Image copyright PA Image caption George Osborne said the Scottish government would have to bear the consequences of using its new powers

Chancellor George Osborne has told MPs that new powers being handed to Scotland could result in a UK-wide competition over tax rates.

The Tory minister was giving evidence to the Treasury select committee which is examining the Smith Commission plan.

Mr Osborne said it would be up to Scotland to decide whether to vary future tax rates and therefore spark "competition".

He added that Holyrood would bear the consequences of using its new powers.

On Thursday the draft Scotland Bill is due to be published.

That represents the next stage in a process to send more powers across the border.

During the Scottish independence referendum campaign, the Tories, Labour and Liberal Democrats vowed to give greater responsibility to Holyrood if voters said "No".

On 18 September, the electorate decided 55% to 45% against change.

Tax thresholds

Lord Smith, who headed the devolution commission, recommended that control over income tax would be shared between the UK and Scottish parliaments.

But within this framework, MSPs would have the power to freely set the rates of income tax and the thresholds of Scottish taxpayers.

Mr Osborne was asked whether that move could lead to "tax competition".

He told the committee: "Ultimately that is a decision primarily for the Scottish Parliament and the Scottish government as to whether they pursue that or not.

"I think it is quite interesting that off the back of the changes we announced at the Autumn Statement to stamp duty that then led to the Scottish government saying it would revisit its proposals on stamp duty.

"You could say that that is a bit of tax competition in action."

George Osborne on the 'no detriment' principle Scenario One Scenario Two Tax rise - The Scottish government decides on a substantial rise to the top rate of income tax resulting in higher tax payers moving from Scotland. Would the 'no detriment' principle mean the UK government compensating Scotland? Tax cut - If Scotland were to aggressively cut taxes and for example wanted to make less onerous the 45p tax rate, might that lead to quite a few English tax payers moving to Scotland? And would that be a risk to income tax yield? George Osborne says: "The UK government will negotiate this in detail after the general election.My interpretation of "no detriment" is that in the example you give there, Scotland would live within the consequences of having imposed a punitive rate of income tax.So, if it imposed a punitive rate of income tax and as a result people left Scotland, partly to the rest of the UK and partly to other parts of the world, Scotland would live with the consequences of that action - it would take responsibility for that action." George Osborne says: "If the Scottish government were to pursue an aggressive policy of lowering taxes, under this agreement they would have to bear the first round impact of that because in the first instance they would potentially forgo revenue.But this would be assessed under the system I would envisage by independent fiscal councils.If over time they gained money as a result of a stronger more entrepreneurial economy then they should see the benefits of that decision that they have taken."

The committee quizzed the chancellor in detail about the Smith Commission principle that there there should be no "detriment" to either Scotland or the rest of the UK in regard to tax receipts and spending.

Mr Osborne explained to committee chairman Andrew Tyrie: "The no detriment principle is around the adjustments to the block grant connected with the loss or additional tax revenues that come from the first round effects and potentially behavioural effects.

"But I think it is important, and I think this is fundamental to what everyone is trying to establish here with this further devolution, that people live with consequences of their actions."

He explained that "no detriment" principle should not try be used to "compensate" for "not very clever economic decisions."

Mr Osborne said that deciding on what was "not clever economic decisions" would form part of negotiations between the future UK government and Scottish governments.

He also believed it was important to have a robust and independent fiscal analysis of the public finances in Scotland.

Mr Osborne covered a number of issues during his evidence session, including;

North Sea - he hinted at fresh measures to shore up the Scottish oil industry in the wake of tumbling prices.

- he hinted at fresh measures to shore up the Scottish oil industry in the wake of tumbling prices. Benefits - he said it was made clear in the Smith agreement that key benefits such as universal credit would be reserved to Westminster.

- he said it was made clear in the Smith agreement that key benefits such as universal credit would be reserved to Westminster. Pensions - he said that although discretionary payments could be used by Scotland it would not be in the spirit of the Smith agreement for Scotland to create a second Scottish top-up pension.

ANALYSIS

By Tim Reid, Westminster political correspondent