Dynamic impacts of a financial reform of the CAP on regional land use, income and overall growth

In this paper we investigate the impacts of abolishing the Common Agricultural Policy (CAP) for the post-2013 European Union (EU) financial perspective and the impacts of re-investing the released funds on research and development (R&D). We apply a linked system of models to analyze the impacts for the EU member states. The linked system consists of five land-use sector models (agriculture, forestry, urban area, tourism and transport infrastructure), which are connected to a macro-econometric model. Additionally, a land cover model is used to disaggregate land use countries to a 1 km² grid. Three scenarios are analysed. In the “baseline” currently decided policies are assumed to be continued until 2025. In the “tax rebate” scenario agricultural support (first pillar) is removed, and the member states’ contributions to EU lowered. In the “R&D investments” scenario agricultural support is also removed, and the released funds are used to increase general R&D efforts in the EU. We find that in both liberalization scenarios, agricultural producer prices drop compared to the baseline. Agricultural production drops too, but less so in the “R&D investment” scenario due to productivity gains resulting from the increased R&D spending. In some countries, the productivity gains totally offset the negative impact of liberalisation on agricultural production. Smaller agricultural production implies less agricultural land use, and the more so in the “R&D Investment” scenario where productivity increases. The fall in agricultural production and prices negatively affects economic activity and households’ purchasing power, but the reduced direct taxation compensates this effect and results in a GDP gain of 0.53% and 0.8 million additional jobs. In “R&D investment” GDP gain reaches 2.57% and yields 2.95 million additional jobs in EU in 2025. The GDP, consumption and employment gains in the “R&D Investment” scenario widely exceed the losses in the agriculture sectors. The analysis indicates that if no external effects of agriculture are considered, then the CAP is an inefficient use of tax money, and that a considerable contribution to reaching the goals of the Lisbon agenda would be achieved if the same amount of money was instead invested in R&D.