Monday, 30 May 2016

Are EU Ready for the Referendum? Part 3: Funding, Fishing, Farming

Yes, I admit I had signed off last time saying that I would be looking at how the result will impact Britain’s ‘importance’ on the world stage. But I have the (not so) "small matter" of preparing for my final A Level exams to contend with. I am in the middle of these and thought to stick with economic issues. Last time I analysed immigration and the referendum. Now I will look at some other topics that have come up in the campaigns ahead of the vote; funding, fishing and farming.


All countries in the European Union pay into the budget which was €145 billion in 2015.  Some of the main areas of expenditure are increasing economic growth in less developed EU regions and ensuring agricultural and environmental standards. The three biggest contributors to the EU Budget are Germany, France and the UK and the largest beneficiaries are Poland, Hungary and Greece.  

Courtesy of the BBC


Why has this been frequently brought up in the debates? This could be because of the large costs involved. Our overall payment in 2015 was estimated to be £17.8 billion and this figure can be simplified to a gross cost of £350 million a week. (Don't worry - I will come to the net figures soon!) This amount has made big news in the last couple of weeks. In order to properly analyse this, the current UK budgetary situation ought to be considered.

Public sector net borrowing currently stands at 5% of GDP in 2014-15 (budgetresponsibility.org.uk). Though this proportion has been reducing over time, the UK government is still borrowing money to finance all of its expenditure, which contributes to the budget deficit. Consequently, this leads to an increase in the National Debt, which means National Debt repayments will increase. In order to increase repayments we must reduce the budget deficit and one component of our spending is the contribution to the EU Budget. In fact, our gross contribution is more than the combined spending for the government departments of Transport, Justice and the Foreign and Commonwealth Office. Leaving the EU would eliminate this component of spending and leave more for other departments while also reducing our need to borrow.

Extra information is needed here to make a better evaluation of the situation. The gross contribution value was £17.8 billion but a deal negotiated by Margaret Thatcher in 1984 means the UK receives a rebate. This, as well as further ‘money back’ from the EU for our public and private sectors, means our annual net contribution is thus actually £8.5 billion. This works out to approximately £160 million going to Brussels from the UK each week.

If the UK were to leave the European Union, it is very likely that the country would continue contributing to the EU Budget in order to retain access to the single market area. I will use the example of Norway here which is part of the European Economic Area. In order to benefit from the EEA, Norway too must contribute to the EU Budget. Relatively, it is less than what the UK pays. However, Norway suffers from ‘integration without representation’, for it must follow EU laws without having any voice in the lawmaking process. Norwegian goods are also subject to tariffs if they are to be sold in the EU which makes them less competitive against EU goods.

Courtesy of the BBC

Other important economic aspects to consider are that of farming and fishing. The agricultural sector is often one that is singled out across the world as one that needs government intervention, since a stable food supply is needed to keep labour productive and working.

The Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) are two important policies administered by the European Union, the former being the EU’s biggest area of spending. Mrs Thatcher was able to negotiate a rebate for the UK because it benefitted relatively less from CAP compared to other countries, such as France. The CAP is also, in many people’s opinion, thought to ‘waste’ money on bureaucracy, which is likely to result in a misallocation of resources. The CFP has affected the fishing industry and its UK workers through the system of quotas limiting the number of fish that can be brought ashore. Demand for labour, i.e. fishermen, is derived demand for the product that they ‘produce’ – fish. Therefore many fishermen have become unemployed. It is possible that the market failures of geographical and occupational immobility are also involved i.e. fishermen are unable to move to find work or use their skills elsewhere. Leaving the EU would likely improve the state of the UK fishing industry; a potential consequence is that the UK can regain full single control of the 200 mile zone around the UK coastline.

However remaining in the EU may be a good idea when it comes to fishing and farming. The quotas help to prevent tragedy of the commons. In this market, tragedy of the commons would have manifested as over-fishing, a problem which arises from a lack of property rights associated with seafood. Staying in the EU also ensures that in the longer term we can contribute to, and benefit from, future reforms of the CAP. UK farmers currently receive about 60% of their income from EU subsidies; from 2014-2020 this is forecast to average about £2.8 billion annually. There is no guarantee that the British government would give similar subsidies if we were to leave.

The degrees to which different parties are affected are remarkable; reliance on subsidies is three times higher in Wales and Scotland than England but four times higher in Northern Ireland. Yet the effects are similar across the board.  It could be harder for small firms to be competitive and achieve economies of scale, which could result in their closure. This could thus mean we have a greater need to import food, which would worsen our deficit on the current account on the balance of payments. Finally, 73% of UK farming exports goes to the EU. Regardless of whether we stayed or left, the UK would still have to meet with EU standards.

In conclusion, after having taken these factors into account, I think that the UK should remain in the EU. If we were to leave we would most likely have to continue contributing to the EU Budget to maintain access to the single market. Yet the UK would no longer have any say in the rules that affect us. These same rules and standards would still be applicable to the UK fishing and farming industries but with the added ‘burden’ of tariffs when selling to the EU. While I accept that the CFP has had a major effect on the domestic fishing industry, I believe that the EU is able to enforce rules that protect fish supplies. This ensures that fishing can take place sustainably and in the long-term.

With the A2's looming I am not making any more promises. I will try and fit in another blog soon before my next round of exams. (No point posting about the EU Referendum after it is done and dusted, is there?)