GROWTH COMMISSION RESPONSE: 6. AIMING TOO LOW

The report notes that “Small advanced economies have made fiscal prudence a strategic priority”^1A3.32 and none of the Commission’s chosen SAEs runs a deficit as large as 3% – in fact most run a surplus.^{2Figure 7-1}

The report also notes^{3Figure 8-1} that the following fiscal rules apply in the three countries it recommends we most seek to emulate:

• Denmark: “the annual structural public balance must not exceed a deficit of 0.5% of GDP at the time of the budget proposal for a given year unless extraordinary circumstances are present”
   
• Finland: “the government is committed to adjust if the debt/GDP ratio is not shrinking or if the deficit stands above 1.0% of GDP”
   
• New Zealand: “Maintaining rising operating surpluses (before gains and losses)  over the forecast period so that cash surpluses are generated …”

Whilst the EU’s Growth and Stability Pact defines a deficit threshold of 3%, the report itself notes “Its successor, the European Fiscal Compact, specifies limits of 60% debt and 0.5% deficit as measured across the cycle”.^4B7.11

The IFS, with customary understatement, has observed that “A deficit of almost 2.6% of GDP might be sustainable for a large country with good growth and a long track record of borrowing on international markets. For a new and relatively small country it may not.”^{5Weak public finance position implies more austerity for an independent Scotland, IFS, 15th June 2018}

The report itself observes that a sensible long term fiscal target should be “fiscal balance over the cycle“ or “if a 2% GDP growth rate can be sustained, then a deficit limit of around 1% of GDP may be appropriate in the longer term”.^6B8.67

The Commission aspires for Scotland to achieve EU membership^7B8.63, for which having an independent currency is effectively a prerequisite.^{8The formally stated economic accession criteria is “a functioning market economy and the capacity to cope with competition and market forces”} One of the report’s six tests for being able to introduce a separate Scottish currency is “does Scotland have sufficient reserves to allow currency management”^{93.212, test 4} – running a fiscal surplus would seem to be a precondition for building up such reserves.

All of the report’s analysis optimistically assumes that, despite servicing its inherited share of UK debt via a ‘solidarity payment’, an independent Scotland would be considered to be starting life ‘debt free’.

To be fiscally sustainable it is therefore reasonable to suggest that, using what are already demonstrably optimistic assumptions, the Growth Commission should be able to show how an independent Scotland would move into surplus. In fact, the best figure the Commission projects after fully 10 years of independence (and likely austerity) is a deficit of 2.6%.^{10Figure 12-2}

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Executive Summary

Context & Response

1. Smaller isn’t Necessarily Better

2. Stretching the Empirical Data

3. Failing to Make a Case

4. A Reality Check

5. The Truth about Austerity

6. Aiming Too Low

7. The Missing Model

8. Currency – an Unsolved Conundrum

9. Making the Case for Union

Endorsements