What economists never get about farmers

One of the first lessons for any economics student is to meet an imaginary species called Homo economicus, who is 100 per cent rational.
He, she or it (such distinctions are irrelevant) can always be trusted to maximise personal profit, from seeking out the best deals to selling her own child if the price is high enough. The fact that economists had to invent a new species is, of course, a clue as to how well their theories work in the real world.
On which note, step forward British farmers. If the National Farmers’ Union is to be believed, our farmers are “irrational” on an epic scale. Instead of selling their land and becoming the millionaires everyone is accusing them of being, tens of thousands choose to stay put, wellies sinking slowly into the mud, tolerating thin, volatile margins, capricious government policy and consumers unwilling to pay the cost of producing decent food.
This is a matter of some dispute, of course. Rachel Reeves insists such people don’t exist in large numbers and that her new inheritance tax charge (20 per cent on estates worth over £1 million, or £3 million with the maximum combination of reliefs, payable over ten years) will catch less than a quarter of farmers. As the NFU and others have pointed out, Defra’s own figures suggest it may be closer to two thirds.
Whatever the exact figure, the likely distributional impact of the tax is this. Super-rich landowners for whom farming is an interesting hobby will be irritated but will absorb the hit with ease, since the inheritance tax relief attached to their land is still favourable compared with other options. As a result, land values won’t fall much, dashing the hopes of any would-be new farmers. Any large landowners who do need to sell land to pay up will only offload a slice, mostly farmed by tenants, and will sell it to some other rich landlord who will, in many cases, rent it out to the same tenants.
Thousands of family-owned farms, meanwhile, whose average household income has swung unpredictably between £30,000 and £90,000 in the past ten years, will be caught. You can call it irrational, and in hard-headed economic terms it is gloriously so, but many of them choose to be asset-rich and cash-poor for the love of farming and their farms.
These families will be forced to sell some or all of their land. Whoever buys it will probably have to keep having it farmed if they want to qualify for subsidies and inheritance tax relief. Given a national shortage of farming skills, the likely outcome is that the families who love farming and were recently forced to sell will become tenants on their own land, farming for a landlord what they used to farm for themselves. They will, though, have a few million in the bank from their sale proceeds, so it’s not all bad.
If Labour had really wanted to target its tax at rich hobbyists, it ought to have set its threshold much higher and equalised the tax rate with other asset classes, like shares, at 40 per cent. The government could, of course, have found all this out before the budget, but that would have involved Treasury officials talking to people outside their own department, which is dangerous for their delicate constitutions.
That must also be why they used the budget to slip out another hugely consequential change that is of much more immediate concern to family farms than inheritance tax. Without explaining its reasoning, the Treasury decided suddenly to start capping subsidies.
Ever since Brexit came into effect in 2020, farms have been in a process of transferring from the old EU subsidy scheme on to a new British one. Until October, the old subsidies were being withdrawn at a stately pace. Then, Rachel Reeves abruptly announced that no farm could continue to claim more than £7,500 under that scheme next year. For a modest-sized arable farm, that will mean a cut of £30,000 to £40,000 in its subsidy income, with no warning. Some farms, which actually make money from agriculture, such as specialist pig, poultry, and fruit and vegetable production, will be all right. Hill farmers, crop farmers and some dairy farms will be devastated.
In theory, the cut in the budget will be made up by handing out more subsidies through the UK’s new farming scheme. This post-Brexit regime is in many ways better: applications are easier to make and in the best cases are processed quickly, giving a decision and schedule of awarded subsidy payments within three weeks. But it is also full of problems and subsidies overall are diminishing, staying at about £2.5 billion a year and unadjusted for inflation since 2016. To make matters worse, Defra is unable to administer it reliably. The department was recently forced to admit it has underspent the new funds by £350 million over the past three years. In other words, money is coming out of the old scheme and disappearing into a black box.
It doesn’t help that the new scheme, despite its slow and painful development since at least 2019, is not complete. In many cases, farmers still don’t know what to plant for next year’s harvest to qualify for payments, let alone planning for the one after that. As a result, when a new decision is announced, Defra is inundated with applications, slowing down processing times. Its core programme, the “sustainable farming initiative”, was designed only with a view to improving the environment. Then Covid shifted attention on to food security and Defra expanded the scheme haphazardly to catch up.
At no point does anyone appear to have sat down and considered the strategic questions. Officials and ministers ought to have asked how we can make farming more productive and competitive in the long run. They should have examined why the Netherlands, England’s peer in weather, land scarcity and agricultural history, trounces the competition in farming exports, whereas Britain’s food imports are rising, from 25 to 40 per cent of our supply since 1990. What is worth emulating and what isn’t? They might have thought about how our subsidy regime could encourage more agricultural research and investment on a grand scale. They could even have considered how British farmers might capitalise on a growing global disillusion with soil depletion and ultra-processed food (or “poison”, as Trump’s incoming health secretary calls it) and designed an integrated trade, subsidy and innovation policy to match.
Instead it’s the same old story: tax a declining industry without addressing any of its fundamental problems or distortions. And all of this in the hope of generating only half a billion a year in tax revenues — about 0.3 per cent of the NHS budget. As any poultry farmer could tell you, channelling the Louis XIV official who first compared tax collecting to plucking geese, that is a very, very bad ratio of feathers to hissing.