THE ability of a future Scottish Government to borrow billions to cope with a recession has emerged as a second major obstacle in the row over new powers for Holyrood.

Finance Secretary John Swinney and Tory Chief Secretary to the Treasury Greg hands meet in Edinburgh tomorrow for the ninth meeting about how to implement the new Scotland Bill.

The negotiations are meant to hammer out the “fiscal framework”, the rules and institutions needed to make the legislation work in practice, but have stalled.

The main fight is over how to adjust Scotland’s annual £30bn block grant to reflect the new income tax powers and VAT revenues devolved in the Bill.

Swinney wants a formula known as “per capita indexation”, which would protect Scotland’s finances if the country’s population grew more slowly than the rest of the UK.

However the Treasury wants a system which Swinney says has an in-built bias against Scotland and would slash billions from the block grant inside a decade.

Nicola Sturgeon has warned that if no deal is struck in the coming days, she will not put the Bill before Holyrood and it will not become law before May’s elections.

A senior Scottish Government source told the Sunday Herald the chance of a deal was now “50-50” at best, with a second problem threatening to derail the talks.

Because income tax revenues slump in a recession, the Smith Commission said Holyrood should have “additional borrowing powers to ensure budgetary stability and provide safeguards to smooth Scottish public spending in the event of economic shocks”.

The current borrowing limits are £500m for revenue and £2.2bn for capital investment.

But the Smith Commission never specified a new borrowing limit, saying it would depend on the fiscal framework, and the Treasury is now said to be resisting the idea.

“They’re saying, Don’t worry, we’ll help you out in a recession,” said the SNP source.

“But that’s not good enough. Who can predict the attitude of a future UK government?”

The idea of Scotland’s borrowing limit being raised automatically in the event of a recession - defined as six months of negative growth - had also been discounted, as the lag in producing Scottish GDP figures means the powers would arrive too late.

Amid growing signs the talks will founder, the issue could become a key factor in the Holyrood election, with the SNP accusing the Tories of betraying their promise of more powers, and the SNP accused of engineering a grievance and running scared of powers which imply tough decisions.

Swinney yesterday said he would publish the key papers on the framework before the end of the parliamentary term to let voters judge for themselves.

“With time running out, we need to make substantial progress,” he said.

“The fiscal framework must remain true to Smith agreement which said the Barnett Formula will remain and Scotland should be no better or worse off as a result of having new powers.

“That cannot be undermined, and I will not sign anything that risks systematically cutting Scotland’s budget, regardless of anything that this or future Scottish Governments do.”

Scottish Secretary David Mundell, who says voters will not forgive the SNP for passing up a mountain of powers because of a molehill of risks, insisted a deal was close after “significant movement” from the UK government, including a review of the funding mechanism.

“Ministers at Holyrood will be shielded from a significant amount of risk – while keeping all the money they take in income tax from Scottish taxpayers.

“What we cannot do is agree a deal where ministers in a future Scottish Government are absolved from any risk at all if they take decisions which mean Scotland’s economy doesn’t perform as well as we know it can.

“People in Scotland... will be mystified if politicians falter at the last fence when these sweeping powers and responsibilities are on the cusp of becoming a reality.”