Scottish Government bonds programme: outline business case summary

Financial Case

Diversifying borrowing sources to include bond issuances presents a number of benefits and trade-offs. One of the fiscal benefits of bond issuance is the ability to both diversify funding sources and specifically to access alternative debt structures. The issuance of bonds, combined with an associated credit rating, can create additional incentives for more fiscally sustainable policy choices, thereby promoting greater fiscal discipline and strengthening Scottish institutions. This would build on the Scottish Government’s already robust financial oversight framework, which includes independent scrutiny from bodies such as Audit Scotland, the Scottish Fiscal Commission and independent operation of the devolved taxation by Revenue Scotland.

A key difference between borrowing via the NLF and a bond is that NLF borrowing requires regular repayment of both principal and interest, whilst a traditional bond structure sees only interest repaid until the final payment, when the principal is repaid in full. These payments, for both NLF and bonds, come out of the Scottish Government’s resource budget. As such, bond issuances generate additional resource funding for the Scottish Government in the short to medium term, with a reduction in funding in the year the bond is repaid. See the Annex for further analysis underpinning the financial case.

The change to the timing of the repayment of principal under a bond also has implications for the Scottish Government’s ability to borrow under the Fiscal Framework limits, which limits the Scottish Government to £3 billion of outstanding debt in 2023-24 prices. As debt is repaid more slowly using bonds, the stock of debt will build up more quickly. However, under the current Scottish Government Capital Borrowing Policy, it will be feasible to manage within the Fiscal Framework limits by adjusting the terms of borrowing as needed when borrowing plans are decided or reviewed in-year.

At the same time, by issuing bonds and diversifying its borrowing sources, the Scottish Government reduces the risk of higher premiums being applied by the UK Government to NLF loans in the future. For example, prior to 2010 the borrowing rates available to Local Authorities and other public sector institutions borrowing via the Public Works Loan Board (PWLB) were set at 10 basis points above the UK government borrowing rates. Over subsequent years, the UK Government increased this premium to 200 basis points, substantially increasing the borrowing costs of organisations utilising the PWLB.

The financial case provides further evidence of a multi-year bond programme being more advantageous than the Scottish Government pursuing one bond in isolation. When assessing the relative merits of the two multi-year programmes analysed in this business case, the analysis shows that:

• From a cost and budgetary perspective, a five-year programme (Option D) is likely to be better, as it will deliver short- and medium-term budgetary savings more quickly than an alternate year issuance (Option C).
• From a headroom perspective, an alternate year issuance plan may be slightly more effective, as it preserves more headroom to accommodate in-year and budget specific needs.

As the Annex details, both multi-year programmes would be deliverable within the Scottish Government’s Capital Borrowing policy. As the quantifiable (short- to medium-term) benefits are larger with a five-year programme, and the headroom trade-offs relatively minimal, the case for a 5 year programme (Option D) is considered most favourable from a financial perspective at this stage.

Overall, by issuing bonds the Scottish Government will be able to access alternative structures and potentially alternative tenors. There may be cost considerations, including the possibility of paying a higher interest rate on borrowing. However, this could be offset by the advantages of accessing alternative sources of finance, greater flexibility and the broader benefits associated with increased fiscal discipline and the development of institutions.