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SHOULD SCOTTISH MINISTERS BE ABLE TO BORROW?

A report published today argues that Scottish Ministers should have limited borrowing powers but warns this creates new risks and challenges.

Speaking in Edinburgh today, Professor Anton Muscatelli presented a report by the Independent Expert Group convened last year to provide impartial advice and evidence to support the Commission on Scottish Devolution. The group comprises experienced and pre-eminent academics and practitioners from the UK, Europe and North America.

Professor Muscatelli, who is Principal and Vice Chancellor of Heriot-Watt University, said,

“The debate around Scottish Ministers having borrowing powers has increased in recent months, so I am very pleased to be able to present a report prepared by an international group of experts providing a definitive analysis of the issues.

“We considered the different reasons governments and sub national governments borrow, what the benefits and costs are and looked to international experiences of where borrowing by sub national or regional governments has been advantageous and where it has gone wrong.

“The first thing we highlight is that borrowing does not represent “new” money, rather it changes the time at which money becomes available. At some time debts have to be paid, whilst borrowing itself incurs charges. Managing borrowing and its repayment requires a sophisticated budgeting and planning function in government.

“Whether Scottish Ministers should have borrowing powers depends on the purpose as Governments borrow for three very different reasons. The answers critically depend on how public expenditure in Scotland is financed.

“Governments borrow to manage their short term cash flows as public expenditure commitments and revenues from taxes often arise at different times; to manage public expenditure to counter the peaks and troughs of the economic cycle over the medium term and to deliver intergenerational equity around the financing of major capital projects over the longer term.

“UK Government debt includes borrowing to counter the current downturn in the economic cycle. Existing public expenditure commitments and social security payments continue to be met at a time when tax receipts are down. Such borrowing relates directly to macro economic policy and the public expenditure commitments met by the UK Government include paying the Scottish block grant.

“This means that the capacity of the Scottish Parliament to deliver public services in Scotland already depends on borrowing by the UK Government and Scotland has a share of UK Government debt.

“We do not attempt to analyse the efficacy of UK macro economic policy or whether Scotland’s needs differ from the rest of the UK. But as macro economic policy is reserved to the UK Government, it would not be appropriate at present for Scottish Ministers to engage in borrowing to counter the ups and downs of the economic cycle.

“We do see benefits in allowing Scottish Ministers to borrow under the present financing arrangements in relation to their capital budget only. UK Departments influence and negotiate their budgets with HM Treasury, so they have a degree of autonomy in determining the size of their capital budget currently not available to the Scottish Parliament. We recommend that under current financing arrangements, this borrowing is from HM Treasury only.

“If some taxes were devolved or assigned to the Scottish Parliament but the major component of the Scottish budget remained the block grant from the UK Government, it would not be appropriate for Scottish Ministers to be able to borrow to fund current expenditure to counter the economic cycle.

“But some devolved or assigned taxes would give Scottish Ministers an income to borrow against, so we recommend the application of something akin to the Prudential borrowing arrangements should be allowed in relation to capital expenditure. The most advantageous rates for this borrowing should be from the National Loans Fund or the Public Works Loans Board and debt and interest payments would have the first claim on devolved tax revenues.

“If the financing mechanism for the Scottish Parliament were to be radically revised and the greater part of its revenues accrued from assigned or devolved taxes, then extensive new borrowing powers would be needed. But a necessary condition of such a change would be the integration of any new borrowing powers conferred to Scottish Ministers with the macro economic policy management responsibilities of the UK Government

“The economic down turn, the current high levels of UK Government debt and the potential impact of transferring PFI sourced assets to the balance sheet (in compliance with international financial reporting standards) all combine to suggest that the scope for additional public borrowing by any UK body is likely to be constrained for the foreseeable future.



