Fiscal framework outturn report: 2022

9. Borrowing

Capital Borrowing

65. Table 19 shows the Scottish Government’s capital borrowing plans.

*New In-year Borrowing from 2022-23 is projected borrowing based on the current Scottish Government capital borrowing plans, as detailed in paragraphs 9.4 and 9.5 below

66. The Scottish Government borrowed £150 million in 2021-22 to support capital expenditure. This is less than the £450 million originally planned. The borrowing was drawn down from the National Loans Fund in February will be repaid over a 20-year period, at an interest rate of 1.44% percent.

67. The Scottish Government included plans to borrow £450 million in 2022-23 Scottish Budget. Final decisions on the specific borrowing arrangements for 2022-23 will be taken over the course of the year.

68. The Scottish Government amended its Capital Borrowing policy as detailed in Chapter 4 of Scotland’s Fiscal Outlook: The Scottish Government’s Medium-Term Financial Strategy in May 2022.^[13] The previous Capital Borrowing policy was designed to support the Scottish Government’s National Infrastructure Mission (NIM), within the limits of the Fiscal Framework. The revised policy seeks to maintain this support for the NIM but take account of longer-term fiscal sustainability.

69. The revised policy assumes that £450 million of annual funding will be available through borrowing, the Scotland Reserve and Barnett consequentials, of which £250 million will initially be assumed to be capital borrowing. Where further capital borrowing is required to support funding, the terms of any borrowing will be amended to balance the resource cost impact and longer-term fiscal sustainability. Accordingly, it is assumed that the Scottish Government will borrow £250 million annually at a 15-year tenor.

70. However, all borrowing drawdown decisions will, by necessity, take into account the in-year budget management position.

71. On the basis of existing borrowing included in Table 19, the Scottish Government had accumulated £1.8 billion in capital debt at the end of 2021-22, 60 per cent of its overall limit.

72. In its report, “Scotland’s Economic and Fiscal Forecasts”, published on 31 May 2022, the Scottish Fiscal Commission judged the Government’s projections of capital borrowing as reasonable if they are risk-assessed and reviewed each year.^[14]

Resource Borrowing

74. 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.^[15]

75. Due to the triggering of the Scotland-specific economic shock provision of the Fiscal Framework, the annual borrowing limit for forecast error was raised to £600 million from 2021-22 up to and including 2023-24. Although the conditions for an economic shock were 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.

76. In 2021-22 the Scottish Government borrowed £319 million, in line with plans as outlined in the Scottish Budget. This was primarily set against the final reconciliations relating to 2018-19 Scottish Income Tax and 2019-20 fully devolved taxes and Social Security benefits expenditure. However, reconciliations and borrowing plans fluctuate throughout the year, reflecting revisions to forecasts of devolved tax receipts, demand-led Social Security expenditure and associated block grant adjustments. The Scottish Government must consider the overall budget management position and ensure the Scotland Reserve limits are not breached when finalising borrowing plans towards the end of the financial year.

77. A negative £15 million reconciliation was applied to the Scottish Budget 2022-23, relating to 2019-20 Scottish Income Tax, 2020-21 fully devolved taxes, FFFP and Social Security. The Budget outlined plans to use the Scottish Government’s resource borrowing powers in 2022-23 to borrow £15 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.

78. Chapter 4 of Scotland’s Fiscal Outlook: The Scottish Government’s Medium-Term Financial Strategy from May 2022^[16] sets out the principles and policies that guide the use of the Scottish Government’s approach to resource borrowing.

79. The aim of the resource borrowing policy is to borrow in the optimum manner to mitigate the effects of adverse forecast errors on the Scottish Budget over the medium term. This takes into account the effect of forecast reconciliations, resource borrowing and costs of resource borrowing. As the forecast reconciliation profile is itself subject to volatility, these plans are continually re-assessed.

80. The outstanding debt from resource borrowing was £505 million at the end of 2021-22, over £1.2 billion below the cumulative Resource Borrowing limit of £1.75 billion. It is highly unlikely that the Scottish Government will ever approach this cumulative limit, given the combination of the Fiscal Framework annual restrictions and the low likelihood of the cash management borrowing power being required.