THE Treasury has given Scotland permission to issue up to £2.2bn on the international bond markets, but has warned that it is "unlikely to be a cost effective form of borrowing".
The move will give the Holyrood administration an extra source of financing when it gets new borrowing powers in 2015. However, Westminster will not guarantee the so-called "Braveheart bonds" and Scotland will not be able to borrow at the UK's low borrowing rate.
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Following a consultation, the Treasury said today that there would be no risk from Scottish bonds to the rest of the UK. However, it added that the cost of issuing such bonds would be "significantly above the UK's cost of borrowing" because of the "market's view of the Scottish government as a worse credit risk than the UK as a whole".
The announcement comes a year earlier than expected, and seven months ahead of the 18 September independence referendum, which will see voters in Scotland asked the Yes/No question: "Should Scotland be an independent country?"
George Osborne described today's decision as "an historic moment for Scotland" and claimed it was further evidence of why being part of the UK "gives Scotland the best of both worlds".
However, the Scottish government said it was "nothing new", arguing that Scotland's total borrowing limit will still be £2.2bn, and only independence would give Scotland full control of its finances.
"Government bond issuance is normally a technical financial instrument for the secure handling of the public finances," says the BBC's Douglas Fraser. "But in Scotland in 2014, it's raw politics."
The UK government wants to send the signal that it is handing over more powers to Scotland without the need for full independence, he says, but the Scottish government's response is that the move is too constrained, and comes too late.
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