Scotland Act 2012 financial provisions implementation: fifth annual report

Chapter 5 - Borrowing and Scotland Reserve

Borrowing

Scotland Act 2012

63. The Scotland Act 2012 allowed Scottish Ministers to undertake borrowing to fund capital expenditure subject to a statutory aggregate cap of £2.2 billion. HM Treasury has set out administrative rules, which limits borrowing in any one year to 10 per cent of the capital budget (Capital Departmental Expenditure Limit or CDEL).

64. The 2016-17 budget includes provision to borrow up to £333m to support capital investment under the Scotland Act 2012 powers. The Office of National Statistics classified the Aberdeen Western Peripheral Route Non Profit Distributing ( NPD) project to the public sector in July 2015. As a result of this classification decision the Scottish Government is managing the budgetary impact of this and four other stand-alone projects in the NPD programme against capital budget limits. Although these projects now impact on the Scottish Government Capital Budgets there is no change to the contract position and therefore no cash requirement for that capital impact. The Scottish Government has therefore again exceptionally agreed a notional borrowing arrangement with HM Treasury which allows the Scottish Government to access the CDEL budget adjustment associated with borrowing (necessary to meet the budget impact of the publicly classified NPD projects) without having to make any cash drawdown. This notional borrowing will be recorded against the Scotland Act 2012 borrowing limit and notionally repaid over the lifetime of the associated projects (30 years). This is for budgeting purposes only. No actual drawdown of borrowing from the National Loans Fund or other sources is required for this amount in 2016-17. This has the advantage of minimising the interest costs in respect of the relevant projects.

Scotland Act 2016

65. The fiscal framework and the Scotland Act 2016 increase the Scottish Government's capital borrowing limits to £3 billion. The annual limit on capital borrowing also increased to 15 per cent of the overall borrowing cap, i.e. £450m per year. The Scottish Government may borrow through the UK Government from the National Loans Fund, by way of a commercial loan or through the issue of bonds. The new limits came into effect from 1 April 2017.

66. The Scottish Government will continue to maximise investment within the capital limits imposed by HM Treasury, and intends to utilise the borrowing powers available through the Scotland Act 2016 up to a maximum of £450m in 2017-18. Given the variety of factors that impact on major projects, the capital programme will be proactively managed through the financial year.

67. Scottish Ministers will continue to evaluate the potential methods of borrowing available to them including borrowing from the National Loans Fund, commercial loans and issuing bonds and will in due course take a decision on which method or combination of methods to use in 2017-18.

Resource Borrowing

Scotland Act 2012

68. The Scotland Act 2012 extended Scotland Act 1998 powers regarding resource borrowing to enable the Scottish Government to borrow from the National Loans Fund across financial years when devolved tax revenues are lower than forecast. This form of borrowing was repayable within four years rather than in-year. An annual limit of £200m was set administratively within a statutory £500m overall limit.

Scotland Act 2016

69. From 1 April 2017, the Scottish Government has the power to borrow up to £600m each year within a statutory overall limit for resource borrowing of £1.75 billion. The Fiscal Framework set out the conditions and limits for elements of resource borrowing: for in-year cash management, an annual limit of £500m; for forecast errors, an annual limit of £300m; for any observed or forecast shortfall where there is or is forecast to be a Scotland-specific economic shock, an annual limit of £600m.

70. Resource borrowing will continue to be from the National Loans Fund and the repayment period will be between three and five years, as determined at the time of borrowing. These borrowing powers replace those put in place under the Scotland Act 2012.

71. There are no plans to use resource borrowing powers in 2017-18.

Scotland Reserve

72. The new Scotland Reserve applies from 2017-18 onwards and will enable the Scottish Government to manage tax volatility. The Scotland Reserve will be separated between resource and capital. Payments into the resource reserve may be made from the resource budget including tax receipts. Funds in the resource reserve may be used to fund resource or capital spending. Payments may be made into the capital reserve from the capital budget and capital reserve funds may only be used to fund capital spending. Detailed arrangements for reporting and repaying borrowing and the operation of the Scotland Reserve are being agreed with the UK Government.