By Keith Aitken in Edinburgh | 22 June 2012
Chief Secretary to the Treasury Danny Alexander has launched a consultation over whether Scotland should have the power to issue its own bonds.
The consultation, which runs to September 14, builds on a provision in the new Scotland Act that gives the Scottish Government capital borrowing rights for the first time. These enable it to finance extra capital investment equivalent to up to 10% of its annual capital budget, to a ceiling of £2.2bn.At present, the borrowing power, which takes effect in the financial year 2015/16, is limited to raising loans from the UK Government’s National Loans Fund, or from commercial banks, much like the borrowing powers of local authorities.
But in March, during the Act’s latter parliamentary stages, UK ministers agreed to consider extending options to open the way for Scottish bond issues.
Alexander set the consultation in motion today in a speech to the Glasgow Chamber of Commerce, and urged ‘academics, investors and other market participants’ to submit their views.
‘This takes forward the commitments we made in the Scotland Act, which represented the greatest transfer of powers from Westminster for 300 years,’ Alexander said.
His paper acknowledges that capital raised by Edinburgh would increase UK public sector net borrowing: ‘Setting limits and controls on any new borrowing is critical to ensuring that any borrowing is manageable from within the UK fiscal position.’
Bonds, it says, can encourage greater fiscal responsibility and their multi-year nature can improve forward financial planning of capital projects.
But these benefits are contingent on a ‘no bail-out’ policy from the sovereign (ie the UK) government. The consultation paper warns of a risk of financial crisis if markets lose faith in the capacity of the borrowing government to make good its debts. Interest rates can also be higher for sub-sovereign governments, it notes.
Although the consultation is explicitly confined to a devolved rather than independent Scotland, it comes just ahead of next week’s formal launch of the campaign for a ‘No’ vote in the 2014 independence referendum, which will be led by ex-chancellor Alistair Darling and the former Liberal Democrat leader Charles Kennedy.
Opponents of independence are keen to counter charges of negativity and to show devolution within the UK to be a dynamic and continuing process. Alexander said in a recent magazine interview that the bond issue option ‘could be a positive in the end’.
