Chamber
Meeting of the Parliament 09 June 2011
09 Jun 2011 · S4 · Meeting of the Parliament
Item of business
Scotland Bill: Borrowing Powers and Growing the Economy
I welcome the debate, and I believe that we can reach some consensus on the issue—certainly in principle. Capital borrowing powers were introduced by the Calman commission and incorporated in the Scotland Bill.
I took the opportunity to look at the Scotland Bill Committee’s report to find out what it said on the matter. Capital borrowing powers are probably the best-known borrowing powers. They are required for large-scale developments. The committee welcomed the proposal—as I imagine we all do. In the first years of the Parliament there were increases in public spending, and financing projects was not an issue. To an extent, public-private partnerships were used to borrow for projects, spreading the cost over the lifetime of a building.
Budgets are now being cut, and they will continue to be cut for some time into the future. Against that backdrop, we need to develop large strategic projects such as the Forth replacement crossing, which threaten to consume most of our capital budget. The bill committee expressed concerns regarding the limits that had been set for borrowing. It is clear that the limits that will be required must be workable and affordable within our taxation revenue.
There were concerns that the powers should be available earlier. I welcome today’s announcement that there might be progress on the matter—that the Westminster Government might be willing to allow the powers to come in earlier.
I voice a note of caution, however. We are all agreed that we need borrowing powers, but it is not free money: the borrowing needs to be paid back with interest. In essence, it is a matter of bringing forward spending and spreading the cost of that spending over a longer period. The point is that the borrowing has to be paid for.
The temptation will be to borrow to cover the shortfall in the budget but, in a climate of falling budgets, that will only impact more severely in coming years. When decisions are being made about borrowing, they must be based on borrowing being economically sensible, rather than politically expedient. The Parliament must assess the impact of borrowing on future spending. In the present climate, there is a temptation to spend to grow. I am not saying that we should not do that, but we need to ensure that that spending will lead to savings in the future that can offset the cost of the borrowing.
There is a further borrowing power that has the potential to alleviate some of the pressure, depending on how it is set up. Short-term borrowing is designed to cover dips in the taxation that is collected. That is an important borrowing power if we are to raise and gather our own taxation. Because we have never used the Scottish variable rate of tax in the past, it has never been an issue before. Now that further taxation powers are being devolved under the Scotland Bill—powers that we will have to use in the future—it is imperative that we consider the issues very carefully. The borrowing powers must be workable, and they must give the Government of the day the flexibility to deal with peaks and troughs in income from taxation. The bill committee expressed concern about a number of issues in that regard.
First, on the levels of taxation that will be forecast and any surplus or deficit that will be paid into or out of the Scottish cash reserve, the bill committee suggested that underspends should also be added to the reserve. That needs further investigation. Could that enable Governments to manage better their finances and budget for the future?
The committee was also concerned that the forecast taxation income would be fixed throughout the spending review period, even if better estimates came to hand at a later date. If the banking crisis shows us anything, it is that we cannot foresee changes in our economic circumstances, which can change dramatically in a very short space of time. If we have to work within original estimates once a situation has changed dramatically, we could find ourselves in an extremely difficult position. If surpluses could be paid into the reserve, would that allow spending to be altered immediately to deal with changing situations? That point is worth exploring. It is my understanding that the current proposals only allow received taxation that is above the estimate to be added to the reserve.
The bill committee suggested that short-term borrowing levels should be increased to reflect the level of taxation income and the percentage of fluctuations that could occur. However, the inability to change estimates might lead to a need for greater borrowing powers to cover deficits that could be created by sticking to estimates of income that had been set too high over a spending review period. The prudent way forward would be to work from the best estimations of taxation available at the time.
If that was possible, and it was also possible to add to the reserve, could the money be used to offset future pressures on the budget? When borrowing was committed to fund capital spending, any reserve moneys could be used to offset the future costs of that, too. If such an ability to relieve pressure on future budgets is possible, it would mean spreading the cost even further by budgeting for it for the future.
Such issues need to be carefully considered before the borrowing powers are finalised. The matter is crucial to our economy and our future. Therefore, I urge the Government to work constructively with the Westminster Government to explore the issues further. I also ask the Government to work with all parties in the Parliament to examine the implications of changes, so that we can ensure that the final settlement is in the best interests of the Scottish people.
