Innovative tax proposals aimed at giving Holyrood the power to raise about a third of the money it spends “meet the test of creating real financial accountability”, the Calman Commission said in its report on the future of devolution.

They also go some way to addressing complaints from England that the annual block grant the Treasury gives the Scottish government is too big. The report says that the level of the grant should be tied to how much tax Holyrood levies.

Overall public spending levels per person in Scotland — which on services such as education and health are about 21 per cent higher north of the Border — would be unaffected unless Scottish ministers change tax and spending levels.

The report says that its main task was to find a way to give politicians in Scotland the power and responsibility for raising the money they spend while preserving the economic and social union of the UK.

The Scottish Parliament has the power to vary the basic rate of income tax by up to 3p, which no party has yet dared to use. The commission proposes in effect to extend this tax power to cover 10p of both the basic 20p and 40p higher tax bands plus the new 50p tax band due to come into force next April. The innovation is that the Scottish government would both control the 10p tax rate and collect the money it raises.

The Chancellor would in each annual budget announce the tax rates for Scotland which would be 10p less in each band than in the rest of the UK. This would mean that the Scottish Finance Secretary would follow the budget at Westminster with a Scots budget.

The report said: “The key feature of this model is that it would require the Scottish Parliament to make a tax decision unless it sets no rate of income tax and bases its budget on considerably reduced revenues.”

A catch in this proposal is that a change to the Scottish tax rate would affect all tax bands, thus preventing the Scottish government from raising the Scottish rate on higher tax bands and lowering it on the basic rate band.

An official explained that this was because the commission took the view that while the Scottish government was responsible for distributing public money, the UK Government was responsible for wealth redistribution policies operated through the tax system.

The commission examined all taxes, including VAT and corporation tax, but concluded that few were suitable for devolution as they created either big administrative headaches or tax avoidance problems.

In addition to the income tax proposal, which the commission reckons will raise £4,150 million of Scottish spending, the report recommends devolving four small taxes: aggregates levy, landfill tax, stamp duty on property sales and air passenger duty, which would raise another £774 million.

The report says that the Treasury block grant to Scotland would be reduced by the amount that these taxes raise. It recognises that the way of calculating the block grant, changes in which are annually determined by the population-based Barnett formula, is not ideal and that it would be better if it was based on the need to spend public money. Sir Kenneth Calman, who headed the commission, said yesterday that a change to the Barnett formula was beyond his scope and was for the UK Government to decide.

The CBI said it was relieved that the commission had not recommended the transfer of powers over corporation tax and national insurance. David Thorburn, chairman of CBI Scotland, said: “If the UK Government and the Scottish Parliament accept Calman’s proposals, it will be vital that implementation is carried out at a time when the economy is more stable and business is better placed to afford the costs involved.”

The commission acknowledges that the creation of a separate Scottish tax would create additional requirements within the existing system but points out that these would be needed if the Scottish Parliament used its existing tax powers. It says that, for efficiency’s sake, Westminster should continue to administer existing tax allowances, credits, and banding arrangements but that the Scottish government should have the power to introduce new taxes, for example a Scottish-wide tax on plastic bags.

These tax plans, if adopted, mean that the Scottish government would have power to borrow more money than the £500 million it is currently allowed. The report says that unlike UK Government departments the Scottish government cannot negotiate directly with the Treasury the amount it can borrow to spend on capital investment. “It would be perverse if the Scottish Parliament could increase taxation above UK levels to finance additional current spending but not use that resource to finance additional borrowing.”

Ben Thomson, of the think-tank Reform Scotland, welcomed the proposals as a step in the right direction but said that they did not provide the necessary level of financial accountability and responsibility to ensure that public money was spent effectively.

The proposals would, however, offer two new incentives for devolved decision-making. First, a political programme aimed at stimulating the Scots economy would, if successful, give Holyrood an increased share of Scottish income taxes. Second, a sustained drive for greater efficiency in public spending could give politicians the scope to reduce Scottish tax levels.

While any cut in Scottish income tax would reignite debate south of the Border about the level of subsidy by the English taxpayer, a Scottish political party may judge the reward in votes to be worth any cost to the UK economic and political union.

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