Brexit, localism and devolution

Judith Barnes, Bevan Brittan

Many people were surprised by the outcome of the referendum on leaving the European Union and the ensuing political uncertainty. Consequences have included the resignation of David Cameron and the leadership challenge to Jeremy Corbyn, among other exits.

Before the referendum few people would have heard of Article 50 of the Treaty on the European Union. However, the implications of Brexit must now be the subject of discussion in many households on a regular basis.

The Treaty on the European Union

The clock only begins ticking on Britain’s exit once the Article 50 Notice is served. There is then a period of two years within which we can negotiate the terms of our exit. If nothing is agreed, all 27 EU countries will have to agree to extend the timeframe or the EU Treaties will cease to have effect in the UK. The draft deal must be put to European Council leaders, and needs approval from at least 20 countries covering 65 per cent of the EU population before the deal can be ratified. The prospects of the UK being able to agree a deal within two years look slim. It took Greenland three years to negotiate an exit, including an agreement over fishing rights.

Theresa May appears to have ruled out a second referendum: ‘Brexit means Brexit’. But questions have been raised about whether the Prime Minister can serve the notice without having a resolution of Parliament and a court challenge on this issue is likely to be heard in October.

The petition, which was started before the result and calls for a second referendum in the event of the vote being less than 60 per cent from a turnout of less than 75 per cent, now has more than 4 million signatures and was debated on 5 September 2016 with no outcome flowing from over 70 pages of Hansard.

A private member’s bill, Terms of Withdrawal from EU (Referendum) Bill 2016/17, has had its first reading. This requires a referendum to endorse the draft exit package proposed by the government for withdrawal or to allow a decision to remain a member prior to the UK giving notice under Article 50.

Theresa May has now announced that any notice will not be served until the New Year, which means that the earliest we are likely to leave the EU is 2019. Meanwhile, the new Department for Exiting the European Union has published its senior management team under David Davis, the Secretary of State for Brexit.

Uncertainty

There is no doubt that the referendum vote has created significant economic uncertainty with the loss of foreign investment into real estate trusts and volatility in financial markets. Overall, the Economist Intelligence Unit projects a six per cent contraction in the UK economy by 2020 and an eight per cent decline in investment. This will result in rising unemployment, falling tax revenues and public debt reaching the whole of our national output. Any economic downturn is likely to translate into increased welfare needs and costs as well as more people becoming homeless at a time when local government funding is projected to fall again.

Business as usual

Although it may be tempting for some elected members to say that because Brexit means Brexit we no longer have to comply with EU directives and rules, it is necessary to remember that all of the current rules continue to apply until such time as we leave the EU. It is difficult to know what the attitude of enforcement authorities will be in the intervening period. However, there is a slim chance that we might remain and it is very unclear what we will negotiate if we do leave. More than ever, lawyers must ensure that they adopt a risk-based approach to their advice to members and officers about the implications of Brexit.

The overriding message is that local authorities need to comply with current rules and regulations until such time as they are abolished.

What will follow Brexit?

The nature of any exit is unclear. Will we try to stay within the single market by retaining membership of the European Economic Area (EEA)? If so, like Iceland and Norway, this would mean free trade with Europe but we would still be required to follow EU procurement legislation and observe rules on the free movement of goods and workers.

Switzerland is neither an EU nor an EEA member but it is part of the single market through a series of bilateral agreements, which cover many areas of trade. It still has to comply with free movement although it is not subject to EU procurement rules. Or will we secure a deal negotiating as part of the World Trade Organization?

It is hard to imagine any local government service where there will be no impact on operations from the exit but, despite that, will the effect be that great? Parliament will need to legislate for virtually all changes: what will be the priorities and how far will legislation be pared back, if at all? Where direction currently comes from the EU, could that be replaced by other organisations, such as the World Trade Organization?

