The Scottish Government had initially – and rightly – complained that devolution had not given it borrowing powers, pointing to a ridiculous situation where local councils had the statutory authority to borrow where their government did not.
This situation was remedied in the 2012 Scotland Act where, as the Scottish Government says: ‘The Scotland Act enables Scottish Ministers to borrow for capital purposes up to a cumulative maximum of £2.2 billion. HM Treasury have made clear that borrowing in any one year must not exceed 10% of the Scottish Government’s capital Departmental Expenditure Limit (CDEL) which restricts annual borrowing to approximately £240 million. Borrowing may be through the UK Government from the National Loans Fund, or by way of a commercial loan (directly from a bank or other lender).’
This refers to borrowing for spending on capital projects.
The 2012 Scotland Act also made provision for the Scottish Government to borrow to support revenue spending.
The Scottish Government says: ‘The Scotland Act enables the Scottish Government to borrow for certain revenue purposes up to a maximum of £500m. Treasury have indicated that the limit in any one year would be £200 million. Such loans are to be repaid within 4 years. The purpose of these loans is to help smooth fluctuations in tax receipts. In particular, revenue borrowing will be available to provide bridging funding where actual tax receipts fall short of forecasts and where the alternative would be for the Scottish Government to have to reduce spending in-year. The intention is that borrowing of this kind would be available in relation to both devolved tax receipts (and therefore effective from 2015-16) and receipts from the Scottish rate of income tax following the transitional period (from 2018-19 or 2019-20).’
New borrowing for Scotland announced in the Chancellor’s Spending Review
In his Spending Review on Wednesday this week [26th June], Chancellor George Osborne reduced Scotland’s annual revenue budget by 1.9% for 2015-16, a very modest cut in real terms in comparison to the cuts made across the board in the Review. The Scottish revenue budget would reduce to about £25.7 billion in that year.
Alongside this, the Chancellor announced an increased borrowing capacity for the Scottish Government for 2015-16, adding almost £300 million to the available limit, a 13.6% increase.
The impact of capital spending in England does not stop at the border and the estimate of spending there in 2015-16 is estimated to see a further £400 million of capital spending in Scotland.
This increases the total capital spend available in Scotland to £3.3 billion.
Following the announcement, Scottish Secretary Michael Moore was quoted as saying: ‘The Scottish Government has asked for additional capital resource and the UK Government has delivered it. They must now use it to invest in Scotland and help the economy grow.’
Scottish Finance Secretary, John Swinney, responded by saying: ‘Any extra borrowing will have to be paid back with money from a declining revenue budget.’
On the one hand, this is an astonishingly simplistic response. It is in the nature of borrowing that it has to be repaid – and that involves interest paid from revenue; with the capital repayment of borrowing coming from reserves and/or revenue – or earnings.
This is why the EU sets a limit of 60% on the ratio of debt to GDP of the 13 member states of the eurozone. The endemic crisis facing the eurozone arises in part from the fact that several of the eurozone states, as they responded to their individual financial crises, borrowed way above that level, leaving them exposed to unsustainable rises in interest rates.
Mr Swinney’s response then ignores completely the fact that the 2012 Scotland Act also confers upon the Scottish Government the powers to vary the Scottish Rate of Income Tax and to introduce new taxes with the consent of the Scottish and UK governments.
These powers allow the Scottish Government to raise revenue to contribute to paying for any increased borrowing it wishes to employ.
Mr Swinney has got what he asked for and has been given a much better deal than he can have expected. The difficulty is that the Scottish Government does not wish to use the powers it asked for because borrowing more would put pressure on revenue – or cash-in-hand – spending, as every family knows; and raising taxes to help pay for the borrowing would hit the taxpayer.
None of these consequences of the borrowing powers it asked for and got are acceptable to the Scottish Government because they involve unpopularity.
Stable governance in Argyll has taken a serious hit from the SNP party hierarchy’s panic in such circumstances. The party has been seen working to force its own group of Councillors from power locally, for fear of the unpopularity that would arise from the party brand being associated with necessary but tough decisions in cuts to local spending.
Mr Swinney’s response to the increased borrowing powers conferred by the Chancellor would indicate that the Scottish Government did not actually want these powers as much as it wanted to be able to protest that it was not being given them.