Since the Scotland Act 2012 there has been considerable change to the Scottish budget-setting landscape, increasing the areas of responsibility and the risks to public finances in Scotland. The Scottish Budget faces risks if devolved taxes do not raise as much as anticipated, if the performance of the devolved tax base is weaker than the UK tax base, or if demand-led spending such as social security increases more than anticipated.
In this context, understanding the ‘fiscal headroom’ that the Scottish Government has to manage this risk is important. The fiscal framework gives the Scottish Government limited powers to borrow to support capital and resource funding. This means that some resource funding is required to make repayments for this borrowing.
However, decisions on resource or capital borrowing are not the only ones which can lead to repayments in future years. Particularly in the earlier years of devolution, the Scottish Government entered into public-private partnerships (PPPs) to deliver additional capital projects such as new schools or hospitals. These require contractual repayments called unitary service charges over a number of years.
In addition to this, since 2012 the UK Government has provided a type of capital funding called financial transactions (FTs). Some FTs require repayment to HM Treasury.
This blog will look at these three sources of repayments – borrowing, PPPs and FTs – and the data we have on the repayment profile and impact on future Scottish budgets.
Resource and capital borrowing
The fiscal framework sets out the limits and circumstances in which the Scottish Government can borrow for resource and capital funding.
Resource borrowing is subject to an annual cap of £628.9 million in 2025-26 (rising annually in line with inflation), and a cumulative cap of £1.83 billion. However, resource borrowing can only be used to manage forecast errors – where the Scottish budget faces a shortfall in funding as a result of differences in actual devolved tax revenues compared to forecasts.
Capital borrowing is also subject to annual and cumulative limits, of £472.7 million for 2025-26 and £3.15 billion respectively. For the 2025-26 Budget year, the Scottish Government planned to use the maximum level of capital borrowing (£472.5 million), which takes the stock of capital borrowing debt to 82% of the limit. However, in practice the Scottish Government often borrows less than planned in the budget, for example the 2024-25 Spring Budget Revision reduced planned capital borrowing from £457.5 million to £332 million, so the final outturn figures may differ from plans.
While proposing capital borrowing of £472.5 million in the 2025-26 Budget, the Scottish Government set out at the same time that £300 million in annual capital borrowing was considered a sustainable amount on an ongoing basis which would prevent the total debt cap being breached. Three guidelines were proposed to assess future decisions on capital borrowing:
- Use £300 million of capital borrowing per annum as the default assumption; and
- This will be amended as necessary to meet budget specific or in-year requirements; and
- Ensure, by way of a fiscal test, that at least £1.5 billion of capital borrowing headroom remains available for the subsequent parliamentary term.
In June 2025, the medium term financial strategy set out anticipated resource and capital borrowing up to 2030-31. Chart 1 below sets out the anticipated repayments associated with this capital and resource borrowing:
Repayments for capital borrowing are expected to grow steadily towards £300 million per year, as the stock of capital borrowing debt rises.
Due to the restrictions on resource borrowing, the Scottish Government last carried out new resource borrowing in 2023-24. Repayments will therefore reduce up until 2027-28. However, the Scottish Fiscal Commission has highlighted that significant negative reconciliations for devolved taxes are forecast in 2027-28. The Scottish Government may opt to use new resource borrowing to help manage this, so repayments for resource borrowing are expected to increase to just over £200 million by 2030-31.
Public private partnerships
Public private partnerships (PPPs) are contracts between the public sector and private investors to deliver the construction of public sector assets like schools or hospitals. The construction of these assets is not funded out of the Scottish Parliament’s capital budget, so allowed for additional capital investment over and above what was possible from the capital budget when this approach was used. The private investors receive a return on their investment to cover the cost of construction and interest, and in some cases the contracts also included payments for the provision of services such as maintenance of the asset. These ‘unitary service charges’ are paid from resource budgets over a number of years (typically 25-30 years).
There have been several different forms of PPPs used in Scotland. The first contracts were private finance initiatives (PFI). These were used until 2007, after which point they were replaced with an alternative model known as the ‘non-profit distributing’ (NPD) model. This was another form of PPP with some modifications aimed at limiting the excessive profits that had been a much-criticised feature of the early PFI projects.
However, changes to accounting rules meant that the Scottish Government has stopped using NPD and hub private financing. This change was to the European wide accounting standards, and requires that the capital costs of projects funded through PFI/ NPD/ Hub contracts be ‘on balance sheet’ (in other words, the Scottish Government would need to cover the capital cost up front from its budget, thereby removing one of the benefits from using this type of financing).
While other forms of private financing have been considered by the Scottish Government (see below), Audit Scotland notes that there have been no new private financed projects since 2018, suggesting that higher interest rates have also made this a less attractive form of borrowing.
The Scottish Government publishes data on the unitary service charges associated with PPP contracts, including expected future repayments, in three places:
Chart 2 below sets out the total estimated unitary service chart repayments which must be covered from the Scottish resource budget.
