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Lord Ouseley: I support the noble Lords, Lord Hanningfield and Lord Smith, in raising real concerns about Clause 98. There is no doubt that everyone would welcome support for greater autonomy for schools, assured budgets and more money. What is of concern is understanding what benefits the clause proposes for the quality of education. There is no justification for the proposal and, at this stage, no evidence of educational benefits. That view is supported by the House of Commons Education Select Committee. I am most concerned about the lack of public consultation and the lateness with which the noble Lord, Lord Hanningfield, has been given information about how the proposal will be implemented. I am concerned about the scant information that is available and the lack not only of public consultation but of consultation with local authorities about how their role is to be changed.

This proposal has been made before the publication of the detailed consultation documents, which continues to undermine the role of local government. The noble Lord, Lord Smith, rightly pointed out the wider role and responsibilities of local authorities for children. We should be concerned not just for the production of examination factories in schools but with the wider issues affecting vulnerable communities and the needs of children. After all, the Children Act 2004 places local government as the accountable body for all children's services.

I am most concerned about the role of local authorities in applying flexibility to move resources between central services, social services and schools to facilitate its responsibilities to meet the individual needs of all young people. We need to be reassured about many of the questions posed by the noble Lord, Lord Hanningfield. It is important that we get assurances that no local authority will lose grant due to spending differences with schools formula spending shares, so as to avoid possible knock-on effects on other services or, indeed, the council tax.

I conclude by saying that the effect of transferring schools funding from SSS to a dedicated schools grant would be the removal of the link between local council tax payers and schools. It would make difficult the role of councils in seeking to justify spending over and above schools grant, as they would have no influence over how schools served the community. I therefore support the opposition to Clause 98 standing part, pending further discussion about how such a proposal could be implemented.

The Earl of Listowel: I shall speak briefly. The Minister knows my sympathy for what the Government are striving to do here but, listening to the debate, I also had some sympathy with what the noble Lord, Lord Smith of Leigh, said.

The noble Lord, Lord Hunt, drew attention to the parallel with the changes in the National Health Service. He will be aware of the concerns of specialised
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health service providers, which were brought home to me when I visited a small project for young abusers in north London during the passage of the Sexual Offences Bill. The manager running the project said that she had difficulty getting funding from a primary care trust for that service, which was provided for a very few children with very difficult, specialist needs. So there is a danger that such specialist services, such as the parliament and Outward Bound, might be missed by schools focused on their more narrow immediate concerns.

I rise simply to draw the parallel and to ask the Minister to tell us in his response that the Government are aware of those concerns and that they will from the very beginning seek to ensure that those small services, which we are concerned may be missed out on due to the change, will be carefully considered in future planning and not lose out because of the changes.

Lord Filkin: Clause 98 introduces Schedule 16, which puts in place powers that will enable the Secretary of State to require local authorities to determine school budgets up to three years in advance. It deals with the provision of ring-fenced grant to local authorities for the purposes of funding their schools, and it repeals for England the existing reserve power to set an authority's minimum schools budget where the budget proposed is inadequate. All those powers are permissive, and we will consult fully before putting in place regulations under any of them. A consultation document on three-year academic year budgets in England will be published shortly.

As several speakers said, there was general warm support for the key measure on three-year budgets at Second Reading, and I was pleased to note the support in principle from both the noble Lord, Lord Hanningfield, and the Liberal Democrat Benches. I should have been shocked, although not for the first time, if I had not had the support of the Conservative Benches given that their education policy document states:

I will say no more on that.

I also appreciated the support in principle of the noble Lord, Lord Dearing, subject to one or two rather significant challenges. The House, with one or two exceptions, is supportive of the measure because there are many people out there who have been telling us for a long time—as the right reverend Prelate put it explicitly, people at the coalface in real life—that they want this to happen. We have listened to that.

In a sense, that is nothing new. I am amazed by those who say that the proposal is a shock and a horror and ask how on earth the Government can suddenly have done that, because it has been the clear thrust of government policy in this respect for many years. What is passporting about but central government saying to LEAs that the amount of additional money that central government put into the system to increase
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school budgets should get to schools? The rows about passporting have been about exactly that. This is an utterly logical consequential move in that process. There is nothing fundamentally different; it has been government policy for many years, for good reason.

