AN INDEPENDENT Scotland should not follow the European Union’s (EU) fiscal rules before joining the bloc as it could spark “several rounds of austerity”, a report has argued.
Dr Dirk Ehnts and William Thomson, founder of Scotonomics, have published a paper setting out concerns over plans to follow the bloc’s Stability and Growth Pact (SGP), which sets a framework for government spending and debt levels.
In the event of independence, the Scottish Government has said it plans to follow the SGP as a currency user and then a currency issuer, before applying for full membership of the EU.
The paper argues this is “economically nonsensical” to suggest the rules apply “equally under two vastly different regimes”.
They suggest that following the SGP while using Sterling could “raise the spectre of the Scottish government running out of Sterling”.
And, while using the Scottish pound, it could pose “significant issues for a newly independent nation”.
Titled “The Economic Impact of Adopting the European Union’s Stability and Growth Pact in an Independent Scotland and introducing Scotland’s Sectoral Balances”, the report issues a stark warning.
Following the SGP would “collapse economic growth, raise unemployment and reduce public goods and services”, with the potential to increase household debt stress and impact lower earners, women, children, and minority groups.
The paper argues that if the Scottish Government seeks to reduce the public deficit to meet the limit set out in the SGP, 3% of GDP (Gross Domestic Product) and 60% public debt to GDP, it would need to cut public spending by 1.7% each year to reach below the 3% target by 2040.
This scenario, it argues, would “mirror the UK austerity years between 2010 and 2015 that caused significant and lasting damage to services and communities”.
“GDP would constantly fall by about 1% per year, so that by 2040 Scotland would have experienced two decades of economic decline,” the paper argues. Instead, Scotland should adopt “economic guide rails tailored to Scotland would better serve citizens’ social welfare”, it adds.
The SGP is the “price” smaller countries pay for access to the EU single market, as well as "perceived economic stability” associated with using the Euro.
But as the Scottish Government has acknowledged that abiding by the SGP is not a precondition for joining the EU, the paper argues that they are “signing up to take the stick without the carrot”.
Aligning with the SGP before formally applying for EU membership is criticised as a “public relations move” aimed at showing fiscal responsibility to the bloc and positioning Scotland as a “safe bet”.
The paper adds: “However, we have shown that following the SGP would be counterproductive.
“By following the SGP, Scotland’s likelihood of joining the EU would be hampered by weakening the medium and long-term resilience of the Scottish economy.”
Scotland’s recent economic history, the paper argues, shows it is not compatible with the EU’s current fiscal rules, and would force Scotland into “several rounds of austerity”.
This would involve spending cuts and tax increases, and would likely see public debt rise rather than fall.
“An independent Scotland has all of the necessary resources, skills, and institutional capacity to enable its citizens to prosper,” the report adds.
“It would be significantly strengthened by issuing its own currency within a few years of securing independence.
“The new nation would be similar in many ways to other thriving medium-sized OECD nations, many of which do not follow rigid fiscal rules like the SGP.”
