The Brexit Conundrum

As part of the wider transformational changes already taking place in local councils across the UK, Brexit adds further uncertainty and challenge.

ARTICLE | Oct 19, 2016

Local Authorities Face Uncertainty and New Challenges

Following the United Kingdom's national referendum on June 23, 2016—only the fourth one ever undertaken—the decision that Britain will leave the European Union (EU) is likely to have significant implications for local councils in the UK. The medium-term effects are still being analyzed; however, some of the main areas of impact are starting to become apparent.

This initial commentary highlights these issues and reminds us of how we got here. It sets out both the potential threats to, and new opportunities for, local government in the UK.

How It Came to Be

It needs to be remembered that there was no groundswell of pressure from the public in the UK for a referendum on its membership in the European Union. Rather, this was a tactical political judgment by ex-Prime Minister David Cameron as a way of reducing the clamor from a large proportion of his party and much of the right wing media to withdraw from Europe.

This desire has existed for the past 40 years and has frequently split and undermined the Conservative Party. Leaders including President Obama advised Cameron against his decision because the outcome of such a referendum would be uncertain.

However, the rise of a new anti-European, anti-immigration political party, UKIP, which was drawing away Conservative voters before a national election this past year, led Cameron to promise a referendum on Britain remaining a part of the European Union if his party won the election, which seemed uncertain at that time.

One result of this is that David Cameron is the third conservative Prime Minister to have lost office as a result of this issue.

In practice, the unexpected outcome of the referendum was less a vote on being part of Europe and more about concerns that are much higher on people’s list of worries. The successful “leave” campaign channeled a howl of (well-founded) pain, fear, resentment, sense of injustice, and anger from those in Britain who felt that 21st century life was passing them by.

It tapped into a strong sense of marginalization and economic insecurity in an age of dysfunctional globalization. The outcome of the referendum vote was a response to the changes that have left millions in the UK feeling that they and the once thriving towns they live in have been consigned to the scrap heap, and that national politicians do not understand or care about their plight.

Public opinion polls show that most British people significantly overestimate the number of migrants in Britain. The English, in particular, have feelings of being overwhelmed by newcomers. This has led to deep concerns about a loss of national identity and confidence, and to many being deeply troubled by rising immigration and its impact on such public services as schools and hospitals.

Voting to change this situation provided a temptingly simple solution to a frightening, complex, and seemingly intractable problem. It was a typically British, bloodless, popular uprising against the ruling class and its apparent indifference or impotence.

Ironically, it is possible that Britain could experience a surge in immigration during the protracted negotiations over leaving the EU, both from elsewhere in Europe and from the wider world because of the uncertainty over future arrangements. The desire to retain free trade with Europe is likely to depend on accepting the principle of free movement of labor within the EU.

A Divided Country in Shock

The seismic reverberations of this most divisive of referendums are now being felt in homes and families throughout the UK. As in a civil war, chasms have opened up in our communities, separating mother from daughter, brother from brother, and friend from friend depending on how they voted.

Among those who voted to remain in Europe, there is a profound sense of shock, disbelief, and bereavement about what will be lost. The "Remainers" and even some of the "Leavers" have a deeply felt sense of having been robbed by major politicians who are cynical liars and who reneged on their promises within days of a vote they did not expect to win.

Those who voted to leave are optimistic about a better future outside Europe, despite the absence of any plan for this and the loss of almost all the main politicians who championed their cause in the referendum campaign. Most shocking has been the visible rise in racism and xenophobia, with a 50 percent increase in hate crimes committed daily on our streets against anyone who cannot trace their British ancestry back for at least several generations.

Restoring a sense of community cohesion and collective action in facing an uncertain future together will be one of the long-term challenges for local government.

Economic Consequences

The sense of disaffection among many people in Britain is not surprising given that only the rich have seen the end of the economic recession that started seven years ago. In fact, recently published research shows that in the UK we have experienced a lost decade of income, in the biggest fall in real wages since the financial crisis in 2009 of any other developed country except Greece.

