Student enrolment for all Professional Accountancy Qualification courses is now open.
Book here >
On 23 June 2015, the citizens of the United Kingdom will vote to decide whether to stay in the EU. Voting to remain is a vote for the reforms negotiated by Prime Minister Cameron and agreed at the meeting of the European Council in February 2016. The reforms concern a UK opt-out from Ever Closer Union, protection for non-euro countries in the EU, and some control of the benefits paid to migrants in the EU. Voting to leave is a vote to initiate Article 50 of the Treaty of Lisbon and begin a two-year notice period before permanently leaving the EU.
Debate on EU membership has been recurring since before the UK first joined the European Economic Community in 1973. Cameron’s Bloomberg speech in 2013 set the tone for debates on Europe during the 2015 election campaign and in the UK’s negotiations with the EU. Over the years, when discussing the UK’s membership in the EU, common themes have been debated: whether there should be ‘more Europe’ or ‘less Europe’, perceived over-regulation, threats to sovereignty, uncontrolled migration and border control.
Both the Remain and Leave camps are touting figures that demonstrate that either the UK benefits financially from being in the EU or is burdened by its fees and tariffs.
In April 2016, the Institute for Fiscal Studies (IFS) found that in 2014 annual UK public spending was £743bn. The European Commission figures show that the UK’s gross contribution to the EU Budget was £11.3bn. IFS suggests the UK received back £5.6bn through various funding streams leaving a UK net contribution of £5.7bn.
IFS has estimated that going forward, the UK’s overall net contribution, though likely to fluctuate, will be around £8bn. Although many Eurosceptics argue the money lost in contributions to the EU could be spent on public services, there is no guarantee a future UK government would choose to do that and, given the oft quoted Norway and Swiss model, it would equally depend upon the deal reached with the EU if the UK were to leave.
What is clear, is that the balance sheet of the UK heavily relies on economic stability, and downturns invariably affect the spending capacity of public services. To achieve economic stability in Europe and boost public spending, the widely respected Eurosceptic economist, Roger Bootle, estimated the EU requires a budget of 10% of GDP. At the moment, data suggests the budget GDP ratio is a lot smaller. IFS claim that the overall EU budget is about 1% of the EU’s Gross National Income (GNI) and GDP, which the IFS acknowledge is ‘relatively small’.
The Treasury released a dossier in 2016 that estimated the UK’s GDP growth would reduce in the event of a Brexit. They predicted a loss of 6.2% by 2030 or £4,300 for each household. Research from the London School of Economics (LSE) in 2016 estimated this figure to be lower, between 1.3% to 2.6%.
The EU’s free movement policy has meant that individuals across Europe have a right to live, work and study in another EU country. All parts of the public sector have benefited from accessing a wider pool of skills and talent across all parts of its business. This includes attracting finance professionals. Although, recruitment outside the EU has always been common.
In terms of employment law, EU regulations are written into the terms and conditions of employee contracts. EU legislation is deeply entangled with UK law and in employees’ contracts
Welfare and the fiscal effects of immigration.
One of the major themes of the EU referendum debate has been immigration and the financial strain it is perceived to place on public services. Although the impact is difficult to evaluate as the costs and benefits are not easily identified or distributed evenly across regions, there is a widespread sense that migrants take advantage of our welfare system. Indeed, at the heart of David Cameron’s reforms were plans to change EU migrant’s access to child and in-work benefits.
According to analysis by the National Institute of Economic and Social Research (NIERS), the issue of EU migrants claiming benefits is not a significant economic problem. The Office of Budget Responsibility (OBR) calculates that "on average EU migrants make a net contribution to public finances" and their net contribution will only grow in future. Indeed, research by University College London (UCL) suggested that European migrants contributed £15.2bn to UK public finances between 2007 and 2011. It also indicated that migrants are less likely than natives to receive state benefits or tax credits.
