Clause 32 — Borrowing by the Scottish Ministers

Scotland Bill – in the House of Commons at 8:30 pm on 14th March 2011.

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Votes in this debate

  • Division number 224
    A majority of MPs voted against requiring Scottish Ministers to have regard to any code of practice agreed between them and the UK Treasury when borrowing money.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury) 8:30 pm, 14th March 2011

I beg to move amendment 51, page 24, line 20, leave out from ‘which’
to end of line 22 and insert—

‘are required by them to meet current expenditure because of a shortfall in receipts from the Scottish rate of income tax or devolved taxes.’.

Photo of Dawn Primarolo Dawn Primarolo Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following:

Amendment 52, page 24, line 22, at end insert—

‘(1ZA) In borrowing sums under subsection (1), the Scottish Ministers must have regard to any code of practice agreed by them and the Treasury.

(1ZB) A code of practice agreed under subsection (1ZA) may include provision as to—

(a) how the Scottish Ministers are to determine and keep under review how much they can afford to borrow,

(b) the terms and conditions on which sums may be borrowed,

(c) limits on the aggregate at any time outstanding in respect of the principal of sums borrowed.’.

Amendment 54, page 24, line 23, leave out from ‘may’ to ‘any’ in line 24 and insert ‘borrow’.

Amendment 55, page 24, line 28, at end insert—

‘(1C) In borrowing any sums under subsection (1A), the Scottish Ministers must have regard to any code of practice agreed by them and the Treasury.

(1D) A code of practive agreed under subsection (1C) may include provision as to—

(a) how the Scottish Ministers are to determine and keep under review how much they can afford to borrow,

(b) the terms and conditions on which sums may be borrowed,

(c) limits on the aggregate at any time outstanding in respect of the principal of sums borrowed.’.

Amendment 53, page 24, line 31, leave out subsections (6) to (8) and insert—

‘(5A) Subsections (2) and (3) are omitted.’.

Amendment 56, page 24, leave out line 38 to line 5 on page 25.

Amendment 57, page 25, leave out subsection (10).

Clause 32 stand part.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

The borrowing powers in the Bill are at the heart of devolution. On Second Reading, a number of serious questions were raised on both revenue and capital borrowing powers. I shall come to the detailed issues in the main part of my comments, but, fundamentally, I am seeking to put in place a code of practice for the Treasury and the Scottish Government to address limits, restrictions, thresholds, maximum amounts and the nature of borrowing, be it through bonds or direct loans from the consolidated fund. That is a sensible way to amend the Bill. To make such provisions otherwise would require draft orders to be tabled, but amendments to Bills cannot be made with draft orders. Much of the narrative on this matter is in the Command Paper, but it is likewise impossible to amend by amending the Bill.

The amendments are pretty self-explanatory but I would like to detail the reasons for them. The revenue-borrowing powers are fundamentally linked to the wider taxation proposals in the Bill. Both the Scottish National party and the Scottish Government have previously made clear their concerns about the tax proposals. If a full range of fiscal policy levers were available to the Scottish Government, it would have to include a borrowing regime with sufficient flexibility to allow public spending profiles to be managed across entire economic cycles, not simply four-year forecast periods. The UK Government’s proposals, however, fall far short of that, yet by exposing the Scottish Government and the Scottish Parliament to cyclical fluctuations in income tax they embed a high degree of volatility in Scotland’s public finances, which cannot be right when we are seeking to protect public services and find means to grow the economy.

The Bill proposes to allow for annual borrowing of up to £200 million in any one year, and for a maximum limit of £500 million to finance current expenditure where there are differences between forecasts and the outturns of Scottish tax revenue under the Bill’s income tax proposals. Loans must be made within four years of being taken out. I understand that these provisions are additional to the provisions of the Scotland Act 1998, which allows revenue borrowing for the purposes of providing cash balances and maintaining cash flow. The aggregate limit of the Act is also £500 million, so the additional purpose proposed in the Bill, plus the passage of the 13 years since the original limit was set, has apparently not been considered sufficient reason for lifting the limit. We do not believe that that is credible.

The Bill also lacks flexibility to deal not necessarily with forecast errors, but forecast falls identified in advance. I will return later to the reason that that is a problem. More crucially, the provisions in the Bill are insufficient to manage volatility in tax receipts that might reasonably be expected to occur. Importantly, over the past decade, UK Government income tax forecasts have, on average, been overly optimistic, and the annual cap of £200 million would have been insufficient to offset deviations in income tax receipts relative to forecasts in recent years.

