Scotland’s Debt Mountain: Holyrood’s Borrowing Could Hit £50bn by 2020
The article is complex covering almost the entire spectrum of government activity in Scotland with the emphasis remaining fixated on unfounded allegations of financial mismanagement by the Scottish government. The author is a vastly experienced journalist and production by himself of a article full of innuendo and distorted truths is very sad. The article is reproduced in full so that readers will be able to read Serverin Carrell’s account then compare this with my submission
Severin Carrell is Scotland editor for the Guardian. He was previously the Guardian’s Scotland correspondent. He has worked as a home affairs, environment and politics correspondent for the Scotsman and Scotland on Sunday, and as a senior reporter with the Independent and Independent on Sunday.
Guardian investigation finds public sector borrowing for schools, roads, rail and education is set to dwarf Scottish parliament’s annual £30bn budget, prompting auditor general and opposition parties to call for greater transparency
Public sector debt in Scotland has mushroomed to record levels after an SNP government spending spree funded by billions of pounds’ worth of borrowing from pension funds, international banks and the Treasury. An investigation by the Guardian has found that total borrowing to build schools, roads, railway stations, colleges and hospitals under the devolved government could reach £50bn by the end of the decade, putting a heavy strain on the public finances. The scale of the debt, which dwarfs Holyrood’s annual budget of £30bn, has never been set out by ministers or investigated by the Scottish parliament.
It has led to calls by Scotland’s auditor general, Caroline Gardner, and opposition parties for greater openness over public finances. Gardner said the need for full transparency was even more urgent given that Holyrood is due to get far greater tax-raising powers and is under significant pressure on public spending. John Swinney, the Scottish finance secretary, is expected to reveal new spending cuts in his budget on Wednesday after a 1.3% cut in Scotland’s block grant from the Treasury in London.
Calling for Swinney to publish whole government accounts that would set out in a single document the full details of all Scotland’s devolved public spending, borrowing and assets, Gardner said: “It is critically important that the Scottish parliament and the people of Scotland have got a very clear picture of what both those assets and those long-term liabilities look like.”
She added it was a “basic matter of accountability” and necessary “to enable the Scottish parliament to make some of the difficult decisions that it will need to make in future, particularly as it takes on its new tax-raising powers.”
Jackie Baillie, Scottish Labour’s finance spokeswoman, said she would be urging Holyrood’s finance committee to investigate. “Future generations are facing a debt mountain and we’re putting more and more on the nation’s credit card. What the Scottish government is doing to add to public sector debt is like PFI on steroids. It is essential with the new powers coming to the Scottish parliament on tax, spending and borrowing that we have complete transparency on the nation’s finances.”
Scottish public authorities and ministers are committed to spending at least £9bn on dozens of privately financed projects overseen by the Scottish Futures Trust (SFT) – the arm’s-length body overseeing infrastructure investment. That is in addition to £22bn-worth of historic private finance initiative (PFI) debts still to be paid off.
There are currently £6bn-worth of privately financed and managed projects under way through the SFT. Including historic PFI repayments, servicing the existing debt already costs £1bn a year. That cost will be at its highest between 2018 and 2028 when Scotland’s public sector will be spending more than £1.2bn a year to repay private finance deals. It will reach more than £1.3bn in 2025.
In addition, Scotland’s 32 councils owe nearly £15bn to banks, public debt agencies and pension funds, and are planning to spend nearly £500m more on new capital projects, in addition to sharing billions of pounds’ worth of private financing through the SFT. Those debts need to be repaid more quickly than before, official data from the Chartered Institute for Public Finance and Accountancy has shown.
The latest data from the industry body shows that nearly 50% of the borrowing must be paid back within 20 years. But councils are expected to face deep funding cuts of up to 5% in their £10bn annual funding in Wednesday’s budget.
