 budget, the overall financial ceiling for financial support to farmers in England was maintained at £2.4 billion although no indication was given of future amounts in later years. However, the pace of phasing out direct payments will be greatly accelerated in 2025. 

For 2025, the UK plans to apply a 76% reduction to the first £30,000 of a payment in England, while making no payments for any portion of a payment above £30,000. For example, a payment of £40,000 will have a 76% reduction applied to the first £30,000 of the payment (a reduction of £22,800). A 100% reduction would be applied to the next £10,000 (a reduction of £10,000). The payment would be reduced by £32,800 to £7,200.  From Table 3, this farmer would have received €19,500 in 2024, so the drop in payments will be significant.

Effectively, no farmer will receive more than €7,200 in delinked payments in 2025. If one looks at the payments received in 2024 by the larger farms (see Table 3), the drop in payments is even more dramatic. For example, farms that received £160,000 in 2020 would have received £62,000 in 2024, but that will now fall to €7,200 in 2025. 

Early impacts of the England agricultural subsidy reform

Evaluating the early impacts of the agricultural transition in England is greatly complicated by the volatility of input and output prices and farm incomes over the period 2020-2023. This volatility has two consequences. First, it makes it difficult to separate out the impact on income at national or farm level of the changes in market conditions from the changes in subsidy policy. Second, the volatility made it difficult for farmers to evaluate the ‘opportunity cost’ of participating in voluntary agri-environment schemes.  Also, despite the volatility in prices, incomes from agricultural production were very buoyant over the period. This may have discouraged farmers from applying to join the agri-environment schemes despite the progressive reduction in direct payments.

We can look at several indicators. The first indicator is Total Income from Farming derived from the Economic Accounts for Agriculture (Table 5). As in the EU, income from farming in England reached a peak in 2022. It fell back in 2023 but aggregate income was still higher (in nominal terms) than in 2020. This is despite a fall in total receipts from ‘Subsidies not linked to production’ which covers both direct payments as well as agri-environment payments between 2020 and 2023. 

A somewhat different picture emerges if we look at Farm Business Income disaggregated by farming system based on the Farm Business Survey (Farm Business Income is very closely related to the Total Income from Farming concept in the agricultural accounts though with some minor differences). Indeed, 2022 was a very good year for farm income for many farms notably cereals and dairy. However, farm incomes collapsed for all farm systems in 2023 (provisional figures) except for grazing livestock where incomes are low in any case. This collapse is not evident in the Total Income from Farming figures in Table 5 – are there any UK readers who might throw light on this apparent inconsistency?

A particularly telling statistic looks at the economic performance of farms in England (Figure 3.1 in the Defra Agriculture in the United Kingdom reports). Performance is based on the ratio of farm business output to farm business costs including an imputed value for unpaid labour. In 2022/2023 (which as we see from the previous tables was a very good year for farm income both overall and in most farming systems), 45% of farms failed to recover their costs in that year. This compares to 52% of farms failing to recover their costs in 2020/21 prior to the transition. 

The government’s assumption was that the loss of farm income due to the progressive reduction and eventual elimination of direct payments would be made up (a) through income earned from enrolment in agri-environment schemes, and (b) through improvements in productivity. Regarding the second point, the assumption was that productivity improvements would occur because farmers have a strong incentive to increase productivity to compensate for the loss of income.

Participation in agri-environment schemes has increased since 2020, but still only covered just under half of England’s agricultural area in 2023. This implies that on one-half of the agricultural area the reduction in direct payments has not been counterbalanced by any increase in agri-environment payments. In any case, earned revenue from agri-environment payments is not worth the same to farm income as receiving the same amount in direct payments as there are likely to be higher costs associated with the actions needed to draw down the agri-environment payments (even taking account of cross-compliance requirements associated with eligibility for direct payments). 

Defra calculates an annual total factor productivity index for England based on Farm Business Survey data (this is distinct from the total factor productivity index for the UK as a whole based on agricultural accounts data and reported in the Defra, Agriculture in the United Kingdom annual statistical publication). The indicator is calculated as the ratio of the volume of output to the volume of inputs including intermediate consumption, land, labour and the depreciation of capital. There can be significant year-to-year variations in the level of the TFP indicator largely due to variations in output volume due to differences in weather conditions.