Many Members of the Committee who have been in government will know partly why. One difficulty with local government funding is that if you persuade your colleagues in government to increase money for X function and then find that the money is spent on Y function, that makes life rather difficult. I will say no more.

However, that is not the reason for three-year budgets. The reason for three-year budgets is that they help schools enormously. Under the current system, they cannot be sure what will be their financial position next year. Understandably, schools make cautious assumptions. For example, they do not employ an additional teacher if they cannot be confident of having that person's salary, for good reasons. The consequence of that is that schools build up surpluses against a rainy day that may never come about, because they cannot be sure that it will not, instead of spending their budgets to the fullest possible extent on the benefit of their pupils.

Our proposals will allow schools to plan confidently over a longer timescale, to use their budgets fully and to afford that extra teacher, which will benefit children in our schools. So this is no technocratic or theoretical set of proposals; it is made for the practical reason that schools want certainty to be able to commit and use their resources. Without knowing what will be their future position, they will not behave so, for obvious reasons. This radical change will apply to all aspects of school funding. It will include grants from DfES and the LSC and devolved formula capital allocations, as well as their core budgets from the LEA. So schools will have a meaningful picture of the overall resources available to them when they plan their provision. That will have a positive impact on pupils.

It will also benefit staff. It has been pointed out to me that every year in some schools there will be some staff who are worried sick about whether their contract will be renewed after the end of the year. Until the school knows its budget, such staff will not know whether they have a job. That should not be a central driver of policy, but it is bound to affect the motivation of such employees, who need to know whether they are likely to be employed. This provision will help them to do so.

For the reasons that I have given, three-year budgets have been very widely welcomed. David Hart, General Secretary of the National Association of Head Teachers, has said that

I wish to outline how the budgets will work in practice. The policy statement that I have placed in the Library of the House gives an overview of how we see the new arrangements working. There is a lot of underlying technical detail. My officials have been working closely with officials in the LGA and our
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national partners, representing local authorities and schools, since the summer on detailed proposals. There is an encouraging degree of consensus on those proposals.

On the flexibility of the budgets, we have no intention of requiring local authorities to set budgets utterly in stone. They must be responsive to appropriate changes in pupil numbers. A school that gains pupils will need more money and one that loses them will need less over time, although that transition must be managed carefully. There may also be other changes in schools' circumstances that should be taken into account in redetermining budgets from year to year. Those are the issues on which it is important that we continue the good discussions that are going on: for example, changes in the number of pupils with free school meals or the size of the school's premises. We plan to consult on whether that is the right way forward.

The initial discussions with our national partners suggest that schools want to have confidence about the unit of resource from year to year, and under what circumstances that unit of resource will flex, rather than simply a cash sum. If they know the unit of resource and how the system will change, they can make their own calculations and assessment of how they will be affected.

However, we want to go further still. We agree that, alongside giving schools improved information about their budgets over a three-year period, we will also need to give them, where possible, information about cost pressures. The major cost pressure is teachers' pay. We have already taken a major step with the advent of multi-year pay proposals from the School Teachers' Review Body. In 2005 we expect to remit the body to consider a further two-year award, to have effect from September 2006. The benefit is clear: if teachers' pay settlements, as well as the school's budget and revenue position, were clear, the school would be better able to forecast resources and costs and therefore to make judgments about what to do.

We do not believe that the system will create additional burdens for schools, nor do we think that it will cause significant turbulence or a repetition of some of the earlier difficulties. There is no reason why the introduction of three-year budgets should do that. It is not about changing the distribution of funds to schools, which will remain largely the same; it is about giving them more information to enable them to plan ahead with certainty.

The noble Lord, Lord Smith, spoke to Amendment No. 143A. Passporting will be unnecessary under the new arrangements, since the size of the schools budget will be determined by central government, subject to any resources added locally, which will be entirely within each authority's discretion.

To sum up on three-year budgets, Amendments Nos. 143A and 143 would delete the provisions that facilitate three-year budgets. Amendment No. 143B would delete paragraph (5) of Schedule 16, which repeals the existing power of the Secretary of State or the National Assembly for Wales to set a minimum
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budget. The National Assembly for Wales intends to continue with the existing system of funding schools through the general local government grant system, but the Bill will give it the power to move to the system that we are introducing for England, if it wishes to.

