Brexit and Scotland’s public sector

The EU referendum outcome is a watershed moment in political history. The campaign was typified by scaremongering on both sides. ‘Leave’ concentrated on immigration and the cost of EU membership in the crassest of ways, while the ‘Remain’ campaign relaunched ‘Project Fear’, which lurched from one exaggerated claim to another. ‘Remain’ also enlisted a host of world leaders, establishment figures and many well-known private sector companies. In this respect it seemed to represent the political establishment and elite in a way that ‘Leave’ did not (perhaps, for some, explaining part of its appeal).

The campaign was captured by a right-wing narrative, in part due to mainstream media rhetoric and the consequent disregard for a more progressive debate. There was a case for ‘Lexit’, which was seldom heard. For some the referendum represented being caught between a rock and a hard place. On the one hand, a UK government and state apparatus that has been administering almost undiluted neoliberalism for decades, and on the other an EU captured by German social liberalism (where the state is seen as subservient to the market, and should be supportive of the market as a means of attaining some theoretical ideal).

So what does Brexit imply for the public sector? Arguably, most economists – both mainstream and heterodox – have reached a rare consensus on the potentially damaging economic implications of Brexit stemming from turbulence in financial markets impacting on consumer and producer confidence with subsequent adverse knock-on effects on investment, aggregate demand, and growth, which would likely increase unemployment, employment precariousness, and further deflate incomes.

But these insightful commentaries tend to analyse the macro-economic impact – the economy as a whole – and trade, and do not focus on the public sector per se. Nonetheless, there may be potentially significant implications for the public sector. However, these implications are not necessarily obvious as the public sector is largely the responsibility of the either British or Scottish governments.

It is perhaps worth offering a definition of the public sector, namely, those production activities wholly or partly owned by the state, or agencies of the state, such as Scottish Water. Following decades of neo-liberalism, such activities are mainly confined to the welfare state, such as education and health care services, and local authority services. Nonetheless, it is richly ironic that technically a significant proportion of the financial sector remains in the public sector following the bailout of banks several years ago.

Given this, in my estimation Brexit may impact on the public sector through changes to current EU law and regulations governing competition in the single market and public procurement, and the fiscal policy context, which may have a number of manifestations, such as cuts to university research funding opportunities. I take each of those areas in turn.

Many public sector activities are subject to competitive tendering in the EU. The EU’s intention is to ensure that there is a single market that generates business opportunities throughout itself and offers transparency over service costs as well as promoting efficiency through competition. This is based on mainstream economic theory, which associates competition with efficiency – even if this competition is for the right to monopoly provision. The most recent example in Scotland is the success of the state-owned ferry operator, Caledonian MacBrayne in retaining its franchise.

EU law and regulations stipulate that where services are subject to competitive tendering workers’ conditions should be protected. TUPE (Transfer of Undertakings (Protection of Employment)) ensures that should any business or public sector activity be transferred, or contracted out workers’ existing conditions of employment should be fundamentally retained.

This EU regulation is enshrined as law in Britain. Arguably, there is a presumption that public sector activities should be subject to competition in the single market. Caledonian MacBrayne is a case in point, where the Scottish Government maintained that it had no alternative but to tender for ferry services, given its understanding of EU law.

Nonetheless, the legal framework is subject to Teckal and Hamburg exemptions. In particular, Teckal applies where a contracting authority deals with an entity established by that authority (or in conjunction with other authorities). Thus, local or regional government authorities could conceivably contract with bodies they have established without the need for tendering. Such is the regulatory context. This, of course has been subject to differences of interpretation. The issue is whether at some point in the future a post-Brexit Government would seek to repeal TUPE and close the Teckal exemption in its quest to pursue ‘efficiency’, or privatisation of public services by the back door.

Examining the recent record of British governments – Labour, Coalition, and Conservative – tends to suggest that the abolition of ‘Brussels red tape’ would be an appealing option for a neo-liberal post-Brexit Government. The previous Labour Government extended the private finance initiative to disastrous effect on local authority and NHS budgets. In 2012, the Coalition Government introduced the Health and Social Care Act in England, which repealed the duty of central government to provide universal health care. Instead, this duty assumed by various ‘commissioning groups’. The legislation is predicated on the mantra of ‘consumer choice’ and competition.

The trajectory of privatisation is further strengthened by the proposed trade agreement between the USA and the EU – the Transatlantic Trade and Investment Partnership (TTIP). It relates to three broad areas: access to markets, regulation of business activities, and principles over modes of co-operation, for example relating to energy and raw materials, such as fracking. In short, TTIP has been criticised on the grounds that it further empowers large corporations. For instance, public service activities, such as the NHS are the focus of market access for US corporations since the barriers to trade between the EU and the US are already very low.

The presumption entailed by TTIP is that there should be access to public services by alternative providers. Again, the assumption is that competition will ensure a more ‘efficient outcome’. Any government attempting to resist such a competitive threat to its public services would be leaving itself exposed to potentially crippling litigation. With the full implementation of TTIP, the EU would in effect be undermining its own regulations around TUPE. There has been extensive debate around the possibilities of exempting large parts of public services from TTIP. The current British Government has resisted calls for the NHS to be exempted. Nonetheless, there are signs that the EU position is shifting; for instance, the French Government appears to seeking to dilute TTIP proposals.

Again, the issue is whether a post-Brexit Britain would seek to avoid, or even miss out on TTIP (as Obama effectively inferred with his argument that Brexit would mean that Britain would be at the ‘back of the investment queue’), or whether it could negotiate a better deal than the EU. Given the current political situation, it is hard to envisage that a neo-liberal post-Brexit government would do anything other than embrace TTIP as a means of promoting free trade in an attempt to stimulate economic growth. By the same token, it is equally hard to imagine that such a government would have the same negotiating strength as the EU.

Further backdoor privatisation may be irresistible to such a post-Brexit government following the misguided mainstream economic nostrum of a balanced government budget. Indeed, Britain has been committed by Osborne to generate government budget surpluses. There can surely be little in modern history that has been as fundamentally misguided as Western governments’ pursuit of austerity.

Government budget deficits and debt are highly desirable in situations of recessions and economic fragility. Deficits stimulate demand, generate employment, and increase the wealth of the private sector. States that issue their own currency, and do not peg its value to another currency cannot be bankrupted: they can simply conjure more money (witness the various ‘quantitative easing’ programmes in Britain and elsewhere). It is one of the abiding myths of mainstream economics that government debt has to be retired.

Yet there is little to suggest that a post-Brexit British government would contemplate abandoning standard economic thinking on this. Thus, given a possible contraction in demand following a loss of consumer and producer confidence further austerity would be a significant probability. In this context the public sector in Scotland and Britain would be subject to further fiscal retrenchment and privatisation.

Of course, much of the foregoing is speculative and should therefore be treated with caution. However, the argument is based on the recent policy trajectories of EU and British governments. On this basis, assuming the current constitutional configuration, the outlook for the public sector and its services in Scotland is, to say the least, challenging.

Robert McMaster is professor of political economy at the University of Glasgow