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Session 2005 - 06
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Standing Committee Debates

Draft School Finance (England)
Regulations 2006

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Second Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Peter Atkinson

†Benyon, Mr. Richard (Newbury) (Con)
†Cox, Mr. Geoffrey (Torridge and West Devon) (Con)
†Curtis-Thomas, Mrs. Claire (Crosby) (Lab)
†Davey, Mr. Edward (Kingston and Surbiton) (LD)
†Evennett, Mr. David (Bexleyheath and Crayford) (Con)
†Gerrard, Mr. Neil (Walthamstow) (Lab)
†Gibb, Mr. Nick (Bognor Regis and Littlehampton) (Con)
†Hall, Mr. Mike (Weaver Vale) (Lab)
†Howarth, Mr. George (Knowsley, North and Sefton, East) (Lab)
†Jenkins, Mr. Brian (Tamworth) (Lab)
†Morgan, Julie (Cardiff, North) (Lab)
†Pound, Stephen (Ealing, North) (Lab)
†Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
†Smith, Jacqui (Minister for Schools)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
Williams, Mark (Ceredigion) (LD)
Wilson, Mr. Rob (Reading, East) (Con)
Geoffrey Farrar, Committee Clerk

† attended the Committee

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Monday 6 February 2006

[Mr. Peter Atkinson in the Chair]

Draft School Finance (England)
Regulations 2006

4.30 pm

The Minister for Schools (Jacqui Smith): I beg to move,

    That the Committee has considered the draft School Finance (England) Regulations 2006.

The draft regulations support the new funding arrangements for schools that we will introduce from April 2006, which demonstrate the continuing high priority that the Government give to schools. By 2007–08, total revenue funding per pupil will have increased nationally by more than £1,400 in real terms since the Government came to power—an increase of some 50 per cent. Specifically, the new arrangements will provide a ring-fenced dedicated schools grant, multi-year budgets for schools and a rationalisation of standards-related grants.

In the statement that I made in December, I announced the details of the funding settlement for schools and local authorities for the next two financial years—April 2006 to March 2008. The regulations are the next step in implementing the arrangements that began with the announcement of our intentions in the Department’s five-year strategy for children and learners, and continued with the statements that I made to Parliament in July and, as I mentioned, in December last year.

It is important that such regulations set out a sensible framework that strikes the right balance between national prescription and local flexibility. We believe that the regulations do just that, and it might help the Committee if I give a brief description of how they will operate.

The regulations begin by setting out the framework of how a local authority’s expenditure on education should be arranged, by defining two separate budgets: the LEA budget and the schools budget. The LEA budget must include expenditure on the strategic functions of a local education authority, whereas the schools budget can include only expenditure incurred on provision for schools and pupils. Under the new arrangements, the whole of a local authority’s dedicated schools grant must be applied to its schools budget. That is the key to ensuring that funding for schools reaches them.

The vast majority of the budget must be distributed in the form of budget shares for individual schools. However, a local authority is of course able to retain some expenditure. For example, it needs to be able to fund certain types of school support services, nursery education provided outside maintained schools and support for pupils who cannot be educated in
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maintained schools. As well as placing restrictions on the types of expenditure for which a local authority may retain money from its schools budget, the regulations limit the amount that can be retained. The intention is to ensure that schools receive the funding increases that they need to continue to implement the standards agenda.

The regulations go on to describe the way in which local authorities must allocate funding to individual schools. Again, they contain a mixture of central prescription and local discretion, and will be familiar to local authorities and schools in most respects. For example, the minimum funding guarantee remains a central feature of the regulations, and ensures that schools will receive a guaranteed increase in per pupil funding from one year to the next. That is an important safeguard for schools, and supports the principles of stability and certainty that underpin the new arrangements.

