‘It’s not too late to give Scots greater borrowing powers’
IFS director says greater financial powers can ease virus damage to the economy
A LEADING economist has said it is not too late for Westminster to provide more flexible borrowing powers to Scotland to help recovery from the coronavirus crisis.
David Phillips, associate director of the Institute for Fiscal Studies (IFS), said that, while greater financial powers at the beginning of the pandemic would have been more beneficial for the Scottish Government, implementing temporary flexible measures now would still help mitigate the economic damage.
It comes after data published yesterday showed the country had the steepest decline in private sector output of any of the 12 nations and regions of the UK last month. Slower re-opening was cited as a main contributor to the decline.
Scottish Finance Secretary Kate Forbes, First Minister Nicola Sturgeon, shadow chancellor Alison Thewliss and SNP Westminster leader Ian Blackford have all said greater fiscal autonomy is essential for effective recovery from the pandemic.
Part of the problem for devolved administrations is they have to wait for the Treasury to decide how funds will be spent, then wait further to find out how much funding will come from those decisions.
Once funding has been announced, devolved governments then have to do their own “number crunching” before being able to announce their own spending plans, creating delays.
Mr Phillips said: “Certainly, the rules around borrowing are not made for a crisis such as this.
“You can’t respond rapidly. Scotland and Wales have to wait to find out how much money they will get from Westminster, then crunch their own numbers, which does slow things.
“If the rules were changed temporarily, even just relaxing them, it would have gone a significant way to give more flexibility and wouldn’t have represented a big change… it’s not necessarily about granting massive new borrowing powers, its about allowing flexibility with the current ones.”
The economist said that, while the Scottish Government can borrow up to £600 million a year, it can only do so if there is a Scotland-specific economic shock, or if the economy grows by less than the rest of the UK.
Mr Phillips said: “It would have been more beneficial at the start but would still be beneficial now, to relax some of the rules... around the fiscal framework. The Scottish and
Welsh government both have borrowing powers but their use is relatively restricted. Scotland’s borrowing is capped at £600m but you can only access the full £600m if there is what is called a Scotlandspecific economic shock.
“That is if Scotland’s economy grows by less than 1 per cent, which it definitely will do, but also if it grows by 1% less than the rest of the UK – which is less clear. “
The £600m available to the
Scottish Government can only be spent on certain things, for example covering a shortfall in revenue as a result of forecasting errors.
Mr Phillips said: “You can’t use it to just spend more, or to offer targeted tax cuts. The Scottish Government can only do that if there has been forecasting errors.
“The borrowing powers are not set up to allow them to respond to the Covid crisis. What I think would make sense is relaxing the rules, and it is not too late to do that.”
The Treasury said it had already offered an unprecedented package of support to the Scottish Government, with funds for Scotland as a result of the coronavirus crisis totalling more than £4.6 billion.
A spokesman said: “The UK’S wide-ranging package of support is one of the most generous in the world, and the Summer Economic Update announced further measures that will benefit Scotland, such as the massive funding boost to Jobcentres, a £2bn Kickstart scheme to help young people into jobs, a VAT cut for hospitality sector, and the Eat Out To Help Out scheme.
“This is on top of existing billions of pounds in loans, tax deferrals, more than £6.5bn injected into the welfare safety net, and our income support schemes, which have protected 774,000 jobs across Scotland.
“The Summer Economic Update also confirmed an additional £800m Barnett for the Scottish Government, taking the total to £4.6 billion through the Barnett Formula since March.”
New borrowing powers were agreed between the Treasury and Holyrood in 2016, increasing the amount the Scottish Government could borrow for capital investment to £450m a year. Up to £300m a year can be borrowed for day-to-day spending for tax or forecasting errors, doubling to £600m if Scotland receives a specific economic shock.
According to Treasury statistics, spending per head of population in Scotland is 17% higher than in the rest of the UK.