Holyrood in line to get new powers over tax

The Scotsman can reveal that the main recommendation from the Calman Commission is to hand over half the income tax raised in Scotland to the Scottish Government.

Significantly, Prime Minister Gordon Brown has suggested he is "very warm" to the proposal, hinting that the recommendations have a strong chance of being enacted.

With the basic rate of income tax at 20p, the change would give Scotland control of the second 10p. This would allow MSPs to vary the tax rate – up or down – by as much as they choose.

Crucially, part of Scotland's budget, which currently comes in a block grant, would then fluctuate, depending on income tax revenues.

This change, known as fiscal accountability, means a successful Scottish economy would lead to larger revenues. Conversely, if there were fewer people in work, this would lead to a drop in the budget.

The proposals would replace the current "tartan tax" – which has never been used – under which income tax can be varied by up to 3p in the pound.

The tax plan – the most significant proposed change to the devolution settlement – will be the central plank of a report to be unveiled by the Calman Commission on Monday.

The body was set up last year by Labour, the Liberal Democrats and the Conservatives to investigate the way forward for Scottish devolution.

Even under a Conservative government, many analysts believe the tax change could be enacted, as David Cameron is keen not to be seen as anti-Scottish.

It also seems unlikely the SNP would oppose the idea of giving Holyrood greater control of income tax, even though the party was opposed to the commission, which it believed was set up to counteract its own National Conversation. While the proposal falls far short of what the Nationalists want, it will be quietly welcomed by much of the leadership as part of a gradual progression towards possible independence.

The new tax proposals have reportedly delighted the Liberal Democrats, who have been led on the commission by former deputy first minister Jim Wallace. They see it as the first step in devolving income tax powers down to councils and improving local accountability.

The changes would mean that on current figures 9 billion, including income tax, business rates and council tax, would be raised directly in Scotland, representing 35 per cent of the total budget.

On the current basic income tax rate of 20p the UK government would get 10p, while on the higher rate of 40p the Treasury would get 30p. It would also take 40p of the 50p top rate being introduced by Alistair Darling.

The Scottish Government would have the ability to raise or lower its 10p share of these rates by as much as it liked, as long as it had approval from MSPs.

However, any change in one rate would mean that all three would go up or down by the same amount. This is an attempt to stop the Scottish Parliament from putting all the tax on the higher bands and reducing the basic rate.

The rest of Scotland's budget would come through a much-reduced grant.

A source close to the commission said: "These proposals provide stability, not as much as we have now, but still they do not allow for any wild decisions in Holyrood."

In terms of other taxes, including VAT and corporation tax, the commission is to recommend that they remain unchanged and reserved to Westminster.

However, the commission will recommend that the issue of assigning all tax raised in Scotland is considered in the future, although this would not mean giving Holyrood the ability to vary the different rates.

The Calman Commission was set up last year on the back of a proposal by former Scottish Labour leader Wendy Alexander. The idea was to counteract the SNP's National Conversation on independence, which was being run through the Scottish Government.

Members of the three unionist parties got together in Holyrood to vote on setting up the commission, and the proposal was then endorsed by the Westminster government.

The commission, chaired by Sir Kenneth Calman, the chancellor of Glasgow University, was specifically told to exclude discussions about independence and, rather, look at ways of strengthening Scotland's position within the Union, while improving on devolution.

It membership included representatives from business, trade unions, the media and the law, as well as the three political parties.

As well as financial matters, it has also looked at devolving other powers, including broadcasting, airgun control and drink-driving.

'Would MSPs have nerve to use extra power?'

THE idea of handing over control of much of the income tax raised in Scotland to Holyrood appears to be a great boon for devolution.

But looking below the surface, the apparent increase in power to MSPs, if the recommendation is accepted by Westminster and Holyrood, could prove an uncomfortable gift. On the one hand, MSPs would seemingly have a large amount of power over the Scottish budget. But on the other, the question has to be asked: would they have the nerve to use it? The history of the tartan tax variable rate of 3p in Scotland, accepted by the Scots in a referendum, shows it has never been used.

MSPs have had no stomach to explain why Scotland should be the highest-taxed part of the UK, or why hundreds of millions should be lopped off public spending to fund a tax cut.

The Liberal Democrats bravely tried to propose a 2p tax cut this year, using these powers, and were shouted down, mainly because it would have led to a 700 million loss of funds.

It is this unwillingness to change anything that may explain why the more conservative elements of the commission are happy with this proposal. But one aspect that should not be ignored is the way that this will reopen the door for the controversial local income tax by giving Holyrood far more control over devolved taxes.

Those who saw a property-based local tax as a source of stability may get a nasty surprise if MSPs use these new powers to replace that with a new income tax.

• Scotland on Sunday's Tom Peterkin is online now and taking your politics questions.