The block grant from the British government to Northern Ireland is governed by an obscure Treasury procedure called the Barnett Formula. None of the UK’s devolved governments like it. The Scots and the Welsh have appointed commissions to review it, and the finance committee of the Stormont Assembly has asked Northern Ireland to do the same.

Even Lord Barnett, the former Labour Treasury minister whose name it bears, has persuaded the House of Lords to conduct an inquiry into its defects.

A report I have recently written with colleagues at the think-tank IPPR North outlines what is wrong with Barnett and how it could be put right. It fails every possible test of public finance. It is unfair, inefficient and opaque.

Concerns about territorial finance are becoming a source of tension within and between the constituent nations of the UK, and have provoked a growing and impassioned debate about how public spending is distributed, with politicians, commentators and the public increasingly asking: who gets what and is public money distributed fairly?

The Barnett formula is regularly vilified as the device that over-rewards Scotland, Wales and Northern Ireland at the expense of England. This is beginning to irritate the public in England, with a recent survey suggesting that the proportion who feel that Scotland receives “more than its fair share” of public spending has risen from one in five in 2003 to one in three in 2007.

In 2007-8, spending per head in Northern Ireland and Scotland was 21% above the UK average, in Wales it was 8% above, while in England it was 3% below the UK average. To put it another way, this means that spending per head in Northern Ireland is £1,161 more than in England; £1,153 more per head in Scotland than in England; and £527 more per head in Wales than in England.

The Barnett formula was originally designed in the 1970s to cut Northern Ireland and Scotland down to size, as the Treasury saw it. Both territories had very high public expenditure per head of population, higher than seemed to be warranted by their relative poverty.

The Treasury therefore designed a formula that was designed to cut their spending per head until it approached their “needs”, at which point it was planned to switch to a formula explicitly based on needs.

That switch never happened. Northern Ireland, although not Scotland, has therefore suffered a “Barnett squeeze”. Its officials and politicians now claim that they get less than they need. We don’t know what Northern Ireland’s relative needs are, because no needs assessment has been conducted for 30 years.

Our research found evidence of the Barnett squeeze operating in Wales and Northern Ireland in particular, where the level of public spending has declined from 2002-3 to 2007-8: from 38% to 21% above the UK average in Northern Ireland.

Some of this decline may be accounted for by reduced spending on security, policing and public safety as the peace process progresses.

Because most of Northern Ireland’s money comes irrespective of what the Assembly does, Barnett is inefficient. If Northern Ireland controlled its own taxes, then the more the economy grew, the more government would get. That gives politicians incentives to encourage growth; to tax and spend responsibly; and makes them answerable to voters for their tax and spend decisions. All of that is utterly lacking now.

We therefore propose more fiscal autonomy for Northern Ireland, but given the disruption to devolution there in recent years, the new Assembly should be given time to bed down before further financial powers are devolved. The Assembly should then have the power to levy some taxes, or the right to collect the Northern Ireland share of some UK taxes such as Vat, or both. There would still be a block grant, but smaller than now. It would be calculated on a true needs basis and would therefore take account of Northern Ireland’s particular circumstances, as Barnett does not.

It is time that the UK’s system of territorial finance was overhauled, creating arrangements that are not only more suitable for devolution, but that meets our principles of equity, efficiency and accountability, and procedural fairness.

Iain McLean is a professor of politics at Oxford University. The full report is at www.ippr.org.uk/publicationsandreports/ publication.asp?id=619