Holyrood administration to get extra source of financing

Capital Markets
Capital Markets
UK ministers said the Scottish government wanted direct access to capital markets
UK ministers said the Scottish government wanted direct access to capital markets

The Scottish government will be given power to issue its own investment bonds, UK ministers have announced.

The move will give the Holyrood administration an extra source of financing when it gets new borrowing powers, in 2015.

Chief Secretary to the Treasury Danny Alexander called the move “historic”.

The Scottish government said it was “nothing new”, arguing only independence would give Scotland full control of its economy and finances.

The UK government announcement came ahead of the 18 September independence referendum, which will see voters in Scotland asked the Yes/No question: “Should Scotland be an independent country?”

Under Westminster legislation which devolved new powers to the Scottish Parliament, the Scottish government will be able to borrow up to ?2.2bn to build major capital projects, like roads, hospitals and schools, from next year.

Government bond issuance is normally a technical financial instrument for the secure handling of the public finances. But in Scotland in 2014, it’s raw politics.

While the UK government hands out powers already available to local councils, it wants to send two big signals. First, it’s willing to hand over more powers to Scotland, if cautiously. Second, those powers may not be that welcome.

The move doesn’t increase spending limits. Instead it lets St Andrew’s House compare the cost of borrowing through the UK with borrowing on its own, using a Scottish government credit rating.

With no borrowing history, it’s expected the latter will be more expensive. So the political message ahead of the referendum: why would Scots want to avoid use of the UK’s market credibility?

The Scottish government response is that the move is too constrained, and comes too late. That’s a reminder that it had wanted to borrow more than the Treasury would allow, to stimulate demand through the worst of the downturn.

John Swinney has balanced the books. He had to. The argument that he should have been allowed to run bigger deficits may have been noted by those who will set Scotland’s credit rating.

Scottish ministers will also be able to set a Scottish income tax rate, as part of a series of reforms put forward by the Calman Commission, which was set up to review the first decade of devolution.

Following a consultation, the UK government said those powers would be further boosted by giving the Holyrood administration direct access to capital funds with the ability to issue bonds.

The arrangement will allow ministers to borrow money from an investor over a fixed period of time for a pre-determined interest rate.

Mr Alexander, said: “This is a historic announcement, demonstrating once again how Scotland can grow and prosper within the UK.

“From 2015, Scotland will be able to borrow up to ?2.2bn to invest in its hospitals, roads and other capital projects. In addition to having access to the National Loans Fund, our decision today means that the Scottish government can directly issue its own debt.

“It will of course be up to the Scottish government to manage their borrowing, but this is complemented by the tax powers in the Scotland Act providing the Scottish government with an independent source of revenue to support borrowing costs.”

Scottish First Minister Alex Salmond told BBC radio’s Good Morning Scotland programme: “This does not give us any additional borrowing powers, it is only a different way of doing it.

“It’s hardly huge news.”

Mr Salmond said an independent Scotland would be able to borrow money at a lower rate than the UK’s current figure of 2.9%.

He added: “The borrowing rate in other small European countries such as Switzerland is 1.2%, Denmark 1.9% and Finland 2%. The evidence is that if Scotland was independent the rates would be lower.”

Treasury analysis has suggested issuing bonds was likely to be more expensive for Scotland than accessing the National Loans Fund.

Most respondents to the Treasury consultation said they believed bonds issued by the Scottish government would likely translate into a cost of borrowing “significantly above that enjoyed by the UK government”.

The consultation, which sought views from the Scottish government and investors, said Scotland might have to pay between 0.3% and 1.2% more than the British government to borrow from financial markets.

Existing funding arrangements charge Scotland about 0.2% extra.

Source BBC

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