Humza Yousaf’s inglorious year as first minister will not be remembered for many lasting achievements. But he does, at least, have one legacy. In October 2023, Yousaf told the SNP party conference: ‘I can confirm that by the end of this parliament the SNP Government will – subject of course to due diligence and market testing – go directly to the international bond market for the first time in our own right.’
Yousaf did not hide the true motivation for the bond programme, adding:
We will show the world not only that we are a country to invest in today. We will also demonstrate the credibility to international markets that we will need when we become an independent country. Delegates, the SNP is delivering for the people of Scotland today. And brick by brick – institution by institution – we are laying the foundations for what will be our newly independent state. We are truly living in the early days of a better nation.
This stuff was catnip to an SNP conference. The reception from delegates was rapturous. The plan to issue Scottish Government bonds – or ‘kilts’ as some have dubbed them – has always been about whipping up nationalist fervour.
Since that conference, the timetable has slipped a little – the first bond sale is now expected to happen after the election in May. But the plan is very much still alive.
Issuing bonds will not allow the Scottish government to borrow more money. It will simply replace a cheap and efficient form of borrowing with something more expensive and more complicated.
Under a longstanding facility with the UK government’s National Loans Fund, the Scottish government is currently able to borrow (within limits agreed under the fiscal framework) at very attractive rates – only fractionally higher than the UK government’s own cost of debt.
Those same borrowing limits will still apply if the Scottish government goes to the bond market instead, but investors are very likely to demand a larger premium than the small spread (over UK rates) charged by the National Loans Fund.
So the Scottish government will probably pay a higher rate of interest by issuing bonds. And that is not the only additional expense it will incur.
To smooth the way for the bond sale it was necessary for the Scottish government to obtain a credit rating. That milestone was achieved last year when the rating agencies S&P and Moody’s both gave Scotland the same credit rating as the UK.
Shona Robison, the Scottish government’s cabinet secretary for finance, was thrilled:
‘This is an excellent result – on a level with the UK’s sovereign rating and better than many major industrial countries – which reflects our strong track record of prudent fiscal policy and responsible debt and financial management.’
But she wasn’t being entirely honest. The credit ratings largely reflected an assumption that Scottish government borrowing will be implicitly underwritten by the UK government. S&P said: ‘We could also lower the rating if Scotland took material steps toward independence from the UK.’
There was something else Robison wasn’t open about: the Scottish Government paid the agencies for those credit ratings. This was only made public through a Freedom of Information response. The government refused to disclose how much it paid, because ‘disclosure may affect the commercial interests of Moody’s and S&P.’
The UK, along with other major economies, does not have to pay for its credit ratings. Smaller nations, however, generally do. So it’s not unusual that Scotland had to pay. But it is plainly unnecessary when a cheap and simple borrowing facility is already available.
And much more unnecessary spending is on the way. News broke this week that the Scottish government is tendering for bankers and lawyers to facilitate the bond sale.
Banks are expected to be paid £5 million to act as ‘bookrunners’ for the bond offering. And legal advice will cost the Scottish government a further £1.8 million. Legal costs of £50,000 have already been incurred, and the consultants EY have a £500,000 contract to advise on the bond programme.
This kind of thing has become entirely normalised under an SNP government
None of this expenditure is necessary or justifiable. It could all have been avoided if the Scottish government simply continued to borrow through its existing facility with the National Loans Fund.
The SNP is wasting millions of pounds of public money on nationalist posturing. It should be a scandal. It is a scandal. But this kind of thing has become entirely normalised under an SNP government.
Perhaps, however, the SNP will get its comeuppance. If there is ever another independence referendum, the SNP could live to regret issuing Scottish government bonds.
A market rate of interest for Scottish debt would provide a very real indication of what the bond market thought about the credit worthiness of an independent Scotland.
The price of nationalist fervour today might easily be nationalist remorse tomorrow.
Comments