What Davos tells us about Scotland’s Budget
In this analysis, Dr João Rafeal Cunha, Lecturer in Economics, reflects on last week’s Scottish Budget against a backdrop of global uncertainty. Writing from a macroeconomic perspective, he argues that what appears to be short-term fiscal caution is better understood as a structural response to prolonged weak growth, productivity stagnation, and constrained budgetary space across the UK and other advanced economies.
All eyes are on Davos this week as political leaders and business figures gather amid heightened geopolitical tension and economic uncertainty. While global disruption dominates the international stage, closer to home, last week’s Scottish Budget helps explain how those pressures translate into fiscal decisions. What may appear as domestic short-termism is increasingly the local expression of a wider low-growth world.
The recent Scottish Budget fits a now familiar pattern across the UK and much of the advanced world: a cautious, short-term fiscal settlement, heavy on near-term fixes and light on long-horizon ambition. But interpreting such budgets through a purely political lens misses a deeper, more uncomfortable reality. Fiscal short-termism has become the default not simply because governments are reluctant to confront the political economy of growth, particularly the taxation of wealth and the financing of long-term public investment.
Such near-term budget focus is not a uniquely Scottish or British phenomenon. Similar concerns are being discussed internationally, including at the annual meetings of the World Economic Forum in Davos, where weak productivity growth, subdued investment, and persistent policy uncertainty are among the topics under discussion among policymakers and business leaders. The Scottish Budget is therefore less an isolated policy document than a local expression of a global macroeconomic constraint.
Weak productivity and the global growth malaise
At the heart of today’s fiscal caution lies a prolonged slowdown in productivity growth. Across advanced economies, productivity has underperformed for more than a decade, constraining wage growth, limiting tax revenues, and weakening confidence in future economic capacity. Despite historically low interest rates for much of this period, investment has remained hesitant, reflecting uncertainty about demand, geopolitics, and the durability of technological gains.
This productivity slowdown matters for fiscal policy because governments do not budget in a vacuum. When expected growth is weak, policymakers become reluctant to make long-term commitments, even when the economic case for investment appears strong.
Debt sustainability depends on growth, not just debt
This pessimism about growth also reshapes how governments think about public debt. The sustainability of public finances depends far more on the relationship between economic growth and borrowing than on headline debt levels alone. When GDP grows faster than debt, even relatively high debt ratios can be manageable. When growth is weak, however, even modest borrowing can appear risky.
In today’s low-growth environment, governments therefore treat fiscal space as fragile. Weak productivity implies that the tax base is not increasing as desired, making debt harder to service and fiscal rules more binding.
Wealth taxation and the politics of fiscal flexibility
One potential response to constrained budgetary space is to broaden the tax base, particularly by taxing wealth more effectively. Wealth has grown faster than incomes across much of the advanced world, concentrating economic capacity in ways that existing tax systems often fail to capture.
Yet wealth taxation remains politically fraught. This difficulty reflects the political power of wealthy elites, whose lobbying influence shapes tax policy and constrains reform. The result is a fiscal system that relies heavily on labour income and consumption taxes, even as wealth accumulation accelerates. By avoiding wealth taxation, governments narrow their own policy options, reinforcing fiscal caution and short-termism.
Importantly, this is not an argument for indiscriminately expanding the state. Instead, it is about restoring fiscal flexibility by aligning revenue systems with modern economic realities.
From fiscal space to growth: investing in productivity
The crucial question is how governments would use any additional fiscal space. The strongest case for wealth-based revenues is not to fund day-to-day spending, but to finance growth-enhancing public investment. Areas such as research and development, innovation ecosystems, education, skills, and human capital formation are central to long-run productivity growth.
Such investments are inherently long-term. Their returns are delayed and less politically visible than short-term transfers, making them vulnerable to the electoral cycle. Yet without them, productivity stagnation persists, private investment remains cautious, and growth expectations remain subdued.
The logic is cumulative and self-reinforcing: taxing wealth can enable public investment; public investment can raise productivity; higher productivity can improve growth; and stronger growth can restore debt sustainability. Avoiding the first step breaks this chain entirely.
Why devolved governments face sharper constraints
These dynamics are felt particularly acutely by devolved governments such as Scotland’s. Devolution brings significant responsibility for delivering public services—health, education, transport—while leaving limited control over macroeconomic stabilisation, capital taxation, and migration policy. Smaller tax bases and greater exposure to demographic pressures further amplify fiscal vulnerability.
In this context, short-termism is not simply a choice but a structural outcome. Devolved governments are highly accountable for outcomes they cannot fully control, making caution the rational response. As a result, long-term investment strategies become harder to sustain, even when their economic rationale is clear.
Scotland in international perspective
Seen in an international perspective, Scotland’s experience is far from unique. The themes discussed at Davos, such as weak productivity, hesitant private investment, and policy uncertainty, mirror the constraints shaping domestic budgets. What differs is scale, not substance. Scotland offers a microcosm of the challenges facing advanced economies more broadly.
Conclusion: The risk of a self-reinforcing trap
Fiscal caution today reflects weak growth expectations, political resistance to wealth taxation, and uncertainty about long-term returns to investment. But without confronting these underlying issues, caution risks becoming self-reinforcing. Avoiding wealth taxation limits fiscal space; limited fiscal space constrains investment; weak investment perpetuates low growth; and low growth justifies further caution.
For devolved governments, limited fiscal autonomy intensifies these pressures. Wealth-tax-enabled public investment offers one plausible route to break this cycle. The real challenge is not whether governments can afford to invest in growth, but whether they can afford not to.