1.  INTRODUCTION

  This note begins by providing a very short update of recent trends in education expenditure. It then discusses some key issues in education spending for the Committee to consider.

  We begin by examining the significance of the Chancellor's statements in Budget 2006—both regarding school capital expenditure, and the pledge to increase funding per pupil in the state sector to that currently seen in the private sector. We then move on to what the Comprehensi`ve Spending Review in 2007 is likely to mean for education, given commitments in other areas of government spending. The last issue we discuss is the mechanics of the new Higher Education funding system set to begin this year.

2.  OVERALL TRENDS IN EDUCATION EXPENDITURE

Compared to other areas of public expenditure

  In our note we submitted to the Committee in September 2005, we discussed the growth rates of various elements of public expenditure relative to education spending. This showed that since Labour came to power in 1997, there have been large real increases in education spending (4.8% a year); but perhaps surprisingly this has been only the fourth fastest broad area of spending growth, after spending on the NHS (6.1% a year), Transport (5.1% a year) and Public Order and Safety (4.9% a year). However, Education received much smaller average annual increases during the 18 years of Conservative governments from 1979-97 (1.5%).

As a proportion of GDP

  Since its lowest point for at least 20 years in 1999-2000 (at 4.4% of GDP), education spending has grown rapidly as a share of national income, and in 2004-05 stood at 5.4%. This share is comparable to that last seen in the early 1980s and well above the average between 1977-78 and 2004-05 of 4.9%. By 2007-08, the share is projected to reach 5.6%. Training expenditure accounts for approximately a further 0.2% of GDP.

International comparisons

  The UK spent a higher share of national income on education than Japan, Italy and Germany, but a lower share than the USA and France in 2002 (Table 1). This ranking is similar if we just consider public education spending as a proportion of GDP. UK private education spending as a proportion of GDP is lower than the USA and Japan, but higher than that of France and Italy.

3.  BUDGET 2006

  The Chancellor made a number of announcements in Budget 2006 about school spending, including new payments to be made direct to schools for 2006-07 and 2007-08 (worth £270 million and £440 million respectively); new school capital spending for the years 2008-09, 2009-10, and 2010-11, and a new aspiration for spending per pupil in the state sector to match that of the private sector. In this note we discuss the latter two of these. We argue that the new school capital spending announced by the Chancellor is not as large as its presentation suggested, whilst the meaningfulness of the aspiration for state per pupil spending depends on the timetable by which it is achieved, something that the Chancellor did not spell out.

3.1  CAPITAL SPENDING IN SCHOOLS: A "£34 BILLION SCHOOLS BONANZA"?

  The Chancellor announced in his Budget statement of 2006 that "In the coming five years investment in schools will rise from £5.6 billion today to reach £8 billion a year—a 50% rise making a total of £34 billion new investment over five years." This figure was widely quoted in the national press (and was referred to in the Daily Mirror as a "£34 Billion Schools Bonanza").

  Commentators would have been forgiven for assuming from the budget speech that there will now be a significant increase in the rate of growth of new public school capital spending. This is not the case. First we set out how much of the spending announced is new spending, and next we show how the projected growth in school capital spending compares with past growth.

  How much of it is new public spending? As Tony Travers was quoted in the FT "The way in which announcements are made, particularly at budget time, makes it very difficult to be certain how much in total is planned in new spending compared to [what was previously planned] for the next year and the year after." [1]

  Table 2 sets out the school capital spending figures provided in the Budget speech and statement. A number of points should be noted.

—  Before the Budget announcements, there were spending plans for schools already in place up to 2007-08 (the end of the present spending review period). In 2007-08 planned school capital spending was £6.4 billion; adjusting for inflation, this is £6.1 billion in 2005-06 prices.

—  The Chancellor announced spending for 2010-11 of £8 billion in nominal terms, which is £7 billion in 2005-06 prices. School capital spending in 2010-11 will therefore be £0.9 billion higher in real terms than in 2007-08, implying an average real increase over the next spending review period of 4.9% per year (or just under 15% over the three years as a whole).

—  By contrast the Chancellor's figure of £34 billion can only be arrived at by adding together total planned capital spending in nominal terms for each of the five years between 2006-07 and 2010-11. [2]This accumulation of total spending is a highly misleading presentational device. It combines the £0.9 billion new planned funds with (i) the total amount of school capital spending already being spent each year, (ii) the new funding already planned before Budget 2006, and (iii) the effects of inflation. Finally, the total is multiplied up across all five years. An analogy is the following: a worker on approximately full-time average earnings (£25,000) is given a nominal pay freeze, but is told he is being awarded a "total of £125,000 new income over five years".

