THE government of an independent Scotland would have to raise taxes or cut services to maintain welfare pay-ments, Iain Duncan Smith said as he defended his Universal Credit plan, which he said would make 100,000 Scots better off.

As the Coalition came under fire for considering linking hikes in benefit payments to average pay rather than inflation, the Work and Pensions Secretary – in Glasgow for a welfare reform conference – defended his plan to replace a string of benefits with a single payout called Universal Credit, stressing how "only the Union could offer this sort of wholesale reform".

He said: "Due to the reliance on the old heavy industries in many parts of the country, it makes perfect sense that we need to spend more money per head of population on welfare support in Scotland; I have no problem with that.

"In fact, I am glad that we are in a position to do it. Thankfully, due to the United Kingdom and the commitment of the Westminster Government, we are able to ensure that money brought in whether it be from the City of London or from North Sea oil can be pooled and directed to wherever it is needed most. That is what being in the United Kingdom is all about.

"If the unthinkable were to happen, a Scottish Government would face a very stark choice of raising taxes or cutting services."

The UK Government was taken to task yesterday for considering a change to how annual rises in benefits are paid after it was suggested ministers were thinking of linking increases in benefit payments to average pay rather than inflation. It was also suggested that the automatic uprating of welfare pay-outs could be axed altogether and benefit payments might be frozen for two years with any subsequent increases linked to average pay.

Chancellor George Osborne has made clear from 2015 he has to find £10 billion in extra savings in order not to increase departmental cuts already planned; linking rises in benefit payments to pay rather than inflation could save the Treasury between £4bn and £7bn.

Last night, No 10 sought to play down the row with a spokesman saying: "Benefit levels are reviewed every year and what normally happens is that there is an announcement, usually in December, setting out the benefit levels for the following year."

Liam Byrne, Mr Duncan Smith's Labour Shadow, said the Work and Pensions Department was now in chaos. "If David Cameron and George Osborne want to start to fill the big hole in the public finances caused by the failure of their economic plan, they should start by looking at their tax cut for millionaires," he said.

The SNP's Eilidh Whiteford said the Coalition had its priorities wrong: Giving tax breaks to millionaires while penalising the poorest in society.