NICOLA Sturgeon has rejected the UK Government’s £4.5 billion “compromise” deal aimed at breaking the deadlock over the transfer of fiscal powers.

The First Minister said the offer would leave Scotland £3bn out of pocket and means talks over the transfer of fiscal powers will continue until at least February 23. After months of behind-closed-doors meetings, the deadline to conclude a deal was due to expire today.

The Scotland Bill on new powers for the Scottish Parliament, which is going through Westminster, cannot proceed until an agreement is reached.

Greg Hands, Chief Secretary to the Treasury, had insisted the UK Government’s “compromise” offer on the fiscal framework – the mechanism that will implement Holyrood’s new tax powers – was worth £4.5bn over the next decade.

He argued it would compensate Scotland for revenue lost as a result of its population growing at half the rate of the UK’s over the next few years.

“It will address the issue of ‘population rate’ for tax as the Barnett Formula does for spending,” said the UK cabinet minister. “Effectively, the offer means the UK will share some of the population risk that Scotland faces.”

However, Mr Hands stressed the UK could not be expected to bear it all and Edinburgh would have to carry some risk for its fiscal decisions.

“Using John Swinney’s own forecasts, our offer means £4.5bn of growth in UK taxes going to Scotland in the coming years; with nothing coming back the other way. This is a very generous offer,” argued Mr Hands, who said he had written to the Deputy First Minister, setting out the details of the offer.

But the First Minister rebuffed the finance package, and her spokesman made clear the offer was unacceptable.

He said: “We remain ready and willing to do a deal but that depends on sticking to the Smith Commission’s ‘no detriment’ principle.”

Edinburgh says it does not want to use a mechanism that “embeds systemic cuts” to Scotland’s revenue, but London insists “no detriment does not mean no risk”. There have been three options on the table.

The first – the per capita indexed deduction – is favoured by Mr Swinney as he believes it protects Scotland’s revenue in light of its projected slower population growth.

The third – levels deduction – is favoured by the UK Treasury as it means if the UK population rises, then the UK would benefit fully from the increased revenue. But Mr Swinney says this would put Scotland at a £7bn disadvantage in the coming decade.

A middle option – indexed deduction – has been proposed as a compromise by the Treasury but Mr Swinney believes this would still leave Scotland £3bn short.

Earlier this week, the Commons Scottish Affairs Committee endorsed Mr Swinney’s preference for the per capita option but suggested it could be tweaked with an “additional adjustment” to ensure fairness.

In the next 24 hours or so, the Deputy First Minister is expected to offer a new proposal to break the deadlock.