Summary of Independent Expert Group Recommendations for Borrowing By Scottish Ministers:

Status quo- funding by block grant:
Short term cash flow borrowing - YES
• £500 million already provided for in the Scotland Act
Borrowing to counter economic cycle - NO
• UK Government borrows to pay block grant;
• UK Debt relates to public expenditure in Scotland
• Consistent with reservation of macro economic policy
Borrowing for capital investment - YES
• Allow Scottish Government some autonomy of timing of capital spend
• From UK Government only

Modest change - some block grant displaced by assigned/devolved tax revenues:
Short term cash flow borrowing - YES
• review £500 million already provided for in the Scotland Act
Borrowing to counter economic cycle - NO
• UK Government borrows to pay block grant;
• UK Debt relates to public expenditure in Scotland
• Consistent with reservation of macro economic policy
Borrowing for capital investment - YES
• From National Loans Fund Or Capital Markets
• Apply Prudential type Regime (inc ultimate oversight by HM Treasury) requiring sophisticated budgetary management
• Debt interest and repayments first claim on Scottish tax receipts

Radical change - greater part of budget from assigned/devolved taxes:
Short term cash flow borrowing - YES
• need to review £500 million cap
Borrowing to counter economic cycle - YES
• Need to integrate borrowing powers with reserved macro economic management
Borrowing for capital investment - YES
• From National Loans Fund Or Capital Markets
• Apply Prudential type Regime (inc ultimate oversight by HM Treasury) requiring sophisticated budgetary management
• Debt interest and repayments first claim on Scottish tax receipts

Notes for Editors

1) The report is published by Heriot-Watt University on behalf of the Independent Expert Group supporting the Commission on Scottish Devolution. Further copies are available from Caroline Dempster of Heriot-Watt 0131 451 3443.

2) Membership of the Independent Expert Group
Members based in the United Kingdom
• John Aldridge, former Finance Director at the Scottish Executive
• Professor David Bell, Professor of Economics, Stirling University
• Professor Julia Darby, Professor of Economics, University of Strathclyde
• Dr Sandra Eden, Senior lecturer in Tax Law, Edinburgh University
• Professor Clemens Fuest, Professor of Business Taxation and Research Director of the University of Oxford Centre for Business Taxation, Oxford Said Business School
• Professor Charlie Jeffery, Professor of Politics, Edinburgh University
• Professor Alex Kemp, Schlumberger Professor of Petroleum Economics, University of Aberdeen
• Professor Iain McLean, Official Fellow in Politics, Nuffield College, Oxford, and Professor of Politics, University of Oxford
• Professor Anton Muscatelli [Chair], Principal and Vice-Chancellor Heriot-Watt University
• Jeremy Peat, Director of the David Hume Institute; former Group Chief Economist at the Royal Bank of Scotland and a former economic adviser at HM Treasury and the Scottish Office
• Professor David Ulph, Professor and Head of School of Economics and Finance, St Andrews University, former Director of Analysis at HMRC.

Members based Overseas
• Professor Robin Boadway, Professor of Economics Queen's University, Kingston Ontario Canada
• Professor Andrew Hughes-Hallett, Professor of Economics and Public Policy, George Mason University, Virginia, USA; Professor at St. Andrews University School of Economics and Finance.

3) The remit of the independent expert group is:
To provide expert advice to the Commission on Scottish Devolution on improving the financial accountability of the Scottish Parliament in terms of the Commission’s overall remit:
"To review the provisions of the Scotland Act 1998 in the light of experience and to recommend any changes to the present constitutional arrangements that would enable the Scottish Parliament to serve the people of Scotland better, that would improve the financial accountability of the Scottish Parliament and that would continue to secure the position of Scotland within the United Kingdom."
To assess the strengths and weaknesses of the present system of financing devolved expenditure (in respect of financial accountability and otherwise), and any alternative fiscal options which might provide improved financial accountability.
In particular, this includes considering the potential costs and benefits to Scotland of any alternative system, and the issues of equity and the economic and fiscal consequences for Scotland and to the UK as a whole.
4) A working relationship between the independent expert group and the Commission on Scottish Devolution has been agreed which confirms its independence and impartiality. Specifically, it has been confirmed that:
The Expert Group - as the provider of impartial advice and evidence - is independent from the Commission itself.
It may subsequently publish work completed for the Commission although it is anticipated that much of the work of the expert group will draw on existing research in this area and hence would already be in the public domain.
The expert group may submit advice and evidence on matters it considers to be relevant to its agreed remit, in addition to meeting the stated informational requirements of the Commission as expressed by its Financial Accountability Task Group.
5) Members of both the Commission on Scottish Devolution and the Independent Expert Group are unpaid.