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It will be a battleground, whatever the formula

It may come as little surprise to Scottish Nationalists that, in the 1980s, Margaret Thatcher's government sought to conceal cuts of tens of millions of pounds from Scotland's budget.

We learned some years ago that similar sleight of hand was used to conceal the true extent of North Sea oil wealth in the McCrone memorandum of the 1970s. What perhaps will be a surprise - to some - is the lengths to which the then Scottish Secretary, George Younger, went to resist cuts to Scottish public spending.

Government documents released from the National Archives under the 30-year rule reveal that in 1984 Mrs Thatcher's chief policy adviser, John Redwood, wanted to cut the annual Scottish Office block grant by nearly 10%, or £500 million. Number Ten claimed there was "substantial over provision to Scotland". Coming so soon after the industrial recession of the early 1980s had destroyed much of Scottish manufacturing, this might have seemed harsh. And the Scottish Secretary made clear that it was politically untenable.

What then followed was something of a reverse auction as Mr Younger sought to reduce the spending cuts to £30m. He said that this was the most that could be countenanced "without risk of detection". Both the Scottish Office and the Treasury agreed that any cuts to Scottish spending should "remain invisible". The jiggery pokery was somewhat blatant.

Yesterday, a spokesman for First Minister Alex Salmond expressed "astonishment" at this deception and claimed that today there are similar secret plans to scrap the Barnett Formula, and with it some £4bn of Scottish spending. Though this is rather an open secret. The Scottish Secretary, Alistair Carmichael, is on record as saying that, "after the economy has stabilised", the 40-year-old Barnett Formula should be scrapped and replaced by a "needs-based formula".

Public spending is more transparent today than it was in the 1980s thanks to the General Expenditure and Revenue Scotland tables that have been produced annually since 1996. These indicate that Scotland receives some £1200 more per head in annual public spending than the UK average - though per capita spending is higher in Northern Ireland and in London. Nationalists insist that these bald figures do not include "non-identifiable" spending on infrastructure projects such as Crossrail or the Olympic Games, which disproportionately benefit the South East. Nor of course is the contribution made by North Sea oil revenues included in the balance. The SNP claim that Scotland more than "pays its way" because the tax yield per head is marginally higher in Scotland than England.

But whatever the outcome of the referendum, the Barnett Formula's days look numbered. Under the Scotland Act, Holyrood will, in 2015, gain the power to vary 10 pence in the pound of income tax. The Calman Commission in 2009 said that to be properly responsible, the Scottish Parliament needed to raise in taxation much of the money it spends on services. Though even under fiscal autonomy, the arguments would continue. In a unitary UK - assuming it survives 2014 - there will always be a requirement for cross-financing between wealth and less wealthy regions. In other words, a whole new Barnett Formula to row over.

Contextual targeting label: 
Local government

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