Implementation of the Scotland Act 2016: third report

6. Chapter Six – Borrowing and Scotland Reserve

6.1 Capital Borrowing

The Fiscal Framework and the Scotland Act 2016 increased 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. £450 million per year.

Key Developments

• The Scottish Government has borrowed £250 million in 2018-19 to support capital expenditure. This is less than the £450 million originally planned, largely as a result of additional consequential capital funding received from the UK Government.

• In order to maximise its commitment to investing in infrastructure in 2019-20, the Scottish Government has announced plans to borrow the annual maximum of £450 million capital intended over a 25 year period.

• The Permanent Secretary has confirmed the aim to set out a more detailed approach on capital borrowing in the next Medium Term Financial Strategy document in Spring 2019.

2018-19 Draw Down

6.1.1 The level of capital borrowing drawn down for 2018-19 is £250 million, £200 million less than the £450 million assumed in the published 2018-19 budget. The £250 million drawn down is what is required to support the 2018-19 financial position and to provide the capital carry forward necessary for 2019-20 published spending plans.

6.1.2 This reduction from the £450 million originally planned is primarily due to the Scottish Government receiving additional consequential capital funding at the UK 2018 Autumn Budget (£112 million) and subsequently in respect of additional Crossrail funding (£45 million) with the balance of the reduction a result of a number of fiscal capital underspends emerging across portfolios.

6.1.3 2018-19 borrowing is from the National Loans Fund and will be repaid over a 10 year period.^[10] The interest rate for 2018-19 borrowing is 0.95%. Budget provision of £49 million has been made within the 2019-20 Scottish Budget to meet the expected fiscal resource costs of the capital borrowing being undertaken in 2018-19.

2019-20 Borrowing Plans

6.1.4 The Scottish Government has set out plans to make full use of the £450 million capital borrowing powers in 2019-20. An assumed annual interest rate of 2.5% for 2019-20 borrowing has been used in Scottish Government affordability modelling.

6.1.5 Final decisions on the specific borrowing arrangements for 2019-20 are taken over the course of the year, reflecting an on-going assessment of programme requirements and value for money assessment of the options available. Final borrowing levels may therefore be below initial estimates.

Capital Debt Stock

6.1.6 On the basis of existing and planned borrowing, the Scottish Government will have accumulated £1.662 billion in capital debt by the end of 2019-20, 55% of its overall limit. Details on previous borrowing can be found in the Fiscal Framework Outturn Report published on 20 September 2018.

Scottish Government Approach to Capital Borrowing

6.1.7 In November 2018, the Permanent Secretary confirmed to the Public Audit and Post-Legislative Scrutiny Committee that the Scottish Government had accepted the Auditor General for Scotland's recommendations to review and refine the Scottish Government's approach to capital borrowing. The Scottish Government aims to set out a more detailed approach to the level, type and timing of borrowing in the next Medium Term Financial Strategy document in spring 2019.

6.2 Resource Borrowing

Since 1 April 2017, the Scottish Government has had the power to borrow up to £600 million 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 £500 million; for forecast errors, an annual limit of £300 million; for any observed or forecast shortfall where there is or is forecast to be a Scotland-specific economic shock, an annual limit of £600 million.

Key Developments

• No resource borrowing was undertaken in 2018-19 and there are no plans for resource borrowing in 2019-20.

6.2.1 Since the publication of the Implementation of the Scotland Act 2016 second report, Scottish Government and HM Treasury have agreed the terms of the resource borrowing loan facility agreement.^[11]

6.3 Scotland Reserve

The Scotland Reserve has applied since 1 April 2017, replaces the previous Budget Exchange mechanism and enables the Scottish Government to manage volatility associated with its fiscal powers. The Scotland Reserve is capped in aggregate at £700 million. The Governments have agreed that annual drawdowns from the reserve is limited to £250 million for resource and £100 million for capital. There are no annual limits for payments into the Scotland Reserve.

Key Developments

• The interim balance on the Scotland Reserve was reported to the Scottish Parliament as part of the Spring Budget Revision process.
• The Scottish Budget 2019-20 anticipated a drawdown of £313 million from the Scotland Reserve in 2019-20.

2018-19 Reserve Position

6.3.1 The 2018-19 Reserve position as reported at Spring Budget Revision is reproduced below. The Cabinet Secretary for Finance, Economy and Fair Work will provide a report of the Reserve position as at 31 March 2019 to the Scottish Parliament in June.

Table 6.1 - 2018-19 Scotland Reserve Forecast at 31 January 2019	HM Treasury Fiscal £million	HM Treasury Fiscal £million
2018-19 Opening Balance		(538.0)
2018-19 Forecast Movements
In-year Reserve Drawdown	250.0
Forecast Underspends	(211.7)
		38.3
2018-19 Forecast Closing Balance		(499.7)
2019-20 Expenditure Commitments
Budget Bill		313.5
Budget Bill - Stage 2		94.0
		407.5
Less: Additional 2019-20 Funding
Late budget consequentials carried forward through HMT Reserve	(148.0)
QLTR Receipts deferred from 2018-19	(60.0)
		(208.0)
2019-20 Planned Reserve Drawdown		199.5
2019-20 Forecast Residual Balance		(300.2)
Of Which
Devolved Taxes Income		136.2
Financial Transactions		78.5
Balance set aside to fund spending commitments		85.5
		300.2

2019-20 Reserve Position

6.3.2 The Scottish Budget 2019-20 anticipated a drawdown of £313 million from the Reserve in 2019-20. The drawdown on publication was expected to comprise £220 million of resource funding, £46 million of capital funding and £47 million of financial transactions. The drawdown is to be funded through a mix of underspend from 2018-19 and the existing reserve balance. The final mix will not be known until after the end of the financial year, when we will have provisional outturn figures for 2018-19.

6.3.3 During the passage of the 2019-20 Budget Bill, stage 2 amendments committed a further £94 million in Resource spending, to be funded from additional consequentials of £148 million allocated to Scottish Government at the 2018-19 UK Supplementary Estimate, comprising £126 million of Resource and £22 million of Capital. Given the late allocation of this funding, HMT agreed an exceptional arrangement to separately carry forward this funding into 2019-20 outside of the Scotland Reserve arrangements. This preserves the flexibility of the agreed arrangements for operating the Scotland Reserve.

6.3.4 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 £700 million reserve with a maximum £350 million annual drawdown 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 financial years.