At long last, Scotland is to meet the capital markets.
Scotland is one of a rare breed of nations: it has its own legal system but lacks sovereignty. It’s also a fiscal outlier. Unlike sub-sovereign entities in the US, Italy and Australia (to name a few), it has little flexibility over taxation and is unable to issue bonds.
But all this is set to change.
UK Government amendments to the Scotland Bill lay the foundation for Scotland to issue bonds to pay for capital expenditure. The details are subject to a review but here’s the relevant section of the Written Ministerial Statement provided to the UK parliament on Monday:
Introducing a power in the Scotland Bill which will enable the Government to amend, in future, the way in which Scottish Ministers can borrow to include bond issuance, without the need for further primary legislation. The Government will conduct a review of the costs and benefits of bond issuance over other forms of borrowing, and will consider extending Scottish Ministers’ powers where this does not undermine the overall UK fiscal position or have a negative impact on total UK borrowing.
The Scotland Bill, which still has a few parliamentary stages to go, has been a long time coming. The previous UK government published the Calman Report, the first major review of Scotland’s reserved powers since devolution in 1999. It set out the sort of fiscal flexibilities the Scottish Parliament could expect through the Scotland Bill. The coalition government has gone a bit further, under pressure from a buoyant Scottish National Party.
The Bill will enable the Scottish Parliament to set income taxes within parameters set by the UK treasury. It also gives Scotland greater autonomy over capital expenditure (UK budgets distinguish between current and capital expenditure), allowing up to £2.2bn of so-called “prudential borrowing” for infrastructure projects.
However, the UK Government had previously rejected the idea of Scotland issuing its own bonds. Here’s Treasury Exchequer Secretary David Gauke back in March:
“As borrowing through bonds is likely to be more expensive than raising finance through UK gilts, these higher costs would be reflected in increased UK debt interest payments,”
One wonders if recent electoral results changed Conservative minds.
Even though the bonds will be denominated in GBP and ultimately (one would imagine) be backed by all UK taxpayers, this is surely true. A “spread” between UK and Scottish bonds would surely exist, not least to account for the political risk of independence, but it would likely be quite narrow.
(Thought experiment: what price a Scottish CDS?)
In its report to the UK Government on desired amendments to the Scotland Bill, the Scottish Parliament appeared to recognise this:
126. The Committee’s view is that it is unlikely that the Scottish Government will need or wish to access the bond markets in the near future. Nevertheless, it is not a possibility that should be ruled out in statute, as we do not think that the bond markets – which are highly sophisticated – are incapable of distinguishing and pricing Scottish Government bonds properly. We therefore recommend that the Bill be amended to permit this, subject, if the UK Government thinks it necessary, to the agreement from HM Treasury to conditions for bond issues.
So Scotland, welcome to the “highly sophisticated” world of the bond markets.
It’s not like there are any dangers for a municipality-cum-peripheral European nation, of course.
(H/T fellow Scot Bryce Elder for the headline.)
Related links:
Boost for Holyrood financial powers under Scotland Bill – The Scotsman
Amendments to the Scotland Bill – Hansard