The system which helps decide the level of public funding in Scotland, Wales and Northern Ireland has been condemned as "arbitrary and unfair".
A Lords committee said the Barnett formula should be scrapped as Scotland's needs were not as great as other parts of the UK.
The system was set up in the 1970s as a short-term fix but became the established funding formula for the UK.
The Scottish National Party repeated its call for full fiscal autonomy.
Peers have said Barnett should be replaced by a system that recognises changing population levels and the differing economic needs of the devolved nations.
They said England and Scotland had markedly lower overall needs per head of population than Wales and Northern Ireland.
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 It must be replaced with a system of full fiscal responsibility giving Scotland the powers over taxation, including oil and gas 
Stewart Hosie
SNP Treasury spokesman |
Responding to the publication of the Lords report, SNP Treasury spokesman Stewart Hosie said the only acceptable alternative was full fiscal autonomy for Scotland, allowing the country to raise all the money it spends.
"That is the best and simplest solution - anything less would be messy and unsustainable, and could well leave Scotland worse off," he said.
"All parties recognise that the Barnett formula is no longer sustainable and should be replaced - but it must be replaced with a system of full fiscal responsibility giving Scotland the powers over taxation, including oil and gas, and spending that are needed to effectively manage the Scottish economy."
He added that the case for financial independence was reinforced by the most recent Gers (Government Expenditure & Revenue Scotland) report which showed that in 2007/08 Scotland's current budget surplus was £219m, compared to a UK deficit of £5.3bn - and that Scotland had been in budget surplus now for three successive years, to the tune of £2.3bn.
'Need for change'
Mr Hosie agreed with the Lords' suggestion that some parts of spending on the London Olympics, such as the £3bn on spent on regeneration, should be considered English spending rather than UK spending and should therefore be counted in any Barnett calculations.
"It is clear the current arrangements are not working, and we will want to be sure that Scotland has not been swindled out of our Barnett share," he added.
Plaid Cymru's Adam Price said: "Plaid has long opposed the workings of the Barnett formula and now this view has been completely vindicated both by the Holtham Commission, and now in the House of Lords committee report.
"The key issue at stake here is that Wales is losing out because of the Barnett formula, and is set to suffer even more unless it is urgently replaced by a needs-based formula.
"All the evidence now points towards the need for change."
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The House of Lords Committee on the Barnett Formula has today labelled the Formula 'arbitrary and unfair' and recommended it should be replaced by a system that recognises changing population levels and the differing economic needs of the devolved nations.
The Committee argue the Formula, which accounted for almost £49 billion of annual public spending last year and has been in place since 1978, was only intended to be a short term measure and should no longer be used to determine block grants for the UK’s devolved administrations. They recommend a UK Funding Commission be established to assess relative need in the UK’s regions and advise on a new method of distributing funding to reflect those needs.
The report identifies a basic weakness in the distribution of funds throughout the UK pointing out that the baseline, which has been added to year on year since the late 1970s (through an application of the Formula) has never been reviewed. There has been no reassessment of the baseline to take account of changing population patterns; this means that the grant provides funds without reference to the needs of each of the countries and regions of the UK.
The Committee have concluded that there should be a link between the grant of funds made to each of the administrations and their actual per capita funding needs. The Committee prepared an overview of a range of accepted indicators of need which suggests that England and Scotland have markedly lower overall needs per head of population than Wales and Northern Ireland.
The Treasury have been judge in their own cause in making funding decisions for the devolved administrations for the last thirty years. The Committee have recommended that the relative needs of each of the devolved administrations be determined by an independent Commission called the UK Funding Commission.
The Committee suggest that the UK Funding Commission undertake an assessment of relative need now and in the future and that they undertake periodic reviews as well as publish annual data about the allocation of funding between the devolved administrations. That would provide a flexible system which adjusts to reflect the needs of the devolved administrations over time.
Commenting Lord Richard, Chairman of the House of Lords Barnett Formula Committee, said:
http://news.parliament.uk/2009/07/lords-committee-says-barnett-formula-a...