Average UK incomes have dropped by more than 10 percent in that period, compared to growth of 23 percent in Poland, 14 percent in Germany, and 11 percent in France. Wages in the UK are 25 percent below where they would have been if the growth experienced in the period 2000 to 2007 had continued.

Wages fell off a cliff after the financial crisis and for most people, they have not yet recovered. With work increasingly insecure, despite high employment levels, many now face a fresh squeeze on their spending power as the recovery is put on hold as a result of the Brexit vote.

Markets abhor uncertainty and since the referendum, across companies of all sizes, investment decisions have been halted or delayed until the economic impact of Brexit is clearer. Service industries and banks on which the British economy depends have all been particularly hard hit by a dramatic deterioration in business confidence, with the UK economy likely to shrink in the remainder of this year and possibly beyond.

The first figures show the sharpest downturn in economic activity on record since the financial crisis in 2009. National and international banks have announced the loss or relocation to mainland Europe of tens of thousands of jobs, and the Ford Motor Company is talking about factory closures in the UK.

The pound has experienced the fastest drop in its value in such a short period and may face further devaluation as the British economy slows, as predicted before the referendum if it produced a leave vote.

Falling consumer confidence will also affect retail spending, and high-end property prices in London have fallen by 12 percent, with sales down 23 percent. Some are predicting that such prices could be cut in half by 2020 if senior bank staff in the financial center of London are relocated overseas, with some building development projects likely to be abandoned.

Such effects are likely to continue for five years or more as Britain’s exit from the EU is negotiated and new world trade deals are pursued.

For these reasons, the Bank of England and the treasury have taken quick action to restore business confidence in the UK economy and to prevent Britain from sliding into a recession later this year. The measures, which have had a positive though probably temporary effect, include a cut in interest rates to 0.25 percent and a resumption of quantitative easing of £50 to £60 billion, with the need for government spending increases on major infrastructure projects and tax cuts later in the year if the UK economy is then strong enough to make these affordable.

At the time this article was written, this seems unlikely, and tax rises are a possibility to support extra spending by the government.

The UK was due to receive around £5.3 billion of EU structural funds in the 2014-program period. The government moved quickly to reassure people that all projects agreed to by October 2016 would be funded. It committed only to reviewing later funding bids on a case-by-case basis after that date, which leaves uncertainty about investments in the medium term.

Those poorer parts of the UK, for example Wales, which benefit from such funds have demanded that the UK government ensure that equivalent sums be invested in their areas, but this is not guaranteed. Similarly, British farmers who voted overwhelmingly to leave the EU expect the British government to replace the European subsidies on which they depend for their livelihood.

The government has committed to this only until 2020, by which time it is hoped that a new funding scheme will be in place. All this extra expenditure will be difficult to guarantee at a time of little or no growth in the UK economy.

The European Investment Bank has invested £42 billion in the UK over the past 10 years. Although membership in the EU is not required to access loans, the application process will be harder for the UK in the future. A number of green infrastructure projects in the UK being considered by the European Investment Bank could be adversely affected by this ongoing uncertainty.

The effect of Brexit on the UK economy will not be clear for some time. The size of its impact will need to be measured as much by the loss of future investment and of the jobs that would have been created, as by the scale of immediate business cutbacks.

Financial Impact on Local Government

Some uncertainty has been expressed about the future of major "devolution deals" (of powers and funding) to local authorities in the UK by national government as a result of the Brexit vote, despite reassurances by government ministers of no change of direction.

As a result, the new Mayor of London Sadiq Khan has called for extended devolution of power to London, where people voted overwhelmingly to remain in the EU. He has called for powers over fiscal responsibility, including tax-raising powers and more local control over business and skills, housing and planning, transport, health, and policing and criminal justice.

These demands are echoed elsewhere, with the Local Government Association (LGA) assertively seeking to fill the void of national political leadership by taking on bigger roles for local authorities. It is local councils that are maintaining a sense of calm and business as usual in our communities, despite uncertainties at the national level.

