Don Peebles: Scotland must deal with its debt responsibly
OUR NEW power to borrow gives us more control over our affairs but the system still lacks flexibility.
There is much debate in Scotland on constitutional reform as well as talk on a date for a referendum on independence. Yet Scotland is about to become financially more powerful as a devolved nation than it has ever been. As well as gaining a tax-raising power, the most high profile new power will be the power to borrow. Scottish ministers will, in future, be able to borrow money to finance public expenditure – a power missing from the initial devolution settlement. In simple terms, think of this as a public sector credit card. It will give our politicians the ability to finance something now and pay later. Borrowing, of course, does not represent new money, it merely changes the time at which money becomes available to government.
The background to all of this is the Scotland Act 2012, which implements much of the work of the Calman Commission. The result is the largest single transfer of fiscal power from Westminster in the history of the United Kingdom. However, HM Treasury is not prepared to relinquish control of Scotland’s finances just yet. Very quickly it was accepted that HM Treasury would impose a limit and political debate focused on the size of this limit.
An alternative discussion would be whether any limit should be imposed. The Scottish Government could, for example, be allowed to determine how much it should borrow, based on its own assessment of what it can afford to repay.
Scotland is not the only part of the UK where there is evidence of an increasing demand for additional powers in this post-devolution era. In Wales, an independent commission is looking specifically at devolving powers to improve fiscal accountability. In Northern Ireland, the assembly already has borrowing powers to fund capital expenditure with an HM Treasury prescribed limit of £200m. Although we can detect differences in the respective powers enjoyed by the devolved nations, what we can detect is that these nations are united in their call for more borrowing powers. The National Assembly for Wales’ finance committee recently recommended that the Welsh government should also be granted the power to borrow. Notably it anticipates, like Scotland, that HM Treasury will prefer to set a borrowing limit in order to preserve control but the committee has called, pragmatically, for maximum flexibility.
Of course a united call to be able to borrow money is one thing but, as with credit cards, the debt has to be repaid. It doesn’t take much further consideration to realise that the current problems of the world economy are rooted in too much debt with seemingly endless headlines from the eurozone countries on excessive public sector debt levels. Countries such as Greece are imposing austerity conditions in an effort to drive down debt and Britain’s borrowing just this week is reported as having increased. Relinquishing control of public sector debt to a devolved administration has almost certainly been considered to be a risk. The UK response has been to give Scotland borrowing powers but without flexibility.
Scotland’s new power to borrow can be compared with Scottish local authorities who themselves have a power to borrow. Notably, there is no borrowing limit prescribed by government and local authorities borrow more than £1 billion annually to finance local investment in roads and schools. What the local government system does have at its heart are clear objectives, which ensure that borrowing is not only prudent but is tested to ensure sustainability and affordability.
It operates like this. Borrowing limits are decided and set locally, based on an assessment of the short-term and long-term affordability of the debt. The decision to increase levels of borrowing is linked to the ability to secure additional income through taxation. Although there are no HM Treasury borrowing limits imposed, there is a reserve power within primary legislation which allows HM Treasury to impose a limit if the level of borrowing being undertaken is viewed to compromise the UK economy. The power has never been used since introduction of the prudential framework.
If we look at the Scotland Act and contrast the new power of the Scottish Government with that of local authorities what we see right away is that the Act “caps” the amount of money that can be borrowed at £2.2bn. That limit has been set on a basis which some commentators have described as arbitrary. What it certainly doesn’t do is provide any flexibility to accelerate capital investment beyond that limit through increased borrowing in order to support economic recovery. Public borrowing must be undertaken responsibly, but what is missing from the debate is whether our national politicians should be able to decide on levels of borrowing based on affordability while enabling overall control to be exercised. The evidence of local government and the prudential framework is that this can be done and that responsible borrowing can be undertaken.
Scotland is part of the UK and, therefore, part of the overall UK fiscal control framework. But this evidence shows that a simple credit card limit, while understandable, can be replaced with a greater degree of flexibility where the responsibility for control rests with Scotland. There is opportunity here for Scotland to demonstrate that, at a time where the very phrase “public sector debt” is itself toxic, we lead the way within the UK and Europe on responsible debt management.
• Don Peebles is policy and technical manager of the Chartered Institute of Public Finance and Accountancy, Scotland
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