The impact of Brexit on government and public sector

With the outcome of the EU referendum being to Leave the EU, you will no doubt be thinking about issues ranging from changes to regulations and the impact on your future funding to migration and the impact on public services. And, while the outcome of the vote is known, a long period of adjustment will now follow a decision to leave which bring with it a period of uncertainty.

The outcome will impact all of us, personally and professionally. Here, we set out some of the implications for the public sector to help you make informed decisions about your strategic choices as we prepare to exit the EU.

 

Ten things you need to know:

  1. Leaving the EU is far from a straightforward process and we still do not know the form this will take
  2. UK politicians, advisers and policymakers will have to balance the perceived benefit of continuing access to the Single Market (e.g. through the European Economic Area or the ‘Swiss model’) with complete freedom from EU regulations and budgetary contributions.
  3. The vote to Leave could yet have significant knock-on consequences for the United Kingdom itself and for the EU. Scotland could now call for a second Referendum to exit the Union.
  4. Meanwhile other EU countries, which will remain important trading partners, may call their own referenda with the departure of the EU’s second largest economy and add to the sense of uncertainty.
  5. The first task of the government will be to trigger Article 50 and formally declare the UK’s intention to Leave; if this is passed by Parliament, there will then start a long period of negotiation of the exit package.
  6. In parallel, government will need to re-create the capacity to re-negotiate its trade agreements in place of the EU’s existing bilateral trade deals (of which there are 53). This will take time. The UK has not single-handedly negotiated a trade deal in the past 40 years and government will need to build capacity and capability.
  7. There is no definitive evidence on the economic impact of exiting the EU on the UK economy. But the PwC report commissioned by the CBI suggests a decision to leave the EU could mean that total UK GDP in 2030 would be around 1.2%-3.5% lower than if we remain in the EU (subject to the trade agreements the UK could negotiate outside the EU), primarily due to the uncertainty which dampens confidence and investment.If this impact is realised, there will be a need to re-visit fiscal plans and consider how much of the funds returned from the EU are needed to help repair the public finances.
  8. The UK is by far the biggest recipient of foreign investment in the EU. Almost half (46% in 2013) of the FDI stock in the UK originates from the EU. The future of this is now uncertain.
  9. The position of London as Europe’s biggest international financial centre is unlikely to change overnight. However, the loss of EU market access via passporting would have a significant impact on the UK financial services sector and the associated tax revenues. Moreover, if some of the above issues materialise then critical mass in the industry could be gradually lost, harming its current status.
  10. Brexit is a process that will take years (between 2 and 10), not a single act. The levels of integration have gone so far that a UK departure will have profound legal, economic, social and political implications irrespective of the type of agreement reached.

The impact on the public sector

Fiscally a vote to leave means the return of UK’s contributions to the EU budget, offering choices on the pace of deficit reduction. From 2010 to 2015, the UK’s average annual gross contribution to the EU amounted to around £16.8 billion. However the UK also receives a rebate and funding from various EU initiatives. This means that the UK’s average annual net contribution to the EU budget over these same years is estimated to be around £8.8 billion, or around 0.5% of GDP.

With a vote to leave the EU, although in the near term budgetary contributions to the EU must still be made, and funding flows into the UK will continue, there will no longer be a requirement to make these contributions beyond the expected two year negotiation period (unless these become part of a deal similar to the Norwegian or Swiss models). But the UK will also cease to receive funding from the EU too (e.g. in relation to the Common Agricultural Policy, regional development and research and development).

For those who need to keep the machinery of state running, there will be other impacts of Brexit, which will differ according to the extent of exposure of each public sector organisation to the EU. For some, like central government departments, there will now be significant transitional work as EU responsibilities move back to the UK.

Policy choices will also need to be made on whether or not to re-create EU Funds but in a Brexit form. This will in turn impact on devolved administrations and local government, particularly if EU funds are not fully replaced. Scotland could also call for a new referendum on the back of the vote to exit the EU.

For others in education and health, where talent mobility is an important issue, it may be that certain parts will be greatly affected. For instance, universities will have concerns about loss of access to EU research funding and student mobility schemes.

And across the public sector, there will also be an impact on public sector bodies as employers, whether that’s in terms of changes to UK employment law (e.g. Working Time Regulations 1998, Agency Worker Regulations 2010) or to government procurement, which is currently subject to EU law.

Of course, in the aftermath of the vote to leave the vast bulk of delivery of public services will need to continue on a day to day basis in parallel with Brexit negotiations, which will add uncertainty to the cocktail of short term fiscal austerity as well as longer term demographic challenges.

Clearly nothing will change overnight, with full transition out of the EU taking anywhere between two and ten years. But even so public servants will now need to commit the plans in their head to paper and get ready.


Things to consider

Top eight issues to think about in relation to the EU Referendum

Trade

Leaving the EU is likely to make trade with EU more difficult and expensive. With 53 EU deals to replace, and 72 more in process of negotiation, there is an urgent need to ramp up government capacity and capability.

Fiscal and funding

The UK will no longer be required to make a financial contribution to the EU (assuming it does not opt to remain a member of the EEA). This could lead to acceleration of deficit/debt reduction plans. But policy makers also need to consider whether to re-create some or all of the EU Funds from which the UK currently receives payments.

Regulation

Brexit will mean an end to EU regulation. But it could also mean that UK businesses have to adapt to a different set of UK regulations which could be just as costly. Public sector organisations will need to adapt as employers and in their role as policy makers to design new regulations taking account of any new freedoms.

Sub-sectors

Within the public sector, some sectors like education and health which have relied on the EU single market for talent mobility (students and staff) will feel a strong impact. In transition, some like central government departments will face a peak workload short term as powers return from Brussels and legislation/policy needs re-setting.

Foreign Direct Investment

Brexit will impact on business decisions to invest and trade with the UK. This means that devolved administrations and local governments will need to re-double their efforts to attract business regionally and locally, but with uncertainty in the short term on whether EU Funds which benefit the regions are to be fully replaced.

Labour market

The UK will now need to change its migration policies. Currently EU citizens have been able to live and work in the UK without restrictions. Government will need to re-set this policy and employers across sectors will need adjust their talent policies. This will be particularly important for organisations with many EU nationals on their staff.

Uncertainty

Uncertainty will continue during the exit negotiations. As this major change to the UK’s position in the world has wide reaching implications for businesses, there will be an impact on investment, growth and the public finances. As a consequence, there may be further squeezing of public sector budgets.

Devolution

The return of powers from the EU will not stop with the UK Parliament. Scotland is likely to call for a referendum to try to stay in the EU; LEPs and Combined Authorities may also be concerned at a loss of EU Funds and have to make the case for their replacement funds. The speed of devo deals may also slow as attention in government focuses on Brexit negotations

Contact us

Tina Hallett
Leader of Industry for Government and Public Services
Tel: +44 (0)20 7804 1704
Email

Nick C Jones
Global Director of PwC’s Public Sector Research Centre
Tel: +44 (0)20 7213 1593
Email

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