Squeeze on Scottish budget to cost 120,000 jobs

The report by five leading academic experts warns that the application of the formula - which calculates how much of the UK government’s tax revenues are transferred to Scotland - will lead to a 5 per cent cut in Scotland’s workforce.

The team from the University of Strathclyde found that a new system of calculating the mechanism, agreed by Alistair Darling, the Scottish Secretary, would have a "substantial impact" on the Scottish economy in the long term.

Cuts in spending are likely to hit labour-intensive areas in the public sector such as health, education, social work and administration hardest.

The SNP seized on the figures, saying they were proof that Scotland needed fiscal autonomy from the UK. But the Scotland Office insisted Scotland was getting a fair deal.

Yesterday’s report concentrates on changes made by Mr Darling when he was Chief Secretary to the Treasury in 1997, which saw the Barnett formula updated every year to take account of Scotland’s changing population relative to England and Wales.

Yesterday’s report states: "If the population weights in the Barnett formula are constantly updated, the real reduction in government expenditure, and the corresponding reduction in activity, is further intensified.

"With full capital and population adjustment, the Darling-amended Barnett equilibrium implies a 4.6 per cent reduction in Scottish GDP and a 5 per cent reduction in Scottish employment and population."

Taking Scotland’s current employment level of 2,445,000 in full- and part-time work, the 5 per cent cut would lead to more than 120,000 jobs being lost.

Last night, Dr Karen Turner, one who wrote the 35-page paper - along with Professor Peter McGregor, Professor Kim Swales and researchers Linda Ferguson and David Learmonth - said it demonstrated there was a "Barnett squeeze" - a cut in Scotland’s budget over time.

Dr Turner added: "Some people say there is a Barnett squeeze and others, who think it has benefits, call it the Barnett hug, but this represents what we expect to happen if politicians do not take different decisions."

Alex Salmond, the leader of the Scottish National Party, said: "One of the reasons that the Barnett formula cannot protect Scottish people is because as our population declines, so does the funding for Scotland. To combat this growing crisis, Scotland needs both fiscal autonomy from the UK and growth in both our economy and population."

A spokesman for the Scotland Office claimed that as a result of last week’s Budget, the Scottish block grant will "virtually double in cash terms" from 13.4 billion in 1998 to just under 26 billion by 2007-8.

He added: "The Barnett formula is simple, straightforward and objective and has served Scotland well. Barnett has delivered fair, stable and transparent settlements for Scotland under successive administrations for over 20 years. What the academics are considering is a theoretical, long-term possibility."

An Executive spokesperson said: "Barnett has brought Scotland record increases in public spending since devolution - and we have seen a full share in UK economic growth and prosperity which sees more people in work than ever before.

"This paper assumes that Barnett convergence implies a real cut in Scottish expenditure - all the evidence is that what is actually happening is that English spending is converging up to our levels, while Scottish spending per head continues to rise in real terms."