The impact of Brexit on the public sector: an overview

25th September 2017

First published by APSE Direct News August 2017

Introduction

In June 2016, the UK voted to leave the European Union in a referendum. The exiting process was then initiated by an article 50 declaration by the UK government in March 2017. The UK now has 2 years within which to negotiate its exit. The negotiations will be complex and wide ranging due to over 40 years’ worth of legislation and related guidance needing to be considered. There are a variety of issues that need to be resolved including whether the UK remains in the single market, has membership of the customs union, whether the free movement of labour will continue, and how EU law will be adapted to apply domestically.

Of particular interest is the impact of this decision on the public sector, one of the sectors most highly regulated by European law. According to the Office for National Statistics the public sector employs 17.1% of the national workforce including teachers, doctors, police officers, and public administrators. With such a large sector, the potential impact of changes resulting from Brexit is significant. Potential impacts arise in relation to key areas of financing, resource availability, regulation, and employment. The focus of this article will be on the impact of Brexit for the public sector in relation to these key issues.

Uncertainty

With negotiations still at an early stage, there are a lot of unknown future decisions that will need to be made affecting what the final outcome of Brexit will be. Clarity will emerge as the negotiations continue. This means that the issues outlined here have the potential to change very quickly in the future, altering the whole outlook of the impact of Brexit on the public sector.

In the short term, these high levels of uncertainty combined with continued austerity could lead to further budget cuts. This lack of clarity over the implications of Brexit is especially pronounced in the public sector as services will continue to operate in parallel alongside the negotiations allowing little scope for delaying decisions to wait for that clarity.

Financing the public sector

Current situation

Currently the UK contributes roughly £16.8 billion each year into the budget of the EU. The UK does receive a rebate due to its funding of various EU initiatives, meaning that in reality the average annual net fee paid is closer to £8.8 billion. This constitutes a share of 0.5% of GDP. These fees will continue to be paid for the whole negotiation period. The UK also is the largest recipient of foreign investment from the EU and some of this goes into funding public sector initiatives.

How will this change?

Upon leaving the EU, the UK will no longer be required to make contributions to the European budget but it is expected by the EU that the UK will make payments towards the residual costs of EU Institutions and programmes which are likely to be amortized over a number of years given the potential scale of the sums involved. This means that promised ‘savings’ might not materialise for some years and that monies to support additional investment in public services will need to come from other sources: prosperity, additional taxes, printing money or public borrowing increases. It may be that as part of the deal negotiated, annual contributions are required for access to various EU institutions. This would likely be less than the current membership contribution but overall will not deliver any windfall benefit unless funded by other means.

In relation to EU investment directly into the public sector, Brexit will result in this ending. Amelioration of the effect of removing investment depends on any attempts by the UK government to replace these funds. This is certainly true in areas such as Further and Higher Education (e.g. universities) where EU investment helps to fund research. If this finance is not replaced, there is a risk to the reputation and research quality of universities as well as longer term financial support from donors and industry. It has been suggested that this potential shortfall could be avoided using the money saved from EU membership fees. The problem with this suggestion is that recent government spending shows a London-centric bias, indicating that this money may not be invested evenly around the country impacting the public sector outside London more severely. This would need a major change in government policy to resolve. There will also be an end to funding from the European Regional Development Fund which may exacerbate this problem in poorer regions of the UK and the government will also need to seek to replace this funding.

The practicality of re-investing money saved from not having to pay EU membership fees does depend on the economic impact of Brexit. If there is a period of economic instability, it may (subject to the influences described above) result in less government money being available and may reduce public sector spending. This would then result in difficulty for the public sector in attracting and retaining employees. It is widely agreed that there may be an economic shock resulting from Brexit and so the potential impact of this on public sector budgets needs to be avoided to reduce the potential impact. Already the falling value of the pound has led to rising inflation increasing operating costs. Even if a major shock was avoided, there will still be some economic difficulties stemming from Brexit due to high costs administering the change. The costs associated with administering and implementing Brexit are expected to be the single greatest contributor to government borrowing over the next five years and this cost means that the financial benefit to the public sector of Brexit may not be as high as may have first been estimated when the potential savings were considered alone.

Procurement

Procurement costs

The public sector relies on effective procurement within its supply chain to deliver the efficiencies and outcomes it requires. Access to particular overseas markets without the disruption of cost or other distortions may be essential to optimise value or deliver particular goods. The potential impact of leaving the single market and the EU customs union is that the public sector may find itself subject to tariff limited access to the European markets, increasing the cost of goods, delaying their delivery and potentially at odds with diverging UK/British Standards. This will have a significant impact on the public sector.

