His comment came as the SNP had a second go at pushing through an amendment to replace the proposals of the Scotland Bill with plans to give Holyrood total control of tax and spending by introducing full fiscal autonomy.
The measure, which has support from some Tories, including Gainsborough MP Sir Edward Leigh, would, according to the leading economic think tank the Institute for Fiscal Studies, leave a £10 billion black hole in Scotland’s finances.
Mr Mundell warned it would be “a disaster” for Scotland, but SNP Treasury spokesman Stewart Hosie said it reflected what Scotland voted for in May rather than the “miserable” proposals of the Smith Commission.
The Scottish Secretary effectively accepted a suggestion from Labour that the new powers being handed to Holyrood should be scrutinised by a Scottish version of the independent Office for Budget Responsibility, which makes forecasts based on government decisions. He said he would use negotiations with the Scottish Government to make sure Holyrood’s proposed Scottish Fiscal Commission would provide the same role by being a “substantial and independent” body.
The government opposed a Labour amendment, backed by the SNP, for Scotland’s police, fire and ambulance services to be given the same exemption from VAT that their English and Welsh equivalents receive.
On welfare, Mr Mundell said it was “crunch time” for the SNP, pointing out that the Westminster government spends £94 billion on working-age benefits. He said: “They will soon be receiving the powers over welfare which they have long wanted. They now have to tell us how they intend to use them.
“If that means higher welfare payments, they will have to be clear with Scotland how that will be paid for – higher taxes or cuts to services.”
But SNP social justice spokeswoman Eilidh Whiteford said the welfare parts of the proposed legislation “fall far short” of the spirit and letter of the Smith Commission.
She added: “Crucially, the bill also limits the powers of the Scottish Government to continue to provide assistance through the Scottish Welfare Fund and contains a Westminster veto over the Scottish Government’s powers in certain areas of Universal Credit – and restrictions on employment programmes.
“That is why the SNP’s welfare amendments to the Scotland Bill are so important and why Scotland needs the opposition parties to come together to support them.
“Labour will show where they stand – for Scottish control or Tory control.”