When discussing the 2004 State Budget Act (see HESO 4/2003), the Members of Parliament also approved the final amount of direct payments to farmers at the level of 52.5% of the EU Member States (25% of the amount is paid by the EU, 27.5% by the Slovak Republic). At face value, this will represent an additional Sk 340m on the amount proposed by the Cabinet (50%). The additional increase by 2.5 percentage point will drain Sk 70m from the Cabinet's reserve, Sk 170m
from the Defence Ministry, Sk 30m from the funds initially aimed at providing state premiums to building society savers and Sk 70m from the Ministry's of Agriculture reserves. The level of direct payments in 2004 is 52.5%, which is lower than the one permitted by the EU (55%) (see Conclusion of Accession negotiations with the EU – HESO 4/2002) and than the one requested by Slovak farmers. According to the Cabinet's calculation, an increase by each percentage point requires an additional Sk 136m. Hence, in 2004, the Slovak farmers will receive direct payments of approximately Sk 3.74bn as well as Sk 3.4bn from the EU coffers.
For the Slovak agriculture, the 2004 state budget allocates a total of Sk 18.577bn. The national resources will channel Sk 11.817bn to the farming sector, whereas Sk 6.761 will be obtained from the EU. The largest sum of the EU budget is determined for direct payments to farmers so that these amount to a total of 52.5% of the payments to the current EU Members.
Farmers were also unsatisfied with the compromise outcome. They appealed to Members of Parliament that these approve maximum direct payments, i.e. 55%. They did not accept the arguments of the Minister of Finance, Ivan Mikloš, that each increment to direct payments above 50% would mean less funds to other areas. The farmers' representatives are not concerned about competition in the EU market. Rather, they are concerned about unequal conditions in the competition between the Slovak farmers and farmers in other Member States, including the new members. The Chair of the Slovak Chamber of Agriculture and Food (SPPK) expressed his regret over the outcome of the voting, but he understood it was a compromise that will not be changed.
He argued that in the current situation the Slovak agriculture needs every million. It is in the interest of Slovakia, as the critics say, to ensure an equal position of its farmers relative to farmers in neighbouring countries. The farmers were also supported by one of the ruling parties.
Prior to voting on the state budget, the Minister of Agriculture, Zsolt Simon, proposed to increase the direct payments using the funds saved from the unemployment support. Nevertheless, the Minister of Finance thought the subsidy of 50% of the level in the EU Member States was exorbitant. He underlined the reserved stance of the MMF, whose Slovak staff concluded that the rise of subsidies in the 2004 budget was regrettable and that it was not likely that it will accelerate the growth of the sector.
The draft budget for 2004, compiled in July 2003, counted on direct payments to farmers at the level of 40%. In September the Government promised to farmers direct payments of up to 45% of the EU average. When the 2004 budget was discussed by the Cabinet, the level of direct payments was again raised, to 50%.
Of the other new EU Members, Hungary and Poland decided to make direct payments to their farmers at the maximum possible level, 55%, and the Czech Republic adopted the level of 48%.
The observers say that when comparing the volume of the resources granted to farmers in individual countries, the most important aspect is the relative amount of the incremental increase as from the previous year. In Hungary, in 2004, the farmers will receive approximately 26% more funds than the year before, whereas the Slovak farmers, with direct payments at the level of 52.5%, will receive 45% more than in 2003.
Regardless of the approved amount of payments, the funds will be provided to farmers only if the Integrated Administrative and Control System (IACS) is fully functioning. The system relates to the interconnection of databases monitoring activities in agriculture. The EU is very strict regarding the supervision of the land subsidised. However, Slovakia is lagging behind in the system development, which was also reproached by the European Commission in its monitoring report. Based on the system, the Agricultural Paying Agency will make payments of the subsidies from the local as well as the international sources.