There are two new provisions in the regulations. The first relates to the important matter of the relationship between the number of pupils in a school and its budget share. Local authorities can currently use a variety of methods to count pupils for the purpose of setting a school’s budget. Such methods often lead to changes in school budgets part way through a year. We know from school representatives that that can be disruptive and create an unnecessary administrative burden. If their budget changes halfway through the year, that does not help them to plan ahead. Under the regulations, every school’s budget will be based on the number of pupils on its roll in the January before the financial year to be funded. The change will provide greater stability, as the largest element of a school’s budget will not alter during the course of the year.

The second new aspect of the regulations relates to the role of schools forums. Hon. Members are aware that some three years ago all local authorities were required to establish schools forums. Until now, such forums have been purely consultative. They retain that important role, but the regulations now give them limited powers to approve local authority proposals to vary some aspects of the regulations. Regulations cannot account for every local circumstance, so it is necessary to allow local authorities to make minor variations.

The minimum funding guarantee is an example. The regulations governing its calculation ensure that schools receive a guaranteed increase in their funding per pupil from one year to the next. That depends on a comparison of the funding on a like-for-like basis over two years. However, where a school is changing in size, perhaps as a result of adding a new year group or a new class, such a comparison is not possible unless a variation is made to the MFG. Such a variation usually consists either of adjusting the baseline used in the MFG calculation, or adding on any new funding to the school’s budget, once its MFG calculation has been worked out. Either way, the effect is to ensure that the school’s guaranteed funding level is calculated fairly and is consistent with all other schools covered by the local authority.

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Similarly, and as I have mentioned, the amount of funding that a local authority may retain centrally from its schools budget is limited by regulation. That is an important safeguard to ensure that schools receive the benefit of the Government’s year-on-year investment in education. There might be exceptional circumstances, however, where the amount of centrally retained funding needs to exceed the limit that is placed on it by the regulations.

For example, a local authority might face some significant unexpected costs to provide for the education of a child with severe or complex needs. At present, variations to the regulations such as I have described can be agreed only by the Secretary of State. Under the new regulations, if agreement can be reached over certain matters between a local authority and its school forum, we believe that there should be no need for the Secretary of State to be involved. That is an important devolution of power and responsibility. However, if agreement cannot be reached locally, the Secretary of State retains power to determine such requests.

That, in simple terms, is what the regulations do. As hon. Members would expect, the detail within the regulations has been the subject of consultation with a wide variety of stakeholders and partners. There was majority support for all the specific issues raised by consultation. Many respondents also offered a number of useful comments on aspects of the drafting, which we have taken into account.

Inevitably, some concerns were raised about certain proposed changes. Despite an overall majority in favour of introducing budgets based on a single pupil count, some believed that the new provision, as originally drafted, did not provide enough flexibility to recognise the immediate financial pressure that might be caused by an exceptional, unplanned change in a school’s circumstances. For instance, there was concern that a sudden, unexpected influx of pupils into a school would result in immediate costs that would not be recognised by using a single count date for pupils, taken prior to the start of the year. The draft regulations on which we consulted did, in fact, make provision for such instances. However, in the redrafted regulations, and in the accompanying guidance, we have made the provision more explicit.

A more substantive concern related to the effect of the single pupil count on those primary and nursery schools that admit their nursery and reception children at three points during the year: September, January and April. A number of respondents argued that using only a January count date for the purposes of school budgets would mean that pupils admitted in April would not be counted, and therefore no funding would be allocated for them.

We think that that is a legitimate concern. In response, the regulations have been redrafted to account for the financial effect on schools that operate a third admission point. In simple terms, we have allowed local authorities to add the number of nursery or reception pupils admitted in the previous April to a school’s January pupil count. That takes account of the third admission point, but also ensures that the
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schools in question receive the same benefit of being given stable budgets at the start of the financial year as those schools that do not have such admission arrangements.

I hope that hon. Members will agree that the new arrangements that I have outlined briefly provide an excellent opportunity to give schools the financial foundation to deliver key Government priorities for schools and pupils. The regulations are an essential component of the new financial arrangements and I commend them to the Committee.

