Lord Sewel, the former Scottish Office minister, has called for the controversial Barnett Formula, which sets Scotland's additional public spending based on population, to be scrapped and replaced by a fairer scheme based on need.

The Labour peer, who helped plan devolution as a minister from 1997 to 1999, also argues that if Holyrood were to feel that under such a new system Scotland needed more money, then it could use the so-called tartan tax, which enables the Scottish Parliament to raise or lower income tax by 3p in the pound.

Lord Sewel makes his views known in a paper for the Smith Institute, sometimes referred to as Prime Minister Gordon Brown's favourite think-tank, whose charitable status is under investigation by the Charity Commission.

The paper forms part of a pamphlet entitled Towards a New Constitutional Settlement. Last week Mr Brown set out his own ideas towards constitutional change.

In his article, Lord Sewel, Professor Emeritus at Aberdeen University, writes: "Barnett served the UK well prior to devolution and was important in enabling a smooth transition to be made to devolved government.

"It has now outlived its usefulness. Its lack of transparency is, at least in part, the reason for it being perceived as a cause of grievance between England and Scotland.

"But, more powerfully, fairness demands that the relative expenditure levels of Scotland to the rest of the UK should be based on a new, objective study of relative expenditure needs.

"The Scottish Parliament, with its power to vary the standard rate of income tax by 3p in the pound, has the means available to it to adjust expenditure either upwards or downwards if the needs assessment produced a figure that was not compatible with Scottish political values."

The views of Lord Sewel, the creator of the Sewel Motion that allows MSPs to give Westminster the power to pass specific laws on their behalf, echo those of Lord Barnett himself, the Labour peer, who came up with the formula in the late 1970s while a Treasury minister.

Last month, he told the Lords that a review should be undertaken to come up with a new scheme "based on genuine need". He pointed out how the latest Treasury figures showed England received £6949 in public spending per head while Scotland got £1465 more at £8414.

For the government, Lord Davies of Oldham, made clear the government had "no plans" for a wholesale revision of the formula, which he suggested could prove to be "a Pandora's box".

The issue of the Barnett Formula is feeding into the whole debate about public expenditure in the post-devolution settlement with claims south of the border that English taxpayers are "subsidising" more favourable conditions for Scots. In November, an ICM poll showed 60% of people in England believed "higher spending in Scotland" was not justified while 51% of Scots said it was.

Last week, Alistair Carmichael, the Liberal Democrats' Scottish spokesman, also insisted the Barnett Formula had to go. "There is an urgent need to reform the way in which Scotland's budget is set. A full constitutional convention to examine expanding the powers of the Scottish Parliament, including greater control over Scotland's finances, is urgently needed.

"It is clear this is far and away the most popular option with the people of Scotland. If Gordon Brown is serious about constitutional change and increasing democracy, he cannot fail to act," added the MP for Orkney and Shetland.

This year, Scotland's total "assigned budget" is almost £30bn. Even though spending on, say, health might rise in England, leading to a proportionate rise in Scotland, it is up to the Scottish Executive to spend the extra money on what it wants.

Last month in Wales, the Labour-led assembly announced it was undertaking its own review of the Barnett Formula, that would include a look at potential borrowing powers for the Cardiff body.