Direct Payments in Germany – Income and Distributional Effects of the 2013 CAP Reform

Abstract

One of the objectives of the 2013 CAP Reform was to improve the distribution of direct income support among farmers by redesigning first pillar payments. In Germany the related discussions led to the political decision to allocate a part of the respective budget to provide extra support for smaller farms. This paper analyses the impacts of the 2013 CAP reform for two scenarios of alternative direct payment schemes, with a specific focus on the distributional effects of the new components of the first pillar. Results on the basis of the farm accountancy data network indicate that overall direct payments reduce income inequality, while the effects differ significantly between the different payment schemes. The redistributive payment (support for the so-called 'first hectares') is almost equally distributed among farms, however due to the small budget allocated the impact on the distribution of income is limited. Compared to the situation before the policy change, the 2013 CAP reform and its national implementation in Germany slightly reduce the inequality of the distribution of direct payments, but do not reduce income inequality. A full utilization of the scope for the redistributive payment could have slightly reduced income inequality, but, due to the limited correlation of land endowment and income level, would not constitute an efficient distributive policy instrument either.