The Whitehall funding formula for Scotland needs to be overhauled soon or Scottish independence might happen via the back door with the English demanding separation, a senior peer and former Treasury minister suggested yesterday.

Lord Barnett, the former Labour Chief Treasury Secretary whose name the formula has borne for 40 years, has over recent years called for a fundamental review of the scheme, which helps determine public expenditure not just in Scotland but also in Wales and Northern Ireland.

Last month, The Herald reported how the peer tried, and failed, to secure a Lords committee to review the formula. Yesterday, he tried and failed again.

"This is not an anti-Scotland proposal," said Lord Barnett. "And it may be proved by a review that Scotland should get this figure of £1500 more per head than England, but the proposed method of doing this surely needs reviewing after 30 years.

"There is an urgency about this because if something isn't seen to be done soon, people in England will start to de-mand separation. That would be disastrous for the UK."

Supporting him, Lord Forsyth of Drumlean, the former Conservative Scottish Secretary, said: "There is a feeling that there is an unfairness in the funding of Scotland relative to the rest of the United Kingdom.

"So long as we continue with a scheme based on increasing the funding according to population, whilst maintaining a base line which reflects previous circumstances, and as long as we have a separatist regime in Scotland which is determined to create conflict north and south of the border, the UK is endangered by our failure to tackle this," he argued.

However, Lord McNally, leader of the Liberal Democrat peers, warned against "opening up a Pandora's box". While he said he had sympathy with Lord Barnett, whom he described as a political ancient mariner "forever wandering the land with the Barnett Formula around his neck", he suspected the creation of an ad hoc committee looking at the funding scheme would stray far and wide into other matters. "I am not sure, on the setting up of such a committee, we should reopen a battle between Lords and Commons," he added.

Lord Brabazon of Tara, chairman of Lords committees, rejected Lord Barnett's proposal, saying such a "highly politicised issue" should be dealt with by the Commons.

However, the UK Government has continued with the mantra that it has "no plans" to review the formula. To do so would be fraught with political difficulties given there would be many winners and losers; a prospect any government would only contemplate just after winning a General Election and not before.

However, of late the clamour for change has intensified. In December, Wendy Alexander, Labour leader at Holyrood, called for a review, suggesting the Treasury block grant should be replaced by new tax powers with assigned revenue from some taxes still controlled by Westminster but complemented by a smaller block grant from London to recognise additional needs in Scotland.

In October, David Cameron, the Conservative leader, dropped his largest hint yet that he believed the time might be right to replace the Barnett Formula.

While a vow of silence on the subject appears to have been taken by Tory front benchers, they are willing to air their views privately. One shadow minister told The Herald: "There is concern Scotland is getting a far better deal through the current financial settlement than the rest of the UK, particularly England. There needs to be a reassessment of it."

Critics often point to how the spending per head in Scotland is £1500 higher than in England. In November, this newspaper researched the figures, which show Scotland's average state spending of £9631 per head is less than London's at £9748 and Northern Ireland's at £10,271.