4.40 pm

Mr. Nick Gibb (Bognor Regis and Littlehampton) (Con): It is a pleasure to serve under your chairmanship, Mr. Atkinson. I thank the Minister for that description of the regulations. I am glad that she decided to describe them in simple terms. I would like to hear them described in more complex terms; that would be quite something.

I welcome the regulations and the general direction of the policy on school financing that they represent and deliver. The problems over school funding in 2003–04 were a salutary lesson for the Government and civil servants, and, indeed, for us all. It is important that we put in place a system that combines certainty and stability with a degree of local flexibility that does not go on to undermine that certainty and stability. My hon. Friend the Member for Brentwood and Ongar (Mr. Pickles), who speaks for the Opposition on local government, said in response to the statement on local government finance in December:

    “I welcome the move towards a three-year programme and settlement, which is extremely sensible, and the Opposition support the Government in their aim to achieve that in the long term.”—[Official Report, 5 December 2005; Vol. 440, c. 630.]

We welcome the principal policy behind the regulations, the new ring-fenced dedicated schools grant, the multi-year budgets and the rationalisation of standards grants. We also welcome the rationalisation into one set of regulations and the fact that they cover two funding periods—2006–07 and 2007–08—with the intention of having three-year funding periods in the future in line with the spending review cycle.

Despite the simplification, however, school funding is still incredibly complicated. Even as a chartered accountant, I find the methodology confusing. There is an array of guidance notes on TeacherNet. In theory, things should be relatively straightforward, but they are not. There is a guidance note on setting school budgets for 2006–07 and 2007–08 for local authorities and school forums. There is a note on the single pupil count. There is guidance on the use of the dedicated schools grant to deliver more practical learning opportunities at key stage 4. There is a central expenditure limit technical guidance note, a central expenditure limit calculator, a minimum funding guarantee technical guidance note, and a minimum funding guarantee calculator. There is a new document: the school finance regulations 2006 “pupil projection toolkit”. There is a Learning and Skills Council proposal for sixth form funding in 2006–07.
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There is a settlement navigation page. There is an overview of the settlement. There are frequently asked questions on the school funding arrangements for 2006 to 2008—I wonder what they are. There is information on the dedicated schools grant for 2006–07 and 2007–08, school budgets in 2006–07 and 2007–08, the deprivation funding review, specific grants, school forums, and reporting and accounting in 2006–07 and 2007–08, and early information about the new funding arrangements. That is a phenomenal amount of information for what should be a straightforward issue of funding for 20,000 schools in this country.

Mr. Edward Davey (Kingston and Surbiton) (LD): The hon. Gentleman has explained the complexity of the regulations. Does he think that that complexity helps transparency and accountability? Does he think that it helps schools in their planning if they have to try to work through all those toolkits and guidance notes and all the other assistance on TeacherNet?

Mr. Gibb: That is a difficult question. Of course, it does not. I am sure that the hon. Gentleman will expand on that in his remarks. The complexity adds to the difficulties that heads have in managing their budgets. It also decreases accountability and transparency. The complexity of the funding is a contributory cause of large numbers of schools running deficits. Will the Minister confirm that there are 1,866 schools currently in deficit and that, of those, state nursery schools had debts totalling £277,000 in 2004–05, primary schools had debts totalling £34 million and secondary schools had debts adding up to £86 million?

Mr. Mike Hall (Weaver Vale) (Lab): While the hon. Gentleman is sharing the information about the debts of those 1,000 plus schools, does he have any information about the surpluses of the 19,000 other schools, too?

Mr. Gibb: The hon. Gentleman anticipates my next question.

Mr. Hall: That is my question to you.

Mr. Gibb: Well, I should like to know the answer, too, because deficits and surpluses indicate a complexity that is giving rise to something that should not happen. There should not be such massive surpluses in schools. Money should be spent on the pupils, but it is being stored and not spent for the benefit of education.

