How long can spending on our population last?

JACK McConnell has hit the jackpot. The spending review yesterday has handed the First Minister a payout that his predecessors could only have dreamed about - it was barely announced, almost treated like a secret, but the figures are undeniable.

Thanks to a mixture of maths, coincidence and botched political ploys, Scotland has emerged as an unmistakable winner from the spending review. The First Minister will soon have more money than almost any of his counterparts.

True, Scotland’s share of the UK spending cake has shrunk: but only slightly. True, Scotland may bear the brunt of the Ministry of Defence cutbacks - and this comprises a large share of government spending north of the Border. Yet for Mr McConnell, there is only one word for it: windfall.

This year, Mr McConnell is being sent 21.3 billion from the Treasury - by the time he fights the next Holyrood election in May 2007 this will be 25.5 billion. Add to this the proceeds from business rates and he will have just short of 30 billion.

This, plus the money directly channelled to Scotland by Whitehall, such as social security and defence industry outgoings, will mean spending of more than 11,000 for each man, woman and child in the country - half of it by the Scottish Executive.

By international standards, this is a fortune. Nationmaster, which compares figures for every country in the world, finds only one administration that will shower more cash on its population than Scotland: the Vatican City, whose population is only 940.

No Scottish secretary, nor any First Minister, has enjoyed the kind of financial firepower that Gordon Brown yesterday handed to Jack McConnell for the rest of his parliamentary term. The opportunity to transform Scotland with these proceeds is extraordinary.

The extra 5 billion is enough to treble Scotland’s transport budget. It can, in a stroke, deliver a cash injection to Scottish universities ten times that given to England by the painful and politically bruising decision to introduce top-up fees.

Suddenly, the estimated 500 million cost of the M74 extension in Glasgow looks quite affordable.

Mr McConnell could build nine more Scottish Parliament buildings - even at the bloated cost of 400 million. All this choice without being forced to do an inch of reform.

The First Minister has the laws of devolution to thank for his windfall. For the past three months, every other secretary of state has been in to the Treasury, cap in hand, promising a whole series of painful reforms to earn extra cash. No investment without reform has been the general rule.

But Scotland is - thanks to devolution - granted immunity. Mr McConnell has been able to cling to the comprehensive education system, being abolished in England, and the state-run hospital system, being liberalised in England. It may infuriate Mr Brown, but the Chancellor can’t touch him.

This freedom from Mr Brown’s control is guaranteed by the Barnett formula, which has been used since 1978 to decide how to share public spending between the countries of the United Kingdom, and which protects a long-standing Scottish advantage.

Every increase in English public spending will trigger a fixed amount to the Scottish budget, which the First Minister can divide up as he likes. MSPs can reject English-style reforms and still claim the cash.

The beauty of it is that Scotland does not necessarily need the money. It already has a generous spending advantage over England, which means health, education and transport are securing generous settlements.

In health, for example, the NHS in England is given 1,200 of spending for every head of population. Yesterday’s spending review will allow Mr Brown to raise this to 1,500 - but by 2007. It’s a slow process, but it is the reason our taxes have gone up.

In Scotland, however, health spending is already at 1,500 a head - and, by the time Mr Brown’s extra cash is spent, this figure will end up at 1,800. This is a direct function of the Barnett formula, which always keeps Scotland’s health spending ahead.

The Scottish National Party point out that the Barnett formula was intended to destroy, rather than protect, this advantage. And, indeed, Scotland’s share of the cake is steadily falling - but at a slow pace. By 2007-8, the share will be 7.49 per cent - down from 7.64 per cent today.

This is the "Barnett squeeze", which undeniably has wiped 500 million from Scotland’s settlement over the course of this spending review alone. This is its original intention: to slowly eliminate spending advantage piece by piece.

Yet at this rate, it will take several decades to wipe out the windfall that Mr McConnell will now enjoy.

Such slow progress is why the Barnett formula has been denounced by Lord Joel Barnett, its inventor, and cursed across the north of England, where no such formula applies.

Politically, this is hugely sensitive. Several English ministers are furious about the Barnett formula, and opinion runs so deep that an entire political party, the English Democrats, has been set up with the aim of abolishing it.

At the last European Parliament elections, almost 500,000 English voters felt so strongly about the issue that they went for the English Democrats above any other party. Any Scottish minister who feels complacent with yesterday’s settlement should consider the party’s campaign message.

The Barnett formula is "an unjustified and unfair institutionalised discrimination against the people of England and will not end until they make their displeasure known," its manifesto warns voters. "The government is controlled by Scots, so it is understandable that they feel no guilt about giving preferential treatment to Scotland."

Yesterday’s spending review was exactly what such people have in mind. Their conclusion is backed up by one Scottish minister, who last week said that "the Barnett formula is safe as long as we have a Scottish chancellor or Scottish prime minister".

Yesterday, the Chancellor guaranteed Scotland’s settlement until March 2008. It is not inconceivable that, by then, someone English will be in the Treasury - by which time devolution will be granted to English regions. When they have a voice, it is likely to call for the abolition of the formula.

Peter Mandelson, Alan Milburn and Stephen Byers - a powerful trio of former ministers - make little secret about their desire for the formula to be abolished.

Traditionally, three forces have militated to protect Barnett - and all three have been substantially weakened.

Lord Lang of Monkton always used the SNP threat to protect his budget, warning that nationalism would be inflamed by any cut. Now, however, the SNP leadership battle shows the party as a risk only to itself.

Second, the secretary of state for Scotland could be relied on to argue Scotland’s case inside the Treasury. But this has effectively been abolished as a full-time post. Finally, the number of Scottish MPs is being reduced by 11, to 59. There are simply fewer MPs to protest.

Yesterday, the Executive insisted it would extract the maximum value for money from an efficiency drive already announced by Andy Kerr, the finance minister.

Mr Kerr’s deputy, Tavish Scott, said: "Scotland receives a fair share of any additional public spending. But we have a duty to ensure we spend public money effectively. That means we need to get the very best value from the money we invest in growing the economy and delivering better services."

The Executive has already been working on its own spending review and will announce its plans in September.

The Nationalists, meanwhile, described the Chancellor’s spending review as "a big disappointment for Scotland".

SNP MSP Angus Robertson said: "

While Gordon Brown talks these figures up, it remains the case that due to the Barnett squeeze, Scotland’s public expenditure as a proportion of the UK is decreasing every year."

And David McLetchie, the Scottish Conservative leader, claimed: "The last five years’ experience tells us that the largesse given to Jack McConnell will be squandered. The simple fact is that Mr McConnell and his predecessors have presided over failing public services despite the increase in funding, and if he remains unprepared to embrace reform this will continue."

So the spending review of 2006 may introduce a new system far less indulgent to Scotland’s traditional claim on cash. Mr McConnell must now thank the Union and spend his money wisely: he may very well have seen the last payout from the Treasury fruit machine.