Grant Scotland an overdraft and scrap Barnett – Calman

HOLYROOD will be allowed to run up debts and the controversial Barnett Formula will be consigned to history in dramatic recommendations by the commission set up to review Home Rule in Scotland, The Scotsman can reveal.

In a long-awaited report, the Calman Commission will call for a new financial set-up which will make MSPs more accountable – but could see Scotland's budget severely reduced. The commission also believes the Scottish Government should be granted limited borrowing powers which would be wide-ranging enough to raise £2 billion for a new Forth Road Bridge.

But, despite proposing the biggest changes to Scotland's governance since devolution, the recommendations will not be welcomed by Nationalists and supporters of a maximum version of Home Rule. The Scotsman understands the commission will reject any new tax-raising powers for Holyrood or assigning Scotland's share of the oil and gas revenues directly to the Scottish Government.

The Calman Commission was set up in 2007 by the three main unionist parties – Labour, Liberal Democrats and Conservatives – after a proposal by former Labour leader Wendy Alexander in direct opposition to the SNP's National Conversation.

Unlike the National Conversation, the commission was supported by a majority of MSPs in a vote in the Scottish Parliament and got the backing from the UK government. Sir Kenneth Calman, one-time chief medical officer north and south of the Border, now Chancellor of Glasgow University, was chosen to chair the commission and its membership included leading figures from Labour, Conservatives, the Lib Dems, business, trade unions and the media.

The commission's remit was to look at how Scotland's place in the UK could be embedded by improving on the devolution settlement. It excluded any discussion on independence, which meant it was at first boycotted by the SNP.

Now the commission, which officially publishes its report on 15 June, has decided major changes need to be made.

Instead of the Barnett Formula it wants Scotland to have taxes raised in the country – including income tax, VAT, stamp duty and inheritance tax – assigned directly to the Scottish budget. On top, there would be a small top-up grant to make up for revenue from corporation tax – many companies in Scotland are headquartered in England – and oil and gas which would mostly go directly the Treasury.

The plan is that with assigned revenues, politicians in Holyrood would have far greater responsibility for the size of their budget through their decisions on economic growth. Significantly, however, experts believe the change will result in a drop in Scotland's budget – which could lead to cuts in services.

The proposals will be seen by some as evidence the commission was a smokescreen to cut Scotland's budget.

Assigned revenue without oil and gas money was first mooted by Gordon Brown in Glasgow last year. This was described as the worst possible option by the SNP because it potentially reduced Scotland's budget but did not give them the control over tax they wanted.

The proposals are a slap in the face for Lib Dems who wanted "devolution max".However, The Scotsman understands Lib Dem members of the commission, including former deputy first minister Jim Wallace, have agreed to the final report which will be unanimously supported.

The Scotsman has been told most members of the commission felt that handing over fluctuating oil and gas revenue and tax-raising powers would create "unacceptable instability" in Scotland.

The oil and gas and borrowing proposals will be unveiled on Friday by the expert group of economists working for the commission headed by Professor Anton Muscatelli.

On borrowing powers, the commission has accepted Prof Muscatelli's recommendation that a minimalist allowance is made. Holyrood would be allowed to borrow but only on a similar basis to councils, which means that the Treasury would have to give its permission and there would be a cap on how much debt the Scottish Government could go into.

One source close to the commission said: "If you look at the papers produced on oil and gas and borrowing by the expert group and compare it to the document produced by the Scottish Government they are a long way apart in quality. The first is world class, the second very flimsy."