I took the opportunity to look at the Scotland Bill Committee’s report to find out what it said on the matter. Capital borrowing powers are probably the best-known borrowing powers. They are required for large-scale developments. The committee welcomed the proposal—as I imagine we all do. In the first years of the Parliament there were increases in public spending, and financing projects was not an issue. To an extent, public-private partnerships were used to borrow for projects, spreading the cost over the lifetime of a building.
Budgets are now being cut, and they will continue to be cut for some time into the future. Against that backdrop, we need to develop large strategic projects such as the Forth replacement crossing, which threaten to consume most of our capital budget. The bill committee expressed concerns regarding the limits that had been set for borrowing. It is clear that the limits that will be required must be workable and affordable within our taxation revenue.
There were concerns that the powers should be available earlier. I welcome today’s announcement that there might be progress on the matter—that the Westminster Government might be willing to allow the powers to come in earlier.
I voice a note of caution, however. We are all agreed that we need borrowing powers, but it is not free money: the borrowing needs to be paid back with interest. In essence, it is a matter of bringing forward spending and spreading the cost of that spending over a longer period. The point is that the borrowing has to be paid for.
The temptation will be to borrow to cover the shortfall in the budget but, in a climate of falling budgets, that will only impact more severely in coming years. When decisions are being made about borrowing, they must be based on borrowing being economically sensible, rather than politically expedient. The Parliament must assess the impact of borrowing on future spending. In the present climate, there is a temptation to spend to grow. I am not saying that we should not do that, but we need to ensure that that spending will lead to savings in the future that can offset the cost of the borrowing.
There is a further borrowing power that has the potential to alleviate some of the pressure, depending on how it is set up. Short-term borrowing is designed to cover dips in the taxation that is collected. That is an important borrowing power if we are to raise and gather our own taxation. Because we have never used the Scottish variable rate of tax in the past, it has never been an issue before. Now that further taxation powers are being devolved under the Scotland Bill—powers that we will have to use in the future—it is imperative that we consider the issues very carefully. The borrowing powers must be workable, and they must give the Government of the day the flexibility to deal with peaks and troughs in income from taxation. The bill committee expressed concern about a number of issues in that regard.
First, on the levels of taxation that will be forecast and any surplus or deficit that will be paid into or out of the Scottish cash reserve, the bill committee suggested that underspends should also be added to the reserve. That needs further investigation. Could that enable Governments to manage better their finances and budget for the future?
The committee was also concerned that the forecast taxation income would be fixed throughout the spending review period, even if better estimates came to hand at a later date. If the banking crisis shows us anything, it is that we cannot foresee changes in our economic circumstances, which can change dramatically in a very short space of time. If we have to work within original estimates once a situation has changed dramatically, we could find ourselves in an extremely difficult position. If surpluses could be paid into the reserve, would that allow spending to be altered immediately to deal with changing situations? That point is worth exploring. It is my understanding that the current proposals only allow received taxation that is above the estimate to be added to the reserve.
The bill committee suggested that short-term borrowing levels should be increased to reflect the level of taxation income and the percentage of fluctuations that could occur. However, the inability to change estimates might lead to a need for greater borrowing powers to cover deficits that could be created by sticking to estimates of income that had been set too high over a spending review period. The prudent way forward would be to work from the best estimations of taxation available at the time.
If that was possible, and it was also possible to add to the reserve, could the money be used to offset future pressures on the budget? When borrowing was committed to fund capital spending, any reserve moneys could be used to offset the future costs of that, too. If such an ability to relieve pressure on future budgets is possible, it would mean spreading the cost even further by budgeting for it for the future.
Such issues need to be carefully considered before the borrowing powers are finalised. The matter is crucial to our economy and our future. Therefore, I urge the Government to work constructively with the Westminster Government to explore the issues further. I also ask the Government to work with all parties in the Parliament to examine the implications of changes, so that we can ensure that the final settlement is in the best interests of the Scottish people.
