House of Commons - Education and Skills

Select Committee on Education and Skills First Report

3 Schools' funding

18. Our public expenditure report last year concentrated exclusively on the issue of schools' funding. Changes were made to the funding formula used to distribute money to LEAs which were designed to make the system simpler and fairer, overall funding for schools and LEAs would rise by 6.5% and each LEA received an increase in average funding per pupil of at least 3.2%. There was therefore reason to believe that there would be a significant increase in funding for all schools, but that is not what happened. Cost pressures in the system and the effects of the new funding formula on distribution led to widely divergent patterns of funding. There was a general outcry that schools' funding was "in crisis" and that large numbers of staff, both teaching and non-teaching, would be made redundant. The Government's response was to retrench, announcing guaranteed per pupil increases in funding for all schools for 2004-05 and 2005-06. This effectively overrode the fair funding formula[10] and local government financing arrangements.

19. The Government has now taken this 'flat-rate' approach one stage further. In its five-year strategy,[11] it announced the establishment of three-year school budgets from 2006, with minimum guaranteed levels of funding:

"There will be a consultation beginning in the Autumn about the arrangements for the new Schools Budget, including transitional protection where local authorities have spent more than their formula allocation in the past. No authority will receive less funding for education than its current level of spending, and we will seek to ensure there are no adverse effects for the rest of local government. Funding will continue to be channelled through Local Authorities, though they will not be able to divert this spending for other purposes. Local Authorities will deliver the national guarantee of extra funding to each school each year, but will retain an important and necessary role in reflecting local needs and circumstances."[12]

20. One of the problems that we faced last year was a lack of hard evidence about what was actually happening in schools. Instead, the debate about what the real situation was progressed through a series of assertions and counter-assertions. Some efforts were made to quantify the difficulties,[13] but the DfES, while it criticised the outcomes of other surveys, did not itself seek to produce hard data on the situation. It addressed all questions about the numbers of teachers and other staff whose jobs might be at risk by saying that the annual staff survey[14] would provide the information necessary to make a judgement. It also said that information on spending by individual schools was collected at the end of each financial year and that this would show how many schools had deficits. We recommended a special survey of LEAs to try to quantify the problems and the causes of them. The DfES in its response to our report said that it already collected information "which will give us a full picture of the situation".[15]

21. The DfES made much of the school workforce survey, but when it appeared it did not answer many of the questions in which we were interested. There were 4,100 more full-time equivalent regular teachers in the maintained sector in 2004 compared with 2003,[16]10,000 more teaching assistants and 3,500 more administrative staff. As we said in our report on teacher retention and recruitment,[17] within that overall picture we still do not have information about winners and losers; how many schools were badly affected by the problems over schools' funding last year and how many did well. We also note that the 13,500 extra teaching assistants and administrative staff were spread over both primary and secondary sectors and some 23,000 schools.

22. It appeared to us that there was a marked reluctance on behalf of the Department to analyse in detail the causes and extent of the problems. As we said, "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."[18] The two year flat rate scheme was designed to act as a brake on further deterioration whatever a school's financial circumstances, and seeking out the causes and extent of the problems appeared to be very much a secondary consideration.

23. The DfES does collect some information about the financial position of schools. David Normington told us that in 2003-04 the number of schools in deficit had been about 2,500.[19]

"If you look at the pattern—I was looking at the pattern of numbers of schools with deficits over recent years—it has gone up and down around the figure 2,000. So it is sometimes 1,800, it is sometimes two and a half thousand. It is in that range."[20]

On the DfES's own analysis, the number of schools in deficit in 2003-04 is within the range that might be expected, though at the very top end. However, given that at least 1,800 schools would be expected to run a deficit in any given year, this is not a dramatic change.