Scottish ministers have also been cleared to borrow up to £4.9bn on upgrading the rail network by 2019 – more than double the borrowing attributed to Scotland in 2009 – using debt funded by Network Rail at UK level.
Scottish ministers are also floating proposals for expensive high-speed rail lines from Scotland, which are not yet funded. Scottish investment in rail funded with record borrowing
Figures given to the Guardian by the regulator, the Office of Rail and Road, show that Scottish ministers would be due to pay up to £868m on financing and interest costs between now and 2019 to service that borrowing.
Meanwhile, households and taxpayers are forecast to come under additional financial pressure with Scottish graduates and students set to owe £6bn by the end of the next Scottish parliament in 2021, according to an analysis by the higher education funding expert Lucy Hunter Blackburn.
That debt would be three times their borrowing when the Scottish National party (SNP) first won power in 2007 on a promise to abolish student debts. The debt is funded by the Treasury in London and is not directly repaid by taxpayers. But Scottish ministers write off an average of 30% of that debt every year to cover students who do not earn enough to repay it, defaulted loans and subsidised interest payments.
Private Finance Initiative (PFI) – An understanding
At the beginning of 1997 the Tory Party Government, led by John Major had re-established stability in the UK economy weathering the financial disaster of membership and withdrawal from the European Community, Exchange Rate Mechanism (ERM). The long recovery process was hard on the UK electorate who suffered the brunt of strictly observed control measures designed to reduce government spending and debt bringing stability to the economy.
With the improving revenue boosting to their fortunes and re-election a distinct possibility the party pressed the self destruct button, when in-fighting broke out within the parliamentary group over the future direction of the party in regard to membership of the EC. The tactics of feuding individuals included releasing damaging information providing opportunity for the media and press to accuse the government of being embroiled in scandal, sleaze and corruption. The party was by result perceived by the electorate to be financially capable but also corrupt tired, leaderless and without vision and at the General Election in May 1997 it was removed from office.
The Labour Party, in opposition had been through 10 years of processes similar to the Tory party, as the old guard fought to retain policies which had been repeatedly rejected by the electorate. But as 1996 drew to a close leadership of the party was decided upon a compromise. The old guard would be allowed to monitor policy discussions but any proposed contribution would be made in private to the party leadership. Tony Blair, as leader would provide the charisma whilst the dour mannered Gordon Brown would have charge of the Economy. The old guard monitor appointee role was given to ex shop steward John (two Jags) Prescott.
Allaying the fears of the electorate (who were concerned about Labour’s previous excessive spending record whilst in power) the 1997 Labour Party manifesto for government undertook, (in government) to retain and manage the economy following the financial policies of the Tory Chancellor, Kenneth Clarke, (whose tenure at HM Treasury had brought with it a reduction in income tax from 25% to 23% and a marked improvement in the budget deficit, (due to reduced government spending), from £51 billion in 1993 to £16 billion in 1997.) Interest rates, inflation and unemployment were also reduced significantly. The pledge to the public was duly honoured and the UK economy returned to balance in 1998. The successful policies were maintained in the lifetime of the parliament and the economy recorded an ever increasing budget surplus.
The Private Finance Initiative (PFI) was a mechanism established by Tory Chancellor Norman Lamont so that a few large infrastructure projects could be commissioned and completed using private sector finance, transferring all liability for construction and maintenance (off the books) of government. Recurring financial liabilities to contractors (for periods between 30 to 150 years) would be charged to revenue expenditure. The schemes offered a means of attracting private finance into a public sector that had been starved of funds for many years. But the consensus, in financial circles was (if used sparingly) PFI had benefits, but any widespread use would be counter-productive since the cost to revenue budgets would greatly exceed the initial projected (on the books ) capital cost including interest charges. The Shadow Chancellor, Gordon Brown attacked the Tory government’s use of PFI as “a cynical distortion of public finance.”