Photo of Jim McGovern Jim McGovern Labour, Dundee West

The hon. Gentleman might have heard me earlier saying that these proceedings are televised. The general public would like to know what we are speaking about, so will he keep his remarks as understandable as possible?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I thought that my remarks were always understandable. The problem is that we are dealing with the technical provisions—the fiscal and borrowing powers—of a Bill. It is necessarily technical. However, I shall try to summarise it in plain English, if possible, when I get towards the end of my remarks.

In 2010-11, the difference between the Treasury’s original forecast for UK income tax and the most recent estimate is about £35 billion. Under the Scotland Bill, an equivalent forecasting error would have reduced the Scottish Government’s budget by approximately £1 billion. The implication of that and the four-year payback period is that had the system been in place during the last spending review period, repayment of the loan would have had to be made within what are now pressurised budgets—a £1.3 billion cut to Scotland this year, and over £3 billion in the comprehensive spending review—between now and 2014.

In contrast, the UK Government can spread the repayment of cyclical borrowing over a significantly longer period to ensure that it does not adversely impact on the resources available for public services. That is important, because it is accepted in all parts of the House that in times of recession or downturn, tax revenue falls and borrowing goes up—that is an automatic stabiliser—but the same implicit provision has not been made in the Bill. That is a flaw that I know is now recognised by people in many parties.

The inadequacy of the borrowing powers for this purpose was highlighted in the written evidence to the Scottish Affairs Committee from Professor Andrew Hughes Hallett and Professor Drew Scott. They said:

“Over the decade before the current recession, 1997-2007, the UK governments track record for income tax receipts is one of forecast errors that range between +7% to -4%, with an average of +1.1%” a year. They continued:

“Since borrowing will follow from overestimates”— the real amount will be less than the forecast—

“this means the Scottish Government will need to cut spending or borrow every year on average and should expect to exhaust its borrowing limit several times in a decade.”

To have such a flaw built into a Bill from the outset is profoundly unhelpful to the efforts of the Scottish Government to protect public services and grow the economy. The proposals also lack any ability to smooth the effects of cyclical downturns.

Unlike the UK Government, the Scottish Government will have no opportunity to use borrowing to compensate for a forecast decline in income tax revenues in the event of, for example, an anticipated slowdown in the global economy. Scotland would have no option but to cut spending to match the reduction in revenue at precisely the time when we might want to invoke an economic stimulus—a policy of the previous Government that we supported. However, it would be impossible to do that, because cuts would be required to match a forecast fall in revenue.

The Bill misses the fundamental point about being able to respond effectively to the natural volatility of tax revenues in managing public expenditure. Paradoxically, the more accurate the Office for Budget Responsibility is at forecasting falls in future revenue, the greater the volatility in the budget, because borrowing is permitted not against a forecast fall but only against a discrepancy between the forecast and the actual level. That is a huge problem with the borrowing powers at the heart of the Bill. If the Exchequer Secretary or his Scotland Office colleague wants to indicate that they intend to table the necessary amendments on Report or later to rectify that, I would be happy for them to intervene at any point.

The need for appropriate borrowing powers for that purpose was identified by Professor Michael Keating, who said:

“Borrowing powers are needed for three purposes: to deal with short-term shortfalls, which the present proposals provide for; to deal with cyclical downturns; and for capital investment. There should be more scope for borrowing to deal with cyclical downturns.”

That point was also highlighted in the written evidence provided by Professors Hughes Hallett and Scott, who said:

“The current recession, for example, would according to calculations on the Scotland Office website have cut the Scottish budget by £748 million and £559 million in 2008 and 2009 respectively, sums that are beyond the entire borrowing ceiling—let alone the annual limit of £200 million. But no borrowing would be allowed in such cases anyway. Or, to put the point another way, given that there is a cycle and that adverse shocks do occur, the more accurate the tax forecasts the more volatile will Scottish revenues become and the more the Scottish government will be obliged to cut spending and social support in a downturn”— precisely the wrong time for cuts to have to be made.

“This is why we say the Bill’s borrowing provisions offer only limited protection against forecast errors and none at all against unexpected economic shocks.”

Clause 32 amends section 66 of the Scotland Act, which deals with the borrowing powers of Scottish Ministers. Proposed new section 66(1)(c) of the 1998 Act specifies that revenue borrowing will be permitted when tax receipts fall short of the forecast, but contains no provision to permit it to deal with cyclical fluctuations in tax receipts, regardless of whether they are accurately forecast. That obvious gap in the Bill must be addressed. On Second Reading I raised the issue of revenue borrowing powers being further constrained because the first 0.5% of any shortfall—about £127 million forecast in 2014-15, say—would have to be found from cuts before any revenue borrowing could even take place if there was a forecast error. Again, cutting at that point, when budgets would already be pressurised because of the cuts from the comprehensive spending review, would be the wrong thing to do.