24. In the absence of the information that we sought from the DfES, we were pleased to see the results of a study undertaken by the Audit Commission into 15 LEAs to assess what had happened to schools' funding in 2003-04.[21] One of the study's five key findings supports our conclusion about the nature of the problems and the amount of information available to the Government:

"There was not a widespread funding crisis in spring 2003. Government action was prompted by perception and assertion rather than accurate information. In any financial year a number of schools will face individual financial difficulties. However, in responding to significant concerns expressed by many schools and councils, the Government did not have reliable information about the state of school finances. Nowhere in the system, neither at government nor council level, is there reliable, consistent and up-to-date information about schools' budgets and financial positions. Forecasts made in spring 2003 that there would be significant reductions in overall school balances have not been realised."[22]

25. The DfES reacted to perceptions of crisis rather than an actual widespread funding crisis, and in the solution that it has provided it has changed the nature of the funding allocation, the role of LEAs in education at the local level, and the role of the DfES. These decisions are matters of political judgment. The Government has opted for clarity and predictability in the schools' funding system rather than traditional notions of fairness (as calculated by the FSS formula), and for national direction in the determination of funding priorities rather than local discretion. However, given the far reaching consequences of the changes introduced for 2004-05 and beyond, it concerns us that they were taken without the DfES having a full and accurate picture of the financial situation in schools across the country. If, for example, the figure on numbers of schools in deficit had been available earlier, the impression that an unusually large number of schools were affected could have been dispelled.

26. The Audit Commission sets out clearly how the change to national flat rates of increase in funding are inevitably broad brush and may have some unintended consequences:

"A minimum funding guarantee for schools and transitional funding for councils do not tackle areas of greatest need and represent an inefficient use of resources. Even though our study has confirmed that some schools are significantly overspending their budgets, schools in most financial difficulty are not necessarily in the one-third of councils that are to benefit from transitional funding support. Such 'one size fits all' measures are inconsistent with the government's published principles of fair funding, which promote transparency, equity and consistency in the way in which schools should be funded. This approach also constrains councils from tackling funding inequalities within their areas. By specifically attempting to support schools in deficit or likely to go into deficit an unintentional message has been given to schools that working within a budget is not a priority."[23]

27. The decision to change to three year budgets with ring-fenced grants and minimum funding guarantees was taken quite abruptly, its announcement forming part of the five year strategy. There has so far been no consultation with local authorities on the way in which their role is to be changed (a consultation paper is promised for early 2005, some time after the legislation to introduce three year budgets has been presented to Parliament).[24] It puts funding for schools via LEAs on a completely different footing to all other local authority spending. LEAs in effect become agents of central Government, as with housing benefit for example. LEAs will be responsible for calculating how much each school will receive in accordance with the rules laid down by the DfES, and will have no local discretion to change that allocation. Schools' funding will no longer be paid for partly through council tax; all funding will come through a grant from central Government. This grant will cover schools' funding, channelled through local authorities. The actual amounts received by each school could still, it is expected, be topped up by councils, though this will not be a universal requirement. Some authorities already fund their schools above the level implied by the schools FSS. It is not clear whether this "overspend" will continue beyond a transitional period.

28. The Government continues to stress the importance of the role of LEAs in delivering education locally, but heavily restricts what they can do. In a speech to the National Social Services Conference in Newcastle the Secretary of State said:

"[Y]our role is not (for the most part, in my view) concerned with directly providing services. It will increasingly be about commissioning and working with and through others."[25]

How far this change will lead to an increased role for the DfES in the distribution of funding to schools is not clear. However, if LEAs have no discretion about what they transfer to any given school, it is reasonable to assume that individual complaints about the way funding has been calculated will increasingly be addressed to the DfES as the prime mover. Over time, if this model continues in place, local authorities' role in the distribution of funding might be phased out and some new funding body for schools created. The previous Conservative Government set up the Funding Agency for Schools to oversee the funding of about 1,000 grant-maintained schools. Given the proposed new funding arrangements, coupled with the increased autonomy now promised to schools, it is hard to imagine the DfES being able to cope without a new intermediary body. The Committee would expect to be kept informed about any moves to create a new funding institution.