But in government Brown was unable to curb his inbuilt urge to spend, regardless of risk He became enamoured of PFI identifying it as a convenient way of concealing public debt. It was the mother and father of the discredited “never never” hire purchase schemes so prevalent in the UK consumables markets of 1950-70. Simplicity indeed. The government would agree to contracts committing their various agencies to make fixed payments to the private sector for a fixed period, typically 30 plus years (the useful life of the asset). And the entire spectrum of business would be conducted outwith the control or inspection of any lending authority. A hospital built by the South London Healthcare Trust under the PFI cost £118 million to build, but had a hidden payback over the life of the PFI contract of £1.2 billion. Cloak and dagger expenditure on a grand scale.
Norman Lamont, (having stepped back from front-line politics but never one to hide his views) alerted the media and press about the Labour Government’s abuse of PFI and whilst accepting responsibility for creating it he insisted it had only intended to be used for projects such as new bridges or roads. There were strict rules in place forbidding use of PFI on normal capital spending but Gordon Brown removed the constraints so that PFI could be used extensively to complete basic structure upgrading projects (the UK treasury building, the Docklands Light Railway in London) and the purchase of hospital equipment and procurement of military hardware and vehicles. A scandalous abuse of financial authority by the New labour government.
The European Commission also became concerned and after a long drawn out process of discussion (lasting many years) the UK Treasury was forced to conform to EU accounting standards. from 2010. Details of the new methodology are to be found in IFRIC12 and ESA95.
Accurate financial figures are impossible to identify but in the period 1996-2014 a PFI contract value of £150 billion with a recurring 30 year commitment of £255 billion would not be that far out. These figures equate to a UK debt commitment not far short of 50% of the UK gross domestic product GDP. So much for Gordon Brown’s sustainable investment rule.
The new rules will transfer the bulk of the £255 billion back “on book” which will further reduce finance available. The only solution open to government for new capital expenditure is to borrow money further increasing the national debt which is nearing £2 trillion. What a disaster.
The 2007- 08 world financial crash proved disastrous for PFI deals. Many participating companies found it difficult to attract new finance and the added burdens of existing debt repayments meant there was a reduced amount of finance available to support existing contracts with result that many establishments had to function understaffed and routine maintenance was often abandoned. Many prospective deals were either abandoned or severely cutback and there was concern the entire PFI system would fail. The crash also exposed, to the public (for the first time) the massive level of previously undisclosed PFI debt repayments being met from revenue allocations, revealed just as the new Tory/LibDem coalition government introduced measures reducing available finance in the public sector forming part of their declared austerity programmes.
But the PFI debt remains within the system and will be a significant burden on the UK’s revenue availability for the next 30 plus years. New Labour (Blair and Brown stand accused of passing a debt of mega proportions on to our children and grandchildren. There are strict rules which prohibit government from concealing debt from taxpayers. It is called “malfeasance in public Office.” and “New Labour” should be asked to answer the charge in a court of Law.
Scotland and PFI under the SNP government
In Scotland in 2007 the minority SNP government accused Gordon Brown of selling out the Scottish taxpayer, (for allowing private profiteering backdoor entry to the public sector) and refused to embrace the PFI option believing it to be a wasteful process which allowed private contractors to make massive unwarranted profits from the nations public services. Indeed publication of information pertaining to recently PFI financed new builds at Edinburgh Royal Infirmary and James Watt College proved that the projects could have been completed for half the cost using traditional methods.
In their manifesto for the 2007 election, the Scottish National Party (SNP) proposed the establishment of “The Scottish Futures Trust” as an alternative to PPP/PFI, encouraging greater use of public bonds, to access to lower-cost borrowing. It was a solution conceived to allow the devolved administration to gain some leverage around private sector investment.
With the approval of the Scottish audit office, the SNP government established, in September 2008 “The Scottish Futures Trust” (SFT). A public corporation of the Scottish Government, operating at arm’s length from the Government the Trust’s remit is to work closely with the public and private sectors to deliver value-for-money on all public sector infrastructure investment across the country. The trust has the aim of saving £100–£150 million each year through a wide range of activities. improving public infrastructure investment.
