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27 November 2014, 06:16 | Updated: 27 November 2014, 10:20
Holyrood is to be handed new responsibilities over income tax and welfare as part of a deal on devolution drawn up in the aftermath of the Scottish independence referendum.
The Smith Commission, which was set up to examine what further powers could be transferred to Edinburgh, has recommended that the Scottish Parliament should be able to set its own income tax rates, with all of the cash earned staying north of the border.
The commission also backed the devolution of air passenger duty, something the SNP has been campaigning for, and suggested a share of cash raised from VAT be assigned to Holyrood.
The Scottish Parliament should be allowed to create new benefits in areas where it has devolved responsibility, but should also be given the power to make discretionary welfare payments in any other area, while a range of benefits that support older people, carers and the sick and disabled could be fully devolved, the report said.
The commission called for legislation to make Holyrood a permanent feature of the UK's political set-up, and proposed it be given powers over its own elections, which could pave the way for 16 and 17-year-olds to vote in Scottish Parliament elections after they were allowed to take part in the independence referendum.
Commission chairman Lord Smith of Kelvin said: "Taken together, these new powers will deliver a stronger Parliament, a more accountable Parliament and a more autonomous Parliament.''
Speaking as the commission unveiled its proposals in Edinburgh, he added: "The recommendations, agreed between the parties, will result in the biggest transfer of powers to the Parliament since its establishment.''
Prime Minister David Cameron had announced the establishment of the commission within hours of the result of September's independence referendum.
The contents are the result of more than a month of cross-party talks with representatives from each of the Scottish Parliament's five political parties.
While the SNP, Liberal Democrats, Conservatives and Greens all favour the full devolution of income tax, Labour has officially only backed Holyrood having control over some of the tax, with former prime minister Gordon Brown warning that full control would be a ''Tory trap''.
Lord Smith said today the agreement was "an unprecedented achievement'' because it had ``demanded compromise from all of the parties''.
He said: "In some cases that meant moving to devolve greater powers than they had previously committed to, while for other parties it meant accepting the outcome would fall short of their ultimate ambitions.
"It shows that however difficult, our political leaders can come together, work together and reach agreement with one another. I pay tribute to them for doing just that.''
Lord Smith's recommendations, known as a Heads of Agreement, will form the basis of draft legislation due to be published by January 25.
The main parties at Westminster have pledged that the legislation will be taken forward regardless of the outcome of the general election in May.
On benefit, the Commission recommended that all aspects of the state pension should remain reserved to Westminster to ensure these remain the same across the UK.
The new Universal Credit should also remain a reserved benefit, to be administered and delivered by the Department for Work and Pensions, it added. Child benefit, statutory maternity pay and statutory sick pay would also remain under UK Government control,
But it suggested attendance allowance, carer's allowance, disability living allowance and the personal independence payment which will replace it should be devolved, along with industrial injuries disablement allowance, severe disablement allowance, cold weather payments, and winter fuel payments.
While the agreement states there should be "no restrictions on the thresholds or rates the Scottish Parliament can set'' on income tax, it said all other aspects of the levy would remain reserved to Westminster, including the amount people can earn before they start to pay.
As income tax will still apply across the UK, it should continue to be collected and administered by HM Revenue and Customs, the Commission said.
The Barnett Formula, which sets out how much public cash different parts of the UK receive, will continue as part of the agreement. The Commission recommended that Holyrood be given additional borrowing powers.
It said this was necessary to "reflect the additional economic risks, including volatility of tax revenues, that the Scottish Government will have to manage when further financial responsibilities are devolved''.
The Commission recommended that the management of the Crown Estates economic assets in Scotland and the revenue generated by these should be transferred to Holyrood.
It went on to propose that following this transfer, responsibility could then be given to local authority areas, such as Orkney, Shetland and the Western Isles.
Westminster should remain in charge of licensing for all offshore oil and gas extraction, but Holyrood could get the power to determine onshore oil and gas extraction.
The parties involved in the Smith Commission are also "strongly of the view to recommend the devolution of abortion'' as Holyrood already has power over health policy.
The report said that "further serious consideration'' should be given to this and a "process should be established immediately to consider the matter further''.