LGA is seeking greater delegation of powers, with support from senior government officials in such areas of activity as waste recycling, food hygiene, and air quality, as well as freedom to raise public funding at the local level.

The UK government’s plans to scrap local authorities’ Revenue Support Grant by 2020, with local government instead retaining business tax revenue locally, will mean that councils will become more exposed to likely falls in tax revenue resulting from any economic downturn, at a time when demand for local public services is likely to grow.

This uncertainty will also make long-term financial planning more difficult and will encourage councils to maintain or build up their financial reserves despite funding cuts to cushion them from sudden changes in their financial circumstances.

The Brexit vote has also prompted warnings about the impact of prolonged uncertainty on house prices in the UK and the cost of borrowing, at a time when home ownership levels are falling in the UK and the lack of affordable houses is causing a national housing crisis.

The construction industry is highly reliant on migrant labor and limits on future free movement of labor could have an adverse impact on building costs and supply, as will the higher cost of materials because of the devaluation of sterling. Those local authorities with a planned house building program will need to make sure that their plans are robust and still sustainable during the next 5 to 10 years.

Large numbers of migrant workers also support the running of the National Health Service in Britain, residential care homes, hotel and hospitality sectors, as well as crop picking. There are concerns that future restrictions on migration will lead to acute labor shortages in employment activities that indigenous British workers choose to avoid. Recent research shows that British workers will not see increased wages from a reduction in cheaper migrant labor.

Some local councils and a number of housing associations have seen their credit ratings downgraded following the Brexit vote. This will affect their borrowing status and the rate of interest they will be required to pay on future loans.

Possible Legal Impacts on Local Councils

Key pieces of EU legislation affect activities carried out by local councils in the EU. These include the processes for procuring goods and services; waste collection and disposal, including recycling and recovery targets; energy efficiency; and trading standards. Most of these requirements have been transposed directly into secondary UK domestic law and so will not be automatically or immediately affected by the UK’s exit from the EU.

The UK after that, however, will be able to amend and/or repeal such legislation. The current government has stated its aim to reduce what it sees as bureaucratic red tape from Europe, including employment protection rights, which it believes is stifling the success of British companies.

Negotiating Brexit

Leaving the EU requires the UK to implement Article 50, which is an untried process unlikely to start until the Spring of 2017. Withdrawal, on agreed terms, subject to ratification by the British Parliament and by all EU member states, would then need to happen within two years. There are two key sets of tasks that need to be completed by the UK government:

• Formulating an acceptable withdrawal agreement and setting out the terms of the "divorce."

• Defining the future relationship between the UK and the EU, including any trade agreement. This is likely to take five years and might only be possible to start after consensus on the withdrawal agreement has been reached. The UK cannot enter into any other world trade agreements until its withdrawal from Europe has been completed, as it is still bound by current EU agreements in the meantime. 

This complex process, for which there is no plan in place yet, is likely to cost £1 billion and take until 2019 to complete. The new UK Prime Minister Teresa May has stated that she wants a new, bespoke deal with Europe, the terms of which are not yet clear. The attitude towards Britain and willingness of the EU to be helpful in such negotiations vary significantly between European countries.

Following lobbying by local government, UK government ministers have agreed that English local authorities will be part of the negotiation of the terms of the EU exit, with some powers being devolved directly from the EU to local government.

The new Minister for Local Government has said that: “When we are transferring power from the EU to Britain, I think that Whitehall [national government] is not the default destination for them.” Recent letters from the Society of Local Authority Chief Executives (SOLACE) to the new UK government have stressed the importance of this and have offered its expertise to advise the government on the best way forward.

The current climate in the UK among those who voted to leave the EU is hostile to any compromise. It is difficult to know how the new government ministers can negotiate any deal on the future of our changed relationship with the rest of Europe that will be palatable to the majority of the British people.

As part of the wider transformational changes already taking place in local councils across the UK, Brexit adds further unwelcome uncertainty and challenge, and it cannot be avoided. In the best British tradition, we will simply "stiffen our upper lips and muddle through" as we always do.

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