Submitted by Bill Fernie
18th September 2026
Highland Council is planning to spend around £2.1 billion over 20 years on schools, roads, housing, community facilities and other infrastructure.
It is an ambitious programme, and one which could bring considerable benefits across the Highlands. But there is a financial issue which deserves more attention.
How much will it cost to borrow the money?
With inflation still creating pressure on council services and interest rates remaining higher than they were for much of the previous decade, the cost of financing Highland's investment programme could become increasingly important to future council budgets.
The Council itself recognises this risk.
Its medium-term financial plan says interest rates directly affect the cost of borrowing and the financing of the Highland Investment Plan and other capital projects. It also warns that the amount of capital investment the Council can support may have to change if interest-rate assumptions change.
Highland is already carrying substantial debt
The Council's own financial indicators show external capital borrowing of approximately £1.294 billion in 2024/25, rising to a forecast £1.430 billion in 2025/26.
Its total Capital Financing Requirement, which represents the underlying need to finance capital expenditure, was £1.406 billion in 2024/25 and was forecast at £1.517 billion for 2025/26.
The cost of financing that borrowing is already significant.
Highland's ratio of financing costs to net revenue funding was 8.0% in 2024/25 and was forecast to rise to 8.4% in 2025/26.
These figures are important because borrowing is not just a capital issue. Once money has been borrowed to build a school, road or other facility, the Council has to meet the financing costs from its revenue budget. That means money going towards debt financing is money which cannot simultaneously be spent on day-to-day services.
Interest rates do not have to rise for Highland to feel pressure
There is an important point here which is easily missed.
The Bank of England's Bank Rate is not the rate Highland Council directly pays on most of its borrowing.
The Council says its main borrowing source is the Public Works Loan Board, whose rates are linked to government bond yields rather than directly to the Bank of England's Bank Rate.
Highland therefore says its borrowing costs are influenced by wider UK and international economic and financial conditions, not simply by decisions taken by the Bank of England.
This is particularly relevant at present because government borrowing costs and long-term gilt yields can remain high even when markets expect the Bank of England eventually to reduce Bank Rate.
For a council planning large amounts of long-term borrowing, that distinction matters.
But Highland has some protection
The situation is not quite as alarming as simply taking £1.43 billion and multiplying it by today's interest rate. Highland says that the majority of its borrowing is at fixed rates.
Consequently, a change in today's interest rates does not immediately affect the whole debt mountain.
The main exposure is on new borrowing and loans reaching maturity which have to be refinanced.
That gives the Council some protection, but it also means the full effect of higher interest rates can take years to work through.
The Council itself says loan charges are difficult to forecast because they depend on the amount and timing of capital spending, prevailing interest rates, when borrowing takes place, the source of borrowing and market conditions.
Inflation creates another problem
Interest rates are only one part of the equation.
Inflation increases the cost of the things Highland wants to build.
Construction materials, labour, energy, transport and professional services can all become more expensive.
A project originally estimated at £10 million can become considerably more expensive if construction inflation remains high.
That creates a difficult choice.
The Council can provide additional money, reduce the scope of the project, postpone it or potentially borrow more.
If it borrows more, the initial inflation problem eventually becomes an additional interest and repayment problem.
The latest Highland Investment Plan update acknowledges that there are continuing cost pressures and risks affecting the programme. It says that keeping investment within agreed borrowing and funding limits is essential to ensuring that the plan remains affordable, prudent and sustainable.
The £2.1 billion figure therefore needs some explanation
The Highland Investment Plan is not simply £2.1 billion sitting in a bank account waiting to be spent.
It is a long-term investment programme with different sources of funding and different projects being delivered at different times.
The Council has established financial controls around borrowing and has earmarked the equivalent of 2% of Council Tax income each year towards the Investment Plan.
That is intended to help support the borrowing costs associated with the programme.
In the 2026/27 budget, that 2% formed part of the Council's 7% Council Tax increase. Five percentage points were for core services and two percentage points were earmarked for capital investment through the Highland Investment Plan.
This is an important feature of the Highland approach.
The Council is effectively trying to create a continuing revenue stream which helps pay for the cost of its long-term borrowing.
