John McTernan: With our debt will come discipline

Allowing Scotland to issue bonds to raise money will mean the market will become our master

'I NEED a dollar, a dollar is what I need" sang Aloe Blacc, auditor turned R&B star, in the song that came to define the global financial meltdown. There's been a similar song from the Scottish Government - though their preferred unit of currency is one billion.

On Monday the Scotland Office signalled a shift on borrowing powers for the Scottish Government and launched a consultation. This is good and smart, but still too timid. What it and the Treasury should have said is that the Scottish Government can have the right to issue bonds to raise money as soon as is feasibly possible. And they should have done this with relish. Why? Because the minute it starts issuing bonds is the moment the Scottish Government learns to live within its means.

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The strongest argument for any new financial powers for the Scottish Parliament is the need to change the dominant culture in relation to public spending. Not so much "tax and spend" - the traditional US political insult - but "spend and spend". Why are so many things free in Scotland? Not because Scots are instinctively collectivist in some odd hangover from the 1970s. No, because every year the Scottish Government receives a cheque for more than 30 billion and few constraints on how it spends it. The proposals in the current Scotland Bill rebalance that somewhat, but the idea of financial responsibility has yet to be inserted into the political discourse.

Thus we have an odd debate about borrowing powers. It starts with the complaint that councils have borrowing powers, so why not the Scottish Government? It's true, they do - the power of prudential borrowing. But it has a tough test: does it strike the right balance between today's taxpayers who get an immediate benefit, and future taxpayers who will pay off the borrowing? And it is externally regulated by a private body, CIPFA, the accountancy professional body. Councils also have a range of revenue streams they control, so they can service a debt. For that is what borrowing actually is - not free money, but a debt incurred that must be serviced and eventually paid off.

The ideology of "free stuff" has infected this vital conversation. All government capital is ultimately a decision about spreading a burden across the generations. Good decisions bring economic benefits now so that growth can defray the costs of borrowing. Some bring a social gain we are willing to fund over decades. And if you get it right, as the Victorians so often did, something that takes a hundred years to pay for may well have another century of useful life in it. Just think of our sturdy stone-built Victorian schools.Some of the best decisions are when you create an asset with its own revenue stream - whether a council house or a toll bridge. With a sensible tolling structure the new Forth Road Bridge could be funded by bonds, but of course as it has to be free it can't be.

Bonds are a very interesting proposition for the Scottish Government. They meet two demands at the same time. On the surface they are just another way to feed the insatiable spending appetite of the Scottish body politic. Bonds on top of the block! Triples all round! Get underneath that and, done properly, it imports real fiscal discipline into Scotland.

To see what would actually happen if the Scottish Government could issue bonds, you only need to go to Australia, where the individual states have that power. As a consequence, every single state is fiscally conservative, careful to keep spending and taxation low. Why? Because they need to preserve an AAA rating with the credit agencies. That's a far tighter fiscal corset than is ever imposed by the Treasury - and the agencies are immune to stunts and statements in the Scottish press.

Scotland isn't Greece, but how should a new bond issue from a government addicted to spending be scored? Upfront signals of fiscal continence will be demanded, indeed required. The unsustainable spending on free personal care, free higher education and on teachers' pay - to name but three - will come under scrutiny. I can already hear the howls of protest: "That's not fair", "Only the Scottish people have the right to make those choices" and so on. But hold on just a minute: that comes with the territory. If you want to borrow on the market, then the market and its judgements, good or bad, become your master.

That is, of course, only one part of the discipline. The other part is having to pay back your debt. Getting a credit rating simply determines the rate of interest you'll be charged. If you borrow 5bn, you have to pay it back someday. Of course, you can pay interest only and push the debt into the future, maybe even issuing new debt as you go along. But after ten years of issuing new slabs of debt every year your interest payments (the yield on your bonds) will be getting close to 5bn a year at even a modest rate. Where does that come from? The only real source: tax income. So either you cut services to pay the debt or you raise taxes. Either way, you are back in the world of hard choices.

It's freedom, but at a price - and MSPs would be forgiven for thinking the block grant has some under-appreciated merits. Money, as any good businessman or woman will tell you, costs money. Many a good and profitable company has gone bust because of problems with cash-flow.

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Balancing the demands of capital and revenue, bondholders and taxpayers will demand a new honesty and discipline from the Scottish Government. This would be a very good thing, and not before time.And this would be imposed not by the Treasury, not by the voters, not even by the Scottish Parliament, but in a delicious irony it would be the market doing the work.

Alex Salmond would be brought into line by the very spivs and speculators he slammed for destroying the banking system.