Page last updated at 08:36 GMT, Friday, 17 July 2009 09:36 UK

Lords call for an end to Barnett

House of Lords
The Lords committee said a new system should be put in place

The system which helps decide the level of public funding in Scotland, Wales and Northern Ireland has been condemned as "arbitrary and unfair".

A Lords committee said the Barnett formula should be scrapped as Scotland's needs were not as great as other parts of the UK.

The system was set up in the 1970s as a short-term fix but became the established funding formula for the UK.

The Scottish National Party repeated its call for full fiscal autonomy.

The Treasury said it would examine the report but that there were no current plans to change the system.

The committee of peers argued that the Barnett formula should be replaced by a system which recognises changing population levels and the differing economic needs of the devolved nations.

They said England and Scotland had markedly lower overall needs per head of population than Wales and Northern Ireland.

It must be replaced with a system of full fiscal responsibility giving Scotland the powers over taxation, including oil and gas
Stewart Hosie
SNP Treasury spokesman

The committee said there should be a link between spending and need - and the needs of each of the devolved administrations should be calculated by an independent body, the UK Funding Commission.

This body would create a new baseline grant taking into account matters such as the age structure, income, health and employment levels within each area, and this would be regularly reviewed.

A proposed transition period of between three and seven years would be needed to bring in the new arrangement.

Lord Richard, chairman of the committee, said: "The current allocations made through the formula give Scotland more funds, per head of population, than appears to be justified when compared to Wales and Northern Ireland and their needs.

"There should be a clear and straightforward method of allocating funds, decided by an independent expert commission, so that taxpayers can be certain that their money is going where it is most needed."

Budget claims

Responding to the publication of the Lords report, SNP Treasury spokesman Stewart Hosie said the only acceptable alternative was full fiscal autonomy for Scotland, allowing the country to raise all the money it spends.

"That is the best and simplest solution - anything less would be messy and unsustainable, and could well leave Scotland worse off," he said.

"All parties recognise that the Barnett formula is no longer sustainable and should be replaced - but it must be replaced with a system of full fiscal responsibility giving Scotland the powers over taxation, including oil and gas, and spending that are needed to effectively manage the Scottish economy."

He added that the case for financial independence was reinforced by the most recent Gers (Government Expenditure & Revenue Scotland) report which showed that in 2007/08 Scotland's current budget surplus was £219m, compared to a UK deficit of £5.3bn - and that Scotland had been in budget surplus now for three successive years, to the tune of £2.3bn.

'Need for change'

Mr Hosie agreed with the Lords' suggestion that some parts of spending on the London Olympics, such as the £3bn spent on regeneration, should be considered English spending rather than UK spending and should therefore be counted in any Barnett calculations.

"It is clear the current arrangements are not working, and we will want to be sure that Scotland has not been swindled out of our Barnett share," he added.

Plaid Cymru's Adam Price said: "Plaid has long opposed the workings of the Barnett formula and now this view has been completely vindicated both by the Holtham Commission, and now in the House of Lords committee report.

"The key issue at stake here is that Wales is losing out because of the Barnett formula, and is set to suffer even more unless it is urgently replaced by a needs-based formula.

"All the evidence now points towards the need for change."

A Treasury spokesman said: "We look forward to examining the report and will respond to its recommendations in due course. The Barnett formula has served the UK well over the years.

"It has proved to be a robust mechanism for allocating spending to the devolved administrations and has stood the test of time. There are no current plans to change the Barnett formula."

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