House of Commons - Education and Skills

Select Committee on Education and Skills First Report

Schools' funding

4. The mechanism for distributing central government funding to local education authorities (LEAs) and indirectly to schools was altered for the 2003-04 financial year. This reform came about as part of a wider review of the funding of local government, involving a change from Standard Spending Assessment (SSA) to Formula Spending Share (FSS) as the needs assessment within the RSG used to distribute grant.

5. In a statement in the House of Commons on 9 December 2002,[3] the Secretary of State set out the changes that he said would provide "a simpler, fairer system". He confirmed that the average national increase in overall funding for schools and LEAs for 2003-04 would be 6.5%, and that each LEA would receive an increase in average funding per pupil of at least 3.2%. With the Government making an announcement on funding for the next three years as a result of the 2002 Comprehensive Spending Review, the Secretary of State said that he expected LEAs to give schools indicative three year budgets.

6. Additionally, he said that the Government was committed to giving local authorities more freedom over the use of resources and that "substantial funds will be moved from central DfES spending to local authority spending […] by 2005-06, more than 92% of all schools funding will be allocated through local authorities in accordance with local priorities. That compares with 87% in [2002-03]".[4] In 2003-04, ring-fenced grants which have ended are: nursery education for three-year-olds, funding for infant class sizes, the school improvement grant, school inclusion-pupil support, performance management and induction for newly qualified teachers.[5]

7. Shortly before the Secretary of State made his statement, David Miliband MP, the Minister of State for School Standards, wrote to all headteachers in England to explain the new system of local authority funding. He told them:

"Reform of the current education funding system was badly needed: it was out of date; it was complicated and hard to explain; it did not reflect the division of responsibilities between schools and LEAs; and it was widely seen as unfair, because it was based on spending patterns from 1991."[6]

He added that the main aim of the changes was to ensure that similar pupils in different parts of the country attract similar amounts of funding. He also mentioned the minimum 3.2% increase in funding per pupil:

"All LEAs will see an increase of at least 3.2% per pupil for next year, with further increases in the following two years. In order to pay for this we are phasing in gains through a maximum increase of 7% per pupil."[7]

8. In the light of these announcements from the Secretary of State and from the Minister for School Standards, LEAs and schools had reason to believe that there would be a significant increase in funding for all schools. That is not what happened. We asked David Normington, Permanent Secretary at the DfES, when his Department realised that there were problems with the distribution of funding. He told us:

"There were two points at which we became worried about this. Before Christmas it was clear to us that demands in the system were quite significant, and although there was more money going in nationally than the demands in the system, there was not that much headroom nationally […] It felt much tighter […] If you ask me when I realised we had a growing problem […] It was when I went to the Secondary Head Teachers' conference and was besieged by head teachers telling me this […] it was mid to late March."[8]

9. Under the Comprehensive Spending Review 2002, local authority education revenue spending on schools was planned to increase from £22.5 billion in 2002-03 to £23.9 billion in 2003-04. With an injection of an extra £1.4 billion of investment in this financial year the question to be answered is, why did any schools face funding difficulties?

The change in the funding formula

Standard Spending Assessment

10. As the Minister for School Standards said in his letter to head teachers in December 2002, the education funding system that existed up until 2002-03 was complicated and hard to explain. Education funding was (and remains under the new system) part of the local government finance settlement. The Government set a figure for Total Standard Spending, the amount of spending as a whole it was prepared to support.[9] The Government provided funding to meet approximately three-quarters of Total Standard Spending, through Revenue Support Grant and distribution of national non-domestic rates. This amount was known as Aggregate External Finance. The difference between Total Standard Spending and Aggregate External Finance is the approximate amount local authorities would need to raise through Council Tax if they spend at the level of Total Standard Spending.

11. Each Council's share of Total Standard Spending, its Standard Spending Assessment (SSA), was calculated by taking account of the population, social structure and other characteristics of each authority. There were separate formulae for education, personal social services, police, fire, highway maintenance, environmental, protective and cultural services and capital finaces.

