Wendy's playing the power game

IF it had not been for the dodgy donations scandal dominating the news agenda, Wendy Alexander would have been making the headlines last Friday for a different reason. Her lecture at Edinburgh University that morning marked a major shift in Labour's attitude on the future powers of the Scottish Parliament, including a willingness to look at realistic new tax powers for Holyrood.

What Ms Alexander proposed was setting up a new independently-chaired Scottish Constitutional Commission, bringing together not just politicians but wider civic Scotland, businesses, community groups, voluntary organisations, trade unions, churches and others to look at what new powers should be transferred from Westminster to the Scottish Parliament.

And the Liberal Democrats and the Tories were supporting the proposal in a vote in the parliament today.

The commission will inevitably be seen as a successor to the Scottish Constitutional Convention that drew up the blueprint for devolution. But the new venture will have a more significant "expert" input, mainly because a key issue will be tax. And insiders say there is some complex tax modelling to be done alongside the debate on the need for financial accountability.

Lib Dems have long supported more tax powers for Holyrood. And Nicol Stephen told MSPs today: "I don't believe a self-respecting parliament can exist permanently on a single grant from another parliament."

He said personal taxation should be decided by Holyrood and argued Scotland should also have powers over business and corporate taxes.

The Tories up until now have merely called for a review, but former leader and Edinburgh Pentlands MSP David McLetchie said today he believed Holyrood should have responsibility for raising a bigger proportion of the money it spent.

Labour before the election was adamant there was no need to revisit the devolution settlement. Yet now Ms Alexander has set out areas in which she believes that more powers could be devolved - in her lecture, she highlighted welfare, road transport, public holidays, marine issues and animal health.

And she did not flinch from the crucial question of tax powers. "The financing of the parliament almost wholly through grant funding does not provide the proper incentives to make the right decisions," she said.

The approach she wants to look at is reducing the amount of money Scotland receives in a block grant from Westminster and moving to a system where some taxes would be set and collected by the Scottish Parliament, while others would be set in London, but with Holyrood being assigned an agreed share of the revenue.

Ms Alexander argues that European regulations seem to rule out handing responsibility for VAT or corporation tax to the Scottish Parliament, but they could be taxes where Scotland is assigned a proportion of the money raised.

Lib Dems are not so keen on "assigned" taxes and prefer a system whereby Holyrood would set and receive certain taxes - they do not specify which - and Westminster would set and receive the rest.

The SNP also boycotted the constitutional convention - and it will not take part in the commission either. As the Government, it launched its own "national conversation" on Scotland's future in the summer and is inviting people to contribute their thoughts over the next three years, leading to a proposed referendum in 2010.

But Nationalists say they are happy for the other parties to agree collectively on a "more powers" option that could be put to voters alongside independence in a referendum. One senior Labour MSP is in no doubt about the importance of Ms Alexander's lecture, saying: "It's the most significant development since the constitutional convention reported in 1995.

"It is different from what the party was saying before the election, but Wendy already believed in extending the powers of the parliament, including financial accountability."

And this source agrees that the tax issue is crucial. "One of the weaknesses of the original settlement was that it was dependent on money being handed down from London. That was fine to start with, when we had the same party in power in London and Edinburgh, and while there was rapidly expanding public expenditure.

"But for the long-term stability of the settlement, the Scottish Parliament needs to be responsible for a significant element of its finances. It would help take the heat out of the English financial question."

The big question is whether the UK Government is signed up to Ms Alexander's plan. Gordon Brown has shown little sign of backing more powers for Holyrood, but politicians in all parties find it hard to believe Ms Alexander would go as far as she has without at least the tacit agreement of her mentor and ally.

One insider says: "Wendy has to deliver on this. There's no point in her putting this forward and then in a few months' time Gordon saying he's not having any of it."

The commission is expected to meet for the first time early next year, but there is a lot of work to be done and a lot of debate to be had before any agreement is reached.