Fiscal framework outturn report: 2020

9. Borrowing

Capital Borrowing

9.1 Table 25 shows the Scottish Government’s capital borrowing plans. 

*2020-21 Figures are indicative.  Final decisions on specific borrowing arrangements will be taken later in the financial year.

** 2019-20 Borrowing took place in three tranches - these are weighted average figures.

9.2 The Scottish Government borrowed £405 million in 2019-20 to support capital expenditure. This is less than the £450 million originally planned, largely as a result of additional consequential capital funding received from the UK Government. The borrowing was drawn down from the National Loans Fund in three tranches throughout the financial year. £200 million will be repaid over a 20 year period, at an interest rate of 0.6% percent, and £205 million will be repaid over a 25 year period, of which £190 million is repaid at a rate of 0.56% and £15 million at a rate of 0.76%  

9.3 The Scottish Government has announced plans to borrow the annual maximum of £450 million in 2020-21. Final decisions on the specific borrowing arrangements for 2020-21 will be taken over the course of the year.

9.4 Chapter 3 of Scotland’s Fiscal Outlook: The Scottish Government’s Five Year Financial Strategy from May 2019 sets out the principles and policies that guide the use of the Scottish Government’s fiscal powers. In relation to capital borrowing, it is the Scottish Government’s policy to borrow between £250 million and £450 million over the remaining period of the National Infrastructure Mission. Final decisions are always taken within the relevant budget year, depending on circumstances. 

9.5 On the basis of existing and planned borrowing included in the table, the Scottish Government will have accumulated £1.99 billion in capital debt by the end of 2020-21, 66 per cent of its overall limit.

9.6 The affordability and sustainability of all Scottish Government long-term revenue commitments, including repayment of debt stock, are assessed through the Budget process and are kept within a maximum of five per cent of the total annual resource budget available (excluding social security spend). The commitments included in the five per cent calculation are the Scottish Government’s share of the ongoing costs of: previous Public Private Partnership (PPP) contracts that are now operational; Non-Profit Distributing (NPD) and Hub programmes; growth accelerator; and cost of borrowing. This self-imposed limit ensures that we do not overly constrain our budget choices in future years.

9.7 In its report, “Scotland’s Economic and Fiscal Forecasts”, published Feb 2020, the Scottish Fiscal Commission judged the Government’s projections of capital borrowing as compliant with the terms set out in the Fiscal Framework.

Resource Borrowing 

9.8 The resource borrowing powers are deliberately restricted to very specific circumstances and do not detract from the fundamental requirement for a balanced Scottish budget each financial year. The Scottish Government plans to use resource borrowing to address the reconciliation for 2017-18 income tax, as outlined in paragraph 9.10, However, this borrowing has not yet been drawn down and no borrowing was undertaken in previous years. The Scottish Government has therefore not accumulated any debt that counts towards its overall and annual limits for resource borrowing.

9.9 The overall limit of resource borrowing is £1.75 billion and the total annual limit is £600 million. Resource borrowing can be used for in-year cash management (maximum £500 million annually) and in cases of forecast error (maximum £300 million annually, increasing to £600 million in case of a Scotland-specific ‘economic shock’).

9.10 The Scottish Government can invoke its resource borrowing powers for a net Budget shortfall to the extent that the outturn net Budget position falls below the forecast for each tax. A negative £207 million reconciliation has been applied to the Scottish Budget 2020‑21 relating to 2017‑18 Scottish Income Tax; 2018-19 LBTT and SLFT; Fines, Forfeitures and Fixed Penalties (FFFPs); and Carer’s Allowance. The Scottish Government plans to use its resource borrowing powers for the first time in 2020-21, to borrow £207 million to fully offset the impact of the negative reconciliation.  This borrowing will be repaid over the next five years. For future years the Scottish Government will make a decision on whether and how to use resource borrowing based on the overall Budget situation.

9.11 No economic shock has occurred which would allow access to the additional resource borrowing and the Scottish Fiscal Commission has not forecast an economic shock. It is important to note that if the conditions for an economic shock are met it is not possible for the Scottish Government to apply resource borrowing to provide an economic stimulus – only to meet a shortfall in tax receipts or demand-led social security spending.

9.12 Chapter 3 of Scotland’s Fiscal Outlook: The Scottish Government’s Five Year Financial Strategy from May 2019 sets out the principles and policies that guide the use of the Scottish Government’s fiscal powers and in particular how resource borrowing will be used in a way that balances the principles of Flexibility, Stability, and Value for Money.