The pressure on the revenue budget is already considerable
Highland's 2026/27 budget was set at about £868 million.
The Council identified a £46.7 million budget gap over three years and agreed a package of £61 million of savings, income generation and financial flexibilities to help close it.
The budget included £20.2 million for pay cost increases in 2026/27, plus £18.9 million of recurring cost pressures. Those figures show why higher inflation can be troublesome.
The Council is already having to find additional money simply to maintain existing services.
Pay is particularly important because councils are labour-intensive organisations. Teachers, social care staff, roads workers, planners and many other employees make up a substantial proportion of spending.
If inflation remains high, pay settlements can also remain higher.
The Council's current plan assumes a 3.5% pay increase for 2026/27 and 2% in each of the following two years. It has not provided a blanket percentage increase for all non-pay costs. Instead, it has allocated specific funding for identified inflation and service pressures.
There is another problem: government funding
Highland cannot simply increase its income whenever its costs rise. The Council's financial plan assumes flat cash Scottish Government grant funding for 2027/28 and 2028/29.
It calculates that a 1% change in its grant is worth approximately £6 million to Highland. That creates a difficult situation.
If costs rise by 3% but the main government grant does not rise by 3%, the Council has to find the difference somewhere.
That can mean higher Council Tax, charges, savings, efficiency measures, service reductions, additional income or a combination of these.
Audit Scotland has already warned that Scottish councils' funding is failing to keep pace with rising costs and demand, despite a small real-terms increase in funding.
What might this mean for the next Highland budget?
The next budget will not necessarily contain a dramatic announcement saying that the Investment Plan is unaffordable.
In fact, the Council's latest information says the Highland Investment Plan is currently operating within its agreed funding envelope.
But there are several things worth watching.
First, borrowing costs.
If long-term interest rates remain higher than Highland has assumed, the cost of financing new capital expenditure will increase.
Second, construction costs.
If projects cost more to build, the Council may have to reconsider their timing, scope or financing.
Third, loan charges.
Highland itself says these will need to be reviewed and rebased annually. It also explicitly acknowledges that the level of capital investment the budget can support may have to vary according to interest-rate implications.
Fourth, Council Tax.
The 2% already earmarked for the Highland Investment Plan demonstrates that Council Tax is part of the financing mechanism. Future increases will therefore be closely connected to both the cost of running services and the cost of financing investment.
The numbers worth watching
When Highland Council publishes its next budget, the headline Council Tax increase will attract most attention. But there are other figures which may tell us more about the Council's underlying financial position.
Look for:
the forecast level of external borrowing
annual loan charges and financing costs
the cost of new borrowing
the amount of debt being refinanced
changes to the £2.1 billion Investment Plan
construction-cost assumptions
pay assumptions
Scottish Government grant
new savings and income-generation measures
the amount being allocated to reserves.
These will show whether the financial pressure is being absorbed by higher income, reduced spending, delayed investment or additional borrowing.
The bigger question for Highland
There is nothing unusual about a council borrowing to build long-lasting assets.
A school or major infrastructure project can provide benefits for decades, so spreading the cost through borrowing can be entirely normal. The question is whether the scale and timing of borrowing remain affordable as economic conditions change.
Highland has one particular challenge that many councils do not face to the same extent. It is geographically enormous, has more than 4,000 miles of roads to maintain and has a large number of schools relative to its population. Its services therefore have significant fixed costs simply because communities are spread over such a large area.
At the same time, the Council is trying to invest heavily in the region.
That creates a balancing act between investing for Highland's future and protecting the revenue budget needed to run Highland today.
The Council has already built some protection into its financial plan, including fixed-rate borrowing and the 2% Council Tax contribution to the Investment Plan.
But its own financial documents make clear that interest rates, inflation and government funding remain major uncertainties.
So the next Highland budget will be worth watching for more than just the Council Tax percentage.
The really revealing figures may be hidden in the capital programme and the borrowing costs behind it.
A £2.1 billion investment programme may transform Highland's infrastructure, but the cost of financing that investment will be paid from future council budgets.
The question is how much of those future budgets will have to be devoted to paying for yesterday's and today's investment, and how much will remain available for the services Highland residents need tomorrow.