In the same item of business
The Presiding Officer (Tricia Marwick)
NPA
The next item of business is a debate on motion S4M-00235, in the name of John Swinney, on borrowing powers and growing the Scottish economy.14:30
The Cabinet Secretary for Finance, Employment and Sustainable Growth (John Swinney)
SNP
Last week, I set out to Parliament the Government’s strategic aims on the economy, and we had a valuable and constructive debate on the economic priorities f...
Willie Rennie (Mid Scotland and Fife) (LD)
LD
The Cabinet Secretary for Finance, Employment and Sustainable Growth quite rightly says that investment in transport infrastructure is important. He says tha...
John Swinney
SNP
Our election manifesto set out the argument that the savings to the public purse that the excellent and well-run procurement project generated, which were sa...
Gavin Brown (Lothian) (Con)
Con
Not yet.
John Swinney
SNP
Mr Brown says, “Not yet,” but a fixed-price contract applies.
David McLetchie (Lothian) (Con)
Con
We have heard that one before.
John Swinney
SNP
I say to Mr McLetchie that a fixed-price contract is a fixed-price contract. We have such a contract for the M74 project, which will be completed early, and ...
Richard Baker (North East Scotland) (Lab)
Lab
We believe that the question that requires to be answered when we debate whether the Parliament should have new powers is this: will the devolution of the po...
John Mason (Glasgow Shettleston) (SNP)
SNP
Is the member arguing that, in the long run, a private finance initiative approach makes better sense than the Scottish Futures Trust?
Richard Baker
Lab
It certainly made no sense to delay those projects at that time. I make it clear that I am happy that we can instead endorse a strategy on borrowing powers f...
Patrick Harvie (Glasgow) (Green)
Green
I understand entirely the member’s point that the amount of borrowing should not exceed the amount that can be serviced through devolved taxation. However, I...
Richard Baker
Lab
We are discussing what can be achieved in the current negotiations and through proposed legislation that is in process. From that point of view, I am trying ...
David McLetchie (Lothian) (Con)
Con
As a member of the Scotland Bill Committee in the previous session, it gives me great pleasure to open the debate on behalf of the Scottish Conservatives. Th...
John Swinney
SNP
Is Mr McLetchie developing an argument for the limitations in the Scotland Bill to be a firm cap, as envisaged in the current proposals, or is he persuaded b...
David McLetchie
Con
I am happy that there should be a principles-based approach to the determination of the appropriate figure. Whether an absolute figure or a formula and mecha...
John Swinney
SNP
Will the member give way?
David McLetchie
Con
No, thank you—I have to make progress.Members: Oh!
John Swinney
SNP
That is a last-minute trick.
David McLetchie
Con
Presiding Officer, can I take Mr Swinney’s intervention and have some extra time?
The Deputy Presiding Officer (Elaine Smith)
Lab
If Mr Swinney is brief.
John Swinney
SNP
Mr McLetchie went on at great length about constraints and limitations on borrowing. One of the constraints on private borrowing by Scottish Water is the rig...
David McLetchie
Con
It is because Scottish Water is in the public sector, which is exactly the point that we are coming to. How disappointing—I thought that we were going to be ...
The Deputy Presiding Officer
Lab
I remind members to speak through the chair.15:02
Maureen Watt (Aberdeen South and North Kincardine) (SNP)
SNP
In the run-up to the 1997 UK election, Tony Blair once famously claimed that it would be odd if the Scottish Parliament did not enjoy the same powers as an E...
Neil Findlay (Lothian) (Lab)
Lab
Is one of the fluctuations to which the member refers the huge fluctuation in corporation tax that may follow, should the SNP get corporation tax powers? Is ...
Maureen Watt
SNP
I was referring to the fact that it will cause severe problems if we can make changes only to income tax. If we have corporation tax powers, there will be at...
Gavin Brown
Con
What kind of impact would such fluctuations have on a local income tax?
Maureen Watt
SNP
I am sure that that issue will be examined when a local income tax is considered. At least local councils have the option of borrowing for projects, which th...
Rhoda Grant (Highlands and Islands) (Lab)
Lab
I welcome the debate, and I believe that we can reach some consensus on the issue—certainly in principle. Capital borrowing powers were introduced by the Cal...