The nineteenth century statesman, Lord Palmerston, supposedly said that the Schleswig Holstein question was so complicated that only three people had ever understood it: Prince Albert was dead, a German professor had gone mad,  He, Palmerston was the third, and he had forgotten.

       Secretary for Finance, John Swinney, is a more modest man than Palmerston.  But as he studies the implications of the combination of the Scottish funding formula and the coalition’s comprehensive spending review, he might have Palmerston’s remark in mind.

       How is it possible that the Treasury in London can claim that Scotland has done better in the review than the country as a whole, and the Scottish Government that it has done worse – and that both sides have good arguments to support their claims?   The answer lies in the complexities of the system by which public expenditure in Scotland is funded.

       The formula dates from 1978, and a time when ministers in Jim Callaghan’s Labour government believed that they were about to give authority to a Parliament in Edinburgh.  The principle was that Scotland would receive a block grant for devolved functions equivalent to the average level of spending on these functions in Britain as a whole.  However, feisty Secretaries of State had in the past defended Scotland’s corner effectively in departmental negotiations, and Scotland was already receiving more than its population share would imply.  So the principle was to be applied only to new public expenditure.  This principle because known as the Barnett formula, after Joel Barnett, then chief secretary to the Treasury.  Even though the first plan to establish a Parliament in Scotland died in the 1979 referendum, his scheme has been the basis of discussion about public expenditure in Scotland ever since.

       But only the basis, because there has always been fudge, opacity and argument about the detail.  The Barnett formula implies that over time Scotland’s relative funding will decline, converging towards its population share, because new spending will become relatively more important than old.  But this convergence has not really taken place.  There has been a tacit compromise in which the claims of ‘it’s our oil’ have been met by a relatively generous allocation from the UK exchequer.  As it did before 1978, the Westminster government has tried to buy off nationalist pressures by stuffing Scottish mouths with gold.  Spending per head on the two costly devolved services of health and education consume most of the budget and is rather more than 10% higher than England.

       When devolution finally did happen, twenty years after the original plan, the funding formula continued essentially unchanged.  But the creation of a devolved Scottish government was followed almost immediately by Gordon Brown’s spending splurge, which was particularly focussed on health and education.  The operation of the Barnett formula therefore meant that the block grant to the Scottish government increased even more rapidly than the expenditure of the UK government.  Between 2000 and 2006, the allocation to Scotland rose by more than 50% in real terms.

       In the first years of devolution, the Scottish government simply had too much money to practice to learn sensible budgeting.  Costly but popular policies like the large boost to teachers’ salaries, free personal care for the old and university tuition without student fees seemed affordable;  populist gestures like lower prescription charges and the abolition of bridge tolls could easily be implemented. Edinburgh’s less than half completed tramway stands as monument to an era in which vocal advocates of a scheme could override any consideration of value for money.

       And then the well of money dried up.  And that is when the squabbling over allocations began.

       The origins of the funding formula mean that the financial relations between Scotland and the UK Treasury are modelled on the financial relations between English government departments and the UK Treasury.  Not so long ago the British government managed its accounts on a cash basis, simply measuring money in and money out.  But in a sensible attempt to improve budgeting the government  began to make separate capital and revenue allocations to spending departments.  The Treasury acted as ‘owner’ of government assets, charging departments for their use and depreciation, and at the same time making allocations to enable these departments to pay for them.  It is a system that is too clever by half, which has never worked particularly well in either England or Scotland.  So the coalition has changed the system – yet again – and the changes create different baselines about which endless argument is possible.

       Hence the dispute between the Treasury, which looks at the allocations made as part of the UK government’s budgeting process, and the Scottish government, which looks at the amount of cash it expects to receive.  The two approaches give different answers.  And that is why Scottish civil servants will have to spend this weekend with wet towels and calculators reviewing the lengthy document on the Barnett formula and its operation which the Treasury published with the Comprehensive Spending Review.  The Schleswig Holstein question was probably easier – and the dispute only ended when German troops stormed into Denmark.

       The best answer – the proper devolved answer – is to change the balance between the centre and the devolved parliament.  Watching the progress of Scottish devolution since 1999 has been like watching a teenager growing up.  Indulged with rather too much money, the Hollyrood parliament was slow to begin to learn, or relearn, how Scots can take responsible control of their own affairs.  It’s now time to shift from pocket money to wage earning, to spending a generous allowance to taking real budgetary responsibility.  That shift means asking whether that higher spending on Scottish schools and hospitals actually provides Scotland with better education and health – and whether the increase in spending between 2000 and 2006 delivered commensurate improvements in services.  That shift also means that the Scottish government should raise most of its own funds, and pay for the UK services it needs, rather than spend a block allocation for Scottish services from the UK government.  Since the election of the coalition, there is considerably more willingness at Westminster to contemplate that option.  I’ll come back to the question of why it’s easier to recommend that principle than to implement it in practice.