Implementation of the Scotland Act 2016: second report

Annex A: Joint UK Government / Scottish Government Paper on Resource Borrowing For In-year Cash Management and Forecast Error

Triggers

• In-year cash management – where there is a temporary in-year excess of expenditure over income or to provide a working balance in the Scottish Consolidated Fund.
• Forecast error – for a negative impact on the Scottish Government budget following revised forecasts of tax, welfare or block grant adjustments at any point during the financial year or after the reconciliation to outturn.

Limits

The SG will be able to borrow within a statutory overall limit of £1.75bn:

• The annual limit for resource borrowing for all purposes is £600m.
• The limit for in-year cash management will remain at £500m.
• The annual limit for forecast errors will increase to £300m.

Source

The Scottish Government will borrow from the National Loans Fund for this purpose.

Draw-Down Arrangements

For forecast errors and in year cash management, SG will draw-down borrowing as and when necessary based on value for money considerations.

SG will advise HMT of the term of the borrowing, which would normally be between 3 and 5 years. The capital will be repaid in equal instalments of principal, along with interest, every 6 months. The interest rate will be the NLF rate for 3 to 5-year money and would apply from the day of draw-down. SG will also retain access to the short-term facility. Further detail is outlined in the Scottish Government Current Borrowing Loan Facility Agreement.

The Scottish Government will provide regular monthly forecasts to the Treasury of the amount of resource borrowing it expects to make, outstanding debt and repayment profiles, but will be able to borrow within the agreed limits as deemed appropriate.

Scotland-specific Economic Shock Resource Borrowing

Triggers

A Scotland-specific economic shock is triggered when onshore Scottish real GDP growth is below 1% in absolute terms on a rolling 4 quarter basis, and 1 percentage point below UK real GDP growth over the same period.

The Scotland-specific economic shock provisions can be triggered based on

1. Scottish Fiscal Commission Forecasts – these will be published at least twice yearly.

2. Scottish Government GDP Outturn – these are published on a quarterly basis.

Once a shock has been triggered, borrowing can be accessed based on:

3. Any observed or forecast shortfall in devolved or assigned tax receipts or demand-led welfare expenditure compared to the original forecasts.

Data used to trigger the Scotland-specific economic shock borrowing powers, whether forecast or outturn, should fully comprise of quarters commencing from 1 April 2017, in line with the commencement date for Scotland Act 2016 borrowing powers. This means that the earliest potential trigger point based on forecast data would be the Scottish Fiscal Commission's GDP forecast for the financial year 2017-18; and the earliest potential trigger point based on outturn data would be the Scottish Government's publication of Q1 2018 GDP data (if the preceding 3 quarters' outturn data from April 2017 showed that onshore Scottish GDP was below 1% in absolute terms, and 1% below UK GDP growth).

Data used to calculate the difference between Scottish and UK GDP growth will be UK GDP growth outturn data, which is the most recent final estimate published by the ONS in the Quarterly National Accounts, and the most recent UK GDP forecast data, which is published by the Office for Budget Responsibility at each fiscal event.
As above, both conditions – that onshore Scottish GDP is below 1% in absolute terms on a rolling 4 quarter basis; and that Scottish GDP is 1 percentage point below UK GDP growth over the same period – will need to be met to trigger a Scotland-specific economic shock.

In order for the first condition to be met, 4 consecutive quarters of Scottish onshore GDP need to be less than 1% greater than the immediately preceding 4 consecutive quarters. This means the following calculation needs to result in an answer that is less than 1:

In order for the second condition to be met, the growth rate calculated above needs to also be at least 1% below the corresponding calculation at the UK level. This means the following calculation needs to result in an answer that is greater than 1:

The quarters t5, t6, t7, t8 can be any time after April 2017 inclusive ( i.e. from Q2 2017 inclusive) in both forecast and outturn as this is when the borrowing powers in the Scotland Act commenced. This means that theoretically the 4 quarters immediately before these (t1, t2, t3, t4) could run from as early as April 2016 (but only if they are the prior period baseline for the 4 quarters starting in April 2017). The Scottish Fiscal Commission can only ever consider t5, t6, t7, t8 as being either the most recent outturn 4 quarters or in the forecast period (or a combination of the both).

The Scottish Fiscal Commission are responsible for notifying when a shock has been triggered based on forecast data or a combination of forecast and outturn data, as long as the 4 quarters considered are consecutive. This notification will be published alongside the Fiscal Commission's Forecast Report. The Scottish Government is responsible for notifying when a shock has been triggered based on outturn data as long as the 4 quarters considered are consecutive.

Limits

For any observed or forecast shortfall in devolved or assigned tax receipts or demand-led welfare expenditure incurred where there is, or is forecast to be, a Scotland-specific economic shock, with an annual limit of £600m.

Once a shock is triggered, the annual cyclical resource borrowing (of up to £600m) lasts for each financial year in which the trigger applies, plus the following two financial years, as the economy and public finances recover. This is the period during which cyclical borrowing powers may be used.

Source

The Scottish Government will borrow from the National Loans Fund for this purpose.

Draw-Down Arrangements

As per the normal draw-down arrangements for resource borrowing, SG will advise HMT of the term of the borrowing, which will be between 3 and 5 years or the short term facility. The Governments have also agreed that the Scottish Government should have the option of refinancing any debt due to be repaid in a year of a Scotland-specific economic shock under the terms specified in the Loan Agreement.