Fiscal framework outturn report: 2021

9. Borrowing

Capital Borrowing

9.1 Table 18 shows the Scottish Government's capital borrowing plans.

*2019-20 and 2020-21 borrowing took place in a number of tranches - these are weighted average figures **2021-22 and 2022-23 figures are indicative. Final decisions on specific borrowing arrangements will be taken later in the financial year

9.2 The Scottish Government borrowed £200 million in 2020-21 to support capital expenditure. This is less than the £450 million originally planned. The borrowing was drawn down from the National Loans Fund in two tranches. £150 million will be repaid over a 25 year period, at an interest rate of 1.14% percent, and £50 million will be repaid over a 25 year period at a rate of 1.25%

9.3 The Scottish Government has announced plans to borrow the annual maximum of £450 million in 2021-22. Final decisions on the specific borrowing arrangements for 2021-22 will be taken over the course of the year.

9.4 Chapter 5 of Scotland's Fiscal Outlook: The Scottish Government's Medium-Term Financial Strategy from January 2021 sets out the principles and policies that guide the use of the Scottish Government's fiscal powers.^[11] 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 Table 20, the Scottish Government will have accumulated £2.5 billion in capital debt by the end of 2022-23, 82 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 August 2021, the Scottish Fiscal Commission judged the Government's projections of capital borrowing as reasonable.^[12]

Resource Borrowing

9.8 The Scottish Government must balance its Budget each year, and has very limited powers in relation to resource borrowing. 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'). Further details on the circumstances in which the Scottish Government can invoke its resource borrowing powers are set out in the Fiscal Framework Technical Note.^[13]

9.9 In 2020-21 the Scottish Government borrowed £207 million in respect of final reconciliations relating to 2017-18 Scottish Income Tax and 2018-19 fully devolved taxes and social security. This was in line with plans as outlined in the 2020-21 Scottish Budget.

9.10 This year, due to the triggering of the 'Scotland-specific economic shock' provision of the Fiscal Framework, largely as a result of timing differences between the respective SFC and OBR forecasts, the annual borrowing limit is raised to £600 million. Although 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 forecast error in relation to receipts or demand-led social security spending.

9.11 A negative £319 million reconciliation was applied to the Scottish Budget 2021-22 relating to 2018-19 Scottish Income Tax, 2019-20 fully devolved taxes, FFFP and social security. The Scottish Government plans to use its resource borrowing powers in 2021-22 to borrow £319 million to fully offset the impact of the negative reconciliation. This borrowing has not yet been drawn down as borrowing drawdowns are subject to the in-year financial position. 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.

9.12 Chapter 5 of Scotland's Fiscal Outlook: The Scottish Government's Medium-Term Financial Strategy from January 2021 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. As detailed in the Medium-Term Financial Strategy, planning to borrow in full against known and forecast income tax reconciliations is the most fiscally prudent way to manage medium-term volatility in the funding position.