Scottish Parliament may win greater tax powers

The Scottish Parliament may be given the power to vary income tax by up to 10p in the pound, the Government will announce today.

Jim Murphy, the Secretary of State for Scotland, will tell the Commons in a statement that Labour would give Scotland control of about £6bn in new tax powers, offset by an equivalent cut in the annual £30bn grant the country receives from the Treasury.

In a White Paper, "Scotland's Future in the United Kingdom," Mr Murphy will endorse the central recommendations of a review of Scottish devolution by a commission chaired by Sir Kenneth Calman, which was published in June. It said the Holyrood Parliament should control half the 20p basic rate and a quarter of the upper 40p rate, allowing it to vary both rates up or down by 10p in the pound. But it would not be able to change the differential between the two rates—for example, to pursue a "soak the rich" strategy.

When the Blair government set up the Scottish Parliament in 1999, it was given the right to vary the basic rate of tax by 3p in the pound. But no party has yet sought to use the power.

Labour hopes that today's plan to "deepen" devolution will head off the Scottish National Party's demands for total independence from London.

However, Mr Murphy will concede that legislation to bring in the significant changes would not be introduced until after the general election next year. Ministers admit there is no Parliamentary time available for such a measure, so it would instead be included in Labour's election manifesto.

With opinion polls pointing to a Conservative victory, Labour's critics may describe the commitment to a 10p tax-varying power as "window dressing" since it might never be implemented.

Although the Calman Commission report was given a broad welcome by Labour, the Tories and Liberal Democrats in June, the Government's move could create a dilemma for an incoming Tory government. While committed to extending localism and anxious not to repeat its hostility to the creation of the Holyrood Parliament, some Tories might have reservations about such a radical change. "It's a headache for us," one senior Tory admitted yesterday. "No doubt that's what Gordon Brown intends it to be. We will consider our options carefully."

Labour's embrace of greater fiscal independence will not satisfy the SNP, which wants full autonomy for Scotland, saying income tax was a "blunt instrument" and dismissing the Calman package as a "messy fudge". The SNP said: "At present, we have a pocket-money parliament – under the Calman proposals, Scotland would have a Saturday job but the pay would be deducted from our pocket money."

The SNP Government, led by the First Minister Alex Salmond, has promised a White Paper next Monday outlining for a referendum on independence for Scotland.