Implementation of the Scotland Act 2016: second report

Chapter 5 - Borrowing and Scotland Reserve

Borrowing

Scotland Act 2012

80. The Scotland Act 2012 allowed Scottish Ministers to undertake borrowing to fund capital expenditure subject to a statutory aggregate cap of £2.2 billion. HM Treasury has set out administrative rules, which limits borrowing in any one year to 10 per cent of the capital budget (Capital Departmental Expenditure Limit or CDEL). These arrangements have now been superseded by the Scotland Act 2016 and the Fiscal Framework.

Scotland Act 2016

81. The Fiscal Framework and the Scotland Act 2016 increase the Scottish Government's capital borrowing limits to £3 billion. The annual limit on capital borrowing also increased to 15 per cent of the overall borrowing cap, i.e. £450m per year. The Scottish Government may borrow through the UK Government from the National Loans Fund, by way of a commercial loan or through the issue of bonds. The new limits came into effect from 1 April 2017.

82. The Scottish Government will continue to maximise investment within the capital limits imposed by HM Treasury, and has utilised the maximum £450m of capital borrowing powers available in 2017-18. This borrowing was accessed in one draw down in March 2018, and will be repaid over 25 years on an equal repayment ( ER) basis. The purpose of the borrowing is to support the infrastructure investment programme as a whole, rather than borrowing for individual assets. £450m represents around 12% of the capital programme for 2017-18.

83. In order to maximise our commitment to investing in infrastructure, we will make use of the full £450 million available in 2018-19. In assessing affordability, this is modelled as being drawn from the National Loans Fund in 2018-19 with an assumption of repayment over 10 years, an interest rate of 2 per cent, and repayments of both principal and interest from 2019-20 onwards. Final decisions on borrowing arrangements will be taken over the course of the year reflecting an ongoing assessment of programme requirements.

Resource Borrowing

Scotland Act 2012

84. The Scotland Act 2012 extended Scotland Act 1998 powers regarding resource borrowing to enable the Scottish Government to borrow from the National Loans Fund across financial years when devolved tax revenues are lower than forecast. This form of borrowing was repayable within four years rather than in-year. An annual limit of £200m was set administratively within a statutory £500m overall limit. These arrangements have now been superseded by the Scotland Act 2016 and the Fiscal Framework.

Scotland Act 2016

85. Since 1 April 2017, the Scottish Government has had the power to borrow up to £600m each year within a statutory overall limit for resource borrowing of £1.75 billion. The Fiscal Framework set out the conditions and limits for elements of resource borrowing: for in-year cash management, an annual limit of £500m; for forecast errors, an annual limit of £300m; for any observed or forecast shortfall where there is or is forecast to be a Scotland-specific economic shock, an annual limit of £600m.

86. Resource borrowing will continue to be from the National Loans Fund and the repayment period will be between three and five years, as determined at the time of borrowing. In December 2017, the JEC agreed the arrangements for revenue borrowing in the event of forecast errors, or a Scotland-specific economic shock. The paper finalising these arrangements has been attached as an annex to this report.

87. There are no plans to use resource borrowing powers in 2017-18 or 2018-19.

Scotland Reserve

88. The Scotland Reserve has applied since 1 April 2017 and enables the Scottish Government to manage volatility associated with the fiscal powers. The Scotland Reserve is separated between resource, capital and financial transactions. Payments into the resource reserve may be made from the resource budget including tax receipts. Funds in the resource reserve may be used to fund resource or capital spending. Payments may be made into the capital reserve from the capital budget and capital reserve funds may only be used to fund capital spending.

89. The Scotland Reserve is capped in aggregate at £700m. The Governments have agreed that annual drawdowns from the reserve is limited to £250m for resource and £100m for capital. There are no annual limits for payments into the Scotland Reserve.

90. At the time of the publication of the Scottish Government's 18-19 Draft Budget on 14 December, there was £74m in surplus tax receipts in the Scotland Reserve.