I was pleased with a number of the recommendations made by the Scottish Parliament Committee, which said among other things that

“the Scottish budget should not be required to meet the cost if tax receipts fall below forecast levels. The Committee recommends that this condition be removed from the Bill.”

The Committee also recommended that

“the short-term annual borrowing limit should be increased from £500 million to around £1 billion,” and welcomed

“the idea of a Scottish Cash Reserve, but proposes going further to ensure that this includes all Scottish End Year Flexibility saved in Scotland without the need for Treasury agreement, so in future Scottish ministers”— of whatever party or Government—

“will have total discretion over the Scottish budget.”

That should be universally welcomed. I welcome those recommendations, and I hope that the Government will table amendments to reflect them. However, it would be so much better to ensure a code within which revenue borrowing—including repayment time scales and so on—could be organised. That is the fundamental purpose of the amendment, along with ensuring that borrowing for current revenue purposes is sufficiently flexible to cope with fluctuations in revenue over a whole economic cycle.

The Bill as drafted has a number of weaknesses when it comes to capital borrowing. Our key concerns, and those of the Scottish Government, relate to the timing of the introduction of the repayment terms, the limits set by the Bill and the limitations on sources of borrowing, which the Scottish Parliament Committee recognised and made a positive recommendation about.

The Command Paper that accompanies the Bill, “Strengthening Scotland’s Future”, sets out in limited detail how the proposals are intended to work. Borrowing is to be available for specific projects, subject to Treasury consent, from 2013, and we discussed that on Second Reading. From 2015, a capital borrowing of 10% of Scotland’s capital departmental expenditure limit, around £230 million a year, up to a cumulative total of £2.2 billion, will be available. To put that into context, the Scottish Government could use up the entire cumulative limit by, for example, paying for the Forth bridge replacement crossing. If my memory serves me correctly, that cumulative amount of about £2.2 billion is less in capital terms than the Scottish Government have been spending in any of the past few years.

Photo of Jim McGovern Jim McGovern Labour, Dundee West 8:45 pm, 14th March 2011

Most hon. Members will know that the hon. Gentleman is my constituency neighbour. He mentioned “Strengthening Scotland’s Future”. Does he actually believe that separating Scotland from the UK would strengthen Scotland’s future?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I certainly think that improving the provisions of the Bill that relate to capital borrowing would strengthen the Scottish Government’s ability to do the right thing, whoever was in power. If we want to have a debate about the relative merits of independence versus the Union, I am happy to do that—[Hon. Members: “When?”] Not today, because we are dealing with the Bill.

Photo of Frank Roy Frank Roy Labour, Motherwell and Wishaw

Does that mean that there will be a referendum in Scotland? Yes or no?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I think it was Wendy Alexander who said, “Bring it on,” but Labour then ran away. Let us deal with the provisions of the Bill, because we need to get them right. I suggest to the hon. Gentleman, whom I like and respect, that we will have plenty of time in the next 52 days leading up to the Scottish elections to have this discussion, but we should not take up the Committee’s time tonight.

The Scottish Government, and the SNP here at Westminster, do not consider an arbitrary statutory limit on borrowing set by Westminster and lacking any objective justification to be an acceptable basis for an agreement between the Governments. In particular, an arbitrary limit this low will do little to promote long-term capital investment or responsible capital budgeting. A regime along the lines of the prudential borrowing regime that applies to local authorities, in which decisions are based on affordability, would be far more appropriate. Such an approach could be operated within the guidelines suggested in our amendment. Such guidelines would be agreed between the Scottish and UK Governments, including any terms, conditions and limits set out in the code in relation to capital borrowing between the Treasury and the Scottish Government.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

I was present when Fiona Hyslop gave evidence to the Scottish Affairs Committee, and I am aware that the SNP’s position is to promote unlimited borrowing. Will the hon. Gentleman at least concede that the UK Government do have some interest in this matter, given that any amount that a future Scottish Government might choose to borrow under his proposal would have an impact on the deficit here and on the country as a whole?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I recognise that, which is why the proposal is about affordability, and why the code of practice would have to be based on established principles to promote long-term sustainability. Of course, within that, there understandably has to be a recognition of the debt and the deficit position. I was critical of the rise in the deficit, and in the debt, in Budgets from 2005 onwards, before the recession and before the banking crisis, so of course sustainability and affordability have to be considered within this proposal and dealt with in some detail.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian

The hon. Gentleman is really confusing me. He seems to be trying to have his Dundee cake and eat it. He said that, in times of difficulty, the last thing we should do is cut expenditure. Is he saying that it was wrong of the previous Government to spend money bailing out the banks when we faced the crisis?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

No, I said that I welcomed the fiscal stimulus to the economy. Many of the efforts on financial intervention were absolutely necessary, and I supported them. Of course that had to be done. My criticism was not that action was taken during difficult periods, but that we went into the recession and the downturn with half a trillion pounds of debt. I am digressing, however—

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I am not giving way immediately, as I want to carry on developing my case on capital borrowing.

Any code has to take into consideration all the issues and be based on an established set of principles for long-term sustainability. That is incredibly important. The Bill, however, currently limits borrowing to loans, which prevents the use of bonds and other instruments. That is significantly more restrictive than the borrowing powers available to Scottish local authorities and to many Governments in other countries with comparable responsibility.

Photo of Ian Davidson Ian Davidson Chair, Scottish Affairs Committee

I want to clarify whether the hon. Gentleman has a specific figure in mind for borrowing. I understand his point about the criteria, but it would be immensely helpful if he gave us an indication, first, of the figure and, secondly, of whether the bonds and other means of borrowing money would be in addition to that amount or part of the total.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I do not have a specific figure, and let me tell the hon. Gentleman why. If bonds are issued in such a way as to generate revenue, that revenue can be used in one sense to offset the level of the loans. That is why I am not being prescriptive about the amount. What I am saying is that the cumulative £2.2 billion is too low for the reasons that I have explained and that the code of practice would allow us to take into consideration all the sustainability and affordability issues and reach a figure that would be much more appropriate. I am not going to be prescriptive; it would be wrong for me to do that.

Photo of Ian Davidson Ian Davidson Chair, Scottish Affairs Committee

If the hon. Gentleman cannot give a figure, how can he say that £2.2 billion is too small? How does he arrive at that judgment when he is unable to use the same reasoning to identify what the figure might be?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

There are annual amounts and cumulative amounts. The annual amount at 10% of the capital departmental expenditure limit is very modest and the cumulative amount is less than the amount spent on capital in recent years. That strikes me as inappropriate when we are seeking to stimulate the economy and do all the things that the hon. Gentleman and I both want to see happen. As we can have revenue streams coming in to offset some of this, I do not want to put a limit on it, but the code of practice would do that. [Interruption.] I am not going to be drawn on that. I have explained why and I want to move on to bonds, which is another important issue.

Professor Gerald Holtham said in his evidence to the Committee that there is no macro-economic rationale to prevent the Scottish Government from having bond-issuing powers. I raised that on Second Reading, when I said:

“The borrowing powers in the Bill will limit the Scottish Government to certain types of borrowing. They will be able to use loans, rather than bonds or other instruments that would provide greater flexibility. Transport for London, which is a local authority in respect of its borrowing powers, is currently issuing commercial paper worth £7 billion for Crossrail and other projects. Birmingham city council issued paper to the tune of £250 million in 2006”.—[

Official Report

, 27 January 2011; Vol. 522, c. 541.]

As I said at the time, it is strange that what should be a seriously enhanced power for the Scottish Parliament, as described in the Bill, does not even put it on a par with TfL or Birmingham city council in its ability to raise cash through commercial paper for important national infrastructure works.

Professor Iain McLean and others have noted that bond issues would have several benefits. First, they would provide the Scottish Government with greater flexibility in the financing of capital projects, and the ability to issue a range of instruments would allow projects to be financed by a mixed portfolio of borrowing both in terms of repayment periods and the interest and other terms of the borrowing instrument. Secondly, in certain circumstances, issuing instruments in the market may offer a better deal on rates and repayment terms than a loan from the Treasury or a commercial bank. Indeed, the Treasury recently announced in the spending review a 1% rise in the charge or cost on loans from the Public Works Loan Board, increasing the cost of local authority borrowing. Having an option to seek financing from the market would provide an alternative in the event of a punitive interest rate being imposed at some future point by the Treasury. Professor McLean said in his evidence that

“it should be for the Scottish Parliament and Scottish ministers—not the UK Parliament or UK ministers—to decide on the soundness of the capital projects to which they commit themselves, and to deal with revenue fluctuations.”

That is the answer to the point raised by Fiona Bruce. If we are serious about responsibility—I hope that we all are—the Scottish Government must be allowed to make the decisions. Those decisions should land squarely on the desks of Scottish Ministers, or those in whatever other body is responsible for raising capital.

