Draft Scotland Act 1998 (Variation of Borrowing Power) Order 2015
The Committee consisted of the following Members:
† Bridgen, Andrew (North West Leicestershire) (Con)
† Brown, Mr Russell (Dumfries and Galloway) (Lab)
Clarke, Mr Tom (Coatbridge, Chryston and Bellshill) (Lab)
† Coffey, Dr Thérèse (Suffolk Coastal) (Con)
† Connarty, Michael (Linlithgow and East Falkirk) (Lab)
† Crockart, Mike (Edinburgh West) (LD)
Doran, Mr Frank (Aberdeen North) (Lab)
† Green, Damian (Ashford) (Con)
† Hamilton, Mr David (Midlothian) (Lab)
† McCartney, Karl (Lincoln) (Con)
McKenzie, Mr Iain (Inverclyde) (Lab)
† MacNeil, Mr Angus Brendan (Na h-Eileanan an Iar) (SNP)
† Mundell, David (Parliamentary Under-Secretary of State for Scotland)
† Roy, Mr Frank (Motherwell and Wishaw) (Lab)
† Weatherley, Mike (Hove) (Con)
† Wharton, James (Stockton South) (Con)
† Wright, Simon (Norwich South) (LD)
Clementine V. Brown, Committee Clerk
† attended the Committee
Seventh Delegated Legislation Committee
Tuesday 17 March 2015
[Mr George Howarth in the Chair]
Draft Scotland Act 1998 (Variation of Borrowing Power) Order 2015
8.55 am
The Parliamentary Under-Secretary of State for Scotland (David Mundell): I beg to move,
That the Committee has considered the draft Scotland Act 1998 (Variation of Borrowing Power) Order 2015.
It is a pleasure, Mr Howarth, to serve under your chairmanship again.
The order was laid before the House on 15 December 2014. It is a straightforward order that will provide that, in addition to being able to borrow by loan, Scottish Ministers will be able to issue bonds from 1 April 2015. The order is made under section 66(5) of the Scotland Act 1998, which was inserted by section 32 of the Scotland Act 2012.
For clarity, I shall provide some brief background. Section 32 of the Scotland Act 2012 amends section 66 of the Scotland Act 1998 to insert, among other things, subsection (1A). The newly inserted section 66(1A) provides that the Scottish Ministers may, with the approval of the Treasury, borrow by way of loan any sums required by them for the purpose of meeting capital expenditure.
Section 32 of the Scotland Act 2012 also amends section 66 of the Scotland Act 1998 to insert subsection (5), which provides that the Secretary of State may, by order made with the consent of the Treasury, amend subsection (1A) so as to vary the means by which the Scottish Ministers may borrow money. As Committee members are probably aware, Her Majesty’s Treasury brought forward the Scotland Act 2012 (Commencement No. 4) Order 2014 and commenced section 32 of the Scotland Act 2012 from 12 December 2014. As section 66(5) of the Scotland Act 1998 is now in force, this order does indeed amend section 66(1A) of that Act to vary the means by which Scottish Ministers can borrow for capital investment to include bond issuance, other than the issuance of bonds transferrable by delivery.
That variation of the means by which Scottish Ministers may borrow money is in line with other borrowing powers in the Scotland Act 2012, and will ensure that the new system of borrowing is both flexible and sustainable. I consider the order to be a sensible use of the powers under the Scotland Act 1998. I believe the order demonstrates the Government’s continued commitment to working with the Scottish Government to make the devolution settlement work. I commend the order to the Committee.
8.57 am
Mr Russell Brown (Dumfries and Galloway) (Lab): It is a pleasure, Mr Howarth, to serve under your chairmanship on St Patrick’s day. It was interesting to hear the words of the Minister. The order is very short;
there were significantly more words in his contribution than in the order itself. I can only say that the Opposition concur with his sentiments .8.58 am
Michael Connarty (Linlithgow and East Falkirk) (Lab): I would not attend a statutory instrument Committee on something as important as borrowing by the Scottish Government without saying something to say about it. There is a myth abroad in Scotland that money borrowed in one way is free, whereas money borrowed another way costs interest. Of course, all borrowing costs the Revenue because interest, and eventually capital, have to be paid back, so what we are doing today is significant. It is the beginning of a process because we have the Smith agreement to come in the Scotland Bill in the next Parliament, which will extend the powers.
There has been controversy for some time about whether the private finance initiative, which has been used to build a lot of public infrastructure—hospitals, schools and so on—is extremely costly, whereas the not-for-profit trust, which is being used at the moment by the Scottish Government, comes with free money. Of course it does not. Although there is a not-for-profit trust, the money still has to be borrowed, and there is controversy about that at the moment. We are not quite sure whether, when the taxation powers come in for Scotland, the revenue costs will be off the books or on the books. PFI was clearly designed to take the capital off the books, to be carried in the private sector, whereas revenue costs have to be met by the public interest. Whether it is a school, a local authority or a hospital, the Scottish Government will be carrying those costs.
