Devolution would lead to greater freedom for voters on taxation and social policy in alternative to SNP proposals
Scottish voters could be offered even greater freedoms on taxation and social policy after Labour said it would consider "radical" new powers under devolution.
A Labour party commission has been set up by the Scottish Labour leader, Johann Lamont, in an attempt to develop an alternative to Alex Salmond's proposals for independence, which are due to be put to a referendum in autumn 2014.
Senior party sources admit this process could eventually lead Labour to propose constitutional and political reforms in Westminster and other parts of the UK, to avoid Scotland's new powers creating further tensions with the rest of the UK, or raise questions about the role of Scottish MPs at Westminster.
Lamont will tell the Scottish Labour conference in Dundee that the party would consider greater devolution at all levels of government within Scotland, a measure that could lead to substantial local council reform and potentially new local taxes.
She will admit that new proposals are essential to prove to disillusioned voters that Labour has fresh ideas to offer after its humiliation in last May's Scottish parliament elections, when "the party got the kind of beating we deserved."
She is expected to say that further devolution does not just mean shifting powers from London to Edinburgh. "If we believe in devolution, we must be more radical than that and ask at which level power should lie if we are to serve the people. Our test is what is in the best interests of the people of Scotland," she will tell delegates.
Her announcement follows direct attacks on Salmond and the Scottish National party in a speech by UK party leader Ed Miliband on Friday
He accused the first minister of seeking only "separation, division, isolation" as the solution for the country's poorest. "If we are going to create a fairer tax system, we must avoid the race to the bottom on tax rates that separation would import," he said. "And if we believe in the idea of Scotland as a progressive beacon, why would we turn our back on the redistributive union, the United Kingdom?" He went on: "Right now, every nation in the UK, every child in poverty, every young person out of work, every small business struggling, needs solidarity, not isolation."
Labour's commission has been preceded recently by open admissions by Alistair Darling, the former Chancellor, and Douglas Alexander, the shadow Foreign secretary, that the Scottish parliament will need new tax powers which could see it raising nearly all the £30bn it spends each year, independently of the Treasury.
Lamont will also play down expectations that Labour would propose sweeping tax-raising powers on corporation tax, or devolve significant powers on welfare or social security benefits, in a sideswipe at Salmond's recent demands. A party official said it would have to take a "cold" look at the impact of new taxes on the whole of the UK.
"I will not be seduced into the place where which powers you demand is a test of pollitical virility. Where calling for corporation tax to be devolved somehow makes you harder, or more Scottish, or even more progressive," she will tell delegates.
It is the latest in a series of initiatives to consider giving Scotland greater autonomy than under existing plans, the so-called "devo plus" option. As things stand, Holyrood is in line to gain new powers only over income tax rates, which will come into force in about 2016.
Repeated opinion polls have shown that more Scottish voters favour devo plus than independence, but Labour has until now resisted promising a significant transfer of power.
The Liberal Democrats are now investigating greater devolution in a "home rule" commission led by Menzies Campbell.
Last month, David Cameron said the Tories could offer further powers too, but only after the referendum.
Lamont's commission will be set up later this spring, but unlike the Lib Dems' review, will include only Scottish Labour MPs, MSPs, councillors and trade union leaders. It will not include figures from the voluntary sector, churches or business.
Senior Labour figures admit that proposing detailed new powers at this stage could backfire, by helping Salmond to challenge them with a question on enhanced devolution at the referendum. The first minister has insisted he wants the option of putting two questions on the referendum ballot paper, and has resisted pressure from David Cameron and Labour to pose just one "yes or no" question on independence on the voting paper.
So far, no political party or campaign group has offered to support a second question or to campaign for it but in a speech on Friday, Salmond fed growing suspicions that he would ask it anyway, and force Labour and the Lib Dems to tell voters why they would not campaign for it in the referendum.
Speaking at a Times conference on the independence, Salmond said these opinion polls showed that current devolution structures were "unsustainable". That presented the UK parties with a dilemma.
"There is a growing need for those parties who are against independence to set out what they actually stand for," he said.
"It is something of a paradox that the people most urgently calling for an early referendum are the ones who are currently least equipped to argue their case in any campaign.
"Without a clear statement of what Scotland might look like in future within the union, the case against independence is inevitably based more on a negative view of Scotland's potential than a positive vision of the future."