Who should rule Scotland? On 30 November, St Andrew's Day, the government will publish a disappointing bill on Scottish devolution. It will follow an equally disappointing one on English devolution. For all its fine pre-election words on "big societies", small governments and re-empowered communities, David Cameron's coalition still has to show what it means in practice.

The Scotland bill will tinker with Edinburgh's borrowing powers, shuffle the Treasury's finance silos and ensure no serious fiscal discretion moves north from Westminster to Edinburgh. Scotland will remain free to splash out on free universities, free prescriptions, free age care and a dwindling council tax – and blame London if anything gets cut. It must be the largest political entity in Europe still without a realistically devolved tax system. Even English parishes can set a local tax.

When Cameron raced north in May to honour an election commitment to "visit Scotland first", no one knew if it was a priority or a sop. It was a sop. The coalition had a golden opportunity immediately to forge a holy alliance between itself and the SNP first minister, Alex Salmond. That opportunity was to give Scotland full fiscal devolution, end the Treasury subvention and reduce the number of Scottish seats at Westminster. It has been blown.

The best plan was that set out in a minority report to last year's Calman committee on Scottish public finance. By giving Edinburgh freedom to tax and spend on functions within its jurisdiction, it would have forced Scottish politicians to come to terms with what they could afford. It would have saved London money and could have saved Cameron from hundreds of Scottish MPs, had he negotiated a new federal relationship between Edinburgh and Westminster. Cameron's Tories would have gained much and lost nothing.

Except power. It is awesome how swiftly this coalition is sliding into the familiar clothes of Treasury control. The new bill will accept the Calman recommendation that the present Scottish discretion to raise up to 3p in the pound on local income tax be raised to 10p. Since Scotland has made no use of the 3p facility, there is even less likelihood it will raise it to 10p. Under Calman, the London subvention would also be decreased by the equivalent of the yield of the extra Scottish tax, making the tax a no-win for Scotland. Only if Scotland decided to go on increasing its income tax would there be any "fiscal bite", and that would have to depend on some separate tax demand. This is also fanciful. The reform will be a dead letter.

The more radical option would have given Scotland its own tax-and-spend regime: Scottish taxes for Scottish services. Known as the Basque option, it would be less than full autonomy but would give Scotland a distinct fiscal personality, inside the UK and Europe. A residual tax, such as stamp duty or VAT, could be allotted to London to pay for joint UK services. Scottish local councils could be freed to fix their council taxes, currently frozen. If Scotland wanted to tax itself some more, it would be free to do so and account for it to its voters.

Although polls suggest that only a minority of Scots want "full independence" – a meaningless concept in modern Europe – most say they want greater devolution. They want to render unto Scotland the things that are Scotland's, and to Britain only what is Britain's. They cannot see why England so stubbornly refuses. The Basque option does not infringe the union, while every bout of resistance from London fuels the wilder demands for independence.

London's response to pleas for more autonomy is supremely patronising. It is that Scotland is too poor (which is Scotland's business) or, if given oil, too rich (also Scotland's business). Or the Scots are too irresponsible, not up to the job, not ready, too grasping or too reckless. None of these arguments is proof against devolved democracy, in a country that is bigger in population than Denmark, Norway or New Zealand. Scotland is cheated of the virtues of smallness while saddled with the vices of bigness.

London's approach parallels the contempt it shows towards local government generally. This week the cabinet is to announce its proposals for fiscal devolution within England. For all the coalition's boasts about decentralisation, the proposals will leave in place the entire Thatcher-Blair apparatus of incomprehensible and dirigiste grants and tax caps. Freedoms allowed local and provincial governments throughout Europe are not to be tolerated. No local government minister, not even Eric Pickles, has the guts to confront the Treasury's control freaks, as did Iain Duncan Smith over welfare reform.

The one innovation is the bizarre manifesto commitment to enable councils to propose, with their council tax demands, a California-style plebiscite on a "budget B", if taxpayers sincerely want more to be spent on local services. The amount must be specified, as will the extra council tax required. There is no question of a council having an electoral mandate to improve local services. There must be a separate referendum.

It is worth pondering how Cameron and George Osborne would respond if Brussels decided to require a plebiscite on the chancellor's annual budget, with an alternative higher-taxing option that taxpayers could veto. They would howl at the outrageous infringement of a democratic mandate.

The iron law of devolution is that without fiscal bite it is either irresponsible or a subcontract. Yet British governments seem genetically programmed to resist it. They cannot contemplate letting peripheral and subordinate democratic institutions enjoy discretion. Pickles is even proposing to cap the hitherto uncapped parish rate. Why? To stop some hapless parishioners having the temerity to overspend his budget norm on municipal petunias?

Had Cameron gone for the Basque option in Scotland, he would save money, escape odium for cuts and make it possible to have fewer opposition MPs facing him in the Commons. The Liberal Democrats could have taken credit for a serious step forward in devolution and constitutional change north of the border. Only Labour would have been discomfited. Why should Cameron and Nick Clegg worry about that? An advantageous strategy has been sacrificed purely and simply because Cameron's cabinet cannot bring itself to relinquish an iota of central control. Forget reading his lips, deep down Cameron is a big government man at heart.