I am pleased that the Scottish Parliament Committee has recommended that there should be higher capital borrowing limits and that they should be introduced earlier, that the limit for prudential borrowing should be increased from £2.2 billion to about £5 billion—the fact that the Committee considers that figure reasonable is a good starting point for negotiations in terms of the code of practice—that Scottish Ministers should have complete discretion in relation to what the money is spent on without having to seek agreement from the Treasury, and that the borrowing powers should be introduced earlier in the next Scottish Parliament. I also welcome the recommendation that the Scottish Parliament should have power to borrow directly from the markets by issuing bonds.

Given the considerable support for these proposals and the deep concern throughout the Committee about some of the Bill’s provisions, I should like to know whether the Government intend to table the necessary amendments for debate on Report on 22 March, or to table them in another place after that point. The Scottish people are entitled to know about the shape of revenue and capital borrowing, and Members representing constituencies in Scotland—and, indeed, elsewhere—are entitled to be able to scrutinise properly whatever proposals may be presented. I hope that the Minister will be able to give us definite information about when amendments will be tabled, and whether they will accord with the recommendations of the Scottish Committee.

Photo of Ann McKechin Ann McKechin Shadow Secretary of State for Scotland 9:00 pm, 14th March 2011

I welcome the clauses relating to borrowing powers. We agree that they make sense in terms of both short-term revenue and capital.

In paragraph 597 of its report, the Holyrood Committee accepted that

“Given its responsibility for macroeconomic management”,

the United Kingdom Government

“has a proper interest in the flow of borrowing”.

We agree with that. However, there is a worthwhile discussion in the report about evidence from the Government and other experts relating to the overall level of borrowing, both short-term and on the capital account, and we think that the Government should consider the Committee’s arguments. It did not identify an alternative figure, but made some suggestions that we think worthy of consideration. I ask the Government to confirm that they will examine the report in detail, and will take the earliest opportunity to present their assessment to the House of Commons or the House of Lords. I note that the Scottish Government will be able to borrow from commercial lenders as well as from the National Loans Fund, and I welcome that as well.

Stewart Hosie should be careful. I assume that his are primarily probing amendments, and I think it right to test some of the issues discussed in the Holyrood Committee, but as well as looking for the benefits, he must accept the responsibilities of the Scottish Government for overall public sector borrowing limits. Although we may disagree with the Government on what those limits should be and on the scale of the deficit reduction, we accept that as an important criterion in the debate.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I am sure that the hon. Lady will want to be generous and accept that I made it clear on two occasions that affordability and sustainability must be taken into consideration. No one wants to do anything silly with the public finances.

Photo of Ann McKechin Ann McKechin Shadow Secretary of State for Scotland

That marks a first. I cannot recall the Scottish Government asking for less money. I seem to remember that when Labour was in government, they kept asking for more money and saying that they did not have enough.

The hon. Gentleman made a comment about the deficit. Before 2007 it was about 2%, which was perfectly manageable within the fiscal settlement. The increase in the deficit was primarily caused by the banking crisis, which was an international crisis as the hon. Gentleman accepts, and by the fact that we stimulated the economy, which he also accepts, although he said we should have stimulated it even more. He cannot have his Dundee cake and eat it, however. He either accepts one interpretation of what happened, or he accepts the interpretation of the coalition Government, which we believe to be false.

The hon. Gentleman raised a number of queries about the Holyrood Committee recommendations, particularly in respect of the requirement that the first £120 million of any tax shortfall must be met by spending reductions in the year in question. It would be helpful if the Minister could explain the rationale for imposing that. I think that measure is in the Command Paper—it is not in the Bill itself, of course. This issue is of particular concern in the light of the Government’s decision to abolish the end-of-year flexibility scheme at very short notice this year, which will cost the Scottish budget an estimated £23 million.

When the Minister gave evidence to the LCM Committee, he drew a distinction in respect of end-of-year finance arrangements, but at no point did he intimate that the Government or Chief Secretary to the Treasury had decided that they would be gobbling up the £23 million as part of the deficit reduction plan. That raises concerns about the nature of the relationship between the UK Government and the Scottish Government in the so-called respect agenda. Will the Minister confirm at what point this issue was raised with the Joint Ministerial Committee and the Scottish Government? Why was no mention made of this when he and the Chief Secretary were giving evidence to the LCM Committee? Again, this is about trust and the maintaining of good governmental relationships. As I have mentioned before, it is key that that is maintained to the highest degree in these clauses.

