‘Kilts not gilts’: the new Scottish bonds

Scotland is “on track” to issue its first ever bonds in the next financial year, said First Minister John Swinney.

On a “very proud day for Scotland”, the Scottish government also received a credit rating boost, with two key agencies giving it the same standing as the UK.

What are bonds?

A bond is “an IOU from the government to investors”, said the BBC. A government borrows money from investors and sells them a bond – a loan it promises to pay back at the end of an agreed period of years or decades.

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The government will also make regular interest payments to the investor, at a percentage rate referred to as the yield. Bond prices can rise and fall, which will have an impact on the yield.

Gilt is another word for a bond, so as a play on this, the Scottish bonds have been nicknamed “kilts”.

Why is Scotland introducing them now?

The Scottish government has had the power to issue bonds since 2016, after Westminster granted Holyrood more powers following the 2014 independence referendum. But it has borrowed money from the UK National Loans Fund, the UK government's main account for managing its borrowing and lending.

Now, limits on how much the Scottish government can raise through bonds have been eased and the Scottish government has concluded that bonds could offer better value for money and more flexibility. Earlier this week, the leading international credit ratings agencies Moody’s and S&P Global gave Scotland a score of Aa3 and AA respectively, the same rating as the UK as a whole and “higher than countries such as Spain, Italy and Japan”, said Sky News.

As for what the funds raised would be spent on, Swinney said housing and the move towards net zero could benefit from the bonds. He spoke of “capital investment in key infrastructure”, but added: “The government will set out in the investment programme in January exactly the projects that we're taking forward over the course of the next few years.”

What about the future?

If it’s re-elected in May, Scotland’s SNP government intends to issue a total of £1.5 billion of debt through bonds during the next parliament. This figure “pales into insignificance” compared to the more than £300 billion the UK expects to issue this year, but it is still “seen as establishing the principle that Scotland can raise its own funds independently”, said The Guardian.

But Moody’s has indicated that the SNP’s goal of independence “might jeopardise its “upbeat judgment” of Scotland’s credit status.

Meanwhile, although bond sales will contribute a “very small part” of the Scottish government’s overall budget because of limits imposed by Westminster, they have a “symbolic value”, said The Scotsman. Bonds could be a means of “raising Scotland’s profile and attracting investment”, according to advisers on the government’s investor panel.