It was suggested by some campaigners for Brexit that the costs saved from not having to follow EU procurement law would be considerable and could be reinvested. These savings seem unlikely because successful procurement is an efficient and effective means of creating market opportunity and achieving lower overall transaction costs. It needs a clear and secure environment to take place in. This means that it is essential that confidence in the system is maintained and so even if the EU rules were removed, there would need to be a domestic system with which to replace them with. For example s.135 Local Government Act 1972 has always required Local Authorities to have standing orders which secure competition for some contracts and regulate the manner in which tenders are invited. Further the Public Contracts Regulations 2014 introduced provisions for sub-threshold procurements beyond the requirements of EU rules. The NHS had also regulated other areas not covered by the previous EU regime (see the Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013/500).  The world has moved on since the 70’s and requirements for good governance now requires more comprehensive procurement processes.

Furthermore, membership of the WTO-GPA rules is likely to be a condition of any trade deal that the UK has with the USA, Canada or other trading partner. This will require a public procurement regime that is non-discriminatory, open, transparent and judicially reviewable.  Looking forward, authorities are unlikely to have the ability to favour UK or regional suppliers.

In terms of challenge, although the current specific challenge process under the Regulations might go, decisions of a public body are potentially subject to judicial review. There is also precedent for the courts intervening where an authority failed to comply with its internal or published rules for tendering  on the basis that they form an implied contract. Of course, another change which has occurred in recent years is a tendency amongst contractors to seek redress in the courts if they believe they have been wrongly treated. So procurement challenge are likely to remain firmly on the agenda.

Labour accessibility

Current situation

The free movement of people is one of the central freedoms of the EU. This means that the public sector is able to employ anyone who is an EU citizen, giving access to a large pool of potential employees. According to the Chartered Institute of Public Finance and Accountancy, 10% of NHS and social care workers originate from within the EU. This indicates the size of the group that these people make up in the public sector workplace.

Labour markets after Brexit

After leaving the EU, free movement will end. This will mean that the public sector will need to adjust to a major reduction in the talent pool. This will increase the difficulty of recruiting enough workers to fill vacancies, especially considering the constant need for employees to alleviate pressure on modern public services.

The potential difficulty in attracting overseas workers is further increased by a perception that the UK is a less welcoming place after the Brexit vote. This suggests a possible further reduction in potential employees willing to come to the UK from abroad. The public sector will therefore need to focus more closely on attracting domestic workers. The risks of squeezed budgets in the case of economic difficulties could also mean that there a lack of funding for the training of these workers which might lead to resourcing issues.

Currently there is no deal in place to allow EU citizens who currently work within the UK to remain in the country after Brexit. If this remains the situation, a large number of the current workforce will have to leave the UK making it very hard for the public sector to deliver services to the required standard. It is likely that the rights of current residents to remain are high on the agenda of both sides in the negotiations so there should be progress on resolving this issue in the near future.

If the incoming labour stream is reduced due to the reasons suggested above, there is evidence that the remaining incoming workers would become overly concentrated in London. This would exacerbate skills shortages elsewhere in the country, having a serious impact on employee availability in the public sector. This will need to be considered by the government in formulating its new immigration policy and exceptions or quotas may need to be considered in areas where there are skills shortages (e.g. doctors, midwifes, nurses).

Legal Regulation

General EU legal issues

The Repeal Bill will repeal the European Communities Act 1972, converting existing EU law into domestic law. Each piece of legislation will then be assessed to see if it needs amending in the UK context. This will result in a large administrative cost for government assessing what needs changing. This cost is especially significant considering the level of lobbying that there is likely to be from some parties trying to get particular changes made. This process does mean that at least in the short term, the public sector will still be bound by current EU law. This means that regulations for workers such as the Working Time Regulations 1998 will still have effect, as will requirements such as data protection laws and environmental regulation. There is a further need for clarity where legislation requires access to EU institutions such as in relation to health and safety law as it is unclear what will happen when access to these institutions is withdrawn. It is impossible to say what changes will occur moving forward. Any changes will have a potential significant impact if the public sector has to change working practices to accommodate them.

Conclusion

The potential impacts of Brexit to the public sector are potentially significant albeit in the short term the Repeal Bill will minimise immediate changes based on a degree of continuity of legal requirement. The acceptance, for example, of the new EU wide approach to Data Protection (General Data Protection regulations) is also an example. In the short term, the removal of free movement of goods and people and the loss of EU funding streams will likely be the more obvious areas of impact – causing current ‘EU’ employees to reconsider their position or deter inward job migration.

Longer term impacts will include the demand of the costs of Brexit on the public purse, the potential negative effect on the economy overall, the effect on the demand for public services as well as the sheer distraction of dealing with Brexit. A successful outcome in the negotiations is crucial and rests very much with HM Government and to the extent the Government determines along the way, Parliament.  Local Government will have views and a voice – whether it will be heard in the cacophony of Brexit noise is another thing.  It is perhaps more important than ever that in this crucial period of change that the quality and delivery of essential public services is maintained and this arguably should be the sector’s primary focus.