THE 30-year funding rules that deliver far higher spending in Scotland than in the much poorer North-East are “arbitrary and unfair” and must be scrapped quickly, a study says today.

A House of Lords committee condemns the Barnett Formula as a “short-term fix”, depriving poorer parts of Britain of billions of pounds by lavishing spending north of the border.

For the first time, its report proposes a system for killing off the formula, which would strip the Treasury of the power to decide where £468bn is spent annually across the UK.

Economists sitting on an independent UK Funding Commission would decide all allocations based on genuine need – not on population size – in a similar way to the method for setting interest rates.

Crucially, the report concludes that such an evaluation could be carried out quickly and simply – despite the Treasury’s insistence that the task would be hideously complex.

Committee chairman Lord Richard said there was no reason why the Barnett Formula – introduced, supposedly for one year only, in 1978 – should not be fully dismantled within five years.

He said: “It is arbitrary and unfair and cannot continue indefinitely.”

Lord Richard described any suggestion that it was worth giving Scotland higher spending to keep the UK together – once made by Tony Blair – as “an absurd proposition”.

Anger has grown in the North-East because in 2007-8 Scotland received £9,032-perhead from the Treasury, while the North-East figure was £876 lower at £8,156.

Yet Scotland is much richer.

Income-per-head north of the border was 96 per cent of the national average in 2006. In the North-East, it was only 79 per cent.

Meanwhile, the Scottish Parliament – thanks to higher funding from London – has announced plans for free prescriptions, free eye and dental checks, a reduction in class sizes in primary schools and a cut in business taxes.

Today’s report leaves the Barnett Formula without a friend outside the Treasury. In the past month, studies in both Edinburgh and Cardiff have also called for it to be scrapped.

However, Lord Richard accepted that change was politically impossible before next year’s General Election – and even axing the formula would not, automatically, deliver higher funding to the North- East, England’s poorest region.

The UK Funding Commission would only decide need – and, therefore, relative spending – in the four nations of the UK. It would then be up to the Government to divide up the English cake.

The commission would sit every five years, judging need by using criteria including income- per-head, child poverty, unemployment, disability and early mortality.

The report, by the Barnett Formula Committee, was not allowed to decide which of the English regions were the big losers, concluding instead that Wales and Northern Ireland were underfunded.

However, Treasury Minister Lord Barnett, who came up with the formula, but later disowned it, pinpointed the North-East and North-West as the regions missing out.

One significant conclusion in the report is that the socalled “Barnett squeeze” – the idea that its unfairness is weakening over time, as Scotland’s falling population is taken into account – is a myth.

That is because adjustments are made only to increases in spending and not to the baseline, the far larger allocations dating back even before 1978.

The funding commission would be modelled on the system in Australia, where spending in the different states and territories is decided independently – without rancour, Lord Richard said.

In a brief statement, the Treasury welcomed the report and promised to “respond to its recommendations in due course”, but added that “there are no current plans to change the Barnett Formula”.