Changing Barnett Formula simply doesn't add up

It was cobbled together by Labour's chief secretary to the Treasury, Joel Barnett in the last year of the Callaghan government, and Lord Barnett himself has said he never expected it to last this long.

People – especially English Tory MPs – have denounced it for years, declaring that it favours Scotland at the expense of England. Their complaints have become louder and more bitter since the Scottish Parliament came into being in 1999, all the more so because, being confined to opposition, they have been free from any responsibility to devise a satisfactory alternative.

However, before we become too aggrieved ourselves, we should note that Professor David Bell, of Stirling University, has calculated that England now loses out annually on about 4.5 billion of public money because it is diverted to Scotland.

In drawing up their scheme for devolution, Donald Dewar & Co shrank from addressing the question. They did grant the Scottish Parliament tax-varying powers, allowing it to raise or reduce income tax by 3p in the pound. But, since neither the Labour/Liberal Democrat coalition, nor the present SNP administration, has chosen – or dared? – to make use of this power, it is effectively a dead letter. It may be there to be used, but varying income tax either way might have consequences that would be politically embarrassing.

So the Barnett Formula has operated since 1999, just as it did for 20 years previously. The Scottish Parliament gets the money that used to be dispensed by the secretary of state and the Scottish Office. It might seem that nothing has changed. Yet this isn't quite true.

If the means of determining what the Treasury hands over to Scotland remains the same as in pre-devolution days, the Scottish Government now has more freedom in deciding how it should spend this money than the secretary of state for Scotland used to enjoy. He did indeed have a good deal of latitude, and strong or jealous secretaries of state defended their territory fiercely.

Labour minister Richard Crossman complained in his diary – and probably, from what one remembers of Crossman, in conversation with colleagues too – that Willie Ross, Harold Wilson's Scottish secretary, used to prevent the Cabinet from discussing Scottish business at all. Nevertheless, in the last resort, the secretary of state, being a member of the UK government, could not step too far out of line.

But, since devolution, the Scottish Executive and Parliament have, quite rightly, been free to allocate money as they choose. So, unlike England, we have free care for the elderly and students pay no tuition fees.

We may approve of this, but we can hardly be surprised if English politicians express some resentment when they see us enjoying what might be called luxuries that cannot be afforded in England.

So there have been these calls for a revision of the Barnett Formula to reduce, or eradicate, the "unfair advantage" Scotland is thought to enjoy. These demands come more stridently from the Tory benches, simply because the party scarcely exists in parliamentary terms here in Scotland.

They are generally more muted from Labour, partly because Labour has its big contingent of Scottish members, partly because of an awareness that opening the Barnett can of worms might lead to questions being asked about the distribution of regional spending in England.

After all, public spending per head is lower in the north-east of England than in Scotland. But it is lower still in other parts of England. If the South-east believes, rightly or wrongly, that it subsidises Scotland, it subsidises other English regions too. So it's not surprising that the Labour government has preferred not to disturb the sleeping dog called Barnett.

Still, the dog is likely to be woken up if we have a Tory government. David Cameron might prefer to let it lie, if only because it is in his interest not to inflame nationalist sentiment here, but his back-benchers will be eager to taste Scottish blood.

The trouble is that any reform will be devilish difficult, affecting not only Scotland, but Wales too and, even more edgily, Northern Ireland, which is – for good and obvious reasons – the most heavily subsidised part of the UK.

Even the allocation of money between different regions of England would have to be examined. A can of worms indeed – and the determination of any new needs-based system is a formidably demanding task.

Cameron has spoken, approvingly, of amending the Scotland Act to allow the Scottish Parliament to raise some – most? all? – of its own revenue.

Deciding how this can be done, and calculating what Scots should then still pay in tax to the UK Treasury, will also be difficult, for we should not forget that a good part of public spending in Scotland comes from the Treasury by way of the Department of Social Security (or whatever it is called this week) and not from the Holyrood budget. This includes pensions and most benefit payments. Moreover, some of what is thought in England to be disproportionately high public spending per head of population here is the result, as in the north-east of England, of the numbers on some of these benefits.

In other words, you might reform or get rid of Barnett, grant Holyrood the power to raise revenue to cover its own budget and still find that in certain areas the UK Treasury might seem to be subsidising Scotland with a higher per capita public spend than in affluent regions of England.

Of course, there is a comparable disparity between east and west within Scotland, but this makes little, if any, impression on Tory back-benchers.

So Barnett may linger awhile yet, at least until the Scotland Act is amended to make Holyrood responsible for raising its own revenue. (And working out who pays income tax and VAT to Edinburgh and who to London will not be easy either.)

Even then, discrepancies and causes for discontent would remain, for, to adapt Abraham Lincoln's observation, in politics you can please some of the people all the time, and all the people some of the time, but you can't please all the people all the time.