FORMULA SPENDING SHARE

12. The new system introduced for the current financial year shares many of the characteristics of the previous arrangement:

"[It] continues to do broadly the same job, using formulae to distribute grant and taking account of the circumstances of an area and a council's relative ability to raise council tax. The main changes are:

· greater resource equalization,[10] using a more realistic national average level for council tax;

· new formulae for each service block;

· new Area Cost Adjustment; and

· an allowance for the fixed costs of being in business."[11]

13. Total Standard Spending becomes Total Assumed Spending, and the money paid direct from central Government becomes Formula Grant. An Authority's share of Formula Grant is assessed by calculating its Formula Spending Share (FSS), which, as before, takes into account the population and other characteristics (such as relative deprivation, rural sparsity, density, wage levels). As in the previous system, Formula Grant is designed to cover three-quarters of Total Assumed Spending. Given the broad similarity of the old and new systems, the most significant feature appeared to be the increase in resource equalisation.

14. FSS, although newly-introduced in 2003-04, is not in principle very different from its predecessor, SSA. Some changes were made to education needs assessments, though the wider redistributions of FSS (including those for other services) were subject to 'floors' and 'ceilings' which damped any impact on grant.

15. Coincidentally, the 2003-04 grant settlement was also affected by the introduction of new population figures from the 2001 census. Changes in population revealed by the census had direct impacts on FSS and grant. Settlements.

STANDARDS FUND

16. As well as general funding through the Formula Grant, specific grants are available through the Standards Fund for 33 separate services and projects. The overall budget for the Standards Fund for 2003-04 is £2.7 billion (the same in cash terms as for 2002-03), consisting of DfES grant and LEA contributions. The LEA contribution is set at £745 million, which the Department describes as "significantly less than for 2002-03". The funds are allocated to LEAs using a different set of criteria for each grant, some being simple flat rate sums per LEA, others being calculated by more or less complicated formulae.[12] As mentioned earlier,[13] a number of grants previously payable through the Standards Fund have this year been absorbed into the general grant, as part of a three year plan to give LEAs greater freedom over expenditure.[14]

How problems emerged

Demands in the system

17. As David Normington told us, by Christmas 2002 the DfES had some indications that "demands in the system" were going to cause difficulties, and by March it was clear that for some schools those difficulties would be very severe.[15]

18. There was increased funding of £1.4 billion for 2003-04, but there were also several specific cost increases which reduced the impact of that extra money. There was an increase in employers' contributions to pensions of 5.15%;[16] there were increased costs for teachers' pay, including costs arising from a shortening of the pay scale, leading to larger increments; and there was a rise in employers' National Insurance contributions of 1%. The effects of these changes were not uniform across the country. As the DfES said on pension contributions and the salary changes:

"Although these items were all covered in terms of national allocation of resources, there were differences between the distribution of additional of resources and the distribution of the additional costs that these items generated."[17]

19. The DfES made a similar point on the changes to the Standards Fund, noting that there had been:

"Reductions in the proportion of funding for LEAs and schools provided through specific grant funding, following requests from local government and schools for a re-balancing in favour of general grant. This led to significant changes at both individual school and LEA level."[18]

20. Perhaps most tellingly of all, the Department told us that change to the SSA/FSS system had also had its effect:

"Compared to previous years, where individual LEA's year-on-year increases were tightly distributed around the national average, the 2003-04 local government settlement had more significant winners and losers than usual."[19]

21. Those differences were brought out in figures we received in the DfES memorandum for this inquiry. The table below, which we have derived from those figures, shows the authorities with the highest and lowest percentage increases:

Percentage changes in education spending assessments, 2003-04

Highest increases Lowest increases

% increase % increase

City of London
Wokingham
Cambridgeshire
West Berkshire
South Gloucestershire
12.6
10.3
10.0
10.0
9.9
Hammersmith & Fulham
Knowsley
Southampton
Plymouth
Portsmouth
3.3
3.2
2.6
2.9
2.8

22. Of course, education is only one element in an authority's overall FSS. Some authorities will have enjoyed a relatively large SSA/FSS increase for education but a much smaller one for other services. On the other hand, authorities with relatively small increases in education SSA/FSS may have had larger increases for other services. It is the change in FSS for all services that determines changes in grant for an authority.

