The move will allow the Scottish government to broaden its sources of borrowing for capital investment, which are currently limited to the National Loans Fund and commercial loans. The maximum it can borrow is £2.2bn.
Treasury chief secretary Danny Alexander said: “This is a historic announcement, demonstrating once again how Scotland can grow and prosper within the UK.
“It will of course be up to the Scottish government to manage their borrowing, but this is complemented by the tax powers in the Scotland Act providing the Scottish government with an independent source of revenue to support borrowing costs.”
The decision comes after a week in which the prospects of an independent Scotland have been hotly contested, with all three major Westminster parties shooting down SNP proposals for a sterling currency union.
According to evidence gathered by the consultation on Scottish bonds, the Scottish government is unlikely to find issuing bonds a cost-effective way to raise money. This was due to market perceptions that the Scottish government represents an increased credit risk than the UK, while its debt has lower liquidity.