England gets tired of constant gifts to Scotland

You do not build a healthy federation - or whatever Blair wants - by appearing to favour one part of it

AT ABOUT this stage in the Christmas cycle, back in pre-history when my daughter was small, she would disappear under the Christmas tree. Her purpose was to rearrange my artfully casual heap of presents, measuring the height of her own pile against her brother's.

This, more or less, is what we do with public spending. Every time a policy change is made, the Scottish and Welsh piles of money are measured against the English and adjusted according to a pre-set formula. The result, over the years, has been disproportionately high spending in Scotland. So it should have been no surprise that the Prime Minister's little tour of the north-south divide ended with MPs from the north of England taking the opportunity to ask for things to be adjusted their way.

Perhaps it should also be no surprise that, last week, the Chancellor told them that the system stays. This loyal Labour group went quietly, but that is not the end of the story. As the new Scottish Parliament asserts its right to set spending in areas as expensive as student fees, and as the Treasury tries to keep the lid on with "co-ordinating" meetings, the English are getting restless.

Geographical differences - particularly in access to "rationed" health care, such as expensive drugs - are increasingly contentious. Resentment at the extent to which a Scottish-sounding government tips public money towards the Scots is building up in the northern shires. Even down south the issue reverberates. London's mayoral candidates demand London's wealth back almost as vociferously as nationalists claim Scotland's oil. And new local government legislation will offer other cities the privilege of electing mayoral loudmouths for themselves.

Contrary to general belief, it is not the famous "Barnett formula" that is the root of the trouble. As Professor Gavin McCrone of Edinburgh University has pointed out, these patterns go back more than a century, to Goschen's Chancellorship. He decided that the proceeds of the wheel tax and the horse tax would be distributed between England (assumed to include Wales), Ireland (then, of course, the entire island) and Scotland in the proportions of 80, 9 and 11. This was supposed to reflect the contribution of each part of the United Kingdom to the Exchequer, although there was some sheltering of the impoverished Irish. Over time, however - elements of this formula survived way beyond horse-drawn wheels - this distribution became way out of line with either fiscal contribution or population. By the early 1950s, Scots were paying 7 per cent less revenue per head than the UK average and receiving 19 per cent more expenditure per head.

In the late 1970s, when devolution was on the cards and spending per head in Scotland had reached 28 per cent above the average, the then Chief Secretary to the Treasury, now Lord Barnett, introduced a formula supposed to bring things back into balance. The Scots were to get no more of any increase in public spending than would be justified by their population. Instead of Goschen's pounds 11 for every pounds 80 spent in England and Wales, the Treasury would pay only pounds 10 for every pounds 90.

There were two problems with this. First, even 10:90 over-represented the Scots, and the disproportion increased. In the early 1990s, Joel Barnett's descendant as Chief Secretary, Michael Portillo, trimmed the ratio again, and it is now supposed to be "recalibrated" to population each year. But - and this is the second problem - as this formula only applied to extra spending, it would take a long time to erode Scottish advantage, especially as successive Scottish secretaries succeeded in securing "special" exceptions. The lower the rate of inflation, the slower this adjustment is. So in the second half of the 1990s, the Scots still received a level of public spending per head more than one- fifth above the English level.

And it shows. Last year only 15 per cent of those on Scottish hospital waiting lists had been there more than six months, compared with nearly 30 per cent of those on lists in the north-west of England. Scottish GPs had an average of fewer than 1,500 patients on their lists, compared with nearly 1,900 in the English north-west. School class sizes were below the UK average in Scotland, spending per secondary school pupil away above. And so on.

Three arguments are still advanced for this pattern. One - more or less Goschen's - is that Scotland should get back what it puts in. That was very fashionable among nationalists when the North Sea started to gush liquid gold, but every detached analyst of public finances has concluded that Scotland has been allowed to run a much larger public sector deficit than the United Kingdom as a whole.

The second argument is quite the opposite - that far from being a relatively rich nation which deserves the benefit of its wealth, the Scots are relatively poor and should benefit from redistribution from the rest of the United Kingdom. That was certainly true in the 1930s, when spreading industrial recession cut swathes of unemployment and poverty through the Scottish central belt. But by the early 1990s disposable income per head was higher in Scotland than in most English regions, and unemployment was below the English average. Both comparisons have drifted away from Scotland somewhat since then, but - even excluding Wales and Northern Ireland - Scotland is still not the worst-off region on either score.

The third and best argument is that the Scots simply need more public funding to achieve the same standards. Despite more doctors and shorter waiting times, mortality rates are higher in Scotland than in any other region. Some services have to be stretched, expensively, to reach remote areas: there are only 66 inhabitants to the Scottish square kilometre, compared with 242 in the United Kingdom as a whole. But other areas face the same problem: there are only 61 people per square kilometre in Northumberland, 70 in North Yorkshire.

A massive "needs assessment" exercise was conducted by the last Labour government in the 1970s, only to be put aside in favour of the Barnett formula. Assessing needs is, of course, a highly subjective and contentious business. But such analysis is supposed to underpin the distribution of funds within England. It is high time it was applied uniformly across the United Kingdom. For, just as the Prime Minister sought to argue on his north-south tour, there are patches of affluence and poverty, enterprise and unemployment, old industry and new business, in all parts of the United Kingdom. Even if we exclude offshore industry, the latest figures show GDP per head to have been higher in north-east Scotland than in any other sub-region except inner London.

Of course Scotland still has problems: sparsity, climate and remoteness from continental Europe. But these problems do not change character at the Scottish border. You will not build a healthy federation - or whatever it is that Mr Blair is aiming for - by appearing determined to favour one part of it. The others notice. And Labour loyalists or no, they are becoming a noisier bunch.

Sarah Hogg is chairman of Frontier Economics