There have been issues to do with the Government’s criterion of setting a limit of £2.2 billion for capital expenditure. There are some very good suggestions in the Committee’s report about increasing borrowing capacity, which we think are worthy of consideration.

Finally, as the Minister will be aware, my colleagues in the Scottish Parliament have called for the borrowing powers to be brought forward from the proposed implementation date of April 2013 to April 2012. Given that we anticipate that this legislation will be on the statute book by the end of this year and before the next financial year, I can see no good reason why the power cannot be advanced to April 2012, which, as the Minister will be aware, is within the current comprehensive spending review period. That would assist the Scottish Government —of whatever political hue—in making appropriate planning decisions after the election. If the Minister could give an early indication that the Government are minded to bring forward the introduction of this power to 2012, that would be widely welcomed. I therefore hope he can give the Committee one positive piece of news tonight.

Photo of David Gauke David Gauke The Exchequer Secretary

I propose to deal with amendments 51 to 57 first, and I recognise that, as has been said, they partly overlap with the report from the Scotland Bill Committee in the Scottish Parliament. As my right hon. Friend the Secretary of State for Scotland set out last week, the UK Government will consider the recommendations in the Committee’s report thoroughly, alongside an assessment of the impact on the UK fiscal position.

The purpose of amendment 51 is twofold. First, it would remove the requirement for Scottish Ministers to access revenue borrowing to meet current expenditure only in accordance with rules determined by the Treasury. Secondly, it would allow such borrowing to be accessed due to a shortfall in outturn receipts against forecast receipts from devolved taxes and the Scottish rate of income tax. I will deal with each of those in turn.

On the need for borrowing by Scottish Ministers to comply with rules determined by the Treasury, I note that the report from the Scotland Bill Committee in the Scottish Parliament—where the Scottish Government voted with the motion—recognised the need for the UK Government to constrain the borrowing powers. I am delighted that there appears to be a consensus in the Committee that nobody wants to do anything silly with the public finances, as one could have been forgiven for thinking that that has not been the case over recent years.

There are important reasons for Scottish Ministers to comply with Treasury rules on borrowing. The Bill’s new borrowing powers will sit within the UK fiscal framework as a whole; interest on Scottish borrowing will be included in the total UK public sector borrowing aggregates. As overall macro-economic policy will continue to be a reserved matter, it is necessary for the UK Government to set controls and limits on the borrowing powers in order to retain overall control of UK borrowing, protect overall economic stability and minimise fiscal risks to the UK Exchequer. This Government believe that the specific terms and conditions set out in the Bill and the Command Paper strike the right balance between protecting overall levels of UK debt and increasing the financial accountability of the Scottish Parliament.

On the second point, I wish to thank hon. Members for bringing an important discrepancy to the attention of the Committee. Although the Command Paper was clear that revenue borrowing would be used to meet current expenditure because of a shortfall in receipts compared with forecast in devolved taxes and the Scottish rate of income tax, the Bill was not so clear. The Government will therefore introduce their own minor and technical amendment on Report to include the Scottish rate of income tax alongside devolved taxes. In conclusion, given the continued control by the Government over the UK fiscal mandate and the fact the Government will be introducing their own amendment in respect of the second issue, I ask Stewart Hosie to withdraw the amendment.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

The Exchequer Secretary has said that the Government will be bringing the Scottish rate of income tax into the consideration, and I presume that that is still to allow borrowing when the actual figure there is less than the forecast. But that does not address the fundamental issue that if there is a forecast fall, the Scottish Parliament will take the entire hit, because there is still no cyclical borrowing—borrowing where a forecast fall actually happens.

Photo of David Gauke David Gauke The Exchequer Secretary

The point of the amendments that will be introduced on Report is to do exactly as I have described. May I make a point about the cyclical impact and the adequacy of current borrowing? In the past downturn, income tax receipts fell by about 6% or 7%, so we are looking at a variation of 6% or 7% of the £4.5 billion estimated Scottish income tax receipts. That is about 1% of the Scottish budget, because it needs to be seen against the continuing bedrock of stability afforded by the block grant. I make that point so that we can place this issue in context.

Amendments 53 and 66 would have the effect of removing the borrowing limits. They do not replace the limit with an alternative figure, as has been made clear following a number of interventions from hon. Members, so I have assumed that the intention is for these limits to be determined by a new “code of practice”, as set out by the hon. Member for Dundee East and put forward in amendments 52 and 55. There are important reasons why the Bill contains limits, which I have already set out and which include the fact that Scottish borrowing would have an impact on the UK borrowing figures. It is surely right that the limit should be determined by the House, first through its consideration of the Bill and subsequently through approval of any order altering the limit. UK Government analysis continues to suggest that the limits in the Bill for revenue borrowing, together with the Scottish budget absorbing the first 0.5% of the deviation between forecast and outturn receipts, are sufficient in normal conditions.