The SFT team is comprised of around 50 professionals, who have the responsibility of increasing the efficiency and effectiveness of infrastructure investment in Scotland. It is run by a board of seven members appointed by Scottish ministers, headed by a non-executive chairman.
Programmes of work given over to the SFT include the building of affordable homes and homes for rental throughout Scotland. Healthcare projects, including the Aberdeen Community Health and Care Village (opened 2013) and the new Royal Hospital for Sick Children and Department of Clinical Neurosciences in Edinburgh due to open in 2017). Other major projects include a £1.5 Billion schools upgrade programme, dualling of the Inverness – Perth road, completion of the Aberdeen bypass. Relocation, new build for the Scottish Blood Transfusion Service Headquarters and a number of smaller but no less important projects. Note: All projects are subject to Scottish Office Auditor approval before implementation
Financial savings achieved by the SFT are significant. In 2009−10 the Scottish taxpayer benefited from £111 million savings increasing to £129 million in 2010–11: £131 million in 2011-2012: £132 million in 2012-13: £140 million in 2013-14: £135 in 2014-15 and £146 million in 2015/16; Note: calculations verified and validated by Grant Thornton LLP and independent academics from the London School of Economics. Cumulative savings over 7 years £924 million plus.
Infrastructure Investment – SNP government Policy
MP for Gordon, Alex Salmond, visited the Inveramsay new bridges site which includes 1.5km of new road, and a new bridge enabling the A96 trunk road to be realigned over the Aberdeen to Inverness railway. An underpass has also been incorporated into the upgrade to allow for more efficient farm access. A notorious bottleneck, the route has was popularly known as being one of the worst areas for delays in the North East of Scotland. The infrastructure upgrade will dramatically improve the reliability of journey times. Commenting, Mr Salmond said:
“This is a great step forward for infrastructure in the North East of Scotland. I inspected the new route today and contractors and workers should be congratulated for bringing this project forward on time and within budget. In the 50 years since the discovery of North Sea Oil the Tories ran Scottish roads for 22 years and Labour for twenty, eight of these hand in glove with the Liberals. In that entire time they did not build a single centimetre of the AWPR while bottlenecks like the Inveramsay Bridge were an embarrassment to the North East. Indeed, the Liberals represented this area for over 30 years with no action whatsoever on Inveramsay. Now after nine years of SNP Government we can see the AWPR take shape before our eyes in one of the greatest road investments in Scottish history. The new Inveramsay Bridge is nearing completion and the route to Ellon has been prioritised in the building of the AWPR. These investments are transformational for transport in our corner. That is a legacy of achievement of which the SNP can be proud just as our opponents should be ashamed of their years of negligence. However, the SNP have shown yet again, that a proactive approach is the only way to solve issues like those which have plagued motorists at the Inveramsie Bridge. I am fully confident that road-users will immediately feel the benefits of the upgrades, and they are but part of the SNP’s wider transport plans for the North-East.”
Transport Minister Derek Mackay MSP commenting on the progress of the works said:
“For years drivers and local communities who use this section of the A96 have endured delays to their journeys with this bottleneck earning notoriety as one of the worst in the country. The old rail bridge was simply not fit for purpose and is why the Scottish Government committed to tackling a unique set of engineering challenges to help bring the A96 at this location up to 21st century standards. We wanted to ensure drivers and local communities who have waited patiently for the upgrade feel the benefits at the earliest opportunity, so I’m delighted that in just a few hours time, they will get the green light to drive on the new road. Inversamsay, which is on time and on budget, is emblematic of our wider commitment to delivering transport improvements right across the region.” He went on to say that:
“The 58km £745 million Aberdeen bypass is on schedule to open to traffic in winter 2017, preparatory work is ongoing which will allow us to start construction of an upgraded Haudagain roundabout on completion of the new bypass, and early design and assessment work to dual the full length of the A96 from Aberdeen to Inverness is making good headway. We are also investing £170 million to strengthen rail infrastructure between both cities to help make journeys shorter, more frequent and more comfortable, and have committed £200m through the City Deal to upgrade the rail line between Aberdeen and the central belt. We have also invested in more trains which will mean from 2018 more local rail services across the north east rail network, and faster, more frequent links from Aberdeen to the central belt.”
