SCOTLAND is £1 billion per year better off thanks to a "flaw" in the mechanism that shares public spending around the UK, says a new report.

The respected Institute for Fiscal Studies says cuts to Scotland's budget have been cushioned as a result of a anomalies in the Barnett Formula.

The IFS says by the next financial year Scotland's annual budget cut will be £600 million less than it would have been under a "corrected" system.

The cushion follows a £400m windfall during the 2000s when Scotland benefited disproportionately from rising public spending, the report argues. The report, Business as Usual, questions whether the Barnett Formula is fair for the people of England and Wales and is likely to increase pressure for the system to be reformed.

It concludes: "Taken together, the £1bn in additional funding for Scotland represents around three per cent of its budget in 2015."

The report says Northern Ireland's cuts are £200m less as a result of the Barnett flaw.

It adds: "Put another way, the cuts Scotland and Northern Ireland will have had to deliver between 2010-11 and 2015-16 will be more than one fifth smaller than if the 'corrected' formula had been in place during this period.

"This may be seen as unfair to the people of England and Wales."

The Barnett Formula has been used to allocate public spending around the UK since the 1970s.

It aims to ensure devolved governments receive the same pounds-per-person change in funding, for comparable services, as England.

However, the IFS claims it does not treat business rates north and south of the Border in the same way.

The glitch means Scotland's budget is cut by less, relative to the rest of the UK, if English councils receive a raw deal compared with other areas of government spending.

As a result, Scotland, and Northern Ireland, where business rates are also devolved, have escaped relatively lightly since Chancellor George Osborne's austerity drive was launched in 2010.

Report author David Phillips, a senior research economist at the IFS, said: "The Barnett Formula looks set to remain in place for some years to come. This appears to rule out a move to a needs-based formula.

"But it makes it more important than ever to examine the Barnett Formula to see if it is working in the way intended, and if flaws are found, to fix them."

He said it was crucial to iron out flaws before further tax powers are transferred to Holyrood if the deal is to be fair to all UK nations.

The main UK parties have all promised to retain the Barnett Formula as part of a new devolution deal for ­Scotland, which is expected to give Holyrood greater control over income tax.

However, some English MPs have called for it to be scrapped.

Prime Minister David Cameron has promised to introduce English votes for English laws amid growing complaints among Tory backbenchers that England is losing out as powers are devolved to Scotland.

A Scottish Labour spokesman said: "The real threat to the future of the Barnett Formula comes from the SNP proposals to devolve all taxes to Scotland."

A government spokeswoman said it agreed with the report that "further devolution of fiscal powers should be accompanied by a block grant adjustment which ensured that new Scottish Government tax receipts were not exposed to risks which the Scottish Government did not have power over".