IT’S the calculation used to allocate money from Westminster to Scotland which Labour’s leader in Scotland Jim Murphy told the audience at a televised debate this week that he wanted to keep forever.

But the Treasury has already admitted that money paid to Scotland through the Barnett Formula will be cut by two-thirds under plans drawn up after the Smith Commission.

Murphy used the Barnett Formula cash as his main argument against SNP backing for full fiscal autonomy for Scotland.

He said the SNP plans would see the Barnett Formula disappear, leaving a £7.6 billion hole in public spending in Scotland.

Murphy has committed Scottish Labour to “guarantee the Barnett Formula”, which he said at the BBC debate in Aberdeen on Wednesday he wanted to keep ‘‘today, tomorrow and forever’’.

But in a speech to the Strand Group at King’s College, London, in January Sir Nicholas Macpherson, the Permanent Secretary to the Treasury, said that while the Barnett Formula would live on, ‘‘its contribution to spending by the Scottish Government will be reduced by some two-thirds.”

The formula, named after its inventor Joel Barnett, a former Labour Chief Secretary to the Treasury, was devised in the late 1970s.

Sir Nicholas told his audience in January that a new funding model was needed to take account of changes proposed by the Smith Commission on enhanced devolution.

“The Smith Commission’s proposals maintain the Union’s key ingredients: a single currency, a single market, a single fiscal policy and a social union based round the basic state pension,” he said.

“Their main impact is on Scotland’s tax regime – with income-tax rates and thresholds fully devolved – and on funding.

“The Scottish Parliament is already responsible for nearly 60 per cent of all spending in Scotland.

“The further tax devolution agreed by the Smith Commission means that it will retain around 40 per cent of Scottish tax.”

He said that while the Scottish Government already had complete flexibility over the use of its budget, it would benefit from a step change in its ability to determine the size of its budget.

“This can only be good for accountability,” he added.

“The principles agreed by the Smith Commission are clear that there needs to be an updated fiscal framework for Scotland.

“A new funding model lies at the heart of this, ensuring that spending in Scotland and the rest of the UK will be unaffected by the decision to transfer tax and spending power.

“The Scottish Government block grant will be increased to reflect devolution of spending powers, and it will be decreased to reflect the devolution or assignment of tax receipts.

“As a result, more than 50 per cent of the Scottish Government’s budget will be directly financed by Scottish taxpayers.”

Macpherson said a new model would also be needed to incorporate the interaction between UK Government tax decisions and the Barnett formula.

He said: “If the UK Government chooses to increase income tax to fund an increase in health spending, the Barnett Formula means that the Scottish Government will automatically receive a population share of the increased funding.

“But once income tax rates are devolved, Scottish taxpayers won’t face the tax increase and so shouldn’t benefit from the extra spending.

“Conversely, if the UK Government chooses to cut spending on health or local government to fund an income-tax cut, the Barnett formula means that the Scottish Government’s budget would automatically be reduced.

“Again, once income-tax rates are devolved, Scottish taxpayers will not benefit from the tax cut so shouldn’t face the spending cut.”

Macpherson said all five political parties involved in the Smith Commission had agreed there “needs to be a new funding model”, adding: “The Treasury is already working with the Scottish Government to make this happen. And of course the new regime needs to operate within the UK Government’s wider fiscal policy.”