Borrowing powers key to ‘meaningful’ devolution

The report warned that if the power to borrow was given only to Scotland the expectation might always be that, in an emergency, Westminster would bail out Edinburgh. Picture: TSPL

And the report by the National Institute for Economic and Social Research (Niesr) said that the power to borrow should be given not only to the devolved government in Edinburgh, but to Wales, Northern Ireland and the English regions as well.

Whitehall has always been wary of allowing lower tiers of government to borrow cash, because of the fear that central government will be called upon to bail out a devolved administration or local authority if it cannot keep up repayments. “Devo-max” proposals from the three main unionist parties offer greater powers to raise taxes and decide spending priorities, but have had less to say about borrowing.

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But the Niesr report, entitled Real Devolution: The Power To Borrow, argues that such fears are “unfounded” and that devolution of the power to borrow is “feasible and desirable” not only for Scotland but for other parts of the UK too.

“Real devolution means that the Scottish state can succeed or fail - and if it fails, it must not count on the rest of the country to step in and rescue it,” said the report. “That must mean devolving borrowing power. Only then will local representatives be responsible for their actions and then held to account by the electorate.”

The report warned that if the power to borrow was given only to Scotland, it would create “moral hazard” because the expectation would always be that, in an emergency, Westminster would bail out Edinburgh - even if UK ministers vowed that they would not do so. This would give Scottish ministers an incentive to borrow recklessly to boost spending north of the border.

According to Niesr, the only “credible” way of overcoming this risk would be to extend the same powers to Wales, Northern Ireland and the regions of England.

“With either a regional or local approach, the result would be different borrowing authorities, of varying size and creditworthiness, and a much less powerful central government,” said the report.

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“Consequently, there would be far less risk of moral hazard. Markets would have an incentive to monitor and discipline excessive borrowing; and more successful and prudent authorities would be unsympathetic to the idea of bailing out failure. Bail-out bias would not be eliminated, but it would be mitigated and manageable.”

The changes could be introduced almost immediately in Scotland, but might take longer in England, as decisions would have to be made about the level of local government which should be granted the new powers. Large cities such as London or Birmingham could be given the power to access capital markets by themselves, while smaller English authorities could group together at a regional level, perhaps via Local Enterprise Partnerships.

The report’s authors Dr Angus Armstrong and Dr Monique Ebell concluded that fiscal decision-making powers, including freedom to tax, spend and borrow, “can and should safely be devolved in part to the nations, regions and local governments of the UK; not just Scotland (and Wales and Northern Ireland) but English regions and local authorities”.

They added: “This would be a huge constitutional change from current fiscal arrangements, but the rewards would be greater regional and local accountability and possibly greater economic dynamism in the regions, cities and towns of the UK ... The UK as a whole, not just Scotland, should not miss this opportunity for real and radical change.”

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