Scotland Acts 2012 and 2016 implementation: annual reports

5. Borrowing and Scotland Reserve

Key Developments

• The Scottish Government's Medium-Term Financial Strategy 2019 set out the principles and policies that guide the use of the Scottish Government's borrowing and reserve powers.
• Capital borrowing - The Scottish Government has borrowed £405 million in 2019-20 to support capital expenditure, £45 million less than was assumed in the published 2019-2020 Scottish Budget. This borrowing was drawn down over three instalments, one in October 2019, and two in March 2020.
• Resource borrowing - In September 2019, the Cabinet Secretary for Finance, Economy, and Fair Work wrote to the Chief Secretary to the Treasury to request an increase to the Scottish Government's borrowing and reserve limits due to their inadequacy compared to the scale of potential forecast errors.^[14]
• No resource borrowing was undertaken in 2019-20. There are plans for £207 million of resource borrowing in 2020-21 to smooth the negative budget impact of forecast errors arising from tax and social security reconciliations.
• Scotland Reserve - The interim balance on the Scotland Reserve was reported to the Scottish Parliament as part of the Brief Guide to the Spring Budget issued on 6 March 2020.
• The Scottish Budget 2020-21 anticipated a drawdown of £168 million from the Scotland Reserve in 2020-21.^[15]

5.1 Capital Borrowing

2019-20 Draw Down

5.1.1 The level of capital borrowing drawn down for 2019-20 is £405 million, £45 million less than was assumed in the published 2019-20 budget. The £405 million drawn down is what is required to support the 2019-20 financial position and to provide the capital carry forward necessary for 2020-21 published spending plans.

5.1.2 2019-20 borrowing is from the National Loans Fund (NLF). Repayments on NLF borrowing have an annuity structure. This means that semi-annual payments contain both interest and principal over the term of the loan.^[16] The repayment periods and interest rates for each tranche in 2019-20 are as follows:

• October Tranche: £200 million repaid over twenty years with an interest rate of 0.60%
• March Tranche 1: £190 million repaid over twenty five years with an interest rate of 0.56%
• March Tranche 2: £15 million repaid over twenty five years with an interest rate of 0.76%

5.1.3 Budget provision of £66 million has been made within the 2020-21 Scottish Budget to meet the expected fiscal resource costs of the capital borrowing being undertaken in 2019-20.

2020-21 Borrowing Plans

5.1.4 In recognition of the Climate Emergency, a decision has been taken to borrow the maximum of £450 million in capital borrowing to support infrastructure expenditure. This is £100m more than the £350m originally planned for in the 2019 MTFS.^[17]

5.1.5 Final decisions on the specific borrowing arrangements for 2020-21 are taken over the course of the year, reflecting an on-going assessment of programme requirements and in line with the principles set out in the MTFS. Final borrowing levels may therefore differ from initial plans.

Capital Debt Stock

5.1.6 On the basis of existing and planned borrowing, the Scottish Government will have accumulated £1.99 billion in capital debt by the end of 2020-21, 66% of its overall limit. Details on previous borrowing can be found in the Fiscal Framework Outturn Report published on 26 September 2019.

5.2 Resource Borrowing

5.2.1 No Resource borrowing was undertaken in 2019-2020.

5.2.2 There are plans for £207 million of resource borrowing in 2020-21 to smooth the negative budget impact of forecast errors arising from tax and social security reconciliations.

Request to increase resource borrowing limits

5.2.3 The previous Cabinet Secretary for Finance, Economy, and Fair Work wrote to the CST requesting resource borrowing and drawdown limits be extended to £900m. This request is to allow the Scottish Government to better manage volatility, as the current limits are inadequate given the potential scale of forecast errors the Scottish Government may face.

5.3 Scotland Reserve

2019-2020 Reserve position

5.3.1 The 2019-20 Reserve position, as reported to Parliament as part of the Spring Budget Revision process, is reproduced below. The Cabinet Secretary for Finance will provide an updated report on the Reserve position to the Scottish Parliament as part of the provisional outturn in June 2020.

Table 5.1 Mid-Year report on Underspend Reserve position

2019-20 Forecast Outturn at 28 February 2020	HM Treasury Fiscal	Scottish Budget
	£million	£million
Budget	-34,707.8	44,203.3
Forecast Outturn	34,606.8	43,896.8
Forecast Underspend	-101.0	-306.5
2020-21 Scotland Reserve Forecast at 28 February 2020	HM Treasury Fiscal	HM Treasury Fiscal
	£million	£million
2019-20 Opening Balance		-605.0
2019-20 Forecast Movements
In-year Reserve Drawdown	431.0
Forecast Underspends	-101.0
		330.0
2019-20 Forecast Closing Balance		-275.0
2020-21 Expenditure Commitments
Budget Bill		168.0
2020-21 Planned Reserve Drawdown		168.0
2020-21 Forecast Residual Balance		-106.0
Of Which
Fiscal Resource		100.0
Capital		0.0
Financial Transactions		6.0
		106.0

Notes:

• The position for the Reserve reflects the 2020-2021 Budget Bill commitments;
• The 2019-2020 forecast figures are drawn from a wide range of income and expenditure activities, including a number of demand-led budgets where forecasts are difficult to estimate exactly, and the forecast will be updated regularly through to year-end; and
• The Scottish Parliament will be provided with a full breakdown of the 2019-2020 provisional outturn figures by portfolio in June, as is normal practice.

2020-2021 Reserve position

5.3.2 Table 5.1 also shows an anticipated drawdown of £168 million from the Reserve in 2020-2021. The drawdown on publication was expected to comprise £131 million of resource funding, £5 million of capital funding, and £32 million of financial transactions. The drawdown is to be funded from the anticipated balance on the reserve after allowing for the 2019-20 net drawdown. The final breakdown will not be known until after the end of the financial year, when we will have provisional outturn figures for 2019-20.

5.3.3 It is the Scottish Government's policy to build up the balance in the Scotland Reserve over time as resources allow, in order to have a financial cushion available. However, a reserve capped at £700 million with a maximum limit of £350 million for annual drawdowns severely limits the capacity for Scottish Ministers to plan for the impact of future fluctuations in tax receipts while also prudently managing any underspend across the financial year.

Request to increase Scotland Reserve limit

5.3.4 The letter from the previous Cabinet Secretary for Finance, Economy, and Fair Work to the CST also requested an increase in the Scotland Reserve to £1.75bn. This increase would bring the Reserve limit in line with the overall limit for borrowing.