Federalism will bring Barnett to a head

The Liberal Democrats have advocated a federal reconstitution of Britain for the best part of a century but, as the SNP has been quick to point out, the party has failed to push it to the forefront of the mainstream political agenda. That may be changing. Labour, though not federalist, is starting to think about a more wide-ranging reorganisation, with Gordon Brown's call to replace the House of Lords with a US-style Senate, representing the nations and regions of UK, being considered seriously by Ed Miliband's policy team.

Next week the Labour leader will set out plans to devolve more powers to cities and regions south of the Border. In another sign of shifting attitudes, the senior Tory MSP Murdo Fraser this week became the first in his party to come out for federalism. He argued the set-up could unite Unionists and many Nationalists in the event of a No vote and be a more enduring arrangement than an ongoing piecemeal devolution of powers.

We should not get ahead of ourselves. A federal Britain would be a radical step and, as Mr Fraser acknowledged in his speech for the Reform Scotland think tank at Glasgow University on Thursday, the "thorny problem of England," as he put it, would have to be addressed. So far there has hardly been a gluttonous appetite for regional self-government south of the Border.

But whether there is a fully federal future for the UK or, more likely, a federal-lite or even federal-like arrangement involving changes to all the UK nations and regions, the fate of the block grant, Scotland's annual spending allocation from Westminster, and the Barnett formula, the mechanism used to adjust it each year, will become key parts of the debate.

It is generally acknowledged that Scotland gets a good deal from the system: public spending here remains about £1300 higher per head than in England. When it was created (originally as a stop-gap measure) in the late 1970s, the Barnett Formula was expected to equalise spending slowly over time but that hasn't happened, mainly because Scotland's population has not grown as quickly as England's, meaning spending increases north of the Border have been shared between relatively fewer people. The problem from Scotland's point of view is that the rest of the UK believes it gets too good a deal. A UK-wide constitutional restructuring would almost certainly bring the issue to head.

That, at least, was the consensus among experts who provided detailed evidence to Holyrood's finance committee this week. They included Gerald Holtham, whose study for the Welsh Assembly put the level of Scotland's "overfunding" at £4 billion, based on a simple needs assessment of the different UK nations. In his written submission to the committee he advised caution on the figure, saying it may well have been reduced (though it was unlikely to have been eliminated) in the four years since his report was published. His main conclusion, however, was clear: "Since the Barnett formula is entirely arbitrary and without any reasoned justification, some sort of reform would be appropriate".

The Barnett formula has already become a weapon in the independence battle, with the Yes side arguing a No vote would give the UK Government the green light to scrap it. The main UK party leaders insist they have no plans to change it. The experts, however, do not see it surviving forever.

In his paper for MSPs this week constitutional lawyer Alan Trench called claims Barnett would automatically be scrapped after a No vote "alarmist speculation", but he added: "There are reasons in the longer term to seek to change the way the block grant is calculated so that it is put on a basis that can command broad support across the UK". A real debate about the Barnett formula, as opposed to political point-scoring, may be on hold until after the referendum. But it will be hard to avoid forever.