Experts counter claim EU will reject Scotland over budget deficit

A new study by Institute for Fiscal Studies (IFS) claims the country’s notional deficit – the gap between Scotland’s spending and tax revenue – has risen from 8.6% of GDP in the financial year before the pandemic to between 22 and 25% in 2020-21.

Speaking earlier, IFS associate director David Phillips said Scotland is "relatively rich" but would "start life [as an independent nation] with a large deficit".

Unionists politicians insisted the projections – based on Scotland’s economy within the Union, not as an independent nation – leave the SNP’s post-independence ambition to rejoin the EU in tatters.

READ MORE: Scotland is rich enough to become independent, think tank says

They cited Brussels’ Stability and Growth Pact, which states members and applicants should reduce budget deficits to 3% of GDP or less, although new members can negotiate leeway as part of transition period agreements.

The Scottish Tories argued the IFS figures mean it is “highly implausible” Scotland will be able to rejoin the bloc.

However, those assertions have been contested by leading European analysts.

Anthony Salamone, who runs the political analysis firm European Merchants, urged Scots to take the IFS study with a pinch of salt, and suggested the importance of the deficit has been “overemphasised”.

Anthony Salamone, founder and managing director of European Merchants

In an online post, he pointed out that the EU’s deficit rules have been suspended until 2022 due to the economic impact of the pandemic. Recent reports stated European leaders will not be “overly rigid” when the rules come back into force, which may not be until 2023. Salamone noted too that the budget targets also apply to member states, with Germany and the Netherlands among those to have exceeded them in the past.

He told The National: “Scotland is not an independent state so it’s hard to determine what the deficit of an independent Scotland would be.”

The Brussels expert explained: “The budget deficit is so important to us in our debate, but it is certainly not the most the important thing when you’re trying to join the EU – far more important are your preparations in terms of having the institutions that you need, having democracy, having a free market economy. Those are what really matter.

“The budget deficit is part of the Stability and Growth Pact, which is part of all the rules [for joining]. So it’s not unimportant, but it’s certainly not the thing on which the question of whether or not Scotland can rejoin the EU hinges.”

READ MORE: Nicola Sturgeon makes passionate defence of independence under BBC grilling

He added: “If your budget deficit is too high it’s not as if the gates come crashing down and your EU membership is over, which is how it’s regularly presented in the UK."

Salamone acknowledged an independent Scotland would have to have its “ducks in a row” in terms of finances and state institutions if it were to rejoin the EU, but he concluded it is “highly probable” the country would reach an agreement with the bloc.

Kirsty Hughes, founder and director of the Scottish Centre on European Relations, also gave short shrift to claims the IFS report could torpedo Scotland’s hopes of rejoining the EU. She did, however, stress the importance of adhering to the budgetary rules.

Kirsty Hughes says Scotland would not have to meet the deficit target on 'day one' of its EU membership

A deficit as large as the IFS reports suggests rejoining would “certainly be problematic”, she explained, adding: “But obviously we’re in the middle of a pandemic and debt levels among EU member states have gone up hugely and the EU has suspended its deficit and debt rules until at least 2022.”

Hughes pointed out there are discussions in Brussels about whether the deficit threshold needs to recalibrated in light of the pandemic, meaning the situation could be completely different by the time Holyrood does seek to rejoin. “Scotland would of course be expected to meet whatever EU deficit levels there are, but that should be quite away past the pandemic and all the extra spending associated with the pandemic,” she told The National.

“I don’t think it’s at all relevant to Scotland’s position in five or 10 years’ time to talk about what’s happening today.”

The European expert also said Brussels could permit a certain amount of flexibility as long as Scotland could show it was on track to meet the targets “within a year or two of joining”.

“You don’t necessarily have to get to 3% on day one,” Hughes explained, noting the example of Croatia, which joined in 2013 with a higher deficit but agreed a plan with European leaders to bring that figure down.

She added: “It’s misleading to suggest that if the rules stay the same that Scotland could somehow ignore it, but there would certainly be scope to join with its deficit at a slightly higher level.”

Nicola Sturgeon dismissed suggestions Scotland's deficit would scupper her post-independence plans in an interview with Andrew Marr.

She said: "We'll deal with a deficit in the same way almost every other country across the world that has a deficit deals with that: you manage your finances through borrowing [and] through prudent decisions about public spending."