Scotland’s government bonds are the least worst way of raising much-needed finance for a Scottish government unable to abandon a neoliberal straight jacket.
By 2026, Scotland will have a Government Bond available to investors. It will borrow up to £3 billion, with a limit close to £500 million each year. For some context, the Scottish GDP will likely be around £170 billion by the end of the parliamentary term. So, a maximum of up to £500 million each year is a small amount to borrow. Some would argue that it is too small to be insignificant, but we don’t agree. £500 million buys you a lot of infrastructure, including, as the First Minister confirmed, new homes. Spending this amount per year can make a significant difference to sectors of the economy and to people’s lives. But with all borrowing, more has to be paid back than is lent.
There is clearly another objective besides the need for cash. The Scottish government want to show the international bond market that Scotland will be a stable government when it becomes independent. Stability is the watchword for the Scottish government’s rock-no-boats approach. And without its own currency, Scotland will be knocking down financiers’ doors.
The first question we should ask is why does Scotland needs to borrow from the international finance markets at all?
The answer is that the central government in London has massively underfunded infrastructure across these islands (outside of the southeast and London). The best solution is for the central government to significantly increase infrastructure expenditure. But that is not likely. So, the Scottish government must seek funds elsewhere. It needs more of someone else’s currency.
It would be great if our media asked why Scotland needs to borrow when it is much riskier for a sub-national government to borrow than it is for the central government. If it did this, rather than just concentrate on how Scotland will borrow, we might get more interesting answers.
And it would be even better if our First Minster and other senior politicians explained why we need to do things that a properly funded state would not have to worry about.
Scotland’s government bonds: The best of the worst ideas if we keep to the neoliberal straight jacket
Most people in Scotland would agree that we need to improve public infrastructure. Borrowing is the best worst option. To pay for the investment without reducing another area of public expenditure, the Scottish government, as a currency user, has three options:
- Receive money from the Central Government (NOT GOING TO HAPPEN)
- Raise taxes at the national level to spend on infrastructure, but lose most of the revenue from a matching reduction in the block grant, so (NOT GOING TO HAPPEN)
- Borrow on international bond markets
There are a couple of other obvious options, among, I am sure, other interesting ways to finance infrastructure, including granting more powers to Local Authorities in Scotland. The Scottish Government could allow local authorities to tax land to raise, let’s say, £500 million per year and allow them to fund regional infrastructure projects. Much of this would come from outside of Scotland as the absent and foreign landowners would have the opportunity to contribute most to our infrastructure development. This would not affect the block grant and would be new money for infrastructure. But this devolution of power to local authorities is…… (NOT GOING TO HAPPEN).
The Scottish Government could introduce an infrastructure savings bond targeting UK citizens keen to invest in worthwhile projects. It could allow a third party to manage the process, or it could widen the remit of the Scottish National Investment Bank. There would be no need to go to international finance markets for this.
During the investigative phase announced by the Scottish government, we will ask why they have not considered these two options. However, as one of the objectives is to demonstrate our fiscal responsibility when it comes to borrowing, the option to offer a bond to international investors is already baked in.
Scotland will always need other people’s money until it issues its own currency
Scotland needs more currency to circulate in the economy to enable the Scottish government to provision itself. If it wants to invest as part of the UK, then it must borrow this currency and then spend it in the economy. As a currency issuer, your options are restricted.
When the UK wants to build infrastructure, which it does so well!!!!! (HS2), it simply creates the currency and then spends it in the economy. It then chooses to do two things:
- It accounts for that spending by issuing government bonds
- Decide on what level of interest to pay on those bonds (as it does on all government lending)
We have to stress both of these options are policy choices. But back to Scotland.
If Scotland were independent, with its own currency, it would simply create that currency (like the UK could and should do now) and then spend that into the economy. It would then decide whether or not to account for the spending via bond sales and decide what interest to pay investors.
Unfortunately, the position the Scottish government is in now, being at the whim of international bond markets under the devolved settlement, will be the SAME position post-independence under the current SNP economic ‘vision’.
Owing money in the currency you don’t create is how sovereign debt crises arise. Borrowing a few billion might not seem like much, but when you add the interest payments, it starts to mount. And remember, this must all be paid back. And when a government doesn’t issue a currency, the only sector that will pay the interest is the private sector. That is me and you folks. But the Scottish government is in a bind; it needs the cash. Their future direction of travel, relying on the international bond market, makes this the most obvious and slightly depressing route.
At best, it is a necessary short-term plaster. Hopefully, it will be money well invested and secured without too high an interest rate. However, without independence and the creation of our own currency, as soon as we are independent, the plaster might be, in the end, too painful to pull off.