Joan McAlpine: Scotland must be allowed to control its finances

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Ever since William Pitt the Younger introduced it to pay for the Napoleonic Wars, income tax has been a hard sell. Pitt's Tory successor abolished it, but not for long. Then as now, the unpopular tax was really about plugging holes, as opposed to creatively managing the economy to encourage business growth.

If you are entirely reliant on income tax to fund public services, you are in big trouble. Research by the OECD says very high income tax is second only to high corporation tax in slowing down an economy. This makes the Scotland Bill unveiled yesterday by Michael Moore, the Liberal Democrat Secretary of State for Scotland, a particularly damaging piece of legislation.

It is sold as giving the Holyrood Parliament "more power", something opinion polls consistently show Scots expect. But simply cutting the block grant and handing Scotland a portion of income tax could have a disempowering effect.

Taxation works in mysterious and complicated ways. While in the UK as a whole, income tax is the largest single source of government revenue, it only accounts for 29 per cent of what Westminster spends. The second largest is national insurance at 19 per cent, then VAT at 15 per cent and corporation tax on 9 per cent.

After these big hitters come a whole array of small fry that add up to quite a big fiscal fish: petrol, tobacco, alcohol and gaming duty, inheritance and road tax. Only two of these will be devolved in the new proposals: landfill tax and stamp duty.

In recent years, the thinking on tax-for-growth in OECD countries is to spread the burden as widely as possible. If you want to put yourself at a competitive disadvantage, over-dependence on one area of revenue - especial income tax - is the way to go. The Moore proposals do just that - and fail to devolve power to stimulate growth by, for example, tax breaks for businesses or R&D.

Let's imagine Moore's Act was in place in 2008-9 when Scotland's share of income tax receipts fell 549 million because of recession. Some say: "Live with it! Scotland should cut its cloth according to its income".

But we ran a modest budget surplus in the year 2008-9, and while income tax receipts might have fallen, other sources of revenue performed better. Yet under the new rules, we could not access that surplus to help our economy through the dark times. It is tied into other forms of revenue that went directly to the Treasury in London.

Everyone needs to cut their cloth in hard times and Scotland is no exception. But these rules will strip us naked. We will have to meet the entire shortfall either by raising tax or slashing spending above the cuts experienced elsewhere in the UK.Naturally this makes recovery more difficult.

Moore's plans fail even to deliver on the promise of devolving income tax. Banding remains in London. George Osborne's decision to raise the threshold for paying income tax above 10,000 results in a further cut to the Scottish Government's income by removing thousands of taxpayers. London will partly recoup this money through the rise in VAT. Scots will pay this VAT increase, but that money will go to London.

We would end up paying more income tax, more VAT and still take a bigger cut to our public services than the rest of the UK. This is why one independent estimate suggests the Scottish budget this year would have lost 900m in addition to the cuts already made in the Comprehensive Spending Review if Mr Moore's Scotland Act was in place.

Is it some kind of punishment? It panders to those who claim Scotland is subsidised by the rest of the UK. This is a misleading line pedalled by the London media. The official Government Expenditure and Revenue Statistics contradict subsidy junkie jibes - as they show Scotland in surplus by 1.3bn in 2008-9, the last year figures were available.

Even from a unionist position, the bill looks damaging. Mr Moore says it will make Holyrood "more responsible" and strengthen the UK, presumably by reducing English resentment. Does this mean the coalition is going to sell it to English MPs as "payback time for Scotland"? I cannot imagine that going down well in Mr Moore's constituency. The shortfall can only be met in two ways: hiking up the block grant or beggaring Scotland. Neither will cause an outbreak of island harmony.

The Liberal Democrats now insist effective fiscal power for Scotland would break up the United Kingdom - a point made by Mr Moore on Sunday and repeated by his colleague Robert Brown MSP on Tuesday.

This hyperbole represents a retreat from earlier in the summer, when Tavish Scott suggested the forthcoming bill would go further than the Calman Commission findings on which it is based. That would make sense for an allegedly federal party whose own work on the subject - under a commission led by David Steel - proposed greater fiscal devolution.

Moore's comments also insult the leading businessmen and economists who wrote to The Scotsman this week in a last ditch attempt to make the Scottish Secretary do the right thing for his country.

There is absolutely no reason why full economic powers cannot be exercised inside a larger political union. The Basque country is in a far stronger financial position than beleaguered Spain for exactly this reason - it even has a better credit rating. We can only be fully responsible for our finances if we control them. We can only address Scotland's particular problems by taking responsibility.

Our infrastructure lags the rest of the UK.Scotland has different needs to the southern triangle of England, which dictates fiscal policy in Westminster.

The coalition, and presumably Labour too, must believe George Osborne is the person best placed to safeguard our economy. That is the real message of Mr Moore's St Andrew's Day disappointment.