Treasury says no to Forth bridge cash

The dismissal of the SNP's latest finance plan increases the prospect of cuts being made to school and hospital projects in order to finance a third bridge across the Forth.

The Treasury has warned the SNP government that a proposal to raise the cash through local authority borrowing cannot be justified given the UK government's need to cut spending during the recession.

Earlier this year, the Treasury rejected an argument by Finance Secretary John Swinney that the money could be raised by raiding future capital spend budgets, worth around 3.5bn per year and contained within the 30bn annual block grant Scotland receives from the Treasury.

The advance would then be repaid gradually in the two decades after the completion of the bridge, which is expected to be built between 2013 and 2016.

The Treasury's refusal to allow the Scottish Government access to future budgets, and the rejection of the use of local authority borrowing, means the SNP could have to find the money from its capital spend budget as soon as construction starts. However, ministers have already warned that could mean major projects such as hospital and school buildings will have to be cut.

The latest warning, contained in a letter from the Treasury minister Liam Byrne to the finance secretary, also reignited the feud between Edinburgh and London over the financing of Scotland's largest ever capital project.

Swinney criticised the government for hindering the bridge, which is to be built alongside the existing but ageing road bridge and its sister, the red steel rail bridge.

According to Byrne's letter, Swinney has told the UK government he wants to increase public spending by using local authority "prudential" borrowing powers to raise millions to help pay for the bridge.

But Byrne warned Swinney that his plan "was not a solution", adding: "It would have a significant fiscal impact by substantially increasing your spending.

"That is not possible to justify in terms of our overall public spending framework."

Byrne's letter, sent last week, is a further indication of the deteriorating relationship between Holyrood ministers and Westminster.

Byrne's letter also said that a previous offer of 1 bn from the Treasury remained on the table.

The Scottish Government has rejected that offer, which is mainly made up of 500 million from Scotland's share of the London Crossrail project and 300m from Scottish under-spending from the capital budget, which normally has to be returned to the Treasury.

The letter expressed dismay that the Scottish Government was not meeting the 3 per cent annual efficiency savings achieved by the rest of the UK – a measure that would provide 400m for the bridge.

David Bell, professor of economics at Stirling University, said: "It looks as though the SNP are looking for another way to borrow and the Treasury wants to keep control."

Professor Richard Kerley, an expert in public finance and vice-principal of Queen Margaret University, said: "The Scottish Government can't borrow and local authorities can, so they are trying to piggy-back on the powers of local authorities. It is probably technically possible, but whether it works in the longer term is open to question."

The SNP could press ahead with the local authority borrowing plan without Treasury consent, but it is understood they were again looking at using their capital spending budget. Last night, Scottish ministers claimed that Byrne's remarks would not affect their commitment to build the crossing on time and on budget.

A Scottish Government spokesman said: "The real issue is that the Treasury should agree to our request for the Scottish Government to be able to pay for such a large, once-in-a-generation capital project over a longer period, rather than within a few short years.

"Everyone, including the UK and Scottish governments, are rightly seeking to maximise infrastructure spending in order to fight recession, so it makes no sense for Treasury ministers to suggest that we reduce capital spending now, when the economy needs all the stimulus it can get, and then pretend that this is somehow new money."

He added: "We are getting on with the important business of building the Forth replacement on time and on budget – if the Treasury won't help, the least they should do is not hinder."