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View from the street: Playing the long (bond) game

Phoebe O'Carroll-Moran

Phoebe O’Carroll-Moran
Senior associate

A surprise council tax freeze dominated headlines following last week’s SNP conference, but the first minister’s plan to borrow on the international markets is likely of greater long-term significance to both the party and the country.

On one hand, the prospect of additional borrowing (and therefore spending) power leans into to the party’s new “delivery over rhetoric” strategy. The capital raised will be earmarked for vital infrastructure and affordable housing: eminently sensible in principle but this is only half of the story.

Brand Scotland is the other half. “Scotland has a wealth of investment opportunities”, declared the first minister on Tuesday, adding that the bonds would help to “raise Scotland’s profile” and “attract investment”.

Investors may not be quite so easily wooed. Though likely underwritten by the UK government, issuing bonds opens up Scotland to scrutiny from rating agencies. They will sit in judgement as to the viability of the country’s finances. Commentators have been quick to weigh in, stressing that – as a new entrant to the bond market – Scotland will be subject to an additional premium over UK government borrowing costs that may be hard to stomach.

Though technically within the gift of the Scottish government since 2015, borrowing restrictions imposed by the original fiscal arrangements between the Scottish and UK governments made such a prospect undesirable. Changes to those arrangements earlier this year have made the bond market more attractive to the Scottish government, but the caps in place on its ability to borrow for investment have only been lifted a little. Questions about the value for money for the Scottish taxpayer remain. When it comes down to it, borrowing via existing mechanisms may simply be better bang for the government’s buck.

So, why bother? By projecting the image of fiscal autonomy, the policy will play well with a party base that is hungry for evidence of progress on the independence agenda. This has led some to brand it mere “political theatre” but just as it is not simply a matter of practicalities, it is also not just a matter of optics.

By opening up the books and issuing that first bond, the scheme will test the fiscal case for Scottish independence. Were Scotland able to borrow on similar terms to the rest of the UK, Yousaf could argue that an independent Scotland would be subject to similar terms.

Issuing Scottish bonds – already widely referred to as “kilts” – therefore nods to a post-independence economic future, one sketched out in the government’s October 2022 “A Stronger Economy with Independence” paper. This promised a £20 billion fund over the first post-independence decade, investing in green energy, affordable housing and other priorities, and likely part-funded in the bond market.

So, the first minister’s bond announcement was designed to attract the attention not only of potential investors but also of voters. How either party responds in practice remains to be seen.


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