—  The figures for future spending announced by the Chancellor are inclusive both of "purely public" capital spending and capital spending through the Private Finance Initiative This leaves room for the plans to be delivered with no new public capital spending at all, if PFI contracts were used to provide all of the additional expenditure. [3]

The evolution of schools capital spending

  It is not straightforward to compare how these (existing and new) plans for school capital spending announced by the Chancellor compare to previous increases in school capital spending. This is because the inclusion of PFI capital spending in the total makes the Budget figures differ from those routinely published by the Department for Education and Skills.

  The fact that the Budget presentation of the school spending figures diverged from those publicly available through DfES made independent analysis of the figures in the immediate aftermath of the Budget extremely difficult. It was only through ad hoc communication with our existing contacts at the Treasury in the aftermath of the Budget that we were able to reconcile the Budget and DfES figures enough to assess the significance of the new plans, relative to the recent past.

  Looking just at publicly available DfES figures, our calculations suggest that the annualised average growth between 1996-97 and 2004-05 in purely public school capital expenditure was about 11.9% per year. We have also calculated our own series for public capital + PFI school capital spending going back over time (again see Figure 2). The real annual average growth in this series between 1996-97 and 2004-05 was around 17.7% per year. [4]

  This growth in the recent past is considerably greater than both the 4.9% real annual average planned growth in public + PFI capital spending between 2007-08 and 2010-11, and the 4.2% real terms growth in public + PFI spending between 2005-06 and 2007-08 (see Table 2 and Figure 2).

  Looking at Figure 2 in more detail, we can see that public expenditure on school capital grew relatively modestly in the first few years of the Labour Government (whilst Labour kept to the spending plans of the previous Conservative Government). However, from 2000-01 onwards it grew by a substantial amount, with double-digit growth for four out of five years. Including PFI spending in the analysis in most cases considerably increases the annual growth rate.

  The plans going forward for school capital spending therefore actually imply a step down in terms of the annualised real growth rate compared to the recent past. However, one should also remember that the growth of schools capital spending began from a small base of about £1.2 billion in 1996-97 (public spend only). Therefore, it is currently growing by a larger amount in absolute terms compared to Labour's first term, despite the slower growth rate.

Sources: Pure public spending and all spending, inclusive of PFI spending on schools capital are the authors' calculations based on Departmental Reports from various years up to 2005, Department for Education and Skills. Figures for PFI spending were calculated under the assumption that the figures stated in departmental reports were in the same real terms as those for pure public capital spending—both sets of figures were presented in the same table, making this a reasonable assumption. Making the assumption that the DfES figures for PFI are in nominal terms does not qualitatively change the above figure, with both under and over estimations under one percentage point. The figures for all schools capital spending, inclusive of PFI, are taken from the Chancellor's Budget statement of 2006.

3.2  RAISING PER PUPIL EXPENDITURE IN THE STATE SECTOR

  The Chancellor also announced in his Budget Statement of 2006 that "Our long-term aim should be to ensure for 100% of our children the educational support now available to just 10%." He clarified this aim in quantitative terms by pledging to increase spending per pupil in the state sector to that currently being spent per pupil in the private sector. According to Treasury figures, this means increasing funding per pupil in the state sector from around £5,000 per pupil to around £8,000 (the private sector level in 2005-06). Here we set out how much this might cost in new public spending to achieve, how long it could take, before making some general comments about how significant and meaningful the pledge is.

Trends in per pupil expenditure in the public and private sectors

  The measure of spending per pupil in the private sector the Chancellor chose to use was the average termly fee (multiplied by three) per pupil in day schools in the UK. [5]The measure of funding per pupil in the state sector chosen by the Chancellor is a total of all schools capital and current expenditure per pupil (inclusive of PFI).

  This figure is not available going back in time as the DfES published figures focus on current spending per pupil. The graph below shows the evolution of the series for private day schools and the DfES' current "pure public" spending per pupil (ie excluding both capital and PFI spending) in the state sector.

  In addition it shows Treasury's figure for total spending per pupil (current + capital + PFI) for 2005-06 only, and IFS calculations of this series going back in time.

Sources: See notes to Figure 2 for public spending per head. Figures for private sector spending per pupil are taken from the annual census of independent schools conducted by the Independent Schools Council from various years, http://www.isc.co.uktindex.phpl347

  The figure shows an increase in the relative gap between current per pupil spending in the state sector and private sector spending since 1996-97: the private sector spent around 70% more per pupil than current spending in the state sector in 1996-97, whilst this rose to almost 90% by 2005-06. Including capital + PFI spending per head in the public sector series narrows this gap (HMT estimates suggest that capital +PFI spending amounted to around £740 per head in 2005-06). Our calculations suggest that taking into account capital spending means that the per-pupil spending gap has stayed relatively constant over time.

How much would it cost and how long would it take to achieve?