“We are determined to transform transport infrastructure right across the region and this much needed improvement here at Inveramsay Bridge underlines that the Scottish Government is getting on and doing just that.”
The Office of National Statistics ONS
ESA10 (European System of Accounts 2010) is a set of Eurostat rules, introduced in September 2014, that determine how the UK government reports its overall levels of debt in the national accounts prepared by the Office of National Statistics (ONS).
The rules have set out a particular approach to classifying infrastructure projects developed across Europe under various forms of public-private partnership. How the new rules and associated guidance are being interpreted is an evolving picture across Europe as national statistical agencies and Eurostat apply the rules to projects and conclude classification decisions.
In Scotland, projects delivered through the NPD programme as well as all hub Design, Build, Finance and Maintain (DBFM) projects fall under the scope of the revised rules and guidance. All projects of this nature see a delivery partner raise debt to pay for construction, and take responsibility for both construction and maintaining the asset in a good condition.
The asset is ultimately paid for by a public authority over time as it is used. A privately classified project sees the debt classified to the private sector whereas a project classified to the public sector counts towards the national debt.
In December 2014, the ONS decided (as part of its work programme) to review the classification of the Aberdeen Western Peripheral Route (AWPR) NPD project.
In February 2015, Scottish Government stated that in light of this review a number of steps would be put in place to refine the NPD programme, and that some changes would be required to hub DBFM projects impacting on the timescales of an anticipated eight projects at that time.
In July 2015, ONS decided that the AWPR should be classified to the public sector under ESA10. This was based on its interpretation of the degree of public sector control over the special purpose vehicle established to deliver the project, and the balance of risk and reward between the public and private sector partners. The Scottish Government stated that as a result of that decision further changes may be required to the hub DBFM structure and that there was likely to be some further impact on the delivery timetable.
hub update (26 November 2015): ONS has now considered proposals for revised hub DBFM arrangements developed and submitted by SFT. The revised arrangements would see hub DBFM projects maintain the current balance of public good, with projects taken forward by special purpose DBFM companies owned 60% by the existing hub private partners, 20% by a Hub Community Foundation charity, 10% by SFT and 10% by the procuring Authority.
On 26 November Parliament was advised that, on the basis of an ONS review of these new proposals developed by SFT, projects could now proceed. Since then a significant number of projects have reached financial close allowing construction to start.
NPD/SFT continues to review options for the potential amendment of the AWPR project and potentially other NPD projects in the light of the ONS’s decision on the revised hub model. All contracted NPD projects continue to be built on site as planned and the classification does not affect this progress.
Transferring Projects to “on book” status
November 2016: Scottish Ministers took the decision to reclassify the funding of a new children’s hospital in Edinburgh, an acute hospital in Dumfries and a new Blood Transfusion Service Headquarters as public projects (on book) taking guidance from events and project management changes pertaining to the Aberdeen Bypass construction, which when implemented satisfied the requirements of the new (ESA10 2014) legislation. Ministers were not confident contract arrangements could be amended in similar fashion in respect of the three projects in question hence the decision to transfer the works on book. Then to appeal the measure. There is the option of transferring all aspects of contracting and financial responsibilities to the SFT which would require the creation of a Scottish National Trust Charitable Foundation. A way forward will be identified in 2017 and put in place before the next round of capital projects
Scotland’s Historical Local Council Debt to be retained on the books of the UK Treasury:
Before devolution local councils were able to borrow money from the Treasury in London, for completion of new housing. Loans were arranged for a fixed term, usually 30 years at a repayment interest rate of 8%. The outstanding loan figure at the time of devolution was £2.45 billion and it is the responsibility of local councils to continue making loan repayments until the loan closure date. In the 17 years since devolution, Scottish Local Councils have paid a minimum of £3.3 billion (interest charges only) to HM Treasury. Projection are that a further £1.95 billion interest payments will be made providing a total interest only charge of £5.25 billion and the prime loan sum will also need to be paid off at the end of the loan period.
