How do we define fiscal sustainability?
This post is written as a direct response to a question posed in a comment on my previous post. I'm not going to offer a personal phd thesis here, so let's look at how the EU answers this question.
For existing member states, EU Law Article 126(2a) states:
"The Commission shall monitor the development of the budgetary situation [...] with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of [...] whether the ratio of the planned or actual government deficit to gross domestic product exceeds a reference value, unless: either the ratio has declined substantially and continuously and reached a level that comes close to the reference value or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio remains close to the reference value."
that "reference value" is also defined in EU Law, protocol 12:
"3% for the ratio of the planned or actual government deficit to gross domestic product at market prices"
So if you're already an EU member state, the answer is simple: have a deficit (or be on a path to having a deficit) of under 3.0% of GDP.
But actually that 3.0% is a very generous definition to choose within an EU context. The pithily titled Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97 states:
"Risk-based requirements for the reference trajectory are expected to be sufficient to bring government deficit levels well below the reference value of 3 % of GDP [...] The reference trajectory shall ensure that fiscal adjustment continues, where needed, until the Member State concerned reaches a deficit level that provides a common resilience margin in structural terms of 1.5 % of GDP relative to the deficit reference value of 3.0 % of GDP."
So if Scotland were an EU member state, the answer today - as established in EU law - would be a target of 1.5% of GDP with a failure threshold of 3.0%.
To ensure we are fully up-to-date with the EU's latest thinking, in June 2025 the European Fiscal Board published a paper assessing the appropriate fiscal stance for the euro area in 2026 which concluded:
"There is exceptional geopolitical uncertainty and moderate yet resilient economic growth in the euro area. Against this backdrop, the EFB calls for fiscal restraint - excluding defence. [...] Member States should use the flexibility under EU fiscal rules solely for bolstering defence capabilities. The EFB recommends that flexibility under the new EU fiscal rules be strictly confined to defence spending. All other areas should follow the prudent expenditure paths established under the recently reformed EU fiscal framework1."
It's worth noting the scale of the defence spending "escape clause" the EFB recommended:
"The ReArm Europe initiative invites Member States to activate the national escape clause of the Stability and Growth Pact (SGP) for a period of four years [...] The extra flexibility under the national escape clause has been capped at 1.5% of GDP
So one exception, with a four year time limit and tightly defined around defence spending which offers an additional 1.5% of deficit leeway.
Any argument about climate change challenges creating the need for an additional "escape clause" must surely recognise that this would follow a similar logic - additional leeway would be for "strictly defined" climate change related spending, it could not act as get-out-of-jail-free card to avoid addressing a pre-existing excessive deficit.
Of course an independent Scotland would not start life as an EU member state, but the SNP's party line is very clear on this point: "The SNP firmly believes Scotland’s best future lies as an independent country within the EU."
If you want to join the club, you have to play by the rules.
In truth answering the "sustainable deficit" question requires more work than simply asking what the EU's rules require.
Before becoming an EU member state an independent Scotland would have had to launch a stable currency capable of meeting the EU's Eurozone convergence criteria, including economic benchmarks regarding price stability, public finances, exchange rate stability, and long-term interest rates. Indeed these should surely be benchmarks an independent Scotland would aspire to meet whether or not seeking to join the EU.
This blog post is not the place to try and lay out the twin deficit challenges associated with establishing and stabilising a new currency - suffice to say meeting the EU's sustainable deficit criteria for economies that already have their own stable currency or have adopted the Euro would surely be the bare minimum requirement. A case can certainly be made that an independent Scotland might need to eliminate its fiscal deficit entirely.
The following chart puts these challenges in context:
- as defined in the April 2024 document referenced above