23. The Secondary Heads Association (SHA) argued that the large increase in school costs had not been properly calculated by the DfES, and so it had underestimated "educational inflation". It estimated that an average secondary school would need a 10.5% increase in its core budget to cover the various increased costs:

"There is a cash increase on average across the country of 11.6% into LEA Schools Budgets; but with a 10.5% cash increase needed to stand still there is little real growth in the whole system. It is certainly not the minimum 3.2% real terms increase promised in the autumn and used by staff and governors in their planning".[20]

SHA added that because the budget increase has to cover the costs of central LEA services as well as services in schools, the increase in schools budgets is well below the increase in funding as a whole.[21]

PASSPORTING

24. When concerns about difficulties with funding for some schools were first raised, the DfES said that one reason why there were difficulties was that not all the money provided by central Government to LEAs had been passed on ("passported") to schools. On 2 May, the Government published an analysis of LEA budgets for 2003-04.[22] Overall, the Government said that the figures indicated that "over £590 million" had not at that point been passed on to schools, although it acknowledged that there might be "good reasons" for this. It listed eight factors which appeared to have affected the distribution of funds from LEAs to schools, in particular that 19 LEAs appeared not to be passporting the full increase into their schools budget.[23]

25. The Local Government Association (LGA) rejected the Government's analysis. The LGA told us that:

"There are no 'missing millions' and councils are not 'withholding funds from schools.' The facts are:

· at the time of the government's exercise in March, many authorities were in the process of decision-making and had not allocated all funds to schools;

· some funds are distributed in line with DFES guidance and this is done 'in-year';

· some funding for Special Educational Needs is held centrally, for example statementing for SEN and central contingency; and

· funds are distributed for the forthcoming academic year, relating to school location and types of staff, such as Newly Qualified Teachers and Advanced Skills Teachers. These are not known until the summer and funding cannot be distributed until that time".[24]

26. Passporting was also affected by the differential increases authorities received. In some cases, the very different SSA/FSS treatment was further challenged by the unexpected interaction between, on the one hand, the requirement that LEAs passport education spending and, on the other, changes in formula grant. For many authorities, the demand (from DfES) that they passport at least 100% of their education FSS meant that most or all of their formula grant—intended to contribute towards the funding of all their services—was consumed by schools funding.

27. Two authorities—Barnet and Essex—found themselves in the position of being expected to passport more additional resources to education than their overall formula grant increase. The figures for Barnet are shown below:

Education SSA/FSS

'Passport' total [(b) minus (a)]

Formula grant increase

Excess of education "passport" over formula grant
2002-03

2003-04
£129.964 million (a)

£144.420 million (b)

£ 14.456 million

£ 13.246 million

£ 1.210 million

Barnet was expected to use the whole of its increase in formula grant (plus another £1.21 million) to fund education passporting. Any increases in spending on social services, refuse collection, highways, planning and other services would have to be financed by council tax rises. As Column F of Table C in the DfES memorandum shows, many other local authorities found themselves in a position where almost all of their formula grant was pre-empted by education passporting.[25]

28. Column G of Table C shows how far LEAs passported education FSS to schools. Some authorities passed less than 100% of the resources the Government wished to see handed to schools. Others passported well over 100%. The table shows the top and bottom five authorities:

Passporting: highest and lowest percentages

Lowest Highest

Westminster
Isles of Scilly
Wokingham
Trafford
Croydon
73.8%
83.4%
88.3%
89.9%
90.2%
Bexley
Southampton
Medway
Camden
Solihull
137.2%
122.1%
120.7%
120.5%
114.6%

29. The Secretary of State has reserve powers to require an LEA to set a minimum level of schools budget if he believes it is not providing schools with sufficient funding.[26] In February, he announced that he had taken this action with Westminster and Croydon, because the DfES considered their budgets to be inadequate.[27] Both authorities subsequently increased their budgets following discussions with the DfES.[28]

30. Mr Normington was asked about the correlation between those authorities which had not passported the full education FSS and those which had problems with teacher redundancies. He said, "I do not think it is a very strong correlation because it depends what action the local authority has then taken to try to minimise problems in its area".[29]

31. We also asked the Secretary of State about passporting. He told us:

"[…] at the end of the year I think we are in a position where about 11 LEAs out of the 150 or so are still not passporting 100% of their expenditure. Earlier in the year in May, we were talking about 19 or 20 that had not passported. Some decided that they would and that is fine. It is a fact that some of those which have not passported were amongst those which were most concerned about the state of affairs […] I think the question of passporting is a legitimate question for me to raise. You then have the question of did schools know they were going to get money that was in the local education authority budget and was en route to them at some point in the year? I can tell you for a fact that there were a number of schools that had no idea either how much money, if any, they were going to get from the beginning of the year when they saw the figures at that point. There were some LEAs who were telling their schools that there would not be any more money and it was all down to the Government and all the rest of it. In those circumstances, I thought it was perfectly reasonable to say the LEAs should make clear to schools in their LEA how much money was going to come to that school in the course of the year as soon as possible so that they had a proper basis upon which to budget."[30]

