An end to austerity was a flagship pledge of the Yes campaign at the height of Scotland’s independence referendum two years ago. The then finance secretary John Swinney unveiled keynote plans to borrow billions of extra pounds in the early years of independence in an effort to ease the impact of swingeing welfare cuts. Those cuts were being imposed by the coalition government which had pledged (unsuccessfully as it turned out) to wipe out the UK’s annual deficit. For those who are not policy wonks, that means the shortfall between spending on things like schools and hospitals and the cash raised in taxes to fund them. At last count the gap was about £90 billion across the UK. But if Scotland is to vote again on leaving a Brexit-bound UK, could the dire state of public finances north of the border scupper Nicola Sturgeon’s hopes of delivering the independence dream?
Just last week, Spain and Portugal found themselves hit with massive EU fines which may well stretch upwards of 300 million euros for failing to bring their public finances under control. They are the first nations to face such a sanction after the European Council – the real seat of power in Brussels – found the Iberian states had failed to reduce their deficits to below 3 per cent of GDP in line with EU rules. Spain had a deficit of 5.1 per cent of GDP, while Portugal’s deficit was 4.4 per cent of GDP. In delivering the sanction, EU finance ministers found that both countries had fallen “significantly short” of the measures required to address the situation.
In Scotland the last, painful, glimpse at the state our own public finances showed that the country is running deficit of 10 per cent of GDP – in other words we’re falling into debt to the tune of £15bn a year. This far outstrips the situation in Spain and Portugal – and is three times higher than the EU rules allow for. This is in large part down to the oil price crash which has seen thousands of lay-offs and the subsequent hit to North Sea tax take. But even going back over the past five years – when the oil price was booming – the best scenario for Scotland’s public finances is a deficit level of 6 per cent. In other words, double the level now being demanded by EU chiefs. And the fine imposed on Portugal of 0.2 per cent of GDP – about 360m euros – is roughly similar the kind of fine we could expect in such a situation. Now it’s not clear if this would act as a barrier to Scotland joining the EU and only eurozone countries are currently liable for a fine. But all members states are expected to meet these rules.
The SNP has already made it clear it will come back with fresh plans for currency for indyref2 after the half-baked proposal for a currency union with the rest of the UK was roundly rejected in 2014. But there seems little indication of how Scottish ministers would tackle the impending headache in getting the nation’s books in order – whichever currency is being used to measure this.
And of course this is no abstract idea. The reason behind the new hardline approach to financial rules in the EU is that several of its member states – Ireland, Greece, Spain and Portugal – have all required bailouts by the so-called Troika of the EU, the European Central Bank (ECB) and International Monetary Fund (IMF). This bailout cash tends to come from the member states with the largest pockets, particularly Germany. And Angela Merkel’s inclination to cough up again is said to be near breaking point.
Most Greeks are likely to tell you the impact of Troika-imposed austerity makes anything cooked up by Westminster pale by comparison. The Hellenic parliament has just voted through its 13th austerity package in the past six years to meet the terms of its latest 86bn euro bailout last year. The measures will include widespread cuts in pensions and increases to insurance contributions. Sweeping tax rises are also being agreed including VAT of 24 per cent, higher taxes on all fuels, and taxes imposed on just about everything from coffee to TV subscriptions, landlines and internet broadband connections.
Greece may be the extreme example, but neighbouring Ireland, once held up as a model for Scotland by Nationalists, had its own three-year £67bn bailout programme which again resulted in widespread spending cuts and tax hikes.
So where does this leave Nicola Sturgeon’s vision of an independent Scotland inside the EU? The last referendum campaign saw Scots sold the vision of a shift towards a Scandinavian-style social democracy with excellent public services, but an insistence that tax rises would not be required to fund this. But with major spending commitments earmarked for the years ahead, it’s hard to see how this could be married with any austerity push to meet EU rules. The Scottish Government is already committed to introducing a system of effective universal free childcare for all pre-school youngsters before the end of the next parliament. It has pledged to fund this with investment of an additional £500m a year by 2021 to employ an extra 20,000 staff. The construction of the Queensferry Crossing is also widely seen to have driven much of Scotland’s moderate growth in recent years. Might we see an end to major infrastructure projects on such a similar grand scale in the years ahead if finance ministers in Edinburgh are forced to cut their cloth to meet the terms of EU membership? And what will the impact be on growth?
Scotland has enjoyed considerable sympathy in Brussels after being seen as an “innocent” swept along in the Brexit maelstrom against its will. But the SNP must surely look hard at the state of the country’s balance sheet if it is serious about becoming an independent EU member state. And within the bloc, sympathies towards Scotland may well shift as the big players weigh up the prospect of admitting another peripheral state with a fragile economy whose deficit may raise fresh alarm over another knock at the Troika’s door.