Financial sustainability of schools Contents

Conclusions and recommendations

1.The Department for Education does not have the necessary arrangements in place to identify, and therefore act, if the actions schools take to make efficiency savings threaten the quality of education and educational outcomes. The Department for Education (the Department) expects over half of the required savings (£1.7 billion by 2019–20) to come from schools using staff more efficiently. Schools spend half of their budgets on teachers and have tended in the past to reduce the proportion of spending that goes on teaching staff faster than other categories. To reduce staff costs, schools are likely to increase teachers’ contact time and class sizes, rely more on unqualified staff and staff teaching outside of their specialism, and require head teachers and other senior staff to do more teaching. The head teachers who gave evidence told us that they plan to make savings by, among other things, dropping subjects and scaling back on school trips to avoid the cost of teaching cover. The actions schools take are likely to increase teachers’ workload, with implications for recruitment and retention, and put at risk the quality of education. The Department said that it will gain assurance that schools are achieving desirable efficiency savings and that educational outcomes are being maintained from existing information, such as Ofsted inspections, key stage tests and exam results. However, these indicators are time lagged and we may not know the full impact on educational outcomes until 2021 when the new GCSE results come through. This will be too late for the children who are in school now. The Department does not seem to have a plan to monitor in real-time how schools are making savings and the impact on the education provided. Without this monitoring the Department will not be able to identify concerns and take action in a timely way.

Recommendation: The Department should develop and publish by the end of June 2017 a set of indicators, which it will monitor to gain assurance that the quality of education and the outcomes schools achieve are not being adversely affected by the need to make savings. These indicators might include the breadth of curriculum, class sizes and pupil-teacher ratios.

2.The Department does not seem to understand the pressures that schools are already under. The Department’s view that schools can make the necessary savings is drawn from its desk-based statistical benchmarking analysis that compared schools with different levels of spending but similar pupil characteristics and levels of attainment. The Department is developing guidance and support to help schools improve their financial management and make savings. However, the head teachers who gave evidence told us that the Department does not understand the budgetary pressures that they are facing. They reported that they have already made cuts in important areas and their ability to make further savings is limited. For example, they have already cut maintenance costs, reduced how much they spend on recruiting teachers and not updated IT equipment. They have also had to cut back on support staff, including counselling and other pastoral services, which provide valuable support for vulnerable students. These cuts are being made at a time when schools are expected to do more to look after the mental health of children and young people. We are concerned that the Department has not spoken enough to schools to understand what savings they can realistically make. Our report on training new teachers in June 2016 highlighted similar concerns about how the Department engages with schools. In response to that report, the Department accepted that it should set out when and how it would talk more to school leaders about the recruitment challenges they face and agreed to put in place arrangements for this from July 2017.

Recommendation: The Department should build on the arrangements it is putting in place from July 2017 to speak to head teachers about the efficiency challenges they face, how useful they find the Department’s guidance and support, and what more the Department could do to help schools make savings.

3.The apprenticeship levy will be an additional cost for schools but they will only be able to benefit in a limited way from the funds. From April 2017, all employers with an annual pay bill of over £3 million must pay the apprenticeship levy to fund apprenticeship training. For schools, the levy will amount to a cost pressure worth 0.4% of the total core budget. The Department views the apprenticeship levy as an opportunity rather than a cost, as schools will be able to use the funds from the levy to increase the training available. However, schools have to use the funds within two years and the only way that schools can currently use apprentices is in back-office administrative roles, precisely the areas where the Department expects schools to make savings. The Department said that it plans to introduce a teaching apprenticeships scheme from September 2018 but agreed that it needed to avoid further complicating the routes into teaching.

Recommendation: The Government should set out by the end of June 2017 the financial impact of the Apprenticeship levy on schools.

4.In calculating the £3 billion of required efficiency savings, the Department has not assessed the impact of all the cost pressures that the Government is placing on schools. While the Department must assess and fund extra costs for local authorities from new powers, duties and other government-initiated changes, it does not have to do the same for schools. The Department’s savings estimates do not take account of the cost implications for schools of its policy changes. We heard from head teachers, the National Union of Teacher and the National Governors’ Association examples of uncosted policy changes, for example curriculum changes that require new textbooks and learning materials. Head teachers and the National Association of Head Teachers also highlighted the withdrawal of the Education Services Grant, which funded the education services that local authorities provide to maintained schools and that academies provide for themselves. This funding will be phased out by 2018–19, saving £615 million per year. The Department has not yet completed its work to assess the impact on schools of withdrawing the Education Services Grant. It said that around £190 million of the money saved is expected to be returned to schools and local authorities to use for school improvement.

Recommendation: The Department should publish by the end of April 2017 the results of its work to assess the impact of withdrawing the Education Services Grant; and it should routinely assess and make public the cost implications of policy changes including curriculum and assessment changes.

5.The Education Funding Agency’s approach to oversight and intervention means it has not intervened in all cases where schools are at financial risk. The Education Funding Agency (the Agency) regards schools as at financial risk if, for example, they have persistent or excessive deficits. The way in which the Agency has applied its intervention criteria means it has not intervened as often or as early as it should have in local authorities with maintained schools at financial risk. For example, the Agency did not intervene in the Isle of Wight even though it was the local authority with the highest proportion of maintained schools in deficit in 2014–15 (13%). The Agency has agreed to adjust how it applies the criteria it uses to decide whether to intervene in local authorities and to consult local government on further changes to its approach. The Agency is also piloting a preventative approach to support academy trusts at risk of getting into financial difficulty and expects to implement the approach in full from March 2017. It undertook to speak to local government about the potential to use this preventative approach for the maintained school sector. The Agency has not evaluated whether its interventions are helping schools to address financial risk. The evidence indicates that its interventions may not always result in academy trusts successfully tackling the financial issues that led the Agency to take action in the first place. The Agency has now agreed to evaluate the effectiveness of its interventions on schools’ financial sustainability.

Recommendation: The Education Funding Agency should set out by the end of June 2017 how it will refine its approach to intervening with local authorities and academies, including how and when it will evaluate the effectiveness of its interventions.

6.Schools are now facing similar pressures to other sectors but the Department does not seem to be learning from this experience, in particular from how over-ambitious efficiency targets in the NHS proved counter-productive. In recent years, the Government has protected school funding compared with most other areas of public spending. However, schools are now entering a period of reduced spending power not experienced since the mid-1990s. This brings risks as schools seek to reconcile financial, workforce and quality expectations. The Department needs to help schools to manage these risks. We reported last month on the ever worsening state of NHS finances as trusts struggle to meet increasing demand for services while also attempting to achieve unrealistic targets for efficiency savings. Twice in 2016, in our reports on the sustainability and financial performance of acute hospital trusts and then on the supply of clinical staff, we reported how the unrealistic efficiency targets set for the NHS had caused long-term damage to trusts’ finances. NHS England and NHS Improvement do not dispute these points. For example, the focus on reducing staff costs in order to meet efficiency targets led to trusts consistently understating how many staff they would need and resulted in gaps in staffing, which then had to be filled with more expensive agency staff. The Department of Health had provided ineffective leadership and support, giving trusts conflicting messages about how to balance safe staffing with the need to make efficiency savings. We asked the Department about the risk that schools could end up in a similar position to the NHS, but the Department said that it was not in a position to comment on the NHS. We are concerned that the Department does not seem to recognise the similarities and the opportunity to learn lessons.

Recommendation: The Department should write to us by the end of June 2017 outlining how its approach to schools’ financial sustainability reflects lessons from the experience of other sectors, in particular the Department of Health and the NHS.

27 March 2017