Let us delve a little more deeply into some of the more direct impacts:

  • European Convention on Human Rights: this is a completely separate issue to EU membership. We are likely to remain a signatory but steps were already in place to reduce the impact of the Human Rights Act 1998 and the European Court of Justice. This would be through a British Bill of Rights that was announced in the Queen’s Speech, through which we would also withdraw from the EU Charter of Fundamental Rights.
  • Employment: much of our employment law may flow from EU directives but some of it predates EU law; in particular, equal pay, race and disability protection. Wholesale change may lead to uncertainty for employers and, therefore, rowing back on gold-plating of legislation may be more likely, such as maternity, holiday pay and TUPE. The EU will not want UK business to have an unfair competitive advantage through more relaxed employment law protection and we may, therefore, remain subject to EU labour regulations in any deal to remain as part of the free market.
  • Immigration: if we remain part of the free market, this implies acceptance of free movement of labour. The alternative is an extension of the points-based system proposed by the Leave campaign. That would mean minimum salary requirements and labour market tests, an immigration skills charge of about £1,000 a year per sponsored employee and the recruitment or reliance on foreign workers may need a sponsorship licence.
  • Procurement law: procurement rules are unlikely to be abolished in their entirety, although options will depend upon what is agreed, for example, with the European Economic Area or World Trade Organization. The Conservative Government believes in private enterprise and the free market economy so we may still see rules to ensure fair treatment and possibly compulsion. Some form of state aid and competition law may well be required to ensure a level playing field and to ensure that abuse of the dominant market position and cartels are monitored, as under the World Trade Organization.
  • Funding: the Chancellor has promised that the government will honour existing agreed projects that are reliant on EU money but this still leaves much uncertainty on future regeneration funding, since thousands of proposals are yet to receive government approval. The Local Government Association is calling on the government to guarantee that local areas will receive all the EU funding they are expecting by the end of the decade, as well as honouring commitments to match fund EU monies with domestic funding. The Treasury’s proposal to review all EU funding schemes, to ensure that any ongoing funding commitments meet a UK national interest test, does not provide any confidence that funding will be matched.
  • Information law: the General Data Protection Regulation is scheduled to come into force on 25 May 2018 and supersedes the Data Protection Act 1998. It will take immediate effect. However, unless the UK adopts data standards equivalent to those in these regulations, sharing personal data with organisations based in the EU may become more difficult.

Overall impact of Brexit

Local authorities may feel the brunt of another recession with reduced council tax and business rates, as well as increased demand for services and welfare support, just when consultation on business rates retention has been announced by Greg Clark, Secretary of State for Business, Energy and Industrial Strategy.

With the prospect of continuing austerity, local authorities need to find ways to cut costs, reduce demand for services through behaviour change, invest in ICT solutions, and generate more income. All the uncertainty and the possibility of another recession mean that there has never been a more important time to look at the impact that all these measures will have on the local economy. Thought must also be given as to how local authorities may promote their own areas to pursue economic growth for the long term, either on their own or jointly through combined authorities.

Many local authorities are looking to invest in assets in order to provide income streams that will help to secure the longer-term future of the council and replace income streams previously delivered through government grants. Trends for alternative delivery vehicles and investment in ‘place’ appear to be even more important in the future, particularly around collaboration with other public bodies in relation to assets, through the One Public Estate programme, and shared services, including with health. This would help to sustain the local economy, drive efficiencies and deliver better performance on outcomes for local people.

It will be interesting to see how far combined authorities deliver shared services into the future, not just between local authorities but between other public bodies where the Secretary of State devolves their functions.

Some local authorities are also exploring mergers in order to deliver efficiencies under section 15 of the Cities and Local Government Devolution Act 2016.

Local spend is important in this context, seeking to ensure that more money is spent and respent in the local economy. It is, therefore, surprising that only around one third of local authorities have sought to implement the Public Services (Social Value) Act 2012 into their commissioning and procurement activity to support local supply chains.

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