Scotland should raise two-thirds of its own taxes, says former Lib Dem leader

The former Liberal Democrat leader Sir Menzies Campbell has proposed allowing Scotland to raise two-thirds of its taxes as the first step towards a new federal structure for the UK.

Campbell will recommend that other parts of England should consider setting up their own regional assemblies, while the Welsh assembly would get greater autonomy, before the introduction of a wholly new federal treaty for the UK, overseen by a new federal parliament.

The proposals are at the heart of 56 recommendations set out in a new plan for "home rule" for Scotland, which Campbell is due to publish in Edinburgh on Wednesday, and which has been leaked to the BBC.

Commissioned by the Scottish Liberal Democrat leader, Willie Rennie, the report will set out the first detailed plans put forward by any of the three UK parties as an alternative to Alex Salmond's independence proposals.

Salmond's quest took a significant step forward on Monday after he and the prime minister, David Cameron, signed a historic agreement giving Holyrood the legal powers to stage an independence referendum in late 2014.

All three UK parties, Labour, the Tories and the Lib Dems, have been under pressure to produce detailed counter-proposals after successfully resisting the Scottish National party leader's efforts to get an extra question on greater devolution included in the referendum.

Based on the latest opinion polls showing a drop in support for independence, and private polling by the pro-UK umbrella campaign Better Together, the three UK parties believe Salmond will lose the referendum.

Campbell's eight-member commission will argue that defeat for independence would "open the door to radical constitutional change" for Scotland and the UK, accelerating legislation for greater devolution after the 2015 general election. They also suggest the SNP should take part in those discussions if the referendum is lost.

In one of the most radical proposals, Campbell will suggest eventually abolishing the Act of Union in 1707, which scrapped the Scottish parliament and handed overall political power to Westminster.

It would be replaced by a new "declaration of federal union" for all parts of the UK.

A new federal government would take over central control for foreign affairs, defence, currency, welfare and pensions, the BBC reported.

The Scottish parliament would control income tax rates, capital gains tax and air passenger duty, but not set VAT or alcohol or excise duties, which would remain set at UK level.

Campbell hopes his proposals will be central to the Lib Dems' manifesto at the 2015 general election, when the party will be under intense pressure to rebuild its popularity following the damaging government coalition with the Tories at Westminster.

But they are not yet UK party policy. His report has to be endorsed by the Scottish party's autumn conference in Dunfermline on 27 October and then passed to a federal party committee.

Keenly aware that the north-east of England rejected proposals by Labour's John Prescott for a regional assembly, while demands for home rule in Cornwall have only minority support, Campbell's report notes that different parts of the UK would move at different speeds.

Campbell says it is his "firm belief" that his proposals are in the best interests of the UK as a whole, not just Scotland. In his introduction, Campbell states: "Over time, we are confident that the constitutional debate in England, currently under-developed, will progress and reach a conclusion – but time will be required for that debate.

"We expect that Scotland will contribute to the terms of that debate, at least by example, but it is for people in England to determine how they wish their own national and regional identities expressed within the constitutional structures of our United Kingdom."

He added: "Scotland will thrive with the fiscal responsibility and authority that comes with home rule, but that home rule settlement can only be stable if it forms part of the move to a truly federal United Kingdom. We shall promote home rule and federalism at every opportunity."

The Liberal Democrats highlighted the fiscal dangers of an independent Scotland when Danny Alexander, the chief secretary to the Treasury, said it would face higher borrowing costs. Alexander, who is MP for Inverness, Nairn, Badenoch and Strathspey, told the House of Lords economic committee an independent Scotland would have a similar level of debt to the rest of the UK. But it would have to pay a premium on its debt because it would be a "newly established country without any established fiscal track record".

Sir Nick Macpherson, the Treasury permanent secretary, told the same committee: "Even countries that are pursuing [a] credible and tighter fiscal approach, such as the Netherlands and Finland, pay a premium on their debt compared to Germany. Even if on day one Scotland is pursuing a surplus there would be some sort of premium."

The remarks follow a warning by the three leading credit rating agencies that an independent Scotland could not count on inheriting the UK's triple A credit rating. The three agencies – Standard & Poor's, Moody's and Fitch – all told the Financial Times in February that an independent Scotland would have to apply for a rating with no guarantee of a triple A rating.