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REPS gives back more than it costs to run

Saturday, August 1st, 2009

Irish Farmers Journal

By Richard J Rea, David Walsh and Michael Ryan

The Agricultural Consultants Association (ACA) recently conducted a study on the economic benefit of REPS to the local economy and found that the scheme contributes more to the National Exchequer than it costs to run.

In this article, we will examine the immediate net cost to the Exchequer of maintaining the REPS programme.

Money paid through the Rural Environment Protection Scheme (REPS) has gone initially to the farmers involved, and ultimately to their suppliers and contractors, as well as to various retailers, Co-ops and shops in rural communities.

REPS payments in 2009 were budgeted to amount to some €330m. Even allowing for the 70% of expenditure on average, which farmers have to incur in order to meet the requirements of REPS participation, this represents a very considerable income supplement to the farmers involved who are mainly low income cattle and sheep producers.

However, the main beneficiaries of the REPS programme are not farmers, but the suppliers and contractors mentioned above.

Benefits of REPS

In the following paragraphs, we will attempt to quantify the benefits of REPS, as it currently operates, to secondary recipients and to the national Exchequer.

If we assume that of the €330m REPS payments, 30% or €99m, ends up as payment for the farmers time and labour then the remaining €231m is spent on inputs and services necessitated by REPS compliance.

This expenditure is predominantly on inputs which are subject to VAT. We can reasonably assume that half of this spending is on service provision such as contractors, builders or planners, which attracts a VAT rate of 13.5% and the remainder is on tangible inputs taxed at 21.5%. The total VAT take in this situation amounts to €34.4m (See figure 1).

The net figure spent on inputs after VAT is removed is therefore €196.6m.

This is the amount that is available to the providers of goods and services to cover wages, materials, overheads and profit.

We have conservatively assumed that 33.3% of net receipts by input providers goes towards wages and salaries, that a further 56.7% goes as cost of sales, i.e. the purchase of materials and overheads and the balance of 10% is retained as profit (Figure 2).

Calculate value

In order to calculate the value of this spending to the Exchequer in terms of taxes on income, we have made the assumption that the average employee in these businesses earns €25,000 per annum. We have also assumed that half of the businesses are incorporated and therefore pay corporation tax at 12.5%.

We assume the remainder to be sole traders who pay tax at 25%. Finally, we assume that 400 REPS planners earn on average €35,000 per annum. The figures for PAYE/PRSI in Figure 3 include the employers’ PRSI contribution. In the case, of farmer tax arising from the €99m accruing to farmers own labour input, we assume again that income tax, PRSI and levies will be paid at an average tax rate of 25%.

Employment

We now turn our attention to employment directly attributable to REPS. We have assumed average earnings of €25,000 per employee and earnings of €35,000 per REPS planner. Given a total wages bill of €67.2m, this suggests a total of 2,460 workers whose livelihood is directly attributable to REPS.

These figures are probably conservative. Closing down REPS would result in even higher job losses when the knock-on effect of the first round of job losses is taken into account.

This latter point is re-inforced by data from the recent Quarterly Economic Commentary issued by the ESRI (Summer 2009), which forecasts an 8.9% decline in GNP for this year.

Unemployment is forecast to increase by 6.3% over the same period.

Extrapolating from this data, using current GNP and unemployment statistics, while an inexact science, would suggest that removing €330m in incomes from the economy (c. 0.2% of GNP) would lead to an increase of approximately 3,100 in the level of unemployment nationally.

This figure corresponds closely with figures for job losses arrived at using the more direct measurement outlined above.

Multiplier

It is important to point out that because a large proportion of REPS expenditure goes to relatively low income households, it is likely to have a relatively large multiplier effect in the immediate economy.

In other words, as pointed out above, farmers are likely to spend a considerable portion of REPS receipts on associated activities such as maintenance, fencing, building and contracted activities. This type of spending will typically have a low import content when compared with spending by other businesses. It will therefore have a positive impact on the Irish balance of payments

Additionally, because low income households are less likely to save and more likely to spend on basic consumer items, the portion of REPS payments retained by farmers is also likely to be spent in the immediate locality as part of normal household expenditure. This further re-inforces the multiplier impact.

Using the lower figure (2460) for unemployment resulting from REPS closure, we can begin to calculate a figure for jobs seekers allowance.

To do this, we assume that half the applicants are married, with an average of two children, while the remainder are single.

Given current rates, this will result in average payment of €15,600 per annum or a total of €38.4m.

The complete closure of REPS would result in perhaps 15% of existing REPS participants qualifying for Farm Assist.

An average rate of €10,600 per farmer is assumed based on half the recipients being married with two children with the remainder being single. The resulting total is €98.6m in additional Farm Assist payments.

Immediate loss

The figures in Figure 4 quantify the immediate loss to the Exchequer of higher unemployment and reduced farm incomes.

To these should be added the less easily quantified second and subsequent losses of incomes and tax revenue resulting from reduced levels of spending by these two groups. We have ignored supplementary social welfare costs, such as increased medical card entitlement, higher spending on rent allowances and on similar schemes.

Current REPS funding is comprised of three elements – EU contribution, co-funding and additional State funding. The latter two elements come from the Irish Exchequer and amount to just over 55% of the total.

Therefore, approximately €181m of this year’s budgeted spending on REPS comes from the Irish Government. This cost to the Exchequer is considerably less than the €214.9m lost from revenue foregone, and the additional social welfare payments incurred (Figure 4).

In the presence of EU co-funding, REPS actually contributes more to the National Exchequer than it costs.

Even this is not the complete picture because we have made no attempt to put a money value on the environmental benefits of REPS to society and the economy in general. This aspect of REPS will be covered in a subsequent article.

*David Walsh and Richard J Rea are Agricultural Consultants.

**Michael Ryan is a lecturer in Economics at the Limerick Institute of Technology.

Money paid through the Rural Environment Protection Scheme (REPS)  has gone initially to the farmers involved, and ultimately to their  suppliers and contractors, as well as to various retailers, Co-ops and  shops in rural communities.