Crucially, the Bill allows borrowing to increase above £500 million but not below, so it is a base. Any such changes would require the approval of the House, but the Government are prepared to look at the specific circumstances in future. There might well be circumstances in which greater flexibility would be appropriate. The capital borrowing limits have been set at £2.2 billion and the Government believe that that represents an acceptable level of borrowing for the UK finances. That figure is based on a 10% annual capital departmental expenditure limit of Scotland’s capital budget—equivalent to £230 million in 2014-15—over a 10-year repayment period. Again, the Bill provides for the limit to be increased above, but not reduced below, £2.2 billion. Any such changes would require the approval of the House.

Amendments 55 and 52 would introduce a new code of practice between the Treasury and Scottish Ministers governing capital borrowing and placing it on a statutory footing. The full code has not been set out but it might include provisions on how Scottish Ministers should determine and review what they can afford to borrow and the terms and conditions on which sums can be borrowed, including borrowing limits. For reasons I have set out, it is right that borrowing limits and the terms and conditions around borrowing should be determined by the House—first through its consideration of the Bill and subsequently through its approval of any order altering the limit.

Amendment 54 would remove both the role of the Treasury in approving capital borrowing and the restriction that such borrowing must be by way of a loan. Let me be clear about the scope of Treasury approval in capital borrowing by Scottish Ministers. If Scottish Ministers wanted to borrow before their full power came into effect, that would impact on the UK’s borrowing requirement as set out by the Chancellor in the spending review. The Command Paper therefore sets out a pragmatic way to manage the risks from maximising opportunities for stimulating economic growth in Scotland while retaining control of the overall UK fiscal mandate. Scottish Ministers will need to seek the consent of the Treasury to borrow early, between 2013 and 2015, in a way that does not impact on the fiscal position or alter the plans set out in the 2010 spending review—for example, to make prepayments to fund the construction of the Forth bridge.

The rationale for restricting Scottish Ministers’ borrowing for capital expenditure by way of loans is simple. Scottish borrowing through bonds would be classified as UK borrowing and, as borrowing through bonds is likely to be more expensive than raising finance through UK gilts, those higher costs would be reflected in increased UK debt interest payments, which would ultimately result in higher costs for the UK. In these uncertain times we cannot afford the risk of extending the power to issue bonds. The hon. Member for Dundee East quoted Professor Holtham, but, because of the likely greater cost of bonds, the professor also made the point that the issuing of bonds by the Scottish Government would essentially be a vanity project. These matters need to be considered in that context.

Photo of Fiona O'Donnell Fiona O'Donnell Labour, East Lothian 9:15 pm, 14th March 2011

Why did the Conservative members of the Bill Committee in the Scottish Parliament vote for the measures?

Photo of David Gauke David Gauke The Exchequer Secretary

We will, of course, look at what the Scottish Parliament has set out and we will engage with those suggestions on alternative ways of proceeding. None the less, given the difficulties that would arise if bonds were issued, particularly in the circumstances we face—there is a crisis in the public finances and it is essential that we meet our fiscal mandate and stick to our spending and deficit reduction plans—we need to take into account the uncertainty and additional cost that could be created at this point. However, there is a general point to be made about borrowing limits. Circumstances will change and the opportunity for greater flexibility in future is something we are willing to look at, but we believe we have the balance right at the moment.

Photo of Ian Davidson Ian Davidson Chair, Scottish Affairs Committee

Am I correct in assuming that the Minister is pretty strongly wedded to the set of proposals that he has introduced at this time, but that he and the Government are not necessarily wedded to them for all time? If devolution continues to evolve, that may well result in the relaxation of those rules, a review and a beneficial alteration of the figures.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman sets the position out well, and I do not disagree with him. The Bill essentially sets out a base for current and capital borrowing. It can be increased, and there is a mechanism in the Bill to do so. We would need to look at the circumstances in future to see whether we could increase flexibility in that area. We have to bear in mind the state of the public finances and the importance of maintaining credibility.

Photo of Ann McKechin Ann McKechin Shadow Secretary of State for Scotland

I asked a question about the transitional borrowing powers that require Treasury consent, and whether the Treasury would be minded to bring them forward to 2012. The Minister has given conditions, which we accept would have to apply in the transitional period, but nevertheless that flexibility would be welcomed by everyone.