The Scottish Government has been exploring new forms of PPP. In February 2023, responding to a petition, the Scottish Government noted that:
“In 2019, the Scottish Government signalled a new approach to revenue finance due to the implication of classification changes to NPD projects and the NPD model has not been used since then. As part of the Scottish Government’s National Infrastructure Mission commitment, a new approach to revenue finance was announced. This approach included the Mutual Investment Model (MIM) which will be used alongside financial innovations (e.g. Growth Accelerators) and capital borrowing to continue to support investment in infrastructure. The MIM model will help secure investment and the best value for the taxpayer by sharing profits between the public and private sector and will be reserved for central government and Non-Departmental Public Bodies where access to borrowing is more restricted.”
In September 2025, the Cabinet Secretary for Finance and Local Government discussed the possible role for revenue based finance in the future, stating that:
“we are exploring things such as the mutual investment model that the Welsh have used. These things are a million miles away from the terrible deal that the public sector previously got out of PFI.
We are also quite interested in understanding where the UK Government is going with revenue-based finances, but any approach has to pass the value-for-money test. Given the current financial climate and current interest rates, the situation is not ideal.
I am a bit of a pragmatist. I am in the space of making something work that will deliver projects that otherwise would not be delivered, but any approach has to meet the value-for-money test and has to be good value for the public purse. We are still working through some of those issues in relation to some of these projects.”
Financial transactions (FTs)
FTs are a form of capital funding, which has been provided to the Scottish Government by the UK Government since 2012-13. These are largely related to 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 and cannot be used for traditional capital projects. Also, importantly, some of the funds must ultimately be repaid to HM Treasury. In Scotland, in recent years, FTs have largely been used to support housing investment schemes and to provide upfront capital for the Scottish National Investment Bank.
There are two ways FTs can be allocated to the Scottish Government, gross and net. The Scottish Government has to repay 80% of the value of gross FTs, but does not have to make any repayment for net FTs.
Since 2012-13, FT allocations total almost £4 billion, £2.3 billion of which are gross FTs which means that the Scottish Government will have to repay 80% of these, which is equivalent to £1.84 billion. As of the end of the 2024-25 financial year, the Scottish Government had made repayments totalling £0.4 billion.
The Scottish Government has agreed with HM Treasury to repay £25 million per year until 2029-2030, thereafter rising to around £50 million per year. These repayments are assumed to continue until 2054-55. Chart 3 below shows this repayment profile:
Chart 4 below sets out the breakdown of the FT allocations received by the Scottish Government:
The 2025 UK spending review sets out planned FT allocations for the next 5 years. There will be a further £245 million in 2026-27, rising to £361 million in 2029-30. However, these future allocations will be on a net basis. In the Statement of Funding Policy which accompanied the 2025 Spending Review, the UK Government stated that:
“Funding for FTC is provided on a net basis, unless specifically stated otherwise. This means that repayments of loans the devolved governments receive can be recycled indefinitely into new loans by the devolved governments.”
How significant are these repayments compared to the anticipated size of the Scottish Budget?
If we combine the repayments expected for resource and capital borrowing, PPP, and financial transactions, the Scottish Government will have to use just over £1.8 billion of resource funding in the 2026-27 budget. This amount remains broadly stable over the next 4 years, as while expected repayments for PPP slowly decline, the cost of planned resource borrowing in 2028-29 and then the doubling of FT repayments in 2030-31 offset this.
Comparing this to the forecast size of the resource budget shows that repayments are expected to decline from 3.5% of available resource funding in 2025-26 to 3.0% in 2030-31. Chart 5 below shows this profile:
Conclusions
Repayments for resource and capital borrowing, unitary service charges related to PPPs, and repayments of FTs are set to continue for decades to come. However, the picture is evolving.
The stock of capital borrowing is expected to have reached around 82% of the limit set in the fiscal framework by the end of 2025-26, which means that, even in the absence of any new borrowing, repayments will continue for years to come. The Scottish Government has signalled its intention to continue to borrow around £300 million each year, which will lock in future repayments.
Resource borrowing on the other hand is expected to have a less even profile – after a few years with no new borrowing, the Scottish Government currently expects significant new borrowing of around £880 million between 2027-28 and 2028-29. If this is required, then repayments will increase.
There have been no new PPP contracts agreed since 2018, but the Scottish Government has done some work to explore the mutual investment model. A new infrastructure investment plan is expected alongside the Scottish Budget next week, so it will be interesting to see whether the Scottish Government consider whether any new PPPs investment is now attractive.
The UK government has likewise signalled that it intends to continue to make FT allocations throughout the spending review period. These will however be on a net basis, which means that new allocations will not require repayment. The remaining £1.4 billion will gradually be repaid, forecast to end in 2054-55.
The Scottish Government has also indicated that it intends to launch its first bonds as part of the capital borrowing this year, which may have an impact on the assumed cost of borrowing and therefore the size of future repayments.
These various repayments will continue to add to the pressure of the Scottish resource budget in the coming years, so understanding the impact of any changes on assumed borrowing will be important when considering the financial sustainability of spending plans.
Andrew Feeney-Seale, Financial Scrutiny Unit