ONE of the country's leading economists has warned Scotland could be left hundreds of millions of pounds worse off as a result of the financial deal that will underpin Holyrood's new powers.

Professor Anton Muscatelli, the principal of Glasgow University, said the so-called "fiscal framework" around the

Scotland Bill now going through Westminster was "arguably even more important" than the powers the new legislation will transfer.

Writing in The Herald, he says Scotland could be hundreds of millions of pounds worse off within a matter of years depending on the mechanism chosen to reduce Holyrood's budget allocation from Westminster.

The fiscal framework was due to have been agreed this autumn but the Scottish and UK governments are still thrashing out a deal.

Although it is UK Government legislation, the Scotland Bill must be rubber-stamped at Holyrood before it comes into force and both Nicola Sturgeon and John Swinney have threatened to block it - delaying the devolution of extensive tax and welfare powers - unless the financial deal is "fair".

They have been accused of planning to stall the powers in a bid to prevent SNP plans for tax and welfare becoming the focus of next May's Holyrood election.

However, Professor Muscatelli's comments reveal the potential impact of the fiscal framework.

In a conclusion that will be welcomed by the First Minister and Deputy First Minister, he said: "The clear demand for more powers cannot come at any price."

The Scotland Bill will make the Scottish Government responsible for raising almost all income tax in Scotland - worth £11billion last year - which will then form a large part of its £30billion-plus budget.

The Scottish Government's budget allocation from Westminster, known as the block grant and based on the long-established Barnett Formula, will be reduced accordingly.

In the first year after the income tax powers are introduced, the calculation will be straightforward.

But it is understood the fiscal framework talks have hit a stumbling block over how to calculate the deduction in future years to take account of inflation.

Professor Muscatelli argues one of the suggested mechanisms, indexing the adjustment to Scotland's population share of changes to income tax revenue in the rest of the UK, would "penalise" Scotland.

He said Scotland's share of income tax was lower than its share of UK population and added: "This means that even if Scotland matched UK economic performance and grew its tax revenues by the same rate as the rest of the UK, the amount deducted from the block grant would always be larger than the revenues collected from tax.

"Within three or four years, the Scottish Budget could be hundreds of millions of pounds lower as a result, and this loss would grow over time."

He suggested an alternative system, linking adjustments to the block grant to per person changes to income tax revenues in the rest of the UK.

Under a "no detriment" rule, the fiscal framework is intended to ensure that neither Scotland nor the rest of the UK lose as a result of decisions taken on the opposite side of the Border.

The cross-party Smith Commission, whose recommendations formed the basis of the Scotland Bill, agreed that Scotland should reap the benefit if Holyrood's policies increased tax revenues and lose out if receipts dropped.

Professor Muscatelli added: "Discussions around the fiscal framework are necessarily complex. However, it is important that the correct decisions are taken, as the risks to Scotland’s budget are potentially significant."

A UK Government spokesman said the framework would not be completed before the Scottish budget on December 16.

He added: "Both governments have agreed not to comment on the detail of the discussions until an agreement is reached."

A Scottish Government spokeswoman said discussions over a "fair adjustment to the block grant" were continuing.

She added: "Without a new framework that is fair to Scotland, ministers have been clear that they will not recommend that Parliament approves the Scotland Bill."