Photo of David Gauke David Gauke The Exchequer Secretary

I note the hon. Lady’s comments. We are looking carefully at the recommendations by the Committee in the Scottish Parliament. We note her representations, and we will respond in due course. I wish to underline the fact that it is of absolute importance that we manage to maintain credibility, which is perhaps why there is less flexibility now than there may be in future. The hon. Member for Glasgow South West (Mr Davidson) suggested that there might be greater flexibility in future, but we would need to assess that nearer the time. However, I note the hon. Lady’s remarks on the transitional period for borrowing.

Amendment 57 is consequential on amendment 56. As hon. Members wish to remove the borrowing limits from the Bill and the ability to revise those limits with the approval of the House, clause 32 (10) would no longer by necessary as there would be no such secondary legislation. Ann McKechin raised the issue of end-of-year funds across all the devolved Administrations and Departments amounting to some £20 billion. Such large sums of accrued EYF present a fiscal risk to the UK Government, which is why new arrangements will be detailed in the forthcoming Budget. I hope that that clarification is helpful.

I thank the hon. Members for the opportunity to set out the Government’s position on the important borrowing powers provided by the Bill. This has been a helpful and perhaps probing debate—we shall see. However, we do not accept any of the amendments, so I invite the hon. Member for Dundee East to withdraw amendment 51. For the reasons that I have set out, I hope that hon. Members agree that that clause 32 should stand part of the Bill.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

The Minister has said a great deal, and it was very instructive indeed. The Scottish Government will still be required to absorb the 0.5% cut in the budget before revenue borrowing can take place. On current forecasts, there would perhaps be £127 million in extra cuts even before we could borrow. There has been no confirmation that cyclical borrowing is permitted—it will still only be against changes to the forecast, which means that if there is a forecast fall we take the full hit. That cannot be right if the Office for Budget Responsibility is accurate and there is increased volatility in the Scottish budget. Repayments on the revenue will still be made over four years, which might well mean that if we borrowed at the height of the recession we would now be paying back, because it is such a short-term repayment schedule, even though there is already additional pressure on the Scottish budget.

The Minister said that capital borrowing of £2.2 billion on a 10% annual CDEL was exceptional, but the Scottish Government and the Scottish Parliament Committee did not think so. He is flatly ignoring the recommendations that have been made. He was anxious that the requirement for the Treasury to approve borrowing should be removed. I ask, what price the respect agenda? Incredibly, he offered no support for bonds, even though it was an explicit Committee recommendation that the

“Scottish Parliament should have the power to borrow directly from the markets by issuing bonds.”

Fiona O’Donnell sensibly asked what the Tory members of the Scottish Parliament Committee would make of that. One might ask what the Liberal members of the Scottish Parliament Committee make of that. I might ask what all the Unionist members of that Committee would make of that, given that they thought they had a deal and that the recommendations would see the light of day in one form or another in amendments in Committee, on Report or in another place. We will be watching extremely carefully to see whether the Government backtrack now on what appeared to be promises, abandoning all the recommendations of the Scottish Committee, which would be a shameful thing to do. I beg to ask leave to withdraw the amendment, but given how little comfort we have had, I intend to divide the Committee on amendment 52.

Amendment 51, by leave, withdrawn .

Amendment proposed: 52, page 24, line 22, at end insert—

‘(1ZA) In borrowing sums under subsection (1), the Scottish Ministers must have regard to any code of practice agreed by them and the Treasury.

(1ZB) A code of practice agreed under subsection (1ZA) may include provision as to—

(a) how the Scottish Ministers are to determine and keep under review how much they can afford to borrow,

(b) the terms and conditions on which sums may be borrowed,

(c) limits on the aggregate at any time outstanding in respect of the principal of sums borrowed.’.—(Stewart Hosie .)

Question put, That the amendment be made:

The Committee divided:

Ayes 7, Noes 393.

Division number 224 Scotland Bill — Clause 32 — Code of Practice on Borrowing by Scottish Ministers

A majority of MPs voted against requiring Scottish Ministers to have regard to any code of practice agreed between them and the UK Treasury when borrowing money.

Aye: 7 MPs

No: 393 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Absent: 245 MPs

Absents: A-Z by last name

Question accordingly negatived.

Photo of Ian Davidson Ian Davidson Chair, Scottish Affairs Committee

On a point of order, Mr Hoyle. According to the votes, eight nationalists have been voting on all these things, and now they are down to seven. Has somebody been kidnapped? [ Laughter. ]