  The Chancellor said that he wanted to bring per pupil spend in the state sector up to today's level in the private sector, ie about £8,000. This means that it will have to rise by around £3,000 per pupil in real terms to meet this objective. Our calculations suggest that on existing plans going forward to 2007-08, current and capital spending already imply spending per pupil rising by a further £340 and £90 respectively. Also announced in the Budget were a further £60 per pupil in 2007-08 from higher direct payments to schools and a further £150 in capital spending by 2010-11. This leaves a further real terms gap of about £2,400 still to be met. (see Figure 4).

Source: IFS calculations.

Note:  Extra current and capital (1) are those already written into spending plans before Budget 2006, Extra current and capital (2) represents the new allocations announced in the Budget.

  How much would this cost in terms of extra public expenditure? Based on constant pupil numbers of about 7.2 million (the Treasury's estimate for pupil numbers in 2010-11), it would cost an extra £17 billion in real terms. Evidently, this does not have to be raised immediately through taxation or borrowing, so it makes sense to try to understand how long it would take to fill this gap based on a series of scenarios for the growth in schools spending.

  If school spending were to grow at the underlying rate of growth in the economy (assumed at 2.5% real per year), [6]and thus remain constant as a share of GDP, it would take till 2022 to fill this gap. Alternatively, if schools spending were to grow by the same amount as total per pupil spending in the state sector grew between 1996-97 and 2007-08, 5.3%, it would take until 2014 to fill this gap. Perhaps a more likely scenario (see Section 4 below) is for school spending to grow at the rate we estimate would be feasible for the whole of education spending over the next CSR period, at 3.4% per year. In this case it would be 2018 before the pledge would be met. [7]Since these estimates are based on constant pupil numbers in the state sector, further falls in pupil rolls would also help to fill this gap.

Significance of Pledge

  But is the pledge meaningful?

  Some commentators have questioned whether the per-pupil spends in the private sector and state sector are comparing like with like:

—  Some private schools may have access to other sources of income, apart from fees, such as rental income or that from capital. On the other hand, some have argued that some private schools may have greater capital expenses (eg old listed buildings). The comparisons also exclude the boarding school population.

—  The age-composition of the private and public school populations are quite different, with a greater proportion of older children at school in the private sector. Since it costs more to teach older children, this probably means that directly comparing the average per-pupil spending the private and state sectors overstates the gap in resources between them.

  However aside from these measurement issues, there are some other important considerations.

—  Achieving this pledge is very unlikely to mean that pupils in state schools will have the same level of funding as those in private schools at any point in time, since private school funding per pupil is also likely to grow in real terms over the future.

—  Moreover, since the Chancellor's target is to increase spending per pupil in the state sector to £8,000 at some unspecified point in the future, it is when it is achieved that would be able to make it a significant one. Meeting it by 2022 with schools expenditure only growing by 2.5% a year would probably not be consistent with making schools spending a priority. The critical question is therefore how much new public expenditure is allocated towards schools in the Comprehensive Sending Review in 2007. We turn to this subject in the next section.

4.  WHAT WILL THE SPENDING REVIEW MEAN FOR EDUCATION?

  The 2007 Comprehensive Spending Review (CSR) will set out public spending allocations for the period 2008-09 to 2010-11.

  In its post-Budget analysis, IFS set out how much public spending on education might increase in the period 2008-09 to 2010-11, given the overall Total Managed Expenditure (TME) envelope now set out by the Chancellor, and the other spending commitments that have been made. One possible scenario is set out in Figure 5, which we explain below.

—  The Pre-Budget Report of 2005 for the first time set out provisional estimates for the growth of Total Managed Expenditure (TME) over this time, implying a real annual increase in TME of 1.9%. Although it is possible that this envelope will be revised before the CSR, any increases in public spending will have to be found from within the TME envelope.

—  Assuming a 1.9% real terms increase in TME each year, we make a number of assumptions about spending in other departments in order to calculate what a plausible increase in education spending might be.

—  In the 2006 Budget, it was announced that the Home Office would see a 0% real increase over the next spending review period, [8]whilst HM Treasury, the Cabinet Office, HMRC and DWP would see a 5% real spending cut each year. [9]

—  It is not yet known how much will be allocated to health spending, but we have conservatively assumed that it will grow at 4.4% per year, which is the amount which the Wanless Report (2002) suggested would be required for the NHS to become a "world-class health service" in its most optimistic scenario, in which the NHS is "fully engaged" in terms of its efficiency, quality and cost to the tax-payer. [10]

—  The Government has also stated its aim to increase Overseas Development Assistance so that it reaches 0.7% of national income by 2007. Achieving this will require constant real increases of 10.4% between 2008-09 and 2012-13. This will further reduce the amount that other public expenditure can grow by.