The Bill offers a guarantee that the increases that we announce in a spending review will get through to schools. It is understandable that, without that guarantee, local authorities would be reluctant to offer their schools much information on three-year budgets. Only if we introduce a ring-fenced grant will local authorities and their schools be able to plan more firmly and take into account funding increases.

My noble friend Lady David asked whether giving three-year budgets to local authorities, as we hope to, would do the trick. Although that would help local authorities, there is no guarantee that an authority would pass on the funding to schools. Unless you close that gap, you have not done what this House has a clear wish to do: to enable schools to know what their income will be three years in advance. So it would not do the job.

Local authorities will continue in their existing role of distributing the funding granted to them from central government for the schools in their area. They will also be able to provide their schools with resources over and above the dedicated schools grant in response to what they judge as local priorities. They will therefore continue to play a critical strategic and quality-assurance role in education. I shall not repeat what I said at Second Reading.

This Government have been clear about the priority that they attach to education. Between 1997-98 and 2005-06, recurrent funding for schools in England has increased by an average of over £1,000 per pupil. It is important that that funding gets to schools and pupils. Our proposals make it clear beyond doubt that they will so benefit.

Ring-fencing does not mean that we are introducing a national funding formula, or that local authorities will no longer have a central role. I hope that I made that very clear at Second Reading. Local authorities' day-to-day relationship with schools will not be affected. The only thing that local authorities will not be able to do is to spend funding that central government provides for school education on non-educational provision. That is the nub of the issue; it is at the heart of three-year budgeting.

It has been argued a good deal in this debate that the provisions will mean almost the end of local government, although it was hardly mentioned at Second Reading. One of the practical reasons why that is not true is that most local authorities already behave as the provisions propose. The clear thrust of central government policy through passporting is that they should pass the funding on to schools, and so they do. The measure will cut out the process of tergiversation and argumentation to make it clear and transparent.

It has been argued that the new ring-fenced grant will make it more difficult to achieve joined-up services. I do not think that that is true. We are introducing a 7.6 per cent increase in general funding
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of children's social services for 2005-06. Although it will never be seen as enough, because that is how life is, it is nevertheless a substantial increase.

Local authorities will not be able to take funding intended for schools and use it for other purposes. However, they will be able to use their considerable discretion to fund other services that they think need more expenditure. So they should, and long may they do so.

The noble Lord, Lord Smith, talked about a £400 million shortfall. The argument that we usually hear is that there will be a £200 million shortfall. It has been suggested that, when the DSG is introduced, it may not take account of the fact that many authorities already spend above the schools formula spending share (SFSS). I can assure the Committee that there will be no shortfall. Our calculations for the new DSG will start from the total of what local authorities are actually spending on schools at present; that is the usual basis for making changes to local government finance arrangements. So it will not be necessary for local authorities to add to the DSG in order to continue spending what they have spent in the past, although they will be able to do so if they wish.

I have spoken about distribution already. In allocating the DSG we do not envisage any significant change to the existing SFSS formula, which was based on a major consultation exercise and introduced only two years ago. Nor will there be micromanagement of schools. We directly rejected that view, which is why we saw it as central to the proposals that the local authority should continue its role of distributing the grant.

On school forums, there is no question of any powers being taken away from local authorities. The powers in the Bill, which we will come to later, are about giving local authorities and school forums more power, at the expense of the Secretary of State, rather than the reverse. We have no intention in this Bill of taking that further to the detriment of local government.

I have spoken briefly about Wales. At this stage, Wales wishes to stay where it is.

I think that I have spoken to my noble friend Lady David. I have heard the comment that there is no evidence that change would be beneficial. I was surprised to hear the noble Lord, Lord Ouseley, also say that. I will put the question back to him. He said that there would be no benefits from moving to a three-year budget. Can he look me in the eye and say honestly that if, when he was chief executive of Lambeth council, he had known his revenue platform for the next three years for the borough, he would not have felt that that was massively beneficial, giving certainty to the local authority about its job? It would have removed a massive amount of officer and member turbulence about their position each year. I believe that he would have snatched at that with both hands, as I would have done when I was a local authority chief executive. One could then have got on with the job, rather than suffering the constant agony
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of wondering, "Where will we be?" and the short-termism that comes about as a consequence of that sort of financial environment. One should never provoke noble Lords; they always want to respond.

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