Signs of radical settlement for Scotland emerge after poll results

The Conservative majority alongside a nationalist landslide in Scotland reopened the question of powers for the Scottish government, raising the prospect that the Tories might offer Edinburgh full control over taxes and domestic expenditure.

The first signs of a radical new settlement emerged on Friday when Boris Johnson, the London mayor and newly elected Conservative MP, said "there has to be some kind of federal offer" for Scotland.

A Tory move towards giving full powers over spending and taxation would call the bluff of the Scottish National party, which aims for full fiscal responsibility only in the medium term.

Under full fiscal responsibility, the Scottish government would have power to set taxes and pay for all services including charges to the UK for collective endeavours such as defence.

The option of full fiscal autonomy for Scotland has obvious advantages for the Tories in England. The Institute for Fiscal Studies has calculated that given Scotland's higher public spending per person and low oil revenues, it would run a deficit of 8 per cent of national income in 2015-16, much higher than the projected equivalent 4 per cent deficit in the whole of the UK.

It would mean the Scottish government would be likely to face deep austerity measures unless oil or other revenues rose sharply because independent borrowing powers would be limited.

But there would be complications to these simple calculations, said David Phillips of the IFS. "There would be plenty of scope for disagreement over what kind of payments Scotland makes for defence, foreign affairs and debt interest," he said.

Full fiscal autonomy would, however, spell the end of the Barnett formula that currently guarantees Scotland much higher public spending than English regions and Wales.

Being in favour of tax competition, the Tories have also been traditionally much more comfortable with the prospect of different tax rates - including corporation tax - north and south of the border.

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The party has argued that the current proposals for limited tax and expenditure devolution set out in the Smith Commission do not go nearly far enough, adding that it aimed for agreement with Westminster "that the Scottish Parliament should move to full financial responsibility" over a number of years.

In an attempt to resolve the apparent contradiction between a demand for more powers and the possibility that it would lose the ability to spend more than England, Alex Salmond, the former SNP leader, suggested last month that principles already agreed would guarantee Scotland's higher spending levels.

He wrote that the two principles in the Smith Commission, agreed by all parties, were that any devolution of tax and spending powers should come at "no detriment" to London or Edinburgh and no proposals should result in England or Scotland "gaining or losing financially".

At the time of low oil prices, this demand would provide Scotland with gains if oil revenues were to rise. The SNP would also hope to make Scotland a more attractive place for business so as to improve tax revenues in other areas.

Such demands are unlikely to find favour in London, setting up scope for further divisions between the UK and Sottish governments in the months ahead.

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