TONY Blair is facing renewed pressure to scrap the spending formula which gives London and Scotland far more money than the North-East.

A new study handed to the Government has concluded that the controversial Barnett Formula "bears no relation to needs" and should be replaced by an independent grants commission.

It would be modelled on the way Australia distributes grants, and the commission would report annually on the relative prosperity of the different nations and regions of the UK and recommend allocations.

The change would favour the North-East, as well as the South West and Yorkshire and Humber - with London, Scotland and Northern Ireland the likely losers.

The Northern Echo is campaigning to revise the Barnett Formula, set up 20 years ago to aid struggling Scotland, but which now channels millions of pounds of extra cash to an economy that is much more prosperous than the North-East's.

The study, called New Localism, New Finance, compared spending allocations in 1999/2000 in the different regions to a fairer distribution, based on the level of gross domestic product (GDP).

It found that London received £1,145 per head more than under such an "inverse GDP" rule, while the North-East received £823 per head less.

Even allowing for the higher cost of living in London, the capital was given £990 per head more, and the North-East £642 per head less, than under the fairer formula.

The study concluded: "Most experts believe that the formulae for distributing central government funds to the elected local authorities of England work badly.

"In our view, they work so badly that they must be scrapped altogether in favour of a coarser assessment of needs, to be conducted not by any department of the UK Government but by an independent commission".

The study also suggested the North-East had been penalised for its loyalty to the UK, while bigger allocations had been made elsewhere to quell discontent.

It said: "The three regions whose share of public expenditure is higher than their GDP would seem to warrant are Northern Ireland, Scotland and London."

The pamphlet, co-written by two Oxford University academics, is crucial because it will now be considered by the Treasury and the Office of the Deputy Prime Minister.