29. Even without such a change the DfES is going to find itself more directly involved with day-to-day issues arising from schools' funding. The effect that proposed staff reductions will have on the Department's ability to do this is an issue we discuss later in this report.

30. The consequences of the problems with schools' funding in 2003-04 have been far-reaching. Given that the settlement for 2003-04 was distributed using a new funding formula, it is remarkable that within eighteen months the whole rationale for that original change, that the funding system needed to be fairer and more redistributive, has been abandoned in favour of a highly pragmatic near flat-rate system, with three year budgets being introduced in two years' time. This change has led to the loss of LEAs' ability to make any executive decisions about schools' funding in their areas and will, we believe, inevitably lead to far greater involvement of the DfES in day-to-day management of the school system.

31. In our report last year we said:

"If [the Government] has a desire for a greater degree of control over schools' funding, about which we would have serious reservations, it should provide itself with an effective means of doing so."[26]

The Government has gone some way towards doing that, with a much simplified system for calculating each school's entitlement, overriding all other arrangements. Whether it has provided itself with an effective mechanism for operating that funding system remains to be seen. The new system is designed to bring stability and predictability, so that schools know what they will be receiving over a three year period. This will bring some benefits, but we have concerns about the way in which this conclusion was reached.

32. Moreover, for some schools (those with falling rolls) three-year funding settlements may mean predictable falling year-on-year resources, with all the local political salience that such news will generate. It is likely that the coming of three-year budgets will intensify the pressure on DfES to move towards flat-rate increases for all schools, each year. This end-point is nearly certain for small schools. The possibility of redistributing money from one area or type of school to another will disappear. Like the Barnett Formula (introduced in the late 1970s to maintain a balance of resources between different countries within the United Kingdom) the impact of the move to centralised school funding will inevitably be conservative.

33. It is clear to us that the DfES does not have adequate information even now to be able to say with certainty how many schools had problems in 2003-04 and what the various reasons were for those problems. Therefore the new system is beginning with a leap of faith that all schools will be adequately funded. As the Audit Commission noted, the transitional funding made available to help with difficulties was provided by LEA area rather than school by school, so schools with problems in areas which received no extra funding will constantly be striving to keep their heads above water. It cannot be right to make far-reaching changes to the funding system for schools because of reported problems without quantifying those problems to see if change is merited, nor without understanding fully the nature of any failings so that the changes made can be demonstrated to address them.

34. The DfES seems content to say that the formula spending share system failed, but that it does not matter to what extent and for what reasons it did not deliver the desired result. This is incredibly short sighted. There is no proper evidential basis for saying that change is merited, and no way of being confident that the changed system will adequately address any problems that exist. For a Department that believes in evidence-based policy the DfES has remarkably little evidence to support the changes it is making.

10 Education and Skills Committee, First Report of Session 2003-04, Public Expenditure: Schools' Funding, HC 112. Back

11 DfES: Five Year Strategy for Children and Learners, p 47, paras 12 and 13. Back

12 Ibid, para 13. Back

13 For example the CEER report for the NUT Back

14 This shows numbers in post in January of any given year and is published each April. Back

15 Education and Skills Committee, Public Expenditure: Schools' Funding, para 58; Education and Skills Committee, Government Response to the Committee's First Report: Public Expenditure: Schools' Funding, Second Special Report of Session 2003-04, HC 377, page 2. Back

16 School Workforce in England, January 2004 (revised), Statistical First Release, DfES 23 September 2004 Back

17 Education and Skills Committee, Fifth Report of Session 2003-04, Secondary Education: Teacher Retention and Recruitment, HC 1057-I. Back

18 Education and Skills Committee, Public Expenditure: Schools' Funding, para 56. Back

19 Q 26 Back

20 Q 28 Back

21 Education funding: The impact and effectiveness of measures to stabilise school funding, Audit Commission, July 2004. Back