A RADICAL pro-devolution group has warned Finance Secretary Derek Mackay against using new powers to increase tax in this week's budget. Reform Scotland was a leading campaigner for taxation responsibilities to be transferred to Holyrood. However, in a surprise call, it said it would be harmful to Scotland's economy to use the newly devolved powers in the budget on Thursday.

The powers over income tax alone are too "blunt (an) instrument" to grow the economy, Reform Scotland said.

Holyrood’s lack of powers over VAT and corporation tax mean that simply increasing income tax would damage the economy, it added. Taxes in Scotland should be pegged to the Westminster level until a full package of powers are devolved, the think tank claimed.

Reform Scotland research director Alison Payne said that VAT and other tax powers could be devolved after the UK leaves the EU.

Writing in the Sunday Herald, she said: "Since its inception nearly a decade ago, Reform Scotland has argued for more fiscal powers for the Scottish Parliament. We believe that those who exercise power should, as far as possible, be responsible for raising the money to pay for their decisions. So, having spent so long arguing for more tax powers, it may seem contradictory that the ask we have of all of Scotland’s political parties is that they do not use the income tax power which has been devolved, but instead peg it to Westminster.

"We do so because the devolution of non-savings and non-dividend income tax alone represents a disproportionate and blunt instrument which is incapable of creating the conditions for economic growth.

"Around two-thirds of the tax raised by the Scottish Parliament now comes from this single source of income tax. Contrast that with Westminster, whose basket includes the very large elements of National Insurance, VAT and the smaller but significant corporation tax."

Payne added: "Furthermore, despite the admittedly substantial latest instalment in the devolution journey, the Scottish Parliament still only controls about 40 per cent of what it spends."

Payne pointed out that corporation tax powers had already been devolved to Northern Ireland.

She said: "There are two very obvious levers which could balance the tax basket. The first is VAT. With the UK voting to leave the EU, there is no reason why the UK Government cannot give a commitment now to devolve VAT in full once we have formally left the EU.

"Secondly, there is precedent to devolve corporation tax within the UK, as it has been done in Northern Ireland. The circumstances of that devolution (tax competition with the Republic) are irrelevant; the only relevance is that it can happen, not why it has happened. Income tax, business tax, sales tax. That is a basket. And a basis for coherent tax reform. Until then, no change, please."

A Scottish Government spokesman said Finance Secretary Derek Mackay would set out his tax plan in the budget this week, adding: “The serious economic threat posed by Brexit, coupled with continuing UK Government austerity following the UK Government’s budget last month, means we are seeing increasing pressure on our public services, and the time is right for a discussion about how we protect these vital services.

“That is why we have started a conversation, including the publication of our discussion paper, to look at how best to use our income tax powers. Our income tax discussion paper outlined four key tests that we feel any change in income tax must meet. One of those was that, when combined with our spending decisions, any change in tax policy should support the economy. Following this careful and considered discussion, we will publish a balanced package of tax and spending proposals as part of the draft budget on December 14.”

Meanwhile, Mackay said the budget would seek to "unlock economic potential" in manufacturing, innovation, digital connectivity, infrastructure and housing.

He said: "As well as continuing to protect public services, the 2018-19 budget will prioritise economic growth and innovation to enable Scotland to grasp the opportunities presented by a rapidly changing global economy.

"Our ambition to create an economy that works for Scotland will be driven by investment in infrastructure, capital, research and in our people.

"We are proud of our entrepreneurs and appreciate that the risks they take in order to innovate require investment.

"This budget will meet those needs by delivering on key commitments to support research and development, to give Scottish companies a competitive edge in manufacturing processes through the establishment of the National Manufacturing Institute for Scotland and to reform business rates."