32. Passporting all education spending would have required some authorities to spend their grant increase for all their services on education. The Secretary of State told us:

"There are a couple of authorities in the country where the relationship between the education amount that was allocated and the [Revenue Support Grant] amount generally could give rise to that kind of concern […] One of the attractions for some kind of national educational schools fund where the money went to LEAs to be passed on, is that it would create a greater insulation between the amount of money that is allocated to schools and the amount of money allocated for other services, which I as Education Secretary would welcome."[31]

33. Estimates of spending on schools during 2003-04 suggest that, in total, LEAs' schools expenditure exceeded the Government's plans by £200 million. While individual authorities may not have passported 100% of additional needs assessment to schools, there was no overall shortfall in schools' funding.

Government proposals for future years

34. In evidence the Secretary of State told us that his main aim was to make sure that there was no repeat of this year's problems in future years:

"The general view I have had from many, many schools […] is that the greatest thing we could do to restore confidence for the current year is to ensure that schools feel that the resources for the future are secure."[32]

He added that "it seems to me critically important that local government and national government do work together in these arrangements to ensure that every school gets a reasonable funding settlement next year and the year after".[33]

35. Two days after giving evidence to us, on 17 July, the Secretary of State made a statement to the House of Commons about plans for schools funding for 2004-05. He set out the basis on which he wished to proceed:

"My guiding principles on the changes needed in the schools funding system for the next two years are as follows. First, every school should receive at least a guaranteed per pupil increase in funding for each year. Secondly, central and local government should make earlier announcements of the financial allocations to schools so that heads have greater certainty and time to plan. Thirdly, we should provide greater stability through a two-year settlement on teachers' pay, ring-fenced grants and the guaranteed per pupil increase in school funding. Fourthly, there should be greater transparency in the overall system of funding for schools. Finally, the reforms agreed with the key work force partners, as reflected in the national agreement on raising standards and tackling workload, should be sustained."[34]

We aim to monitor the Secretary of State's success in meeting these objectives over the next two years.

36. The Secretary of State's main proposal was that for both 2004-05 and 2005-06 every school should receive at least a minimum increase in its funding per pupil based on "the average cost pressures for 2004-05 and 2005-06", to be announced in the provisional local government finance settlement in November.[35] This would be achieved by placing each LEA under an obligation to provide for such a minimum guarantee, while the DfES would ensure that each LEA has the necessary resources within its schools budget. The DfES part of this bargain would be to set the minimum increase of schools' FSS at a level "that will cover the school level guarantee" and to ensure that LEAs receive enough in central Government grant to passport increases in schools' FSS in full.[36]

37. On the Standards Fund, the Secretary of State announced that the reductions previously announced for 2004-05 and 2005-06 would be reversed, providing "more than £400 million in each of the next two years, over and above existing plans" and that announcements on Standards Fund distribution would be made earlier than in the past. This last point reflected a concern he raised in evidence to us, namely that the local government budget setting process does not provide hard information until very late in the day:

"[W]e have a system which has a very late settlement of resource, with very late set council tax and therefore, by definition, a very late position of budget for any school in our current regime."[37]

In his statement to the House, the Secretary of State said that it was the Government's intention to bring forward the announcement of the provisional local government settlement to mid-November, and bring forward the deadline for notification of passporting intentions by LEAs to the end of December rather than the end of January. He also said that in his submission to the School Teachers' Review Body he had made the case for a two-and-a-half-year settlement to try to establish some stability.[38]

38. On 29 October the Secretary of State made a further statement in which he gave the figures for the funding guarantee. He said that the DfES had calculated that "unavoidable cost pressures" for the average school will increase by 3.4% in 2004-05. On that basis, schools would receive in general a 4% increase in their overall budgets. Those schools with declining pupil numbers would receive slightly more per pupil to meet fixed costs (such as cleaning, repairs and heating), while those with increasing numbers would receive slightly less, on the grounds that their fixed costs form a proportionately smaller part of their budgets. In addition, he said that he expected the minimum schools guarantee for 2005-05 would also be 4%.[39] The guaranteed minimum per pupil increase for LEAs will be 5% for 2004-05, with an expectation that it will also be 5% in 2005-06, and he confirmed the additional funding for the Standards Fund as £435 million in 2004-05, and £520 million in 2005-06. He also announced that those LEAs which had received the lowest increases in funding in the past two years, around a third of the total, would receive additional grant over the next two years of £120 million to assist affected schools.[40]

