Osborne: Scottish MPs could be barred from voting on parts of budget after tax powers devolved

In a message aimed at Ed Balls, who could find himself in No 11 Downing Street after the election as part of a Labour government relying on the support of smaller parties such as the SNP, Mr Osborne also said the chancellor after the next election should not be "beholden on Scottish nationalist votes".

Once powers to set income tax have been devolved, Scotland would have to "live with the consequences" of its decisions - including if wealthy individuals flee across the border to escape "punitive" rates, Mr Osborne told the Treasury Select Committee.

Mr Osborne said proposals for "English votes for English laws" would be published before the general election, but he insisted that it must be the case that Scottish MPs should have their ability to vote on aspects of future Budgets curbed if powers have been devolved.

The cross-party Smith Commission on devolution said the Scottish MPs should continue to vote on the UK's Budget, including income tax.

Many aspects of the system would remain UK-wide, Mr Osborne said, including the definition of income and the system of reliefs, so MPs from Scottish constituencies would be able to vote on those.

But in response to questions from the SNP's Stewart Hosie, he said: "I don't want to pre-empt the proposals that we are going to bring forward on English votes for English laws, as it's commonly known - but of course is English and Welsh votes on English and Welsh matters as well - although I do think that they will have to apply on areas connected with the Budget."

He added: "I'm a believer that as a result of this further devolution we need to have a settlement that is fair to the rest of the United Kingdom as well and that as part of that MPs from England and Wales should be able to vote exclusively on matters that affect England and Wales. Indeed, as I understood it, the SNP has been an ally of this principle over many years.

"How that works in practice is something we will set out in a relatively short period of time, and before the general election, but that's the principle I hold to."

He added: "I take the words ... in the Smith report as applying to the things that are to do with the elements of income tax that are going to remain UK-wide.

"(Lord) Smith did not have a remit to talk about the constitutional arrangements of the rest of the UK or the House of Commons."

The Chancellor told Labour's Andrew Love, who represents an English seat: "I would have thought ... you would want to say to your constituents that matters that affect them but are devolved to Scotland are not going to be decided on by Scottish MPs, that wouldn't be fair.

"It would be particularly unfair, of course, if Scottish MPs held the balance of power on these decisions."

He added: "There is going to be a lot of hard negotiation on things like the fiscal framework and I think it would be very unfair to the whole UK if we had a chancellor of the exchequer who was beholden on Scottish nationalist votes in the next parliament.

"I think that would not be fair for the rest of the UK and I think those who aspire to hold this office should make it very clear before the election that they would not be beholden on Scottish nationalist votes."

Mr Osborne said the basic principles of granting extra powers were that there should be "no fiscal gain or fiscal loss to either Scotland or the rest of the UK on further devolution" and "you have to live with the consequences of your decisions once that devolution has taken place".

Asked by committee chairman Andrew Tyrie whether the rest of the UK would "compensate the Scottish government" if tax receipts went up as a result of an influx in wealthy Scots travelling south to avoid a "substantial rise" in the top rate of tax, Mr Osborne said Holyrood would have to accept the consequences of its decisions.

He said: "I should speak here in a personal capacity because the UK government will negotiate this in detail after the general election. My interpretation of no detriment is, in the example you give there, Scotland would live with the consequences of having imposed a punitive rate of income tax.

"So, if it imposed a punitive rate of income tax and as a result people left Scotland, partly to the rest of the UK and no doubt partly to other parts of the world ... part of the concept of further devolution is that Scotland would live with the consequences of that action, would take responsibility for that action."

In response to Mr Hosie, Mr Osborne said Scotland would also reap the benefits if it grew its economy through the use of its extra powers.

"If the Scottish government pursues policies, including tax and spend policies allowed to it under this Smith agreement, that improve the Scottish economy relative to the rest of the UK economy then the benefit of that should accrue to the people of Scotland and its Parliament and its government.

"That is at the heart of what we are trying to achieve with devolution, but of course the reverse is also the case - if a set of decisions are taken that damage the Scottish economy relative to the rest of the UK then Scotland and, more to the point, Scotland's elected representatives, should bear the consequences of that and be held accountable for that."

Mr Osborne said some form of "balanced budget" rule may be needed to ensure the Scottish government did not use the new powers to live beyond its means.

The Chancellor said: "Of course we wouldn't allow Scotland to go bust, but in order for that situation not to arise we would have to agree fiscal rules, independently verified, to make sure that doesn't happen, so that we never actually reach that situation where the sovereign backstop has to be deployed."

He said a form of balanced budget rule, which would not necessarily require a balance every year, was "something that will operate and will be very solid and robust".

Mr Osborne said it was vital to conduct the negotiations for further devolution in a "fair" way.

He told MPs: "There's a very particular task for the next government, which is to negotiate this fiscal programme, which is hopefully going to endure for a long time, and it's very important that that negotiation is conducted in a way that is fair to the whole of the United Kingdom.

"If you had a Chancellor of the Exchequer who could only get their way because they were relying on Scottish Nationalist votes to get their way in the House of Commons, I don't think that would be fair to the rest of the United Kingdom."

Mr Osborne conceded there could be some impact of the plans for further devolution on regional airports in England if Holyrood lowered its Air Passenger Duty (APD), citing HMRC research that predicts Manchester would lose around 3% of its traffic and Newcastle around 10%.

"I think these are manageable but I think (the Conservatives and Labour) could work to try and find a solution," he added.

After the hearing Mr Hosie said: "It seems incredible that the Chancellor wants to ban Scottish MPs voting on parts of the entire UK Budget simply because of the incomplete devolution of income tax rates and bands.

"Until income tax is devolved in full and with it responsibility for savings and investment income, it is illogical and wrong for the Chancellor to carve Scottish MPs out.

"The admission from George Osborne today is the strongest argument for full fiscal devolution with home rule, allowing Scotland full responsibility for growing the economy, and not this half-way house which offers minimal economic powers while resulting in a loss of voting rights."

Mr Balls however insisted decisions over income tax should be made by MPs from all across the UK.

He said the Smith Commission, which proposes devolving control over much of income tax in Scotland to Holyrood, "makes absolutely clear that tax matters that are reserved to the UK are a matter for all MPs to vote on".

The shadow chancellor, who was speaking during a visit to Aberdeen, accused Mr Osborne of adopting "short-term, divisive petty politics".

The Labour MP said: "I think there is a principled way forward on devolution, and politicians of principle should stick to it.

"The Smith Commission sets a way forward and it makes it clear that it is a UK income tax system, within which there is some important devolution for Scotland, and it would be for all MPs to vote for the UK tax system.

"That's the agreement that was reached in Smith and I think it is important we all commit to do everything we can to deliver it. It's not sensible to try to unpick that now."

Mr Balls also insisted that Labour was "not planning a coalition" with the SNP after May's general election, adding: "We're planning on winning a majority and that means we need people all across the UK to think very hard about the choices we've got ahead of us."