The Treasury's announcement that the Scottish Government will be able to issue its own bonds is largely of symbolic constitutional importance. It will not involve raising the cap on Scotland's borrowing powers
The announcement that the UK government will grant the Scottish Government the power to issue bonds may have importance of a symbolic nature but it will not provide the Scottish Government with any more finance.
Debate on the power to issue bonds in Scotland can first be traced back to the 2007 Scottish elections when the SNP manifesto proposed that if elected to power, it would issue bonds to finance its spending proposals. It was of course elected as the first ever minority administration in Scotland, but the promise to issue bonds was one which could not be kept. It was a power that the Scottish Government did not have. In fact the Scottish Government (unlike local government) had no power to borrow any type of debt product and no power to issue bonds.
Since then, the Calman Commission which reviewed Scotland’s fiscal powers, recommended stonger fiscal powers including the introduction of borrowing powers which were subsequently incorporated within the Scotland Act 2012.
The Act itself did not include the power to issue bonds but the Act did allow later modification to the way in which Scottish ministers can borrow, and that included bond issuance but without the need for further legislation.
HM Treasury first consulted on the topic of bond issuance in 2012. The outcome was the statement last year, to the effect that the government will not make any decision on bond issuance ahead of the introduction of capital borrowing powers in 2015/16.
But what are bonds? and just why have they become such a major issue for both the devolved administration in Scotland and the UK government.
Bonds are a debt instrument which, like any other debt instrument will have to be repaid over time. Notably, the unexpected announcement from HM Treasury does not, and is not intended, to provide additional funds to the Scottish Government. What it does do is provide another 'source' of borrowing. In the Scotland Act 2012, Scotland’s borrowing powers which are effective from 2015/16 are capped at £2.2 billion. The HM Treasury announcement carefully states that it is a source of borrowing '..within the same limits..' meaning that Scotland’s borrowing, despite this announcement, will still be capped at £2.2 billion.
When CIPFA responded to the HM Treasury consultation in 2012, we recognised that bonds were one type of product of debt and that generally any entities engaging in treasury management activity would likely utilise a basket of products, which crucially would be managed in line with an underlying treasury management strategy. This means that the underlying policy intention behind borrowing and then repaying it using public money should be of more significance than the type of product used. We also commented on the need for a borrowing control and on the need for national transparency on indebtedness.
The timing of the announcement on bonds is likely to be of more significance for the current constitutional debate than it ever will be for Scotland’s future debt management. But it does allow an opportunity to again raise questions on how Scotland should report its indebtedness more transparently and also to reflect again on the proposed borrowing control.
The borrowing control contains no test of affordability of what Scotland could in fact borrow. It is merely a cap – which can be likened to a credit card limit. The solution to transparency? As we suggested in 2012, transparency could be further improved through the publication of a Scottish Government consolidated balance sheet, an issue which is likely to gain more prominence as the financial elements of the constitutional debate develop.
Don Peebles is head of CIPFA Scotland