The consequences for schools

39. The debate about how money has been distributed to schools has not, of course, taken place in a vacuum. Some schools which had been anticipating increased funding have, because of the rise in costs and for other reasons, found that effectively they are no better off than last year, and in some cases their situation is worse. The DfES has acknowledged difficulties and taken some steps to alleviate them; for example, by giving the 36 authorities which received the lowest increase in their education FSS an extra £28 million between them,[41] providing LEAs in London with an extra £11million to offset increases in teachers' pay[42] and allowing schools to use capital funding for revenue purposes for this year only.

40. The Government has been criticised for not doing enough to address funding problems, but it has proved impossible to gain a definitive picture of how many LEAs and schools have problems as a consequence of the funding changes. The main indicators that have been used are the number of teaching posts lost and the number of teachers who have been made redundant. There has, however, been no generally accepted view of how serious the consequences for schools have been, with different surveys giving different results.

41. The Times Education Supplement and SHA published a survey on 29 August which suggested 3,500 school staff had been lost. This survey also indicated that while 50% of schools had been able to expand staff numbers, around one third had reduced teaching and support staff. This survey was criticised by NASUWT, which said that its monitoring showed no indication of that scale of redundancy or indeed a greater level of redundancy than in previous years (around 250).[43] A survey in The Guardian on 1 September suggested that 2,500 teaching posts had been lost in England and Wales. Most recently, a survey for the NUT undertaken by the Centre for Education and Employment Research at the University of Liverpool suggested that schools adversely affected had lost 8,800 full time equivalent teachers: 5,702 in primary schools, and 3,115 in secondary schools. The net effect taking into account those schools which had created new teaching posts was a loss of 4,537 in primary schools and a gain of 20 in secondary schools. The Liverpool survey also suggested that in affected schools 12, 308 support staff had been lost.[44]

42. The Government has generally refused to be drawn on the question of how many posts have been lost and how many teachers have lost their jobs because of problems with the funding regime. The Prime Minister suggested in the House of Commons in June that the DfES believed there were 500 net redundancies.[45] In evidence, DfES officials were cautious about giving a precise figure. Mr Stephen Crowne, Director, Resources, Infrastructure and Governance said that the Department broadly agreed with the figure suggested by a NASUWT survey of approximately 250 redundancy notices, but that without a special exercise asking for that information it was not possible to give a definitive number.[46] He added that "our priority has been to work with those local authorities which are facing some of the biggest challenges and to try and help them through those difficulties".[47] Mr Normington said:

"I do not want to put another figure equally distant from the facts into the public domain […] I think actual redundancies as a result of these funding reductions will be quite small at the end of this process, but I do not want to put another figure in because we do not have up-to-date information".[48]

43. The Secretary of State gave a similar response:

"[W]e will not know the figure [of the number of teachers made redundant] until 1 January when we get the returns on unemployment […] We have gone round all the LEAs and asked for their assessment as we have been going through the process. As I have said in the House on a number of occasions, the overall level of redundancies is broadly comparable with previous years. The truth is that the number of compulsory redundancies is relatively low, but there is an issue about the number of teachers who have left employment but have not been made compulsorily redundant, whether through early retirement or natural wastage in some other form."[49]

What went wrong

44. The difficulties faced by schools in 2003-04 occurred for a number of reasons, almost all of them beyond the control of schools themselves. The most significant of these external factors were:

· The decision by the Government to change the distribution formula for allocating spending (and thus grant) to local authorities. This led to very different changes in resources from one authority to another.

· A second decision by the DfES to transfer money (as compared with the position in 2002-03) from the Standards Fund to the general distribution formula. This shift has the effect of leaving some schools that had previously received Standards Fund resources much worse off in 2003-04.

· Decisions by local authorities about the allocation of their budgets between education and other services and, within education, between schools and services provided centrally by the LEA itself (which gave rise to some of the disputes about passporting).

· The within-authority distribution of resources—on the basis of DfES approved Fair Funding Formulae—which is required to be heavily pupil-driven. Schools with static or falling rolls are likely in many cases to have lost resources.

45. Once budgets had been settled through these mechanisms, schools then had to deal with extra demands through:

· The increase in teachers' pay;

· The increase in pension contributions; and

· The increase in National Insurance contributions.

