THE infamous Barnett Formula looked doomed last night as Britain's top economists were given the go-ahead to investigate whether it should finally be scrapped.

The funding rules - which deliver much higher public spending in Scotland than in the poorer North-East - will be reviewed for the first time in 30 years by a House of Lords committee.

Crucially, the 12-strong committee will employ leading economists to examine why the formula gives the Scots much higher funding and which parts of England are penalised.

They are certain to focus on why Scotland, in the last financial year, received £9,179-per-head from the Treasury, while the North-East figure was just £8,505 - a staggering £674 less for every person.

Yet, Scotland is much richer. Income-per-head north of the border was 95 per cent of the national average in 2006. In the North-East, it was only 81 per cent.

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

Now, treasury ministers will be called before the committee to defend that huge gap in spending and wealth, as will ministers from the Scottish Executive.

A delighted Lord Barnett - the author of the formula, who has since disowned it as patently unfair - described the move as the "biggest threat to its existence" since it came into being in 1978.

The Labour peer believes the Government will find it impossible to dismiss the verdict of independent, respected economists in the way that past protests have been shrugged off.

Lord Barnett said: "I hope the committee will find that my formula should never have been kept on for 30 years and that there are fairer ways to deliver expenditure, based on need.

"It will employ the best economists available, who I'm sure will be keen to work in the House of Lords, with simple terms of reference - whether the formula should be replaced."

Asked which parts of England were punished by the formula, Lord Barnett was in no doubt: "It is the North-East and poorer parts of the North-West, because you have to look at need as well as funding."

The former Treasury chief secretary devised the formula - "for one year only, to make life easier for myself" - to give England 85 per cent of increases in expenditure, Scotland ten per cent and Wales five per cent, on a per-capita basis.

Over time, partly because Scotland gets a slice of major allocations anywhere in England and partly because of its declining population, it has skewed spending wildly.

For example, when the Government gave the go-ahead to the £16bn Crossrail project in London, Scotland was automatically handed £500m - while the English regions received nothing.

Earlier this year, Lord Barnett warned MPs that the UK could fall apart because the English were increasingly angry about better public services in Scotland.

Just days before leaving No10 last summer, Tony Blair virtually admitted that higher spending was a bribe to keep the Scots within the United Kingdom.

Chancellor Alistair Darling will publish a "factual paper" on the Barnett Formula within weeks - but has insisted that does not mean a review.

Meanwhile, Conservative leader David Cameron recently said the spending rules "cannot last forever", but did not commit the party to a rethink. The Lords "ad-hoc select committee" will begin work in the autumn and is not expected to publish its findings until next summer.

Andy Sugden, policy director at the North-East Chamber of Commerce, said last night that it supported a fresh look at the Barnett Formula.

But at the same time he warned of a need to be careful since changes could also mean the North-East in fact found itself worse off.

He said: "Our issue with the Barnett Formula is that when funding is allocated to any project in England it automatically means a proportion is also allocated to projects in Scotland. That is neither fair or equitable.

"The Barnett Formula served a purpose when it was first devised decades ago, but now the regions of the UK deserve a more intelligent settlement."

Mr Sugden said any review could decide to match spending in a particular region to the amount of tax that is raised there.

He said: "We need to be careful here. There is an element of people in glasshouses should not throw stones.

"The North-East currently gets more public investment than it contributes in tax.

"If Ministers ultimately decided to keep spending within a region and base it on the level of tax that is raised then the North-East would be worse off."

Dari Taylor, Labour MP for Stockton South, hailed the inquiry as a breakthrough that would give North-East MPs more "ammunition" to get the formula scrapped.

She said: "Many in the Northern group of MPs have been arguing for this for years, because we know we are badly done by.

"In the Seventies, when Scotland and Wales were at the sharp end of economic breakdown, people accepted that the formula could give them a lift.

"But in the Eighties and Nineties, our region's industry was destroyed, yet there has been no rebalancing of the Barnett Formula to reflect that."

Fiona Hall, Liberal Democrat MEP for the North-East, said: "The Barnett Formula was always meant to be a short-term solution, yet 30 years have passed without coherent debate on the issue.

"If the North-East is to tackle the growing challenges of an unstable economy head on, then the region deserves a needs-based funding formula.

"Labour promised to address this inequality when it came to power in 1997, yet 11 years have passed without anything being done.

"I welcome any review into this funding system as very much needed, and long overdue.