Historically, direct payments, as a constituent part of the Common Agricultural Policy, are a compensation for the decrease of guaranteed prices. The EU Summit in Copenhagen in December 2002 (see – HESO 4/2002) decided that the basic level of direct subsidies to farmers was the same for acceding countries, amounting to 25% of the level of the support received by the original Member States' farmers. In the following years, direct payments to new Members will rise. In the first year after the accession, the initial level will be 25% and will rise by 5 percentage points in each following year until 2006. The full level of direct payments will be granted to new members after a ten-year transition period. As the Common Agricultural Policy is expected to be reformed in the future, the avenue that the European subsidies will take is not clear today. Likewise, 5 percentage points will be added each year to the maximum limit, to which the farmers of the new Member States will be entitled, including the domestic direct payments.
Evaluation of the Experts’ Committee:
The lingering inefficiency of the system of subsidies to agriculture in Slovakia and the EU makes high subsidies to farmers doubtful. The logic of subsidies that allow farmers to sell their expensive produce for a cheaper, more competitive, price, is incorrect and, at least, unsustainable.
Disregarding the fact that direct payments are also made by other, more developed, European
countries, the experts admit that it is a non systemic and difficult-to-conceive measure, subsidising a private sector.
The experts believe the EU Common Agricultural Policy is built on feeble foundations and it regularly yields to the agricultural lobby. Taxpayers then finance an entity that brings them no benefit whatsoever. The new Member States has only adjusted. Critics say that it is difficult to believe how such a relatively small group of people producing only a fractional added value, with growth potential at nought, can acquire selective advantages.
Experts say that there is no guarantee that a soaring rise of subsidies to Slovak farmers (year-on-year increase by 45%) will lead to a fundamentally positive turnaround in their business and to a renewal of their equipment. Conversely, the threat posed is that inefficient farms will obtain further resources that will only prolong their agony. Paradoxically, instead of increasing the farmers' ability to compete in the subsidised EU market, the subsidies may eventually weaken the farmers' efforts and motivation to increase their production efficiency and their ability to compete.
Should an efficiency analysis of the funds channelled to agriculture be conducted, it would be possible to see, as critics say, the nonsensical character of this decision much more clearly.
Furthermore, compared to the parity of purchasing power, the level of direct payments to Slovak farmers correspond to 120% of the EU average and is higher than that of other Visegrad countries.
Some experts suggested that it would be better if the funds used for direct payments to farmers were rather used in the education system, infrastructure or more sophisticated production, which would, in their opinion, be more advantageous for Slovakia from the strategic point of view. They think that the decision to increase the direct payments to 52.5% of the EU level was a political, compromising and populist one. It is only a small remedy that the Slovak Government and Parliament did not take the opportunity to approve to levelling off the direct payments at the maximum level of 55%. The new Member State's farmers will not have the same starting line as their older EU peers, but they will have an opportunity to benefit from a better efficiency (economies of scale) and incomparably lower input costs.
One respondent said that in the case of more vigorous control of the claim to the direct payments, the subsidies could have even been raised above the maximum limit.
In its Framework for the 2005 State Budget, the Ministry of Finance forecasts that the direct payments to farmers will amount to 40% of the EU level (original proposal of the MF was 45%).
The Minister of Finance, Ivan Mikloš, argues, however, that agriculture is the sector that contributes to the country's economic growth the least. Slovakia should, in his opinion, invest public finances more sensibly. According to the MF SR, although the country's part of the subsidy is lower than in 2004, the total amount of the subsidy to farmers will rise by Sk 1.6bn on 2004.
The Framework further says that due to high contributions from the common EU budget, the Ministry on Agriculture can count on total resources of Sk 20.3bn in 2005, Sk 21.7bn in 2006 and Sk 23.2bn in 2007.
The Ministry of Agriculture disagrees with the MF's proposal and requests maximum level of direct payments for 2005, which is 60% of the EU average (EU 30% + SR 30%). The Minister of Agriculture, Zsolt Simon, assumes that the situation will develop similarly to the situation in 2003, when the direct payments were gaining percentages little by little before they were finally approved by the National Council.