UK, Scottish Governments Agree to Increase Borrowing Limits

The Scotland Act 1998 (Increase of Borrowing Limits) Order 2026 marks the latest annual adjustment to the Scottish Government's fiscal powers, increasing both its resources and capital borrowing limits. This Statutory Instrument amends sections 67(2) and 67A(1) of the Scotland Act 1998, raising the resources borrowing limit from £1,834.303 million to £1,910.141 million and the capital borrowing limit from £3,144.519 million to £3,274.527 million. The Order, which revokes the superseded 2025 Order, is a routine implementation of the 2023 Fiscal Framework Agreement between the UK and Scottish Governments, ensuring that the Scottish Government's borrowing capacity is uprated annually in line with inflation. This adjustment is crucial for the Scottish Government's ability to manage its budget, address forecast errors, and fund capital infrastructure projects.

The Scotland Act 1998 (Increase of Borrowing Limits) Order 2026 represents a significant, albeit routine, development in the financial architecture governing Scottish devolution. This Statutory Instrument, made by the Secretary of State with the consent of the Treasury, directly amends the foundational Scotland Act 1998 (c. 46) to enhance the Scottish Government's capacity for both resources and capital borrowing. Specifically, it elevates the resources borrowing limit in section 67(2) from £1,834.303 million to £1,910.141 million and the capital borrowing limit in section 67A(1) from £3,144.519 million to £3,274.527 million.

This annual adjustment is not an isolated event but rather an integral part of the ongoing fiscal relationship between the UK and Scottish Governments, formalised under the Fiscal Framework Agreement. The Order's primary function is to implement the agreed-upon policy of annually uprating these borrowing limits to account for inflation, thereby maintaining the real-terms value of the Scottish Government's financial flexibilities. For legal professionals, understanding these periodic legislative changes is essential, as they directly impact the Scottish Government's financial capacity, its ability to fund public services and infrastructure, and the broader economic landscape within Scotland.

This article will delve into the statutory and doctrinal underpinnings of these borrowing powers, trace their evolution, and analyse the practical implications of the 2026 Order within the context of the Fiscal Framework. It will highlight how these regular adjustments are critical for the Scottish Government's fiscal management and provide insights for practitioners navigating public finance and governmental projects in Scotland.

The legislative foundation for the Scottish Government's borrowing powers lies within the Scotland Act 1998, the primary legislation establishing the devolved Scottish Parliament and Government. Initially, the 1998 Act provided limited borrowing capabilities, primarily for in-year cash management or to maintain a working balance in the Scottish Consolidated Fund, with an aggregate limit of £500 million for resource borrowing. However, the scope of these powers has expanded significantly through subsequent devolution legislation.

The Scotland Act 2012 (c. 11) marked a pivotal extension, introducing powers for the Scottish Government to borrow for capital expenditure, initially capped at £2.2 billion. It also broadened resource borrowing to address shortfalls in devolved tax revenues against forecasts, repayable over four years. Further enhancements came with the Scotland Act 2016 (c. 11), which increased the aggregate limits for both resource borrowing to £1.75 billion and capital borrowing to £3 billion, and expanded the reasons for borrowing to include welfare payments and Scotland-specific economic shocks.

Crucially, the operationalisation and ongoing management of these borrowing powers are governed by the Fiscal Framework Agreement between the Scottish and UK Governments. First established in 2016 and subsequently reviewed and updated in August 2023, this agreement details how the Scottish Government's block grant is adjusted, how forecasts are provided, and the rules surrounding borrowing powers and the Scotland Reserve. A key commitment within the 2023 Fiscal Framework Agreement is the annual uprating of both resource and capital borrowing limits in line with inflation, specifically using the Office for Budget Responsibility's (OBR) GDP deflator forecast. This mechanism ensures that the borrowing capacity retains its real value over time, providing a stable and predictable fiscal environment for the Scottish Government.

The Scotland Act 1998 (Increase of Borrowing Limits) Order 2026 directly implements the commitment within the 2023 Fiscal Framework Agreement to annually uprate the Scottish Government's borrowing limits. The Order increases the resources borrowing limit under section 67(2) of the Scotland Act 1998 from £1,834.303 million (as set by the 2025 Order) to £1,910.141 million. Concurrently, the capital borrowing limit under section 67A(1) is raised from £3,144.519 million to £3,274.527 million. These specific figures reflect the application of the OBR's GDP deflator forecast, ensuring the limits keep pace with inflationary pressures.

The practical implications of these increased limits are substantial for the Scottish Government. Enhanced resource borrowing capacity allows for better in-year cash management and provides a crucial buffer against forecast errors in devolved taxes and social security expenditure. This flexibility is vital for maintaining stability in public service delivery, particularly given the volatility inherent in tax receipts and demand-led welfare spending. The increased capital borrowing limit, on the other hand, directly supports the Scottish Government's ability to invest in critical infrastructure projects, which are essential for economic growth and public service improvement.

The mechanism for implementing these changes is through secondary legislation, specifically Statutory Instruments like the 2026 Order. Sections 67(3) and 67A(2) of the Scotland Act 1998 explicitly empower the Secretary of State, with Treasury consent, to amend these borrowing limits by order. This process requires a draft of the Order to be laid before and approved by a resolution of the House of Commons, underscoring the intergovernmental oversight of Scottish fiscal powers. The annual nature of these Orders, and the routine revocation of the previous year's Order (e.g., the 2026 Order revoking the 2025 Order), highlights a well-established and predictable legislative cycle for managing these fiscal adjustments.

Furthermore, the Fiscal Framework also outlines the permissible sources and purposes of borrowing. Resource borrowing is typically accessed from the National Loans Fund, with terms restricted to between three and five years. For capital investment, the Scottish Government can borrow from the National Loans Fund, through commercial loans, or by issuing bonds, subject to Treasury approval. The recent appointment of banks to advise on a potential £1.5 billion bond programme over five years demonstrates the Scottish Government's strategic intent to diversify its borrowing sources and enhance its financial autonomy within the agreed framework. This approach aligns with the broader principles of financial responsibility and democratic accountability embedded in the Fiscal Framework, incentivising the Scottish Government to foster economic growth while operating within a sustainable fiscal position for the UK as a whole.

The Scotland Act 1998 (Increase of Borrowing Limits) Order 2026 is a testament to the dynamic and evolving nature of the Scottish devolution settlement, particularly in the realm of public finance. These annual adjustments to borrowing limits, mandated by the 2023 Fiscal Framework Agreement, are more than mere numerical updates; they are critical enablers of the Scottish Government's fiscal autonomy and its capacity to deliver on its policy objectives. By regularly uprating these limits in line with inflation, the UK and Scottish Governments ensure that the devolved administration retains the necessary financial tools to manage its budget effectively, respond to economic fluctuations, and invest in long-term capital projects.

For practising attorneys and legal professionals, particularly those involved in public law, finance, and infrastructure development, it is imperative to remain abreast of these annual legislative changes. Understanding the nuances of the Scottish Government's borrowing powers, their statutory basis, and the overarching Fiscal Framework is crucial for advising clients on public sector contracts, project financing, and the broader economic environment in Scotland. Practitioners should monitor future Orders, as well as any reviews of the Fiscal Framework, which could introduce further changes to borrowing parameters or mechanisms. The Scottish Government's exploration of bond issuance, for instance, signals a potential shift in its borrowing strategy that could open new avenues for investment and require novel legal considerations. Staying informed about these developments will be key to providing comprehensive and effective legal counsel in this complex and vital area of public finance.