Local government is Scotland is committed (over the next decade), to spending 44p of every £1 of Council Tax collected from Scottish residents on servicing debt liabilities. 10p can be attributed to outstanding pre-devolution liabilities.. The government in Westminster confirmed the loans and any financial matters arising will be retained by the UK treasury for accounting purposes.
8 Jun 2014: EU farm payments deadline extended to October
The deadline for paying European subsidies to farmers has been extended from 30 June to 15 October, a senior EU official has confirmed. Problems with a new Scottish government computer system have caused delays to many Scottish farmers due the money. The Scottish government had been facing fines of between £40m and £125m if it did not meet the June deadline. But the EU’s commissioner for agriculture, Phil Hogan, announced the new date.
The move followed a meeting between the commissioner and Scottish First Minister Nicola Sturgeon in Edinburgh last month. Mr Hogan stressed that this was “an exceptional measure” which reflected the difficulties some member states and devolved regions had experienced with the first year of payments under the new CAP. He emphasised that the move should not be used as an “excuse” to slow down the rate of payments.
30 September 2016: Auditor General reports on Scottish Government accounts
The Auditor General has welcomed steps taken by the Scottish Government to strengthen transparency of public finances, but says there’s more work to do as new financial powers are introduced at a time of uncertainty created by the EU referendum result.
The Scottish Budget for 2015/16 reflected new tax and borrowing powers for the first time. With further powers flowing from the Scotland Act 2016, it’s increasingly important that the Scottish Parliament and the public have comprehensive, transparent and timely information on how public money is used and what has been achieved.
In her report on the Scottish Government’s consolidated accounts, the Auditor General notes that progress has been made to improve reporting of the Scottish Government’s budget and spending decisions. Her independent audit opinion on the 2015/16 accounts is unqualified.
She has identified a number of areas for further improvement to support the Parliament’s scrutiny of the draft budget and new powers. These include making it clearer what spending aims to achieve and how this contributes to the Scottish Government’s overall purpose and outcomes.
The report highlights risks to the management and control of European funding which, for the foreseeable future, will continue to be an important income stream for the Scottish Government.
Other significant matters from the 2015/16 audit include:
The continuing risks in the delivery of the Common Agricultural Policy Futures Programme, established to implement reforms and deliver financial support to farmers and rural businesses.
The need to ensure that management of European Structural Funds, which provide financial assistance in areas such as transport links and business growth, comply fully with European Commission requirements. During 2015/16, three of the four programmes managed by the Scottish Government were suspended by the Commission. While the Scottish Government has taken action to have the suspensions lifted, the accounts show that it may not be able to recover an estimated £14 million in grant funding.
The Office for National Statistics’ decision to classify the Aberdeen Western Peripheral Route as a public sector project and the Scottish Government’s decision to adopt a similar treatment for three further projects reduced its capital spending power in 2015/16, though this was successfully managed within overall budget limits.
Caroline Gardner (the Auditor) concluded:
“The construction and management of the Scottish budget is becoming increasingly complex and the Scottish Government has established a strong base to address the substantial changes and uncertainty affecting public finances. While recent developments show the Scottish Government is heading in the right direction, there’s much still to do to ensure that the Scottish Parliament, and the public, have the information they need to fully understand and scrutinise the implementation of the new powers, especially the new tax and spending choices.”
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