One of the major decisions affecting Scotland post-independence is whether or not it should join/re-join the European Union. The economic case has not been proved, it has not even been discussed.

There is no doubt that Brexit had a huge and unnecessary negative impact on the Scottish economy. But this does not mean that being part of the EU is the solution. The economic case for European membership still has to be made.

The case for Scotland as part of a single market is much stronger. The main economic difference between being part of the single market and the EU is what appears to be a rather technical one:

All EU Member States are committed under rules known as the Stability and Growth Pact (SGP) to pursuing sound public finances because they are an essential pre-requisite for sustainable economic growth and financial stability.

Dr Tim Rideout in Episode 79 of SCOTONOMICS earlier this month, said it was more appropriately called the “instability and no growth pact” and we echo his thoughts and concerns.

Scotland in the EU under the Stability and Growth Pact

The main concern for Scotland as part of the EU is its neoliberal economic framing, especially this view of government debt and deficits. Both are regarded as unquestionably bad. This is economic opinion, not economic fact.

“Sound public finances” as a statement makes sense. And no economist would want unsound public finances. However, it is not the idea but the application that has significant considerations for an economy.

The technical and specific concern is the budget deficit to GDP figure:

The Excessive Deficit Procedure

Member States which run excessive budget deficits of more than 3% of GDP, or which fail to reduce their excessive debts (above 60% of GDP) at a sufficient pace, follow a particular set of rules known as the Excessive Deficit Procedure (EDP).

Even under the neoclassical framework, it is not the size of the deficit that is the issue but whether debt service is sustainable. The 3% figure has no economic basis.

The fact that these rules are regularly ignored by almost all of the EU members and are currently being renegotiated (with the chance that they may become MORE stringent) is incidental. It is unthinkable that, as a new member, Scotland would not want to be a shining light by following to the letter the economic framework of the EU. In fact, an independent Scotland would already be mirroring this framework as it seeks to become a member, as outlined in the Building a New Scotland economic paper released by the Scottish Government in October.

This is economic suicide for a newly independent nation. It is so impractical, in fact, that it is really a meaningless statement.

After independence, Scotland will have ended decades of under-investment as part of the UK

One of the main reasons for independence is to have the ability to do things differently from successive UK governments who have consistently underinvested in vital public infrastructure. When independence arrives, Scotland will:

  • inherit crumbling public services in desperate need of huge investment.
  • need to build a new state. 10,000s of new public servants will be needed.
  • be in need of scores of new institutions.
  • hear calls from every sector and every part of the country for help. It would be the time to deliver a just transition and a wellbeing economy.
  • be coming to terms with the climate and biodiversity crisis.

To deal with these multiple issues will require massive government spending. It is likely that a new Scottish Government would need to spend figure sin the double figures as a percentage of GDP for several years to simply catch up with our European neighbours.

We need to put this clearly. It will be impossible for Scotland to start to invest anywhere near the levels required to create a just transition and a wellbeing economy if it follows a framework based on the SGP. If Scotland was to join the EU and adhere to the stability and growth pact, it would almost certainly lead to a large austerity programme.

The only small caveat is if Scotland somehow suddenly turns round its large trade imbalance. This is as near as impossible in the short to medium terms as you can get.

Sectoral imbalance

Assuming a trade deficit, which Scotland will undeniably inherit, then if we want the private sector (us) to be in surplus, i.e. spending less than we earn, then the government will have to be in deficit. Considering the size of the trade imbalance, a 3% GDP budget deficit would lead to a massive increase in private sector debt. In a macrosectoral view of the economy, this is an accounting identity, which means it is a fact, not an opinion.

Scotland consistently runs a trade imbalance. For the last five years, the average was almost £16 billion, which is about 10% of the Scottish economy. We are only going to look at the trade imbalance. If we consider that Scots will be using a foreign currency (the £) until several years after independence (as per Building a New Scotland), the figure could be a multiple of this. But let’s not go there.

A public sector in deficit means that the private sector spends more than it earns. This is also known as going into debt. And no one really wants that.

“If we want our private sector to save, which almost everyone thinks is a good idea, we must have the government running a deficit” Professor L. Randall Wray.

So if we are in deficit to the rest of the world by £16 billion and if we want the private sector not to be in debt, then the Scottish government must run a deficit of £16 billion, or around 10% of GDP at 2021 figures.

Private sector: 0

Foreign sector:  + 16

Government sector: – 16

Private debt is what leads to financial instability, not government deficits

All of the concern for debt and deficits within the neoliberal framework is focused on government debt. Not private sector debt. If we have learned one thing from the financial crash in 2007/2008, it should be that it is the private debt that leads to financial instability. Not government debt.

Scotland in the EU? In summary, all the evidence suggests that joining the EU will likely lead to a massive austerity programme. For those EU supporters, now is the time to make their economic case for Scotland to be part of the EU. We are ready to listen.