16/10/2025
Executive summary of our Discussion paper: Undermining Economic Resilience - The Economic Impact of Adopting the European Union’s Stability and Growth Pact in an Independent Scotland.
Full details here: https://scotonomics.org/the-sgp-in-an-independent-scotland/
An independent Scotland has all of the necessary resources, skills, and institutional capacity to enable its citizens to prosper.
The decisions made in the first decade of independence will have a significant impact on the level of prosperity. Following the European Union’s Stability and Growth Pact, while outside of the European Union, is likely to have a negative effect on Scotland’s prosperity.
Scotland’s recent economic history as part of the United Kingdom suggests that its economy, once independent, will not initially be compatible with the European framework of fiscal rules.
As part of the UK, Scotland has experienced relatively low levels of public spending and investment over several decades compared to similar European countries. In this regard, it has a significant historical public spending/investment deficit that must be filled. If the government increases its own investment beyond the Stability and Growth Pact levels in public services and infrastructure, it will encourage more businesses to invest, thereby increasing productivity and efficiency.
Applying the Stability and Growth Pact would force Scotland to undergo several rounds of austerity, involving cuts to government spending and tax rate increases. These measures would be self-defeating, as they are unlikely to achieve the Stability and Growth Pact’s deficit and debt criteria and would come at an enormous real economic cost, shrinking output and damaging living standards.
Reducing government spending directly reduces GDP for three reasons. (i) It is part of the equation defining GDP. (ii) Reduces private incomes, which reduces tax revenues. (iii) Increasing tax revenue to fill the gap from reduced government spending reduces the private sector’s purchasing power, which sees consumption fall, which leads to less spending.
Applying the Stability and Growth Pact would damage the Scottish economy. Reducing government spending would weaken the quantity and quality of public services, public goods, and public infrastructure. This will lead to decreased productivity and competitiveness in the Scottish economy. The long-term effects of higher unemployment would result in a permanent decline in the workforce’s skills and knowledge.
It is economically nonsensical for the Scottish Government to suggest that the same macroeconomic rules apply equally under two vastly different regimes—monetary dependence under Sterling and a higher level of monetary sovereignty with a Scottish currency.
Following the Stability and Growth Pact while using Sterling would raise the spectre of the Scottish government running out of Sterling.
Following the Stability and Growth Pact as a currency issuer, with Scotland using its own Scottish currency, poses significant issues for a newly independent nation.
Following the Stability and Growth Pact leads to the government’s focus shifting from tackling society’s real needs to simply managing the fiscal deficit, a rather meaningless statistic.
An independent Scotland complying with the Stability and Growth Pact (3% public deficit to GDP, 60% public debt to GDP) would collapse economic growth, raise unemployment, and reduce public goods and services. It would also likely increase household debt stress, disproportionately affecting the lowest earners, women, children, and minority groups.
Should the Scottish Government wish to reduce the public deficit after independence to meet the Stability and Growth Pact deficit limit, it would need to cut government spending by 1.7% annually in the business-as-usual growth scenario, thereby reducing the public deficit to below 3% of GDP in fifteen years. This ‘best case’ scenario would mirror the UK’s austerity years between 2010 and 2015, which caused significant and lasting damage to services and communities. GDP would constantly fall by about 1% per year.
A private sector surplus of about 10% of GDP for at least a decade would be essential to reconstruct a normal European level of public services. This requires a significant public deficit.
Foreign Direct Investment (FDI) can boost private investment and support economic growth, but it also results in significant income outflows as foreign investors repatriate profits. Relying on FDI alone to reduce the public deficit to 3% of GDP is unrealistic, as the annual income outflows from FDI over time — such as profits, dividends, and interest payments repatriated to foreign investors — are typically larger than the annual income inflows received from abroad.
An export-led GDP growth strategy is the stated trajectory for the Scottish Government post-independence. However, the international trade environment — marked by a new era of protectionism, the impact of the ecological crisis, Scotland’s relative isolation from international trade compared to other medium-sized European nations, and structural issues such as the lack of direct routes to European markets — suggests that this strategy will ultimately fail to generate significant growth.
‘Supply-side’ policies, for example, removing regulations, more ‘innovation’, and developing an ‘entrepreneurial culture’, will likely have significant redistribution impacts, but would not increase Scottish GDP.
It is reasonable for the Scottish Government to reject rigid, arbitrary deficit and debt rules of the kind seen in many countries in recent decades. Any economic rules should instead aim to create a resilient economy, ensure macroeconomic stability, sustainable resource use, full employment, and price stability.
While there is no one-size-fits-all solution, adopting economic guide rails tailored to Scotland would better serve citizens’ social welfare.
Tracking sectoral balances helps policymakers understand how different parts of the economy— households/businesses, government, and the rest of the world—interact, making it easier to design policies that support a sustainable and balanced economy.
We recommend that the Scottish government publish and maintain Scotland’s sectoral balances statistics.
Adopting the EU's SGP in an independent Scotland will undermine economic resilience. Discussion paper: Undermining Economic Resilience - The Economic Impact of Adopting the European Union’s Stability and Growth Pact in an Independent Scotland. Dr Dirk Ehnts and William Thomson. The paper is writte...
