Fiscal framework outturn report: 2018

5 Borrowing

5.1 The Scotland Act 2012 gave the Scottish Government power to borrow from the National Loans Fund, through the issue of bonds, or through commercial loans (directly from a bank or other lender). Resource borrowing can only be funded from the National Loans Fund ( NLF), whereas capital borrowing can be funded from the NLF, commercial loans or the issue of bonds subject to a statutory aggregate cap and an annual limit. The Scottish Fiscal Commission is required to assess the reasonableness of Scottish Ministers borrowing projections and does so at each fiscal event.

Capital Borrowing

5.2 Capital borrowing allows the Scottish Government to fund capital projects, for example to invest in schools, roads and hospitals.

Table 5.1 – Capital Borrowing

5.3 The Scottish Government agreed a notional borrowing arrangement with HM Treasury in 2015-16 and 2016-17 as part of managing the budgetary impact of Office for National Statistics classification decisions on a number of Non-Profit Distributing ( NPD) projects, including the Aberdeen Western Peripheral Route. The amounts recorded against borrowing limits for those years are notionally repaid over 30 years (linked to the life of the underlying NPD contracts). This notional borrowing arrangement counts towards the overall capital borrowing cap, but does not have a cash impact on the Scottish Budget.

5.4 The Scottish Government borrowed £450 million in 2017-18, the maximum allowed within the Fiscal Framework limits. The borrowing was drawn down from the National Loans Fund on 08/03/2018 over 25 years on an annuity repayment profile with a fixed interest rate of 1.90%.

5.5 In total, the Scottish Government will have accumulated £1,459 million of capital debt by the end of 2018-19, well within its overall £3 billion limit. For 2018-19, final decisions on the source of capital borrowing, repayment period and method will be taken during the financial year. The evolution of the debt stock and future repayment obligations are shown in table 5.2.

Table 5.2 - Scottish Government Capital Borrowing and Repayments (£ million)

Resource Borrowing

5.6 The Scottish Government has the power to borrow for resource spending for the following reasons:

• In-year cash management.

• Forecast error in relation to devolved and assigned taxes and devolved social security expenditure arising from forecasts of Scottish receipts/expenditure and corresponding UK forecasts for the Block Grant Adjustments.
• Any observed or forecast shortfall in devolved or assigned tax receipts or devolved social security expenditure incurred where there is, or is forecast to be, a Scotland-specific economic shock. This is defined as annual GDP growth of below one per cent and GDP growth in Scotland one percentage point below GDP growth in the UK. A forecast economic shock would depend on the Scottish Fiscal Commission forecast of Scottish GDP compared to the OBR’s forecast of UK GDP and is assessed on a rolling 4‑quarter basis.

Table 5.3 – Resources Borrowing

5.7 The Scottish Government has not used resource borrowing powers to date. The resource borrowing power is deliberately restricted to very specific circumstances and does not detract from the fundamental requirement for a balanced Scottish Budget each financial year.

5.8 The Scottish Government could 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. Current estimates of this were outlined in Chapter 3. The Scottish Government will make a decision on whether and how to use this borrowing power based on the overall Budget situation.

5.9 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. ^[20]

Future Borrowing

5.10 For 2018-19 final decisions on the source of capital borrowing, repayment period and method will be taken during the financial year.

5.11 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 5% of the total annual Budget available. The commitments included in the 5% calculation are the Scottish Government’s share of the ongoing costs of: previous PPP contracts that are now operational, the current Non Profit Distributing ( NPD) and hub programmes, rail investment (financed via the Regulatory Asset Base – RAB) and the costs of borrowing.

5.12 In their report, “Scotland’s Economic and Fiscal Forecast”, published in May, the Scottish Fiscal Commission judged the Government’s projections of capital borrowing as reasonable and as compliant with the terms set out in the Fiscal Framework.