Mr. Davey: I am surprised by the hon. Gentleman’s remarks on surpluses. His party has advocated school freedoms and autonomy, so why is he—from the great corridors of Westminster—telling those schools that they should not manage their budgets as they have been doing? Is that not contradictory?

Mr. Gibb: I was citing the opinion of a primary school head teacher whom I met on Friday. He said that he does not want to run a surplus, because he
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wants to spend every penny that he can in-year on those pupils, so that they get the best possible education. Nor does he want to run a deficit, however. I shall turn to his concerns later.

Will the Minister confirm that those figures on the amount of funds involved are right? Will she also confirm that 10 primary schools are in deficit to the tune of at least £247,000 and that 10 secondary schools had debts exceeding £858,000? Will she deal with the question from her hon. Friend the Member for Weaver Vale (Mr. Hall), and tell the Committee how many schools are sitting on reserves and what is the cumulative total of those reserves?

The Minister talked about the single pupil count. The key regulations before us are regulations 14 and 15, which require local authorities to use a single pupil count to calculate the individual school budgets. Why any school would want to remain on the five twelfths and seven twelfths system baffles me. The single pupil count is defined in regulation 14(6) as the number of registered pupils at the school on 19 January 2006—a Thursday—for funding period 1, and on 18 January 2007, which is also a Thursday, for funding period 2.

As the Minister said, there was massive support for the regulations during the consultation. Some 53 per cent. of people said that they were in favour of the principle, with 42 per cent. against. The Secondary Heads Association, for example, said:

    “This is a sensible balance between predictability and flexibility and works well in many authorities already. There may need to be some local sensitivity and flexibility in the first two years as schools adjust—but eventually it works perfectly well”.

The Chartered Institute of Public Finance and Accountancy was also in favour of the proposals, but it was unclear about the meaning of regulation 21(3), which relates to the flexibilities in the formula as a result of changes to pupil numbers part way through the year—an issue to which the Minister referred.

Regulation 21(3) has been removed from the final draft of the regulations. Will the Minister confirm that paragraph (3) was removed because it added nothing of substance to the remainder of regulation 21? Or was there a substantial reason why it was removed?

As the Minister said, concern was also expressed during the consultation about primary schools that operate a staggered intake in the reception year, and how that could affect funding if the count took place in January, with another intake arriving at Easter. In response, the Minister said that those concerns had been addressed in the finalised regulations. It is clear from regulation 14(7) and (8) that pupils admitted in the summer will count towards next year’s funding. That is welcome.

When there are unplanned changes to or significant increases in pupil numbers, the explanatory note says that the regulations allow local authorities to provide funding from their central resources and that the Department will issue explicit guidance about that. That guidance is right when it says:

    “In deciding whether a school needs an in-year increase in its budget for a pupil number increase, local authorities should consider the impact on the school’s costs, rather than simply applying a percentage threshold increase in pupil numbers”.

It goes on:

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    “Such an approach will take into account the need of schools to put on additional classes, and hence incur significant additional costs, and also what proportion those additional costs are of the overall budget of the school.”

That must be the right approach.

The associated issue is deductions from funding when pupils are removed from a school’s roll and attend alternative provision. The SHA stated:

    “A pupil leaving the school for whatever reason after the start of the year does not enable the school to make any appropriate savings. The removal of funding when a pupil leaves does not encourage schools to support the move to an alternative placement; nor is it an efficient way of funding alternative provision.”

I should be grateful if the Minister were to set out how those concerns were dealt with in the final draft of the regulations.

Another concern was brought to my attention by the primary school in my constituency to which I referred. The decision to allocate teachers’ pay grant money through the pupil numbers formula might adversely affect schools with a high proportion of experienced and effective teachers. According to initial calculations, the decision, if fully implemented in 2006–07, would mean a loss of revenue to the school that I mentioned of between £15,000 and £18,000 a year. Even if the change were phased in over three years, it would still have a similar impact in three years’ time, because no retirements in that period are anticipated. Will the Minister say how such a school should deal with that issue, and whether there is flexibility in the regulations to assist the school in my constituency?

