‘Strong case’ for scrapping Barnett Formula

THE former head of the UK civil service has raised the prospect of ending Scotland’s block grant system, saying a new devolution settlement could give ministers in Edinburgh powers over different welfare benefits from their counterparts in London.

In an excerpt from a new book on Scotland’s constitutional choices, serialised in The Scotsman today, Lord Gus O’Donnell says an extension of financial powers for Holyrood short of independence would “almost inevitably raise questions” about the way the Treasury funds Scotland and the rest of the UK.

There would be a “strong case” for scrapping the Barnett Formula – which has historically favoured Scotland – he says, and replacing it with a system based on people’s needs in the UK.

Given the Scottish Government’s desire to run things differently, he says a new system could allow Edinburgh to pay Whitehall for welfare programmes dumped by the rest of the UK – or the other way around.

But Lord O’Donnell, who was also Permanent Secretary to the Treasury, spells out the limitations on devolution, saying Whitehall will always want to retain tax powers to guard against a “race to the bottom”.

“Everyone wants to spend more and tax less, and at the national level that does not add up to a sustainable fiscal policy,” he writes.

Lord O’Donnell’s comments focus on the potential changes facing Scotland if it votes against independence in the referendum next year. All the leading pro-UK parties are now weighing up their options on a more powerful Scottish Parliament.

Lord O’Donnell, who was also permanent secretary to the Treasury under Gordon Brown, as well as being Cabinet Secretary until 2011, is among contributors to a book by Strathclyde University on Scotland’s constitutional future, entitled Scotland’s Future.