Scotland’s deficit and joining the EU

Some commentators have suggested that an independent Scotland could not join the EU with its current budget deficit, which – based on the Government Expenditure and Revenue Scotland (GERS) 2015-16 report – was 9.4% in 20151. This was the biggest in the EU, 1.9% worse than the next country, Greece, and 7% greater than the EU28 deficit of 2.4%.

But is it the case that Scotland’s ascension to EU statehood would be prevented by its current fiscal position? Regardless of your opinion on the validity of the GERS figures (which only really show how Scotland is performing as part of the UK, with limited control over economic policy2), you might reasonably expect the EU to look at these figures when considering Scotland’s membership, since they’re the only ones that exist.

The deficit would almost certainly exclude Scotland from joining the euro (a condition of which is a deficit of no more than 3% of Gross Domestic Product (GDP) and government debt of no more than 60%). But what about the Stability and Growth Pact (SGP), which some commentators cite? The EU describes the SGP as “…a set of rules designed to ensure that countries in the European Union pursue sound public finances and coordinate their fiscal policies.” Its criteria also demand a 3% deficit limit and debt-to-GDP ratio of no more than 60%3.

“It’s a myth that Scotland will have to meet the deficit criteria to join the EU.” contacted Steve Peers, Professor of EU, Human Rights and World Trade Law at Essex University, and asked how – given the deficit – he thought the SGP would play into Scotland’s EU ascension should it vote for independence. He told us: “It’s a myth that Scotland will have to meet the deficit criteria to join the EU,” adding: “The Pact isn’t binding, although some EU legislation on reducing deficits would apply. However, those laws are applied quite flexibly.”

When Croatia become the 28th member state in 2013, its deficit was over 3%.

For context, based on the latest (2015) Eurostat figures, six EU countries had a deficit of over 3% of GDP in 2015: Croatia, France, the UK, Portugal, Spain, and Greece. In 2014, 13 countries exceeded the 3% ceiling. Perhaps most interestingly, when Croatia become the 28th member state in 2013, its deficit was over 3% (6.2% in 2010, 7.8% in 2011, 5.3% in both 2012 and 2013) and has remained over 3% since (although they have since been striving to meet the 3% limit).

We also looked at the Fiscal Stability Treaty, an accord signed in 2012 to “reinforce the budget discipline of euro area governments following the sovereign debt crisis that started in 2010.” It covers euro area countries, but other EU states can join if they wish to do so4. We reached out on Twitter to Dr Kirsty Hughes – writer and commentator on international and European politics, and former senior political adviser in the European Commission – and asked whether she thought Scotland would have to sign up to the treaty. She said it wouldn’t have to, as it’s an intergovernmental treaty (as opposed to being written into existing EU treaties5) – though there would probably be pressure to do so. Dr Hughes also said that a key question would be whether the treaty would be brought into the EU on Brexit, adding that there would “equally be a reluctance at [the] moment to re-open EU treaties.” believes Scotland should aim for a balanced budget within a sensible timeframe in the event of independence. But from what we’ve learned in the process of researching and writing this post, it seems that having to cut the deficit in a rush in order to be accepted into the EU won’t be necessary. We hope this post helps bring some clarity to the issue.

  1. Source: Government Expenditure and Revenue Scotland (GERS) 2015-16 Spreadsheets, Table A.4, cell S20. The 9.4% deficit takes into account a geographical share of North Sea oil revenues. The Scottish Government provides calendar year balances in the GERS report to allow for international comparisons (the 2015-16 financial year number was 9.5% [table S.6]). The calendar year figures are for the government sector only (i.e. not including pubic corporations such as Scottish Water).
  2. Scotland currently doesn’t have control over taxes such as national insurance, VAT, corporation tax, and fuel duty, which are all reserved to Westminster. It currently also doesn’t have full control over income tax (e.g. being able to set the personal allowance), or any control at all over immigration.
  3. Source: Specifications on the implementation of the Stability and Growth Pact… (dated 5 July, 2016; page 3, paragraph 3).
  4. All EU countries signed up except the Czech Republic, Croatia, and the UK.
  5. Thanks to a David Cameron veto.

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