Schools have relatively small budgets and reserves compared with LEAs. The gap that in many cases emerged between the resources provided and the demand for those resources led to reductions in teacher numbers. The situation was not helped by the process which meant that schools did not know the size of their budget until the beginning of the financial year.

46. This outcome was clearly not the one that the Department had been anticipating. In evidence, the DfES conceded that the money it provided covered the extra costs in the system overall with a small margin, but that those LEAs which had below average increases in SSA/FSS would undoubtedly have had severe pressures on their budgets.We asked Mr Normington about what forecasting and modelling the DfES had done. He told us:

"[W]e did not know, as I have admitted, precisely what the effects would be on individual schools. It was very difficult to model that, but at the beginning of this process, we did have a very good fix on how the changes we were making to the local authority funding formula would impact differentially on local authorities. We did have that, and the evidence of that is, of course, that we put in floors and ceilings, so that the effect was not as extreme as it would otherwise have been. Secondly, we did know very well what the costs that schools were facing would be, and we were able to model that. We also knew that some standards fund grants were ending and some standards fund grants were being transferred into the local authority settlement. What we were not able to do was to model the total impact of that on every school, because, as the memorandum says, there are decisions being taken at each level—some by us, some by local authorities, some by schools—which makes it virtually impossible for us to model what the impact will be on every individual school. We did not believe that the impact on individual schools would be as different across the piece as it has been. Some are big gainers, and some are losers, and of course, we have been hearing from the losers, who have real problems. It was that bit of it, the modelling of the impact on schools, that we were not able to do, so we were not able to provide that to ministers. Overall, in the national settlement, we believed there was enough money to cover all the demands, but of course, as it spreads out, as the memorandum shows, the differential impact, first on local authorities and then on schools, was very wide."[50]

47. The Secretary of State made a similar point:

"[T]he question you ask as to what extent this could have been modelled more greatly than it was, I think that is a very difficult question because a significant number of the decisions, for example the level of council tax increase by a particular LEA, the amount of passporting, the allocation to particular schools, the allocation as between secondary and primary schools, the question of how much went to special educational needs and so on, were all decisions of individual LEAs which by definition you could not model. You could have various hypotheses but you could not model what a particular LEA would do in those circumstances. I do not think it is true to say that my officials did not model the situation correctly."[51]

48. He did agree that the late settlement was a problem:

"The one area of criticism which I think is warranted is […] the fact that the whole thing came in too quickly at the end, so that schools felt they got their budgets without knowing what the situation was going to be quickly enough to deal with it, and they had a presumption, for rhetorical or other reasons that had gone on earlier, that the situation was going to be better than they expected and that speed of events led to some of the situations being as acute as they were. That is one of the reasons why I have given a great priority next year to getting the earliest possible announcement of what schools budgets will be."[52]

49. The DfES did not have accurate enough information to know how the changes in budget calculation would affect individual schools before the system was changed. It still does not know how many teachers and teaching posts have been lost as a consequence of this year's events, and won't know until the survey of teacher numbers is completed in January.[53] Even then, the breakdown in teacher numbers is done by LEA at the lowest level, so the effect on schools may not be apparent.

Will the problems recur?

50. The Government has taken a number of actions to try to avoid a repetition of this year's problems in 2004-05. It has introduced a guaranteed minimum increase in funding for every school and LEA; it has restored money to the Standards Fund that it had planned to remove; it has introduced payments for worst affected authorities to give extra assistance to schools in particular difficulties; and it is seeking to have decisions made earlier so that schools know what their budgets are to be in good time before the start of the financial year.

51. Despite these initiatives, there are still grounds for concern:

· The planned increase in year-on-year resources of 5.7% is less than for 2003-04;[54]

· Some schools have a starting point for next year which includes funding from this year from reserves and/or their repairs and capital resources budget. These one-off resources cannot be re-used next year;

· Inflation is a little higher this year than last;

· The 3.4 % estimate for fixed costs in the coming year may be exceeded;

· The Government's announcement includes additional Standards Fund resources for 2004-05 and 2005-06 which is designed to help authorities and schools in particular difficulties. This may encourage schools and LEAs to expect such support into the future.