On schools forums and accountability, the Local Government Association expressed its view well. It stated that

    “the LGA considers that Schools Forums have worked well as consultative bodies. It can see the benefits of giving them power to agree certain regulation changes in order for the local authority not to have to seek the permission of the Secretary of State. However it is against giving them decision making powers which should properly be the province of the local authority.”

The LGA makes a serious point about democratic accountability. Yes, there is a case for a formal consultation body made up of local head teachers and other stakeholders to advise policy makers and elected officials on decisions, but ultimately such decisions need to be taken by people who are accountable to an electorate, however technical and detailed that process might be. Today’s technical issue is tomorrow’s point of principle.

The National Union of Teachers is concerned. It states:

    “We do not agree with the proposal that local authorities need only consult their Schools Forum on changes to the local funding formula. Schools forums have an important role to play, but are not the only local stakeholders in education. Local stakeholders that are not represented on the Schools Forum, including unions and individual schools, need to continue to be included in consultation on changes to the funding formula. Such changes will have a potentially significant impact on individual school budgets.”

The SHA has also expressed concern in respect of the power that schools forums should have.

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Will the Minister explain the changes in the regulations to the rules on prudential borrowing? During my long history of knowing about school funding issues—since last weekend—I had always assumed that prudential borrowing required the capital from that borrowing to be spent on things that reduced ongoing revenue costs. That definition of “prudential borrowing” was set out in regulation 5(1)(c) of the draft regulations that were sent out for consultation. However, that provision has disappeared and is not in the version of the regulations before the Committee. I should be grateful if the Minister were to set out the reasons for that.

These are complex issues and perhaps they should not be quite so complex. I hope that the regulations will be a first step towards simplifying the whole funding regime for schools. There is still much further to go, but we support this first step.

4.54 pm

Mr. George Howarth (Knowsley, North and Sefton, East) (Lab): I shall be brief. Will my right hon. Friend the Minister let me have further information? I think that the answer to my concern is in part 3 of the regulations, but despite having read through it, I have not managed to convince myself that I know what that answer is.

There have been difficulties in Sefton, part of which is in my constituency and part in the constituency of my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas). Because of surplus capacity—there has been a programme to reduce it—the local authority has not been able to even out expenditure between schools to enable them to get from where they are to where they want to be. I suspect that arrangements through the schools forum and how the minimum funding guarantee will work deal with that issue, but I would be grateful if my right hon. Friend reflected on it. If she is not able to answer today, perhaps she will write to me.

4.55 pm

Mr. Davey: It is a pleasure to serve under your chairmanship, Mr. Atkinson.

The regulations are good in one way but worrying in another. They are good in that they move towards multiple-year funding. The idea of providing greater stability, and allowing schools and local authorities to plan ahead, is exceedingly sensible and welcome. The Government gave those powers to Whitehall several years ago, and we have begun to see some benefits. Therefore, that part of the regulations has achieved consensus across the House. However, I am worried about the control from the centre proposed in the regulations.

The Minister said that there is local discretion, and indeed a little remains, but the moves in recent years to passport and ring-fence more and more money directly to different local authority services are undermining accountability, local politicians’ ability to deal with issues and even key planks of Government policy.

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Mr. Hall: The hon. Gentleman says he is against ring-fencing funds for education. Is he against Government policy on local education authorities that do not want all the central Government funds that have been provided for education to be spent on education? Is he against such ring-fencing?

Mr. Davey: The real problem with ring-fencing is twofold. First, the danger is that local authorities that were spending more than the Government were passporting may decide that the passported and ring-fenced money is all they need to spend. They will be discouraged from spending more.

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Prepared 7 February 2006