Sixth Annual Report on the Implementation of the Scotland Act 2016: Tenth Annual Report on the Implementation and Operation of Part 3 (Financial Provisions) of the Scotland Act 2012

6. Borrowing and Scotland Reserve

Scotland-specific economic shock

56. The Fiscal Framework has provisions for a 'Scotland-specific economic shock' (SESS) to be triggered. When this happens, the Scottish Government has access to increased borrowing and reserve flexibility. This provision is triggered when onshore Scottish GDP growth is below one per cent in absolute terms on a rolling four-quarter basis, and one percentage point or more below UK GDP growth over the same period. This can be either on the basis of outturn data, or on the basis of forecasts.

57. The SFC's forecasts in January 2021 projected a SESS occurring in 2021-22, which triggered the provisions of the Fiscal Framework, allowing the Scottish Government to borrow £600 million rather than £300 million per year for forecast error on tax receipts and social security expenditure, and temporarily removing the annual drawdown limits for the Scotland Reserve. These flexibilities apply in the financial years 2021-22 until 2023-24.

58. Although the SFC's latest publication no longer forecasts a Scotland-specific economic shock,^[21] these flexibilities will not be withdrawn retrospectively in the event that outturn data indicate that the criteria for a Scotland-specific economic shock are no longer met.

Capital Borrowing

59. Since 1 April 2017, the Scottish Government has had the power to borrow up to £450 million each year, up to a maximum total of £3 billion, to support investment in capital infrastructure.

2021-22 draw down

60. The Scottish Government borrowed £150 million in 2021-22 to support capital expenditure. This is less than the £450 million originally planned.

61. The borrowing was drawn down from the National Loans Fund in full on 3^rd February 2022. This will be repaid over a 20 year period, at an interest rate of 1.44% percent.

2022-23 borrowing plans

62. As part of the Scottish Budget 2022-23, a decision has been taken to borrow £450 million to support infrastructure investment.

63. Final decisions on the specific borrowing arrangements for 2022-23 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

64. The Scottish Government has accumulated £1.8 billion in capital debt as at the end of 2021-22, 60 per cent of its overall limit. Details of the capital borrowing and repayment schedule can be found in Table 6.1.

Resource Borrowing

65. 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.

66. The Fiscal Framework sets out the conditions and limits for elements of resource borrowing:

i. for in-year cash management, an annual limit of £500 million;

ii. for forecast error in relation to devolved and assigned taxes and social security expenditure, and corresponding BGAs, an annual limit of £300 million; and

iii. for any observed or forecast shortfall in relation to devolved and assigned taxes or social security expenditure incurred where there is or is forecast to be a Scotland-specific economic shock, an annual limit of £600 million.

2021-22 draw down

67. In 2021-22 the Scottish Government borrowed £319 million in respect of final reconciliations relating to 2018-19 Scottish Income Tax and 2019-20 fully devolved taxes and social security BGA reconciliations. This was in line with plans as outlined in the 2021-22 Scottish Budget.

2022-23 borrowing plans

68. In an attempt to manage volatility risk, in 2022-23 Scottish Ministers plan to borrow £15 million to smooth the negative budget impact of forecast errors arising from tax and social security reconciliations.

69. As the MTFS states, the Scottish Government will assess all planned resource borrowing decisions to smooth the funding trajectory over five years.

70. In order to promote budget stability and maintain flexibility in the Reserve, Scottish Government budgets will assume full borrowing against known and/or forecast tax and social security reconciliations. Final in-year borrowing drawdowns will take account of the movement of reconciliations and the overall budget management position.

Scotland Reserve

71. The Scotland Reserve has applied since 1 April 2017. It replaces the 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, with annual drawdown limited to £250 million for resource and £100 million for capital. There are no annual limits for payments into the Scotland Reserve.

72. The triggering of a Scotland-specific economic shock has removed the annual drawdown limits on the Reserve. This applies in the financial years 2021-22 until 2023-24. However, the annual cap of £700 million remains.

2021-22 Reserve position

73. The latest forecast Scotland Reserve position is detailed below. 2021-22 drawdown plans are unlikely to change materially however 2021-22 additions are subject to provisional and final outturn processes. The final Scotland Reserve position for 2021-22 will not therefore be confirmed until later in the calendar year.

74. Notwithstanding the flexibilities provided through the triggering of a Scotland-specific economic shock, 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 financial years.