Conclusions and recommendations

52. The Government introduced changes to the funding system for schools in good faith that it would bring about an improvement, and backed up the change with an increase in funding of £1.4 billion. Against expectations, the result was an outcry from certain sections of the schools community that they were suffering from effective cuts to their budgets and that only by making savings, including making teachers redundant, could they survive. Faced with these problems, the Government has retrenched, putting money back into the Standards Fund and doing everything it deems possible to provide certainty for schools about the money they will be receiving in their budgets for next year. The extra money amounts to £1.075 billion over the next two years; £955 million for the Standards Fund and £120 million in targeted support for the LEAs with the lowest funding increases in the last two years.

PLANNING AND OUTCOMES

53. The Government faces a conundrum. On the one hand, the DfES wishes to be able to guarantee schools a particular level of funding. Although it is not explicitly stated that every school is to receive more money, this is the implication of official statements. Often the increases implied are rather greater than many institutions can reasonably expect to receive. On the other hand, the DfES cannot directly control the allocation of money to every school and, more worryingly, cannot model what is likely to occur in any particular year. The Government's aspirations exceed its capacity to deliver and to predict what will happen.

54. The Secretary of State and his officials told us that they were unable to model the effects of this year's funding changes to the school level. We acknowledge the problem, given the funding split between the DfES and LEAs and the complexity of the calculations. It was, however, a serious weakness in the Department's strategy to implement the funding changes without knowing in detail how schools would be affected.

55. We have criticised the Department a number of times recently for not having sufficient evidence to underpin policy decisions it has taken. The DfES did not have enough information about the benefits specialist status may confer on schools to justify the expansion of the specialist schools programme,[55] and it has not undertaken a detailed assessment of various school improvement initiatives such as Excellence in Cities to establish which have been most effective in improving the performance of pupils.[56]The criticism here of the DfES' modelling is similar: the Department did not have sufficient evidence to be able to say with confidence that it would be able to achieve its planned objective.

56. The danger for the DfES now is that it is attempting to remedy the problems without a full knowledge of where those problems occurred and the reasons for them. The School Workforce statistics in January will tell us how many teachers are in employment and the number of vacancies. It will not reveal the reasons why some schools have been affected and others not. The DfES needs to have information from schools as well as LEAs in order to gain the full picture, and it needs more than simply teacher numbers. For example:

· Were schools which lost money from the Standards Fund worse hit than others?

· How many schools have deficit budgets for this year?

· How many schools used the option of spending their capital funds on revenue expenditure?

57. There are parallels here with the alleged 'fixing' of A level grades in 2002. When those complaints were first raised, it appeared that the whole system might be called into question. Following an inquiry by Mike Tomlinson, and the opportunity he had to look at the facts of the case, the relatively small number of 1,945 students overall received at least one revised A or AS level grade[57] and the sense of crisis abated.

58. A similar situation might now exist with schools funding. There is a perception that the funding system is failing schools, and some schools clearly have had serious problems, but the DfES, Parliament and all other interested parties need hard evidence about what has happened across the country in order to make judgements about how to proceed. Without that hard evidence, the perception of a widespread funding crisis will persist whatever the real position is, and that is damaging for the whole schools system. We recommend that the DfES undertakes a survey of LEAs, seeking information on individual schools to provide an assessment of how widespread and how severe the problems with schools' funding have been for 2003-04. We also recommend that the results of this survey are made public as soon as possible.

59. The Government has already made decisions about how to try to avoid problems in 2004-05. For the future, if the Government intends to continue to seek greater control over the detailed distribution of funding to schools, it needs a far superior information system, which needs to be predictive. If it is unable to achieve that, the Government needs to understand the limitations under which it is operating, and so be more cautious about what it promises on schools funding.

60. There has been an increase in central Government's expectations for schools. It wants certain things to happen, but it does not have the means to ensure that they do happen. If it has a desire for a greater degree of central control over schools funding, about which we would have serious reservations, it should provide itself with an effective means of exercising that control.

NATIONAL EDUCATION FUND

61. One way of providing greater clarity on spending issues would be more formally to separate education spending from the rest of the local authority settlement. The Secretary of State said that the idea of a national education fund held some attractions,[58] and it would help to prevent the problem of authorities being asked to pass on to schools increased funding at a higher level than is provided for their services as a whole. Such a policy has implications for local government finance which go much wider than education services alone, but it may be the way forward if the Government seeks to target education spending more directly.

