Rishi Sunak's budget appeared to offer some good news to Scots, not that the SNP saw it that way. An additional £1.2 billion in Barnett funding was handed over to Scotland's government. This is on top of £9.7 billion in extra spending delivered over the past year for pandemic support.
But the SNP Scottish government took a different view. 'While I welcome some of the announcements today, it is clear the Chancellor has not matched Scotland’s ambition for economic recovery and supporting households,' said Scottish Finance Secretary Kate Forbes.
Forbes and her colleagues often point out that 'Scotland's ambition' includes more borrowing powers. Throughout the pandemic, the SNP has been at pains to suggest that if only Scotland had more — or indeed full — fiscal autonomy then it would be in a better position to fund the pandemic emergency and recovery.
'Scotland can make different choices for an investment-led recovery but we can only do it with the borrowing powers and access to capital needed to stimulate our economy,' said the SNP's Westminster leader Ian Blackford last June.
But this begs the question as to why the SNP does not fully utilise all the borrowing powers it currently has. The Scottish government has the power to issue Scottish government bonds to finance capital investment. This is summarised in the Treasury's latest Debt Management report for 2020-21 as:
“Both the Scottish and Welsh governments also have the power to issue bonds to finance capital investment. The Scottish and Welsh governments will be solely responsible for meeting their liabilities and the UK government will provide no guarantee on any bonds issued by the Scottish and Welsh governments. If there is an increase in the Scottish or Welsh government’s borrowing limits, the UK government will also review devolved administrations’ powers to issue bonds. In addition, the Scottish and Welsh governments would need further approval from HM Treasury to issue in any currency other than sterling.
So why is the SNP administration reluctant to issue Scottish government bonds? Even with the limits that apply under the Fiscal Framework, wouldn't this be a useful way for the SNP to demonstrate how Scotland has the ability to finance itself independently of Westminster?
The timidity might be to do with what the issuance of such bonds would reveal about the reality of secession.
If the Scottish government issued bonds on the open market, it would be joining the ranks of many sub-national administrations in many countries that issue debt. It would not be unusual: when the coronavirus emergency first gripped Europe, the Free State of Bavaria issued £2.5 billion (€3 billion) of bonds to fund crisis support, for example.
What would be unusual is that the yields on those bonds would partly reflect the probability of the sub-sovereign debt suddenly turning into sovereign debt if Scotland became independent, and what the risk of default under that scenario would be. The SNP's 'sterlingisation' plan for its currency arrangement means there would be a material risk of default.
The upshot of this is that any sub-sovereign Scottish bonds would trade with a hefty risk premium to UK government bonds. What's more, that premium would likely fluctuate in line with assessments of the likelihood of secession. A new poll for instance showing growing support for 'Scexit' could push that premium up.
The SNP like nothing better than seeing news stories that support for independence has risen. Simultaneous reporting that the market is taking a dimmer view of Scottish debt would be an unwelcome dampener for them. And would the Nationalists be keen to see rating agencies like Moody's putting out regular reports discussing how secession risk is negatively impacting the credit rating on Scottish government bonds? Not likely.
This then — greater transparency of secession risk — might be why the SNP is reluctant to use the full powers at their disposal. In other words, they're feart.