The other answers are all helpful, and it seems the consensus is that it could be many countries, and is (possibly deliberately) vague.
However it is useful to know that the original tale was apparently set in the UK, according to Wikipedia (yes, I know). If anyone has read it and can confirm then that would be useful.
The Sheep-Pig, or Babe, the Gallant Pig in the U.S., is a children's novel by Dick King-Smith, first published by Gollancz in 1983 with illustrations by Mary Rayner. Set in rural England, where King-Smith spent twenty years as a farmer, it features a lone pig on a sheep farm.
The original question referenced the film, and so this is arguably not an entirely valid answer... and yet the actual question was 'What is the in-universe setting of Babe?' and it seems that this is the closest we will come to an answer.