The Scottish Government has been urged to halt the issuing of bonds after the Deputy First Minister admitted that volatility in the market meant there were “risks” in pursuing the plan.
Ministers are preparing a £1.5 billion bond programme, nicknamed “kilts”, with the first issuance expected later this year or early 2027.
Nine major banks, including HSBC, Merrill Lynch International and Barclays, have been appointed to advise on the framework for the bond scheme.
DFM and Finance Secretary Jenny Gilruth told the Finance and Public Administration Committee this week that the Scottish Government will only move ahead if the “market conditions allow us to do so”.
The Scottish Greens point to a warning by economists that raising money through bonds would be more expensive than regular government borrowing from the National Loans Fund, which offers low-cost loans to public bodies.
Significantly, the UK Government sets strict limits on the overall amount of money the Scottish Government can borrow, regardless of whether it is through the National Loans Fund, bonds or by other means.
Professor Jim Gallacher, a former senior civil servant and expert on devolution, told a meeting of the FPA committee on 9 September that a bond would not provide additional spending power only an alternative source of borrowing, and would carry inherent risks of higher costs.
“Bonds are not a way of spending but a way of financing,” he said. “They do not provide any more capital spend. A bond substitutes borrowing from the National Wealth Fund.”
He added: “The government would have to make provision for the cost, including administration costs, which are substantial.” Administration costs could run into millions, he said, as the government would have to buy-in the technical capability.
At the FPA committee meeting on Wednesday, SNP MSP Pauline Stafford stated that the bonds programme “isn’t about more borrowing but better borrowing,” and therefore asked Ms Gilruth to “outline what the benefits will be in using a bond programme for our borrowing? ”
She added: “Are there any risks that are specifically important at this point, and how central is it going to be to delivering a capital programme?”
Ms Gilruth replied: “There are risks, and we need to be mindful of that, and I just want to say we will only move ahead on the bonds work if the market conditions allow us to do so. Colleagues will be aware of some of the challenges in the bond market just now, so we need to be mindful of that.
“This is ultimately about us diversifying our sources of borrowing, and as you have set out Ms Stafford, it’s about borrowing better, not borrowing more.
“I think committee took evidence from some that suggested this would be more expensive – that’s not necessarily the approach that we would set out, and of course, if that was to be the case, I would have to take advice on the approach we were taking. So let’s be careful not to arrive at conclusions.”
She added: “I would go back to some of the volatility, though, in the bond markets. We will only move on this if the market conditions are right to allow us to do so. We do need to carefully judge that at the current time because of the volatility we’ve spoken to today.”
Scottish Greens co-leader Ross Greer today said the comments by Ms Gilruth are “further evidence that the Scottish Government’s bonds programme would be a costly mistake.
“The Deputy First Minister has admitted how risky it is, something that the Scottish Greens have warned from the start.
“Scotland needs investment in schools, hospitals, homes, bus and rail services – but there are already safer ways to borrow the money needed for those investments. Issuing bonds is an unnecessary and avoidable risk.
“The Scottish Government should not put itself at the whim of the bond markets. It needs to drop this gimmick now, before the bonds are issued.
“The Scottish Government can borrow through existing routes which are cheaper and lower risk.”
Mr Greer has also warned that a bond creates a barrier to Scottish independence as unionists would seize on the higher borrowing costs that a new state would incur.
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