—  Social security and tax credit expenditure is the largest single element of public expenditure and so what the 2007 CSR allocates to them will make a significant impact on what is available for other areas of spending. The Government has explicit targets for child poverty, and strongly stated aims to reduce pensioner poverty, both of which are likely to require significant amounts of public expenditure. One gauge of how much might be required is the growth rate between 1996-97 and 2007-08, which was 2.2% per year—a time of falling expenditure on unemployment-related benefits, but also of rising generosity of benefits and tax credits targeted at poorer households in order to achieve its goals in terms of relative poverty.

—  Assuming that all remaining elements of public expenditure (which include amongst others, transport and defence) are subjected to a real terms freeze, this would leave a 3.4% real terms annual increase for the whole of education spending between 2008-09 and 2010-11. This is slower than the average increase seen over the period of the Labour Government, up to 2007-08 (4.6%).

  In sum, it appears that there is unlikely to be room in CSR 2007 for substantial increases to education spending, given other commitments and priorities. Alternatively, further cutbacks will need to be found in other spending areas if education is to be given as strong a priority as it has in recent years.

5.  HIGHER EDUCATION REFORMS

  The reforms to Higher Education funding, which are due to be fully implemented by 2006-07, will require considerable additional funds from the public sector, alongside the increase in graduate contributions through top-up fees. Based on the latest DfES cost estimates, we calculate the additional annual taxpayer costs associated with the reforms to be £1.2 billion per year. Most of this will pay for the extension to student loans, which, it should be noted, are "off balance sheet" expenditures, and will not score as spending when assessing the Chancellor's fiscal rules. The rest will pay for new student grants.

  Some new analysis at IFS has considered different ways in which the Government might choose to consider scaling back the considerable cost of the student loans as it reviews the new funding system in the future. One option would be to remove the interest subsidy: the lowest earners—particularly women who take time out of the labour market—would be protected from paying any more if a positive real interest rate were charged, since they are fully protected by the new provision for debt write off after 25 years. By contrast, allowing students to take a 25% discount on their fees instead of taking out a subsidised loan would penalise all but the highest earning graduates who decided to take this option.

  Another important issue we highlighted in our note to the Committee last year relates to the complicated design of the new system of student support comes in as part of the new funding regime. As we set out the new system will involve a combination of five different income tapers, with the maximum amount of maintenance loan of £4,405 advertised by DfES available only to students with family income of exactly £33,560. There are two main problems with this design:

—  The unnecessary complexity of the new system could put students off.

—  Compared to the system it is replacing, it is students from parental incomes between £22,100 and £26,000 who will expected to make the biggest additional net contribution to the cost of their tuition and maintenance, taking into account both new fees and student support. This arises simply because of the way that the maintenance loans and grants are due to be tapered, and could easily be avoided if the system were re-designed in a cost-neutral way. It should be noted that the £22,100-£26,000 income range is a particularly dense part of the income distribution with parents largely in the 2nd and 3rd income deciles—arguably it is exactly students from these families that the Government is trying to encourage rather than dissuade from attending university.

June 2006

2   Assuming a constant rate of spending growth between 2005-06 and 2007-08, and between 2007-08 and 2010-11, the sum £6 billion + £6.4 billion + £6.9 billion + £7.4 billion + £8 billion = £34.7 billion. Back

3   Of course such PFI contracts would entail significant future public spending commitments. Back

4   See notes to Figure I for discussion of assumptions about PFI spending over time. Back

5   This is taken from the annual census of independent schools conducted by the Independent Schools Council, http://www.isc.co.uk/index.php/347 Back

6   This is the central assumption for underlying growth built into HM Treasury's public finance projections. Back

7   All of these scenarios are based on the assumption that the additional capital spending announced in Budget 2006 makes up part of the increases of 2.25%, 5.3% and 3.4% per year. Back

8   "The Home Secretary has agreed that he can invest more in priorities like policing and security, while making savings in other areas within a three-year budget at its 2007-08 real terms level." Budget Speech 2006. Back

9   "HMRC, HM Treasury, DWP and the Cabinet Office have also agreed that necessary modernisation will be funded from a new innovation fund and, alongside this, the spending review for these four departments will proceed on the basis of minus 5% a year real terms below the base line of 2007-08." Budget Speech 2006. Back

10   The 2002 Wanless report estimated that health spending would need to grow by between 4.4% and 5.7% per year after 2008-09 if the NHS is to become a "world-class health service." The Government is currently revising the calculations made for the Wanless Report, and so the amount required to maintain a "world-class health service" may change as a result. Note that a growth rate of 4.4% for health spending is also considerably less than that seen between 1996-97 and 2007-08, when it grew by an average of 6.1% per year. Back