SCOTLAND stands to lose £3.5billion from its budget within a decade if the Treasury blocks Finance Secretary John Swinney's plan for bringing new powers to Holyrood, according to one of the country's leading economists.

Professor Anton Muscatelli, the principal of Glasgow University, said public spending would face a major squeeze under alternative proposals for the "fiscal framework" that will underpin the Scotland Bill.

His comments will come as a significant boost to Mr Swinney ahead of his meeting today with Greg Hands, the Chief Secretary to the Treasury, in their latest attempt to strike a deal.

At stake is the future of the Scotland Bill, which promises extensive new tax and welfare powers for Holyrood.

Under the legislation, the Scottish Government would set and retain income tax and other levies, worth approximately £15billion in total, and keep a further £5billion of VAT paid in Scotland.

After months of talks, the two governments remain deadlocked over how to reduce Scotland's annual grant from the Treasury to take account of the new tax powers.

Mr Swinney favours a mechanism known as "per capita indexed deduction," which would protect Scotland's budget in the likely event its population grows less quickly than England's.

However, it has been claimed the system would be unfair to English taxpayers.

Writing in today's Herald, Professor Muscatelli rejects the claim, saying the "per capita" method is "a fair deal for both Scotland and the rest of the UK".

Endorsing Mr Swinney's position, he said it was the only system that satisfied the principles laid down by the Smith Commission, whose recommendations formed the basis of the Scotland Bill.

Using official population projections, and assuming Scottish tax revenues kept pace with the rest of the UK, he Scotland would not lose out as a result of slower population growth under the 'per capita' adjustment.

However, he calculated that an alternative system known as "indexed deduction," which had been put forward as a possible compromise, would leave Scotland £3.5billion worse off after 10 years, with the loss increasing into the future.

A third mechanism, known as "levels deduction" would leave a £7billion hole in the finances after a decade.

Raising hopes of a way to break the stalemate, he also suggested the "per capita" mechanism could be tweaked to ensure it was fair to taxpayers on both sides of the border.

Mr Swinney said the economist's conclusions were "stark" and warned the multi-billion pounds losses he identified would breach the cross-party Smith agreement.

He said: "We are not asking for any special favours.

"We are not asking for a penny more than the Barnett formula would have delivered to Scotland.

"But we do demand a fair deal."

Mr Swinney has set a deadline of February 12 to reach a deal, arguing it would leave the minimum time required for MSPs to approve the Scotland Bill before the Holyrood election.

Repeating his threat to walk away unless the deal was right, he added: "We have to be honest: time is now very short."

Labour's Shadow Scottish Secretary accused the two government's of delaying the talks.

He called for details of the behind-closed-doors meetings to be published.

He said: "The new powers are too important to be abandoned at the eleventh hour.

"The new powers must go to the Scottish Parliament as soon as possible so that we can get on with using them.

"We need a deal that is fair to people across Scotland, but neither the UK nor the Scottish Government should leave the table until a deal is done."

A Treasury spokesman said: "The government wants a deal that is fair to Scotland and fair to the rest of the UK. We are also committed to a deal that fully delivers the principles of the cross-party Smith agreement."