For this reason, it is hard to draw conclusions on the direction or rate of TFP growth over a short period of time. However, for what it is worth, the indicator shows a significant increase in the three years 2019/20 to 2022/3 of 7.3%, compared to a long term trend of just under 1% annually. This is entirely due to a reduced volume of inputs. Whether this is the result of genuine efficiency improvements or a temporary reduction in input use due to the upward spike in their costs will only become clearer in time.  

Conclusions

The repurposing of England’s agricultural policy is the most dramatic reform of a developed country’s agricultural policy since New Zealand undertook its reform in the 1980s. The circumstances are very different. New Zealand eliminated its agricultural subsidies as part of a response to a deep foreign exchange crisis which had seen the New Zealand dollar devalue by 55% against the US dollar in the previous ten years. England has maintained its level of financial support to agriculture (in nominal terms) but is redirecting it (this AHDB briefing makes a comparison between the UK and New Zealand in pre-Brexit terms).

To set the English reform in perspective, the reform of the CAP in 2021 also maintained a constant level of financial support to EU agriculture (in nominal terms) while increasing the share of that budget allocated to agri-environment measures from 11% to 29% (excluding funding for areas of natural constraints, see Röder et al, 2024; if this funding is included as in the Commission calculations, the share increases to 32%).

The English scheme has increased the share of its agricultural budget allocated to agri-environment measures from 23% in 2021 to 57% in 2024 (see Figure 3). If the same trajectory holds to 2028, environmental measures will account for around 90% of the agricultural budget in 2028, with the remaining 10% allocated to productivity improvement or farm diversification. This underlines the much greater ambition of the English scheme.

The report of the Strategic Dialogue on the Future of Agriculture can be read as supporting a further move in the direction of the English model. It does not argue for the full removal of income support payments as in England, instead calling for the CAP to deliver income support for certain active farmers in a much more targeted way based on farmers’ economic viability. However, it does call for the rewarding of environmental services to be pursued further, calling for a substantial annual increase in the share of the CAP budget allocated to agri-environment schemes throughout the following two CAP periods. Understanding and learning from England’s experience in reforming its agricultural subsidies is thus highly relevant. 

CAP payments made up 65% of Total Income from Farming (equivalent to Entrepreneurial Income in the Eurostat Economic Accounts for Agriculture) in 2018 (House of Commons Library Briefing, 2020). According to Defra analysis undertaken in support of the Agriculture Act 2020, across all farm types in England in the period 2014/2015 to 2016/2017 direct payments were equivalent to 61% of farm business income (profit). The contribution of direct payments varied greatly by sector, being most important for grazing livestock and mixed farms, and also higher for upland farms. Defra estimated that many English farms would not have made a profit without CAP support. In 2018, without direct payments some 42% of farms had costs exceeding their revenue (19% if depreciation is excluded). 

The UK government has assumed that enrolment in expanded agri-environment schemes as well as the greater incentive to improve productivity as direct payments are removed will help to maintain farm income. The extraordinary market circumstances and price volatility in the years since the agricultural transition started make it hard to evaluate whether this expectation has been borne out or not. Farm income on farms in England has improved since 2020, despite a fall in the overall value of farm subsidies. Uptake of agri-environment schemes has increased but half of agricultural land remained outside of these schemes in 2023. However, enrolment in the new Sustainable Farming Initiative has been increasing rapidly and this should continue in 2025 with an expanded range of actions introduced (National Audit Office, 2024). There is also evidence that productivity has increased more rapidly than trend in recent years, mainly driven by a fall in inputs. Whether this is a permanent rise in efficiency or a temporary response to higher input prices will only become clearer with time. 

The UK October 2024 budget massively accelerated the progressive reduction in direct payments. From next year, no farm will receive more than €7,200 in direct payments no matter what level of payments it received in 2020. 

The UK National Farmers’ Union has called for a day of protest on November 19^th against the budget but the agricultural transition programme is not the focus of the protest. Instead, farmers’ ire is directed at proposed changes in farm inheritance taxes which lower exemption thresholds (the Agricultural Property Relief) in order to discourage wealthy individuals from non-farming backgrounds from purchasing farmland purely as a tax break. Farmer representatives argue this tax change will have a devastating effect on farm businesses while the government insists that relatively few working farms will be affected. 

It will be interesting to see if protesters on November 19^th broaden the issue to also include the ongoing reform of agricultural subsidies.

This post was written by Alan Matthews.

Photo credit: UK farmland downloaded from geograph.org.uk © Copyright MrC and licensed for reuse under this Creative Commons Licence.