Four Brexit Takeaways for America’s Local Governments
June 24, 2016 – Brandon Camhi
You’ve seen the news by now. On Thursday, June 23, British citizens voted to exit the European Union, unleashing a tidal wave on a continent that has embraced political and economic integration since World War II.
The vote occurred across the Atlantic, but the era where America could insulate itself from European events is long gone. Instead, as the financial market’s reaction indicates, Brexit will impact institutions across the globe. And America’s local governments are no exception. Here are four key Brexit takeaways for city and county leaders:
1. Prepare for a possible recession.
Recession was likely even before Brexit. In May, the economy added just 38,000 new jobs – the lowest since 2010. Auto sales in May were over 15% lower than they were a year ago; and business investment is dropping as market risk rises. A Wall Street Journal survey of economists published before the Brexit vote pegged the odds of a recession within the next year at 21% and former Treasury Secretary Larry Summers believes “the economy is more fragile to a negative shock than at any time since the second World War.”
Brexit may be that shock. Local governments should begin preparing for budget challenges. Now is the time to put the technology in place that ensures the entire management team and elected officials understand the revenue and expenditure picture so the organization can proactively plan for different economic scenarios and manage its finances during the recession.
Some governments are already implementing the necessary technology. For example, Jason Loveland, Northglenn, Colorado’s Director of Finance, describes how “The reason I want to do a lot with OpenGov now, and not wait until there’s a crisis, is because the time at which we’re most going to need OpenGov is also the time at which we’ll be least able to think about it. We’ll need to just have all of that information in front of us so we can act intelligently rather than with panic.”
2. Consider investing in critical infrastructure.
Last September, we explored how the interest rates municipal governments pay on their debt depend on the Federal Reserve’s interest policy decisions. Quick recap: the Federal Reserve (the Fed) is America’s central bank. It sets interest rates that serve as a floor for other public and private sector rates. The Fed lowers rates to spur investment and stimulate the economy during tough times, and raises them to combat inflation. When the Fed raises rates, other interest rates go up too and vice versa.
The Fed raised rates 0.25% in December 2015, and since then, experts expected a couple more increases in 2016. However, during its last meeting, the Fed cited Brexit as a reason why it may delay these hikes. Some analysts speculate the Fed may even reduce rates again. Britain’s citizens just made it unlikely the Fed will significantly increase interest rates this year.
This means municipal debt interest will be lower, ensuring governments can finance mission-critical infrastructure projects at lower cost. A third of mayors in a Politico survey believe a ‘Flint-like’ situation could occur in their city due to neglected infrastructure investments. Lower interest rates present governments with an opportunity to act.
3. Don’t neglect public engagement.
Although we may never pinpoint the exact reasons the Brexit resolution confounded expectations and passed, it’s clear multiple levels of British and European government failed to show how citizens benefit from European Union membership.
Governments must proactively show the public how agencies are addressing pressing public policy challenges. Far too few governments report performance outcomes, focusing instead on financial and operational reports. Leaders must do more to quantify and share how tax dollars and the policies they support lead to better outcomes for citizens.
Technology has a role here – citizens are used to accessing information on the web and on their smartphones, and governments must meet constituents on the platforms they use. Today, too many government transparency efforts use stale PDFs that are not accessible to citizens.
4. Empower your government to rapidly adapt to changing macroeconomic and local conditions.
We don’t know for sure what will happen next; we may avoid a recession and we hope we do. However, this uncertainty explains why governments must be innovative and adapt to changing circumstances.
This requires decision-making processes that encourage agencies to share data and insights across the government, and a willingness to nimbly change course. Governments must also be prepared to learn from each other so innovative responses to complex challenges can spread.
News headlines direct our attention across the Atlantic to governments in London, Paris, Brussels, and Berlin. However, we must not forget to consider how events will impact the governments next door and how we can prepare for what comes next.