Scotland Act 2016 implementation: eighth annual report

6. Borrowing and Scotland Reserve

Capital Borrowing

50. Since 1 April 2017, the Scottish Government has had the power to borrow up to £450 million each year, up to a maximum total of £3 billion, to support investment in capital infrastructure. Following the Fiscal Framework Review both limits will be maintained in 2023-24 prices (meaning these limits will be uprated annually using the OBR's GDP deflator forecast at the time of the Scottish Government draft Budget).

2023-24 drawdown

51. The Scottish Government borrowed £300 million in 2023-24 to support Infrastructure and Investment expenditure.

52. The borrowing was drawn down from the National Loans Fund on 27/03/24. This will be repaid over 10 years at an interest rate of 3.95%.

2024-25 borrowing plans

53. The 2024-25 Scottish Budget outlined plans to allow for £458 million of Capital funding to be made available from borrowing.

54. The Scottish Government’s medium term financial strategy (MTFS) details the Scottish Government Capital Borrowing Policy. Policy to date has been built around ensuring sustainable Capital Borrowing within the fiscal framework limits. With these limits now growing with inflation the dynamics of a sustainable level of Capital Borrowing have changed and therefore the next MTFS will provide further detail on the future approach to Capital Borrowing policy.

55. Final decisions on the specific borrowing arrangements for 2024-25 will be taken over the course of the year, reflecting an on-going assessment of programme requirements and value for money assessment of the options available. Final borrowing decisions for 2024-25 will not therefore be taken before March 2025.

Capital debt stock

56. The Scottish Government has accumulated £2.23 billion in capital debt as at the end of 2023-24, 74% of its overall limit. Details of the capital borrowing and repayment schedule can be found in Tables 6.1 and 6.2.

• Projections based on borrowing incurred plus plans outlined at the 2024-25 Scottish Budget with interest rates as at 27/03/24. A 50 basis point premium is applied to all interest rate assumptions
• Forecast Debt Cap limits are based on GDP deflator forecasts as at the 2024-25 Scottish Budget these will be revised annually.

Resource Borrowing

57. Following the Fiscal Framework Review, the Scottish Government can borrow up to £600 million for resource annually within a statutory overall limit for resource borrowing of £1.75 billion from 1 April 2024, with both limits in 2023-24 prices (meaning these limits will be uprated annually using the OBR's GDP deflator forecast at the time of the Scottish Government draft Budget).

58. Resource borrowing cannot be accessed to increase the discretionary funding. However, it can be used for the following reasons:

I. for in-year cash management;

II. for forecast error (in relation to devolved and assigned taxes and demand-led welfare expenditure arising from forecasts of Scottish receipts/expenditure and corresponding UK forecasts for the block grant adjustments).

59. Prior to the Review, under the terms of the 2016 fiscal framework agreement, the Scottish Government could cumulatively borrow up to £600 million for resource annually for the following reasons:

I. for in-year cash management, with an annual limit of £500 million, or

II. for forecast error with an annual limit of £300 million (in relation to devolved and assigned taxes and demand-led welfare expenditure arising from forecasts of Scottish receipts/expenditure and corresponding UK forecasts for the Block Grant Adjustments).

60. In practise, although the 2016 agreement stated we could borrow up to £600 million, in the ordinary course events, the limit was £300 million for forecast error. However, there was a provision in the 2016 agreement that increased the £300 million limit for forecast error to £600 million in the event of a Scotland-specific economic shock.

61. Under the terms of the revised fiscal framework agreement, the Scotland-specific economic shock provision will no longer apply from 1 April 2024 as the increased limit of £600 million for forecast error makes the provision defunct.

2023-24 drawdown

62. In 2023-24 the Scottish Government borrowed £104 million from the National Loans Fund at an interest rate of 4.23% over a 5-year repayment period. This was in respect of final reconciliations relating to 2020-21 Scottish Income Tax, 2021-22 fully devolved taxes and social security BGA reconciliations, and in-year variances on 2023-24 social security and devolved tax positions. This represented an increase of £63 million against the plans outlined at the 2023-24 Scottish Budget.

2024-25 borrowing plans

63. In the 2024-25 Scottish Budget Scottish Ministers plan to borrow £338 million to address adverse tax and social security reconciliations.

64. Borrowing decisions for 2024-25 will be finalised in March 2025 given the revised reconciliation profile and in the context of the overall resource budget monitoring position and the latest forecasts of future year funding availability.

Scotland Reserve

65. The Scotland Reserve has applied since 1 April 2017. It replaced the Budget Exchange mechanism and enables the Scottish Government to manage volatility associated with its fiscal powers. The Scotland Reserve was capped in aggregate at £700 million but following, the 2023 Fiscal Framework Review, the £700 million cap will be indexed to inflation and the drawdown limits of £250 million for resource and £100 for capital will be abolished from 2024-25. There are no annual limits for payments into the Scotland Reserve.

2023-24 Reserve Position

66. The latest forecast Scotland Reserve position is detailed below. 2023-24 drawdown plans are unlikely to change materially however additions are subject to provisional and final outturn processes. The final Scotland Reserve position for 2023-24 will not therefore be confirmed until later in the calendar year.

*2023-24 Additions will be determined by the outturn versus final HM Treasury budgets. The nil figures reflect that there were no planned additions to the reserve and any subsequent additions will simply reflect the final underspends versus the Budget Aggregates.