Systematic Policy Decisions on Direct Income Payments in Agricultural Policies

Direct income payments (DIP) are in the centre of the discussion in the ongoing political debate whether agricultural policy objectives can be pursued in an economically more efficient and less distorting way. This paper discusses under which circumstances DIP are an appropriate and efficient measure to address the objectives of agricultural policies. It identifies and examines the characteristics that DIP should have in the context of different objectives. If governments want to meet their policy objectives by the use of DIP efficiently, a precise definition of the objective is crucial. An optimal policy design achieves a specific objective while keeping the impact on economic distortions low and ensuring efficiency in the allocation of resources. The decision tree for DIP presented in this paper contributes to a more systematic approach to the topic and facilitates the policy design for a sustainable and resource saving economic policy in the field of agriculture. We show that DIP can be used to address different types of policy objectives, but have to be adapted carefully depending on the specific targets. If used as a measure to compensate income losses due to policy changes, DIP could help farmers to adjust to policy changes in an efficient way and, at the same time, release budget funds. Such gains could then be used in and tied to areas that are known to be crucial but currently lack resources due to budget restrictions - e.g. the provision of environmental goods and services, which can also be addressed by DIP.