Will the Scottish Budget's Capital Spending Plans Create a Drag on the Scottish Economy?

14th January 2026

The recent Scottish Budget has prompted debate over whether its capital spending plans will support economic growth or, conversely, risk acting as a drag on the Scottish economy.

Capital spending is investment in infrastructure such as transport, housing, public buildings and energy systems and is traditionally viewed as growth-enhancing.

However, the effectiveness of such spending depends not only on headline commitments but also on their real-terms value, funding constraints, timing, and interaction with wider fiscal pressures.

Capital Spending in the Scottish Budget

The Scottish Government has committed substantial sums to capital investment in the latest Budget, with spending plans covering affordable housing, transport infrastructure, and public assets. In nominal terms, these commitments appear robust and are presented as evidence of continued support for long-term economic growth and the transition to a more sustainable economy.

However, when assessed in real terms, the picture is more constrained. Inflation in construction costs, combined with limits on devolved borrowing powers and rising debt servicing costs, means that the effective purchasing power of the capital budget is under pressure.

Independent fiscal institutions have highlighted that while capital spending is not being cut outright, its growth is limited and may fall in real terms over the medium term. This raises questions about whether capital investment will be sufficient to materially boost economic momentum.

How Capital Spending Affects Economic Growth

Capital investment influences the economy through two main channels. In the short term, it raises aggregate demand by supporting construction activity, employment, and supply chains. In the longer term, well-targeted infrastructure investment can enhance productivity by reducing transport costs, improving housing availability, and supporting private sector investment.

If capital spending is maintained or expanded in real terms, it can therefore act as a stabilising force during periods of weak private demand. Conversely, if investment is delayed, scaled back, or crowded out by other spending pressures, the expected growth benefits may fail to materialise.

Constraints and Risks

Several features of the current Budget suggest that capital spending may deliver only a modest economic boost. First, borrowing limits and rising interest costs restrict the Scottish Government's ability to expand investment significantly. Second, increasing pressures on resource spending — particularly health, social care, and social security — risk crowding out capital investment in future budgets. Third, the effectiveness of capital spending depends heavily on delivery. Large infrastructure projects are often subject to delays and cost overruns, which can weaken their short-term impact on economic activity.

There is also a timing issue. Capital investment typically takes years to translate into productivity gains. As a result, even if current plans are well designed, they may do little to counter near-term economic weakness, especially if wider UK and global economic conditions remain challenging.

Does Capital Spending Create a Drag?

On balance, the Scottish Budget’s capital spending plans are unlikely to constitute a direct drag on the economy in the sense of actively suppressing growth. Investment has not been sharply reduced, and targeted spending on housing and infrastructure should provide some support to economic activity. However, neither do the plans appear large enough, in real terms, to act as a powerful engine of growth.

The more accurate characterisation is that capital spending is broadly neutral to mildly supportive of economic growth, but constrained by fiscal realities. The risk is not that capital spending itself drags the economy down, but that limited real-terms growth in investment, combined with delivery challenges and competing spending pressures, results in an opportunity cost: the economy may grow more slowly than it would under a more expansive and flexible capital framework.

Conclusion

The Scottish Budget’s capital spending announcements do not point to an outright drag on the Scottish economy. However, they also fall short of providing a decisive growth impulse.

With real-terms pressures, borrowing constraints, and rising demands on day-to-day spending, capital investment is likely to offer only modest support to economic performance in the coming years.

The ultimate economic impact will depend less on headline figures and more on effective project delivery, cost control, and whether future budgets can protect investment from being squeezed by other fiscal priorities.