New cash deal could cost Scotland £4.5bn

Professor David Bell has analysed the impact for Scotland of a study looking at the future funding of the nations and regions of the UK. His report was commissioned by the Welsh Assembly to produce the first fully worked-through alternative to the Barnett Formula – the current funding arrangement that has been in place for more than 30 years – since devolution.

As part of the study into funding for Wales, the report calculated the money that would go to the devolved assembly based on need rather than population.

Writing in today's Scotsman, Prof Bell warns that, if the same measure were used for Scotland, the result would be a 4.5bn cut in the amount it receives from the Treasury.

"If its calculations were put into practice, it would have dramatic effects on the Scottish budget," Prof Bell says. "The size of the block grant from Westminster to Holyrood would shrink substantially. Instead of the Scottish grant being 20 per cent higher per head than in England, the margin would shrink to 5 per cent.

"At current spending levels, this would mean a cut of around 4.5bn in Scotland's annual grant from Westminster."

The Stirling University professor's conclusions have sparked a row over the possible consequences for Scotland of a Conservative victory in the general election next year.

Labour has argued that it means Scotland could lose out on billions of pounds if David Cameron plans to introduce a spending formula based on needs, rather than the current system of population.

Labour's Holyrood finance spokesman, Andy Kerr, said Prof Bell's analysis showed why Scotland did so well from being part of the UK. He added: "It also shows that we could lose billions under a Tory government, although further analysis needs to be done of this review for the Welsh Assembly."

But the Tories have claimed that the Welsh study is inconclusive and that Scotland could do very well from the change, because it has "substantial needs".

The Conservatives' shadow Scottish secretary, David Mundell, said: "We believe that the Scottish Parliament needs to be given more responsibility for raising its own revenue. We also believe that there needs to be a full assessment of the different needs of the different parts of the UK.

"But we're clear that, if Barnett is replaced with a needs-based formula, then Scotland has substantial needs and will get substantial resources."

However, Prof Bell, who advises Holyrood's finance committee, warned that, despite the Tories' arguments, a needs-based formula would not differ greatly from the conclusions of the Independent Review of Funding and Finance for Wales.

Although he insisted he does not believe Scotland receives 4.5bn more than it needs, he said: "The review takes into account models of deprivation used in England, which suggest it is pretty close to what might happen, should a needs-based formula be introduced."

And referring to the likely effect on the debate over independence, he added: "Of course the argument here is that the assessment of need would be made on English terms, rather than a Scottish one."

The conclusions have added fuel to MPs in the Conservative ranks who believe Scotland is benefiting enormously from an out-of-date formula and should have its funding cut significantly.

Monmouth Conservative MP David Davies said: "This doesn't surprise me. The Barnett Formula is over 30 years old. Scotland and possibly Wales are getting more than they should on a needs-based formula. The English taxpayer has every right to be aggrieved."

The suggestion was described as "crackpot" by former Conservative Scottish secretary Lord Forsyth, who this year took part in a House of Lords committee's review of the Barnett Formula.

The House of Lords committee also recommended a needs-based replacement, but to be introduced slowly.

During the committee's hearings, Lord Forsyth said that when he was Scottish secretary he had been advised to resist Treasury proposals to introduce a needs-based formula because it would cost Scotland between 2.5bn and 3bn a year.

"That is why it would be a mistake to introduce this barmy proposal from the Calman Commission," he said.

"The tax base does not exist in Scotland to make up that difference. If a needs-based formula were to be introduced, it would need to be done over time."

A spokesman for finance secretary John Swinney said: " The only acceptable change from the Barnett Formula is full financial independence for Scotland.

"Along with several eminent economists – including Andrew Hughes Hallett, who was a member of the Calman independent expert group – we have pointed out that the Calman proposals are not properly thought through and could well be damaging to Scotland."

MILLION AT RISK

COSTS equivalent to one million public sector jobs would have to be cut if the government was to meet its target of reducing the deficit, a think-tank has warned.

Frontline services could not escape cuts, despite pledges from politicians including Prime Minister Gordon Brown and Conservative leader David Cameron, Reform said.

The report, The Front Line, finds that headcount across the public sector has soared by 16 per cent in the last decade. The deficit could only be brought down over the years by cutting the equivalent of 15 per cent of the pay roll – saving 27 billion a year.

Reform argues that a reduction in staff numbers could actually be good for the civil service and public services delivery.

Greg Rosen, one of the report's authors and a visiting fellow in the department of politics at Goldsmiths, University of London, said over the last half century, all political parties had pledged cuts that would still protect frontline services.

"It's not enough that the government is taking seriously the need to tackle inefficiencies in the back office. They need to do this right across the public sector but as yet, no party has achieved this."

The think tank also said that since 2001 public sector pay had risen at a faster rate than private sector wages.