Ballooning Budget Deficit Would be an Independent Scotland's Biggest Barrier to EU Membership

Latest finances from the Scottish government confirm a growing budget deficit that would in theory scupper an independent Scotland's hope of joining the EU.

Latest revenue and expenditure data on Scotland has shown the country’s deficit between revenue and expenditure to be growing.

According to the Scottish Government’s Government Expenditure & Revenue Scotland 2015-16 report, public sector revenue was estimated as £53.7 billion, or 7.9% of total UK revenue.

Total expenditure for the benefit of Scotland by the Scottish Government, UK Government, and all other parts of the public sector was £68.6 billion.

This is equivalent to 9.1% of total UK public sector expenditure.

This has left Scotland with a budget deficit that’s over twice the level of the UK average at 9.5% of GDP.

The UK and Scottish governments spend £12,800 per person in Scotland, which is £1,200 per person greater than the UK average.

The burgeoning deficit appears to have the slump in global oil prices behind it.

Scotland’s illustrative share of North Sea revenue fell from £1.8 billion in 2014-15 to £60 million in 2015-16.

Analysts have responded by saying today’s publication confirms that Scotland’s finances are precarious at the current time.

As can be expected, there are political ramifications to the data.

“This should concern those pushing for Scottish independence. With independence, the Scottish Government would have to take on the burden of a high budget deficit, which would inevitably lead to a combination of fiscal instability, higher taxes and a cut in government spending,” says Daniel Mahony at the Centre for Policy Studies.

Mahony points out that Scotland’s high budget deficit would also make Scotland’s entry into the EU even less likely – “given that new member states are expected to have a budget deficit of just 3% of GDP.”

According to Eurostat, the general government deficit of the 28 EU countries is at 2.4%, while for the Eurozone it stands at 2.1%.

And Scotland's deficit position is unlikely to improve anytime soon.

The Institute for Fiscal Studies has previously predicted that the UK as a whole is projected to achieve a budget surplus by the financial year 2019/20, while Scotland’s deficit is set to be stubbornly high at 6.2%.

Of course, both sets of projections are likely to be negatively impacted were the UK economy to slow as Brexit takes shape.

“We expect that the ratio of the difference between the UK and Scotland’s budget deficits will be maintained,” reads a working paper on Scotland’s future finance’s published the Centre for Policy Studies.

Oil Revenue Projections Blown off Course

When the Scottish Government published Scotland’s future: your guide to an independent Scotland in 2013, it was assumed that oil prices would remain above $100 a barrel and that receipts from Scottish North Sea oil and gas would be between £6.8bn to £7.9bn in the year 2016-17.

However, the subsequent problems faced by the industry means that North Sea oil and gas receipts are only expected to achieve between £0.5bn to £2.8bn, according to the Scottish Government’s latest Oil and Gas Bulletin.

While prices may recover over coming years it would appear that the lessons delivered by the recent collapse in oil prices and the subsequent drop in Scottish tax revenues would make the work of the Scottish nationalists a little bit harder.

Scotland’s Main Trading Partner: The UK

The focus of oil and Europe often conceals an important fact when it comes to the economics of the Scottish independence debate; and that is what trading partners really matter for Scotland.

Figures from the Scottish government show that the UK remains by far the largest trading partner of Scotland, accounting for a 64% share of exports.

The EU, by comparison, accounts for 15% of Scotland’s exports with the rest of the world accounting for another 20%.

The reliance on trade conducted with the rest of the UK explains why the Scottish Government has previously advocated an independent Scotland to have a formal currency union with the rest of the UK.

The other point to note is that were Scotland to join the EU they would have to adopt the Euro, as per European Union membership rules.

With peripheral Eurozone countries having been hampered by an overvalued currency for many years, Scotland's competitiveness with the rest of the UK would be seriously impacted.

After all, the Euro ultimately remains a reflection of German economic strength, and having your currency set by an external economy is always likely to cause distortions.