The UCL report also argued that migrants provide savings to the taxpayer by bringing with them educational qualifications paid for by their countries of origin. They found that "between 1995 and 2011 European migrants endowed the UK labour market with human capital that would have cost £14bn if it were produced through the British educational system".
France and the UK negotiated a bilateral deal, called the Sangatte protocol, to counter the number of people arriving in the UK and claiming asylum. First introduced in 1994, the agreement means British border guards carry out passport checks in France and Belgium, rather than French and Belgian authorities.
As a result of these agreements refugee camps, such as the ‘Jungle’, have surfaced close to French ports, which are managed by French authorities. Due to the fiscal burden this places on French public resources, the British Prime Minister David Cameron, in a speech made in February 2016, suggested the French government would end this treaty if the UK were to leave the EU. Because of this, the Prime Minister suggested that the camps would appear in southeast England.
Rob Whiteman, Chief Executive of CIPFA and himself former head of the UK Border Agency, argued that it is likely the camps would close, but they would not appear in the UK. He went on to claim that migrants arriving in the UK would be able to claim asylum and be dispersed across the country or placed in immigration detention centres at the cost to the British public.
EU regulations have a far-reaching impact on the way public services are managed. The general discourse of the referendum debate has reflected the widespread disgruntlement with EU legislation and directives imposed on the UK.
Data from Open Europe shows that some of these regulations may create an unnecessary cost. Open Europe claims that between 1998 and 2010, regulation introduced in the UK cost the economy £176bn. Of this, £124bn, or 71%, had its origin in the EU.
Similarly, the Eurosceptic, David Davis MP argued that the previous government’s own regulatory impact assessments estimated that EU regulations cost Britain’s private and public sectors £140bn between 1998 and 2010.
Conversely, the Coalition government’s review of competencies within the single market report painted EU regulation in a positive light. It concluded that the evidence showed the constraints on policy making were outweighed by integration, appreciable economic benefits and a liberal model of policy-making.
Equally as with the balance of payments, there is the likelihood that maintaining a special and reciprocal relationship in terms of trade and access to the EU would require the UK to conform to the EU’s regulations.
As EU laws and regulations are deeply entrenched in public sector procedures, it is difficult to disentangle trends in policy, legislation, and finance that are EU-specific from those that were made in the UK.
By the same token, it is difficult to judge whether certain changes in UK public administration would have taken place whether or not the UK had joined the EU.
For example, the EU practice of codification, where relevant legislations are brought together under a single act, was happening in the UK before they were members of the EU Single Market. Despite the difficulty in working out the EU’s influence on the UK legislation and regulation, research claims the UK heavily influences the EU agenda.
According to research by Robert Thomson, at the University of Strathclyde, out of 29 EU actors the UK was fourth closest to final policy outcomes between 1996 and 2008. The UK was also a lot closer to policy outcomes than France and Germany.
Despite the UK’s influence, evidence shows its position is particularly unique. According to LSE in 2015, the UK has demonstrated a reluctance to participate in many EU areas, more than any other member state.
This includes: the Euro, justice and home affairs provisions, a banking union and a place in the Schengen area.
The public sector’s pension funds totalled £1.3tn in the last Whole of Government Accountants (2015). A significant proportion of these are held in UK based shares. In a briefing in 2016, Camden Council estimated this amount to be at £1.23bn or 30% of the total national pension pot. This means these funds are vulnerable to changes in UK share prices. There is concern that if the UK were to exit the EU then the value of these holdings would decrease as there could be less investment in the UK market due to any trading restrictions.
Camden Council also argued that in the event of an exit then the pension funds yields could increase. They claimed that as government bonds- or gilts- may be a less attractive prospect outside of the EU, investors are likely to sell them off. This would bring down prices and, as the fund’s liabilities are based on gilt prices, the ratio between public sector pension’s assets and liabilities would increase. As a result, yields from public sector pensions could be greater.
Download the full report (PDF, 1.9MB)