Mr Cameron said: "I'm delighted with what's been announced. We are keeping our promises and we are keeping our United Kingdom together.
"I always said that a No vote did not mean no change. Indeed, we made a vow of further devolution for Scotland and today we show how we are keeping that vow and we will continue to keep that promise.
"The Scottish Parliament is going to have much more responsibility in terms of spending money but it will also have to be accountable for how it raises taxes to fund that spending and I think that's a good thing.
"I think the report today also makes the case for English votes for English laws unanswerable and we will be taking action on that shortly.
"I think taken together, this extra devolution for Scotland and deal on all these issues will mean our United Kingdom is stronger.''
Mr Cameron said proposals for English votes will be published "before Christmas'' and that draft clauses for devolution will be before Parliament in January.
Asked whether the Smith Commission proposals marked a "slippery slope toward the end of the Union'', Mr Cameron said: "I don't think it does.
"I think what this report will do is achieve a better deal in our United Kingdom - a stronger Scottish Parliament in particular for raising and spending money but with the responsibility and accountability that involves.''
New Scottish Deputy First Minister John Swinney said the proposals would fail to deliver the "powerhouse parliament'' the leaders of the Westminster parties had promised in the days immediately before the independence referendum.
Mr Swinney, who was one of the SNP representatives on the commission, said nationalists "welcome the new powers - as we support all progress for Scotland - and pledge to use them when they are in place in the best interests of the Scottish people''.
But he said the proposals "clearly do not reflect the full wishes of the people of Scotland'' for constitutional change and "also fall far short of the rhetoric from the No campaign during the referendum''.
Mr Swinney said: "Regrettably, the Westminster parties were not prepared to deliver the powerhouse parliament the people of Scotland were promised - under these proposals, less than 30% of our taxes will be set in Scotland and less than 20% of welfare spending will be devolved to Scotland. That isn't Home Rule - it's continued Westminster rule.
"As polling has shown, two-thirds of people want Scotland to have all powers apart from defence and foreign affairs - devo max - including majorities among supporters of all political parties; 71% want control of all taxation in Scotland, 75% want control of the welfare and benefits system, 65% want control of policy regarding the state pension, and 68% want control of oil and gas revenues.
"Most significantly, the proposals do not include the job-creating powers that Scotland so badly needs to get more people into work and grow the economy, or welfare powers to tackle in-work poverty.
"Control of employer national insurance contributions, tax incentives for research and development, the personal allowance to lift more low earners out of tax and make work pay, corporate taxation, child and working tax credits, and the ability to shape a welfare system that helps rather than hinders the path to employment - these all stay with Westminster.
"This was a missed opportunity to devolve the welfare system in order to help build a fairer, more prosperous society - as the Scottish Council for Voluntary Organisations and many other expert organisations in civic Scotland called for - and the minimum wage, as the STUC (Scottish Trades Union Congress) wanted.''
He added: "We will use all the new powers Scotland gets wisely, to improve the lives of the people we serve.
"But the opportunity of the commission was to make this the strongest package of self-government possible short of independence - which is effectively what the people voted for in the referendum. Unfortunately, this falls short because it could only go as far as the Westminster parties were prepared to go.
"Next year's general election offers the people of Scotland the opportunity to have their say, and the SNP will propose improvements to the package for which we will seek popular support in May. The Westminster parties have now gone as far as they are ever prepared to go in terms of powers for Scotland - and it is not as far as they indicated during the referendum. They have drawn their final line in the sand - and it is on the wrong side of majority opinion in Scotland.
"The general election enables the voice of the people to be heard over the powers that Scotland needs to boost employment and tackle inequality - and we look forward to their verdict.''
Deputy Prime Minister Nick Clegg said the three main Westminster parties had fully delivered on promises made during the referendum campaign.
"We have not only delivered on our vow, we have actually over-delivered on it now. Call it 'vow-max' if you like, 'vow-plus-plus','' the Lib Dem leader said on his weekly LBC radio phone-in.
"It shows what can happen when politicians get together and agree across parties to set their differences aside. I think that contrasts quite starkly with the politics of confrontation which you get from the SNP, which wouldn't deliver any of this at all.''