LATE SETTING OF BUDGETS

62. The difficulty caused by the lateness of the setting of budgets for the coming year is one that the Government has tried to address. The announcement in October 2003 of plans for 2004-05 year was significantly earlier than the announcement for the current year, as was the announcement of the local government revenue finance settlement, made on 19 November. With the announcement of the teachers' pay award also having been brought forward, with the announcement made on 10 November, then it should be possible for schools to know what their budgets will be at least one month earlier than in previous years. The Government had hoped that the new system of funding would be easier to understand than the old, and therefore would bring clarity. This year's events suggest that not only has that not happened, but that it might be a forlorn hope, given the variables that the formula is attempting to reconcile. Even if it is not possible for the process to be more transparent, earlier announcement of decisions on education financing brings some welcome certainty for schools and LEAs, and we expect the Government to continue to pursue this aim.

FINANCIAL MANAGEMENT IN SCHOOLS

63. It is not possible to quantify how far the problems schools faced came about because schools were planning on the basis of at least a 3.2% increase in funding which then did not materialise, although SHA suggested that many schools had done so.[59] Earlier finalising of budgets would help to avoid some of those problems. The Secretary of State has also suggested that the financial planning by some schools was not as effective as it should have been, and has put in place support and guidance to help schools' budget management, particularly in LEAs which have received transitional grant.[60]

64. School-based funding inevitably brings problems as well as benefits. Schools have to accept the risks as well taking advantage of the flexibility the system brings to enable them to manage their own affairs. This is not to seek to blame schools for the situation that arose; but if a school had not handled its budget well, that deficiency could be masked by the general funding issues. Any schools with a very high percentage of their budgets committed to salaries and with few reserves, for example, are likely to have faced funding difficulties. Here again a detailed survey might help to highlight those schools which need assistance.

THE FUTURE OF THE FORMULA SPENDING SHARE SYSTEM

65. The move from SSAs to FSSs was the culmination of a number of years of effort by officials in central and local government. The 2003-04 needs assessments were supposed to be 'fairer' than those which preceded them. Without that greater degree of fairness there would be no grounds for undertaking the move to FSS.

66. Yet it is now clear that the problems that emerged during 2003-04 were made worse by the redistribution implied by the move from SSA to FSS. Authorities and schools that were made worse off by the local government funding reform were bewildered and felt the new resource allocations were anything but fair. Understandably, the Secretary of State has announced measures for 2004-05 designed to restrict the possibility of individual schools facing too great a loss of resources. These funding 'floors' will be paid for by mirror-image 'ceilings' that will restrict other schools' resource increases.

67. Although the new arrangements for 2004-05 spring logically from efforts to solve the problems of 2003-04, they are hardly consistent with the notion of 'fairness' that originally drove the move from SSA to FSS. In effect, the new schools funding arrangements for 2004-05 (which will, presumably, be extended in future years) have the effect of over-riding the expected impact of the spending needs assessment reforms introduced for 2003-04. The 2004-05 arrangements also have the effect of reducing the 'per pupil' funding guarantee embedded in the Fair Funding Formula system that has been in use for some years.

68. Thus, the 2004-05 smoothing arrangements imply an important new principle for the funding of schools in England. There has been a move towards a system where schools will receive increases in year-on-year funding that are closer to a fixed, average, percentage for all. Opportunities for authority-to-authority FSS resource redistributions or for school-to-school redistributions as a result of changes in pupil numbers or social factors have been substantially reduced. One sort of fairness has been reduced in order to increase another. In making these changes, the purpose of moving to FSS has been undermined. The question is whether the settlement being provided for 2004-05 is designed to provide stability in the short term before a return to allocations based on the full operation of the FSS calculation, or whether the 'flat-rate' approach being taken for next year is the beginning of a long term trend.

69. We recommend that the Government makes an announcement on its long term future plans for the schools funding system as soon as possible, for the sake of clarity and to enable a full public discussion on the best way forward. Whatever approach it decides to take, clarity and early settlement of budgets are vital to enable schools and LEAs to plan effectively and to help prevent a recurrence of this year's problems.

70. This is another matter which cannot sensibly be decided without a full understanding of what has happened in schools this year. Hard evidence about how many schools were adversely affected and to what extent is vital if the Government, schools, LEAs and all other interested parties are to be able to plan responsibly for the future funding of schools. Unless the scale of the problem is quantified and the reasons for it fully understood, there will be no certainty for schools, and no end to the criticism of the Government.

3 HC Deb, 9 December 2002, col 22. Back

4 ibid, col 23. Back

5 ibid Back

6 Circular Letter from David Miliband, 5 December 2002. Back

7 ibid Back