Brexit: An opportunity to rethink

For the UK government, the Brexit vote marked the end of an era as it moved from a time of challenge around one primary objective – eliminating the budget deficit – into an era of parallel challenges. The next five years will call upon the government to navigate the UK’s complex route out of the European Union while continuing major reforms, managing uncertainty in the economy and maintaining business as usual. Deloitte and Reform’s annual State of the State report, launching this week, explores those challenges ahead.

The State of the State 2016-17 looks at Brexit’s potential impact on the public sector from several perspectives, starting with the citizen view. We commissioned Ipsos MORI to survey more than 1,000 citizens and found that 41 per cent believe leaving the EU will be bad for the public services. That said, most see other policy issues as more important. When we asked the public what the government should focus on over the next year, 57 per cent said the NHS while 33 per cent said Brexit. So while the public recognise that leaving the EU is an enormous challenge, they still want the government to focus on ‘business as usual’.

Second, the report also considers Brexit from the perspective of public sector executives. We interviewed 40 key officials for the report, including senior civil servants, police chief constables, council chiefs and NHS directors. Many were disappointed with the referendum result, but most were sanguine about its implications and all were ready to lead their organisations through any challenges it may create. One chief constable told us that public leaders “need to stand up, accept the situation and make the best of it.”

Third, The State of the State looks at Brexit through a productivity lens. That suggests in the short term, the renegotiation process will place substantial new burdens on a number of government departments in Whitehall and the devolved administrations. And in the longer term, Brexit could require the UK public sector to establish new processes or even new agencies to take on activities that it repatriates from the EU. To consider where those responsibilities could come from, we put forward ten aspects of the public sector that are most exposed to the EU and therefore to the impact of Brexit. They are:

  1. The public finances. HM Treasury modelling suggests that the deficit – the shortfall between the government’s income and its spending – could be up to £19 billion more this financial year as a result of the referendum. Exchange rates can also affect the public sector as a major purchaser of goods and services, if the cost of imports such as pharmaceuticals and fuel rise.
  2. Whitehall’s capacity. Central government moved swiftly after the referendum to establish the new Brexit department but there is little doubt that disentangling the UK state from the EU will present an era-defining challenge. A memo from the chair of Parliament’s Public Administration Select Committee urged Whitehall to build trade negotiation quickly, fill gaps with external expertise and make sure that officials remain energised for the task ahead.
  3. Tax systems and laws. If negotiations lead to a more remote relationship between the UK and EU, the implications for taxation could be far reaching. While the UK may gain greater freedom to make different choices, the short term challenge will be one of systems and law.
  4. Regional and rural funding. The UK received £4.5 billion of EU funding in 2015, mostly targeted towards rural communities and farming as well as programmes to support disadvantaged places. Whitehall and the devolved governments will need to work through the impact of Brexit on the funding.
  5. Regulation. EU regulations create consistency over wide-ranging issues. The public sector is subject both to generic regulations, such as those on employment, and sector-specific directives. In healthcare, for example, EU rules govern blood and tissue use, ensure that clinical qualifications are recognised across member state and set expectations for reciprocal access to state healthcare for EU citizens.
  6. Transport. European legislation covers substantial elements of transport, in particular where it crosses national borders. As with other areas of Brexit negotiations, the UK Government will need to balance the benefits of policy freedom with the benefits of market access. For example, membership of the European Common Aviation Area requires obligations under EU law.
  7. Immigration. The UK has never been a part of the EU’s passport-free zone and has maintained an opt-out on EU border control measures. Some fundamental issues that need to be considered include determined rights – especially whether there will be a cut-off date for European Economic Area migrants exercising their rights to freedom of movement.
  8. Policing and border control. The UK’s exposure to EU measures on policing is mixed. On one hand the UK already has an opt-out on certain security issues but on the other, UK authorities co-operate extensively with EU partners through measures including reciprocal searches of crime databases. Substantial changes to border controls could raise particular challenges and the complexity of transactions at UK borders might even require an entirely new operational approach.
  9. Workforce. About 55,000 EU nationals work for the NHS and 80,000 in the adult social care sector as part of a combined workforce of 2.6 million. While that might seem a limited proportion of the total, employers are already struggling to recruit and retain over both sectors. Public sector employers have acted fast to reassure EU national in the wake of the referendum result, but many employees remain understandably concerned.
  10. Higher Education. The UK’s universities are particularly exposed to Brexit issues. The Erasmus+ programme allocates €1 billion over seven years to UK bodies in support of student mobility, around 125,000 EU students study in the UK and the EU funding accounts for 11 per cent of research income for the UK’s top universities.

Whilst addressing these and other issues will be substantial tasks, The State of the State concludes that Brexit provides an opportunity for the government to rethink – rather than recreate – every responsibility it repatriates form the EU to make sure they are as productive and effective as possible.

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