GORDON Brown, the Prime Minister, completed a remarkable U-turn last night when he signalled his willingness to allow the Scottish Parliament to set its own taxes.
He used a key speech to Scottish business leaders to say Holyrood should be given the power to raise money as well as spend it, in order to make it more accountable for its budget.
At the moment, Holyrood gets all its funding from Westminster – and Mr Brown said this was a "problem". With it due to receive £30 billion a year by 2010, Mr Brown said a "critical part" of Sir Kenneth Calman's review of the way Scotland is governed would be to tackle what he regards as Holyrood's lack of accountability for its spending.
Addressing a meeting of CBI Scotland in Glasgow, the Prime Minister also made clear his annoyance that the funding was provided regardless of the effectiveness of the ruling administration in running a strong economy.
He said that while he was "not going to prejudge" the Calman Commission's work, he saw "one problem" with devolution. "The Scottish Parliament is wholly accountable for the budget it spends, but not for the size of its budget. And that budget is not linked to the success of the Scottish economy.
"That is why we asked the Calman Commission to look carefully at the financial accountability of the Scottish Parliament. And this is a critical part of Calman's remit."
While the Scotland Act allows Holyrood to vary income tax by up to 3p in the pound, the so-called "tartan tax" has never been used, because any party imposing a higher rate north of the Border would be sure to face the consequences at the ballot box.
Since the SNP came to power in the Scottish elections in May last year, the Westminster government has become increasingly angry at having to take the flak for collecting taxes – then seeing the Nationalists spend them on populist schemes.
This has left Labour without any credit for managing the economy – thereby providing the funds – and has fuelled the perception in England that Scotland is being subsidised by the rest of the UK. The SNP has also been able to blame London for providing insufficient cash if it finds itself unable to pay for all its proposals.
The SNP said Mr Brown was now "singing a different tune" in the wake of Nationalist gains at Holyrood and Westminster.
A spokesman for Alex Salmond, the First Minister, said: "Only last year, Gordon Brown was rejecting all calls for any increase in the powers and responsibilities of the Scottish Parliament. Since then, we have had SNP success in the Scottish Parliament election and in Glasgow East, and now Gordon Brown is singing a very different tune.
"The more economic and financial responsibilities we have, the better Scotland can do – it is essential that we have the ability to grow the economy, and that means real fiscal autonomy, not just assigned revenues."
Tavish Scott, the new leader of the Scottish Liberal Democrats, said he wanted the Prime Minister to talk "the language of home rule". He told The Scotsman: "If he has woken up to the demands for greater tax powers, then that is progress. I want the Calman Commission to be radical, and the test of Brown will be whether he tries to water it down or whether he is prepared to implement real and lasting changes."
The Prime Minister used his speech to deliver a full-frontal attack on the SNP, accusing it of having a "bleak, separatist obsession" and of being guilty of "self-indulgent posturing".
He said the "simple arithmetic" of the Union with England resulted in the Scottish financial services sector alone generating more money than the rest of the Scottish economy did with the European Union.
The Prime Minister also ruled out cash handouts to families struggling with soaring energy bills. It was thought ministers would unveil plans for handouts of up to £100, following talks with energy companies.
But government sources last night said ministers would now focus on long-term proposals including support for energy efficiency measures.
Mr Brown said there would be no "short-term gimmicks or giveaways". Ministers were "working up proposals" with utility companies but these would be focused on reducing bills in the long term.
David Thorburn, the CBI Scotland chairman, urged the Prime Minister not to impose a windfall tax on energy firms.
Mr Brown, who spoke of a desire to "free Britain from the dictatorship of oil" provided by foreign nations, said the national demand for oil would reduce by 20 per cent by 2020 as a result of energy-saving policies.
But he committed the government to extracting as much oil as possible from the North Sea and announced that a 139-turbine wind farm off the Cumbrian coast had been approved.
A relaxed Mr Brown joked with the audience of more than 800 guests at the Glasgow Hilton, before going into the meat of his speech, that he believed Churchill's maxim that "politicians usually got it right after trying everything else". He then stuck to his prepared text but won only brief applause.
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The late Donald Dewar, Scotland's first First Minister, with the Queen at the opening of the Scottish Parliament on 1 July, 1999
Two possible paths forward, but both could be fraught with difficulties
THERE are two ways in which the Scottish Parliament can have more responsibility for the money it spends – transferring tax powers and assigning tax revenues.
Transferring tax powers is the most controversial but seen by many as the best way of giving the parliament more power over the Scottish economy.
Earlier this week, the Borders housebuilder Tweed Homes called for stamp duty to be devolved.
Other taxes which could be devolved are inheritance tax, VAT and excise duty, although these come with particular problems which would be difficult to resolve.
There have been repeated calls for corporation tax to be devolved, giving the Scottish Government the chance to lower business taxes and attract more companies to Scotland, but it is not clear whether the European Union would allow this because it opposes differential business tax rates within the same member state.
It would be much easier for tax revenues to be assigned.
At the moment, the Scottish Government gets a block grant, a set amount which does not go up or down depending on the Scottish tax take.
If, however, it was assigned all Scottish tax revenues, it could grow its budget by improving the tax take, providing a clear incentive for it to grow the economy.
The danger for unionists is that, with every tax that is assigned, so demands would grow for the economic levers to be transferred and with every tax power devolved, the demands for more would follow, until independence was all but achieved.
Mixed reception for Brown's remarks
Peter McMahon
GORDON Brown's speech outlining the government's strategy to cope with the economic downturn and his hint that he supported greater financial powers for the Scottish Parliament won a mixed reaction from guests at the CBI dinner last night.
Owen Kelly, the chief executive of Scottish Financial Enterprise, said: "I warmly welcome the Prime Minister's commitment to free competition and fair markets.
"I also think his comments on globalisation have particular relevance for the Scottish financial services industry."
Mr Kelly said that any reforms of devolution should be judged by whether they "enhanced international competitiveness" and did nothing to diminish Scotland's leading rule in the financial services industry.
Andrew McNamara, a partner in BDO Stoy Hayward, a firm of chartered accountants based in Glasgow, said: "I am not convinced the Prime Minister knows how to get the economy out of the state it is in. He made all the right noises on issues like renewable energy, but really the speech went around the edges of the issues."
Mr McNamara welcomed the idea of more financial responsibility being given to MSPs, saying: "It is essential that they are given greater fiscal authority provided they use it wisely and not to the detriment of Scotland's economy as a whole."
Allan Hogarth, a spokesman for the Scottish North American Business Council, said the UK government should do more to make sure renewable technology was developed here and not abroad. He added: "The Prime Minister did not quite explain what his position was in terms of freeing up the economy."
Mr Hogarth said that most business people would support making the Scottish Parliament more accountable for raising the money it spends.
"Business people would welcome the increased rigour that would be required from 129 MSPs if they had to consider how to raise the money they spent as well as just spending it," he said.
Former home secretary's warning
THE Prime Minister's leadership was called into further question yesterday when former home secretary Charles Clarke warned that he had just months to prove himself or he would have to quit.
Mr Clarke said there was a "deep concern" within the party that the government was heading for disaster.
He later said: "There are two essential possibilities. The first is for the performance of the government to improve significantly ... or the second is for Gordon Brown to stand down with honour."