We are giving Scotland a significant right to borrow up to an annual limit of 10% of the Scottish Government’s capital budget in this SI, which is a very positive thing to do, but it also comes with dangers, because if the Scottish Government decide they want to take up that limit, a substantial sum of money then appears on the revenue side every year, to be paid from the Scottish block grant, and there is no Barnett formula rescue package available for these revenue sums. As we know, the grant comes from expenditure by the English Departments. There is then a transfer under the Barnett formula to Scotland. Additional costs during the year in England are transferred to Scotland. I asked the Secretary of State for Transport about this. In 2014, Scotland received £190 million extra from the additional Barnett consequences of transport expenditure in England. Therefore, all this comes with a cost.
If Scotland decides to borrow the money itself to undertake such infrastructure projects, it will carry the costs entirely; that will be the consequence of the borrowing powers that we are giving it now. The results will be interesting. Scottish Ministers may be able to borrow from the National Loans Fund or, the explanatory memorandum states, from commercial banks, which may be a more risky prospect for them in the longer term, as we hear that interest rates are about to start to creep up. There was a discussion this morning about the potential for inflation if the economy begins to grow.
For me it is a significant thing to be here today to give these powers to Scotland and to be part of the Committee that does so, but to bring with that the warning for the Scottish people to look very closely at what happens when these powers are used by the Scottish Government, because there is no such thing as free money.
Andrew Bridgen (North West Leicestershire) (Con): Does the hon. Gentleman agree that with authority should come responsibility and we are giving responsibility to the Scottish Government? Effectively, what we are giving them, if they use that incorrectly, is enough rope to hang themselves.
Michael Connarty: I would look at it differently. The warning I am giving is not one to make a rope with. It is one to make a little whip with, basically, to let the Government in Scotland know that these powers come with responsibilities. A mythology has been going around. For many authorities, PFI has been a very good bargain because the private company taking on the debt also takes on the risk on the maintenance of the project, sometimes for 30 years. In many cases, as I know from the experience in my own area, there is a payment of £1 at the end and the building becomes the ownership of the local authority. Hospitals, such as the new hospital at Larbert in my area, also become the property of the health board. However, the cost of maintenance and the risk of maintenance—all the costs up to that point—are carried by the commercial enterprise that borrowed the money and built the PFI hospital in the first place, which was the theory behind it. With this kind of direct borrowing by the Government, no one else carries the responsibility for any expenditure that that is used for. For example, the bridge over the Forth, which crosses to my constituency, was built entirely of Chinese steel, with not a single pound of order going to any UK enterprise. That project is carried on the debt of the Scottish Government. Any other similar project, should it run into maintenance problems such as we believe there have been on the main Forth road bridge, would also be carried by the Government. That includes the cost of the interest.
Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP): This has been correctly described this morning as the start of a process. Surely the answer to the problems the hon. Gentleman has started to lay out, is full fiscal autonomy, when these problems become the problems of any normal Government. I am sure he will agree that there is a process ahead of us and this is one of the steps in that process.
Michael Connarty: I think that might be termed a predictable intervention. The point is that the hon. Gentleman ignores the fact that 55.31% of the Scottish people decided that we would like to stay in the United Kingdom. I think that one of the reasons for that is that we have the cushion of the Barnett formula. At the moment, as I said earlier, the Barnett formula covers most other expenditures. In this case, we have a situation where the Government will carry the burden entirely on their own back.
The problem that I have with the concept of full fiscal autonomy at the moment is that we would have a £4 billion annual deficit in the Scottish budget. I do not think that the Scottish Government would be able to carry much of the interest on such a debt. Everyone
knows that full fiscal autonomy would destroy the Barnett formula and, therefore, that assistance from the booming economy in the south would no longer come to Scotland. We have a good deal, but we are trying to signal to the Government that they have power, which we are going to give them today, and responsibility, which they must accept. Thank goodness, by remaining within the United Kingdom, we also have support for our main spending from the rest of the UK through the Barnett formula.9.5 am
Mr MacNeil: It is a great pleasure, as others have said, to serve under your chairmanship, Mr Howarth. To respond to the points made about the referendum, the referendum was, finally, not between yes and no; it was between yes and quite a lot. The referendum was about spending. The Prime Minister offered all forms of devolution: all forms were possible and all were on the table. The former Prime Minister, a member of—
The Chair: Order. I know that the hon. Gentleman has been led astray on that point. I remind him that we are here to talk about the devolution in Scotland public finance and accountability SI, not to rerun the referendum.
Mr MacNeil: I am grateful to you, Mr Howarth. [ Interruption. ] Someone says from a sedentary position that my side lost. We accept that. We also accept the promises and I hope that this is part of the promises, or a step to as near to federalism as possible, when the Scottish Government will send money south to subsidise foreign affairs and defence and not, as we have been told, be liable for the debt: the sum of a percentage of £100 billion. The hon. Member for Linlithgow and East Falkirk said that our deficit would be only £4 billion—half of that sum.
This is an important step on the way to normal responsibilities for normal Government. That is exactly what the Scottish people voted for and I welcome this step.
9.6 am
David Mundell: I will not detain the Committee for long. It is important to clarify, following the two contributions we have just heard, that the borrowing powers were transferred in the Scotland Act 2012. The order allows the borrowing powers to be taken forward by way of bonds; it does not relate to the transfer of additional borrowing. Obviously, further powers will come forward as a result of the Smith commission, to which all parties in Scotland signed up. Those will be for another day, as indeed will be the debate over Scotland’s finances, which will be well rehearsed over the next 50 days.