MPs urge Westminster to increase Scottish Government’s borrowing limits

A Westminster committee has urged UK ministers to increase the Scottish Government’s borrowing power.  

Currently, the cap is at £600m for day-to-day spending and £450m for capital projects. 

The recommendation was part of the Scottish Affairs Committee's inquiry into the effectiveness of the Barnett Formula - the measure used to work out how much funding the UK government sends to devolved nations every year. 

In the report, MPs said there is a clear need for Holyrood to “have great fiscal flexibility”, calling on the UK Government to review and reform the borrowing limits.  

The report said: “There is also a clear need for the Scottish Government to have greater fiscal flexibility, with the committee warning that there is no real benefit to the current system capping the amount stored in the Scotland Reserve. To avoid the real possibility that Scotland would have to surrender any of its funds, the UK Government should consider removing this cap.   

“Similarly, the Scottish Government’s fiscal flexibility is further constrained by its limited borrowing powers. It can only borrow to cover forecast errors, meaning it has a limited ability to manage fiscal shocks - to remedy this, the report recommends that the UK Government should reform the Scottish Government’s capital borrowing powers to offer higher limits.” 

The committee found the Barnett Formula was “fit for purpose” but not perfect and demanded more transparency on how Westminster uses the measure.  

The report said the lack of transparency “limits the ability of the public, UK and Scottish Parliaments to hold their respective governments to account”, and called on ministers to share details of their calculations in future funding policy statements as well as to publish an updated Block Grant Transparency document alongside every major fiscal event.   

The committee also voiced concerns on the impact Westminster spending decisions can have on the Scottish Government’s budget, “often with little warning”. 

It urged for “regular communication between the two governments on UK spending”, and for the UK Government to carry out and publish an impact assessment of any budgetary changes on the block grant. 

In written evidence to the committee, Scottish finance secretary Shona Robison had reiterated support for full fiscal autonomy, which would see powers over tax and spending devolved, but MPs found the arrangement to be an ‘unrealistic prospect’. 

The report said that there was not a “compelling case” it would “automatically” result in higher funding for Scotland. 

  Chair of the Scottish Affairs Committee, Patricia Ferguson said: “The Barnett Formula has been the subject of continued debate since its introduction, nearly fifty years ago. Throughout our inquiry, we’ve scrutinised it from every angle and ultimately found that the formula is fit for purpose and support its continued use to determine Scotland’s funding levels.”

She argued that while the formula was “in no way perfect”, the committee had “heard no convincing evidence” during the inquiry for it to be “reformed significantly” or for a “workable alternative” to replace it.  

“To ensure that the Barnett formula works as well as it can for Scotland, today’s report sets out ways to improve the way it operates in practice, by improving transparency about its application and making changes to Scotland’s broader financial framework”, Ferguson added. 

Robison welcomed the report, saying it “rightly recognises” the UK Government's funding allocations “largely” dictate Scotland’s finances, “irrespective of the impact on Scottish public services.” 

She added: “That has meant Scotland has been left with a shortfall of £400m to pay for the Chancellor’s national insurance increase, and saw Scotland short-changed by more than a billion pounds over the next three years at the recent spending review. 

“The decisions we have taken to ask higher earners to pay a little bit more – while most income tax payers pay less than in the rest of the UK – mean that we can support vital public services and provide free tuition, prescriptions and the Scottish child payment to help tackle child poverty.” 

Scottish Secretary Ian Murray said the spending review had given the Scottish Government a “record settlement” of an extra £9.1bn, and that the formula has meant spending per head in Scotland was around 20 per cent higher than elsewhere in the UK.  

He said: "This report confirms that it appears to be the position of the Scottish Government to scrap that formula that delivers higher funding – they should explain why they want less money for public services in Scotland. 

“Their plans for full fiscal autonomy would mean a £12bn cut in public spending for Scotland.”