Local government can successfully manage the Brexit transitions by knowing where potential challenges are and understanding their position.
In the immediate aftermath of June’s referendum on the UK’s EU membership, our public sector briefing - Assessing the impact of Brexit on your public sector entity [ 1133 kb ] noted the direct correlation between the strength of the UK economy and the funding made available for public services.
Very little detail has emerged about what the UK's future relationship with Europe will look like, the outcome of both the US Presidential election and the Italian referendum have confirmed that uncertainty is the new normal.
Sound financial and risk management processes are now more important than ever. In the absence of any concrete information, there is a temptation to 'do nothing' and, whilst we would not encourage organisations to act irresponsibly, there are steps organisations can take.
The potential implications of Brexit will vary significantly from organisation to organisation. Geography, financial standing and the types of service provided will all have a direct bearing on the impact of Brexit.
At this stage we expect organisations to have assessed the operational areas where they may be affected and included these on their risk registers. This will ensure that these issues remain in the minds of members and senior managers.
Key areas for most organisations are likely to include:
Access to talent
Net migration to the UK is at historically high levels and will be a key priority for the government.
Our expectation is that EU employees already here will be allowed to stay, although employees on short term or rolling contracts might find it more difficult to stay over time.
We would encourage organisations to assess their reliance on overseas workers both in total and at an operational level. Local authorities are much more reliant on staff from overseas in areas such as adult social care compared to their finance teams or fire fighters. Providing adult social care represents the major financial risk for many local authorities and retaining reliable affordable access to enough people with the right skills will be a significant challenge.
We have found large geographical variations within the boundaries of large local authorities, with some towns and cities being much more reliant on non-UK workers than others.
Organisations should prepare for possible restrictions of the recruitment of overseas workers by understanding their baseline position.
Access to funding
Access to EU funding will cease at some point, potentially as early as Q1 2019.
Whether this will happen immediately after the UK formally leaves the EU, or if there is some transitional arrangement, will depend on the nature of the exit agreement the UK reaches with the remaining EU member states.
In principle the negotiations need to be completed within two years of triggering Article 50 , in our view this is an incredibly challenging timescale.
In August 2016 the UK Government said that treasury funding will replace some existing EU funding. Details and timescales remain vague and there is no commitment about future funding. Local government bodies receiving EU funding should ensure these are quantified, profiled and included on their risk registers.
We recommend seeking assurances prior to incurring additional costs for future projects
Local Government pension schemes are defined benefit schemes and any weakening of the financial markets could increase the on-going funding requirements from local authorities.
Trustees should review the investment policies to ensure that they remain appropriate.
Interest rates have been at record lows for a considerable period of time. Many local authorities have some long-term debt at fixed rates that do not reflect the current costs of borrowing. As part of their treasury management arrangements, local authorities should already have a profile of their debt and this will be essential in assessing the impact of any post-Brexit interest rate changes.
We recommend that local authorities project their future financing requirements, whether this is new debt or replacement debt.
At this stage it is difficult to predict Brexit’s impact on the financial markets, it is possible that supplier credit lines may tighten and access to debt finance may become harder.
Local authorities have a statutory duty to set a balanced budget each year. This has proven an increasingly difficult challenge for many reasons, including:
- a reduction in central government funding
- increasing demand for services
- the fact that the 'easier' savings areas – the 'low hanging fruit' – are already identified
Setting a balanced budget in 2017/18 will be particularly challenging and it is essential that the assumptions are validated and stand up to challenge.
If realistic savings plans and an appropriate use of reserves does not lead to a balanced budget, then local authorities need to consider a referendum on council tax levels.
Medium term financial plans
Most public sector organisations already have a medium term financial plan.
Ranging in timeframes from three to twenty years, the level of detail varies considerably. Some are high level strategic plans whilst others are detailed three year budgets.
We expect the UK Government to trigger Article 50 by 31 March 2017 with the UK's formal exit from the EU possibly taking place by 31 March 2019, depending on agreed transitional arrangements.
Brexit will take place during the lifetime of most public sector medium term financial plans.
Planning in a rapidly changing environment is inherently difficult.
This uncertainty shows the need for effective planning with constant review and updating to reflect emerging developments or clarifications.
We would expect as part of the medium term financial planning:
- as with the annual budget, the assumptions underpinning the medium term financial plan are validated and stand up to challenge
- a range of scenarios (e.g. inflation, demand, funding etc.) is used so that a range of possibilities are considered - is the General Fund balance sufficient to cover any reasonably foreseeable overspends
- earmarked reserves are reviewed for adequacy and need – are they sufficient for what is planned and are previously anticipated projects still likely to go ahead.
Effective financial management also means stress testing key suppliers.
If you would like to explore these issues in more detail, please speak to your Grant Thornton contact or contact us.
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Cost and cashflow