Scottish Government bonds: Putting a kilt on the finances
The Scottish Government plans to raise funds on capital markets for the first time by 2026. What does that mean for the country’s finances?
Scotland’s first minister announced last week his intention within three years for the nation of Scotland to issue its own ‘sovereign’ debt, as coined by us back in 2010 as 'kilts'. At the SNP’s annual conference, Yousaf declared: “[We] will… go directly to the international bond market for the first time… to fund vital infrastructure like affordable housing projects… this will bring Scotland to the attention of investors across the world. And it will raise our profile as a place where investment returns can be made… we will show the world… that we are a country to invest in today [and] demonstrate the credibility to international markets that we will need when we become an independent country.”
To be clear, the Scottish Government (essentially thus far, the SNP) has had the power to issue debt and tax since the Scotland Act of 2012 was passed, devolved authority which, after 2014’s indyref, was bolstered further in 2016. And to be all the clearer still, the SNP has largely failed to use the powers vested in Holyrood but thus far nascent. Contrary to popular belief, we suggest Westminster will welcome kilt issuance, with this proviso.
To underwrite the payment of the coupons on kilts Westminster will demand of Holyrood the rolling-out of the “tartan taxes”, which to repeat have yet to be largely activated, despite the aforementioned Scotland acts, vesting such rights.
The SNP will in short be told by Westminster; issue kilts as you see fit, but accept the Barnett formula is at an end – the equation of how revenues collected centrally by HMRC are re-distributed around the Union – viz Scotland’s Block Grant.
Thinking through the monetary ramification of kilts being issued, one should have these overseen by a Bank of England (BoE) rebranded into the Central Bank of Britain (CBB). Moreover, a far greater – indeed unprecedented – devolution of fiscal powers could only be sanctioned if Scotland’s finances were carefully scrutinised by the OBR so as to monitor our collective Unionised fiscal position. The OBR would “fiscally police” accounts at all ‘sub-sovereign levels’ to remove the moral hazard/free-riding around budgetary ‘miscalculations’. The demand will be simple enough – if you issue debt, not least kilts, you will have to be entirely accountable for paying their coupons and repaying them on maturity. You and not the UK purse – Treasury – writ large.
Now, to ensure Scotland does not become a special case within the Union, there is a powerful argument that whatever fiscal powers Holyrood undertakes must quickly be rolled out into Wales, and indeed far and wide across England; into London and other soon-to-be-created English elected unitary assemblies. In essence, the UK remains ‘United’, but composed of fiscally and monetarily untied “regional units”.
One has to stress that significantly devolved fiscal policy within a sovereign state made of united “regional units” is not unusual. It exists and works well across the expanse of the “Federated States of America” but so too the cosier cantons of Switzerland. May I also point out that when it was within the EU, devolution of sales-based taxation across the UK, VAT, was all but forbidden. Greatly restricted too was the introduction of entirely new spatially distinct taxes. Such limitations existed because the EU tax ambition has long been fiscal harmonisation. Ironically, given the SNP’s attachment to the EU, it is because the UK writ large is outside it that Scotland has scope for fiscal unilateralism from other parts of the Union.
As to how the success, or otherwise, of intra-national “tax and spend” policies will be measured, this will be simple enough to gauge – households and businesses will vote “with their feet” migrating from fiscally poorly run regions for their good and that regions economic bad. To repeat the greater fiscal powers detailed above would make Edinburgh directly accountable for its hitherto “other people’s money spending policies”. “Tax and spend at home” will, in our estimation, put the SNP’s long-held Alice in Wonderland accounting in full untenable view. These developments would re-enforce to the Scottish taxpayers how remaining in the Union is so much more economically favourable than being outside it.
If events to date in 2023 have failed to thus far ‘checkmate’ the SNP for good, the introduction of kilts and tartan taxes most certainly will. Or maybe the SNP is aiming to leave those who replace them in power within Holyrood with an unwanted welcoming present.
PS: Many Scottish nationalists believe the move to higher energy prices post global events of 2022-23, should encourage Scotland to capitalise on its reserves of oil and gas under “its” waters (as well, of course, on its green energy – wind and tidal – from along “its” shorelines and off “its” seas). The problem here is that the SNP’s alliance with the Greens, as well as the strong green lobby within its own ranks, seriously restricts its ability to pursue fossil-based energy growth. In this regard too, the SNP have snookered themselves. After all, just consider the long suppressed and arguably Scottish independence-friendly McCrone Report of 1975. This suggested a sovereign and extremely carbon rich Scotland would have its kilts priced alongside the likes of Switzerland’s sovereign bonds. The SNP turning its nose up to its national oil and its worth now means that kilt yields will turn up markedly higher than otherwise.
Dr Savvas Savouri is chief economist at Toscafund Asset Management and Ed Kerr-Dineen is a research assistant