Financial Transactions: ‘real’ money?

In recent years, the Scottish Government has received substantial sums from the UK Government known as ‘Financial Transactions’ (FTs). To date, the Scottish Government has received more than £3bn in FTs, including an allocation of £1.1bn in the November 2017 UK Budget.  This latest FT allocation led to some heated exchanges over whether these allocations represent ‘real’ money or not.  At First Minister’s Questions, the First Minister said she could “explain exactly why the Chancellor of the Exchequer’s announcement…is accurately described as a con”, to which Ruth Davidson MSP responded that “only this First Minister could be handed an extra £2 billion in spending power and still sound like somebody has stolen her scone.”

So, what are the facts about FTs? What are the restrictions attached to their use and how has the Scottish Government used them?

What are FTs?

FT funding results primarily from a range of UK Government housing-related equity and loan finance schemes, such as ‘Help to Buy’. When the UK Government invests in such schemes in areas that are devolved to the Scottish Parliament, the Scottish Government receives a proportional share of the UK Government’s investment (as a result of the ‘Barnett formula’).

In contrast to most of the funding that the Scottish Government receives, there are restrictions on how FTs can be used. The Scottish Government can only use FT funds to support equity or loan schemes beyond the public sector.  This means that they cannot be used to support day-to-day ‘resource’ spending.  Also, importantly, the funds must ultimately be repaid to HM Treasury.

How has the Scottish Government used FT funding?

The Scottish Government has used FT in a range of areas, beyond the housing-related schemes that were the original source of FT funding. Although housing-related schemes still account for the majority of FT funding allocations by the Scottish Government, other areas have also benefited.  These include, for example:

  • loans to farmers who have been affected by delays in payments from the Common Agricultural Policy scheme
  • loans to and equity investment in small businesses, through the Scottish Investment Bank
  • loans for homeowners and private landlords for energy efficiency home improvements.

BLOGImageTemplate_Financial transactions - Total

The Scottish Government also plans to use FTs to provide initial funding for the proposed Scottish National Investment Bank.

When will FT funding need to be repaid?

The Scottish Government has to repay the FT money to HM Treasury. For each scheme that uses FT funding, the Scottish Government agrees a repayment profile with HM Treasury based on repayment of 80% of the original amount provided (this has increased from 60% for the first tranche of FT money).  Reflecting the longer-term nature of many of the schemes that use FT funding, funds are generally planned to be repaid over 30 years.

The repayment profile is based around when the Scottish Government expects to receive repayments from those it has made loans to, or when it expects the release of equity invested. As such, the Scottish Government should only be repaying to HM Treasury once it has received payments itself.  Repayment profiles are reviewed annually.

Because of the nature of these investments, there is an element of risk involved and the Scottish Government might not get the full value of its investment back. The 80% repayment to HM Treasury reflects this.  On the other hand, if the Scottish Government receives more than 80% back from its loans or investment, it can retain these funds and reinvest them, but still only in the form of loans or equity investment i.e. any excess funds cannot be used for day-to-day spending.

As at March 2017, the repayment profile agreed with HM Treasury was as shown in the chart below. The first repayment is due in 2019-20.

BLOGImageTemplate_FT repayment profile

So, what’s the verdict on FTs?

It is certainly true to say that FTs cannot be used in the same way as the rest of the Scottish Government budget. They can’t be used to fund the running costs of services such as schools and hospitals, nor can they be used to fund capital projects, such as new school or hospital buildings.  And, over time, the majority of the funds will need to be repaid to HM Treasury.  But, equally, the Scottish Government has been able to use them to support areas of activity that would otherwise have had to be funded from its core budget.

Nicola Hudson, Senior Researcher, Financial Scrutiny Unit, SPICe