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Lord Smith of Leigh: Before my noble friend sits down, I would like to probe him on a couple more points. He talks about the logic of the Government's position as an extension of policy. Yet why in 2001 did the then Minister for schools standards state exactly the opposite?

There is a clear distinction of principle here. The Government are saying that any additional money for schools from the government should go to schools. From the total budgets that are being spent on education, a substantial part does not come from the Government but from local authorities or council tax payers. That is the distinction between the positions.

My noble friend made much about the position of certainty. We had a small debate on student numbers. I am pleased that he thinks that he can get an agreement on the long-term issue of teachers' pay. I hope that he is right. He is not right yet. I am sure that all parts of the public sector would welcome three-year budgets. I am sure that children's social services will also look for certainty for three years so that they can plan. We would all like that, but we can never be certain.

Let us remind ourselves that the Government are taking responsibility for 25,000 schools up and down England, which is a huge responsibility. In terms of accountability, if a school comes to me and says that it does not have enough money, I will tell it who to go to and it will not be the local education authority.

We have also conducted this debate with the background of the current Government. I welcome the additional funding that has gone into education in the past few years, but I can remember when schools were losing money. Head teachers welcomed the fact that local authorities were able to put additional money into schools to make sure that they could survive. So perhaps—

Lord Hunt of Kings Heath: I am grateful to my noble friend for giving way. But is that not the point? In
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those situations, it was not clear which public authority should take responsibility for the problems that schools had then. Now, in terms of how well the money is spent, responsibility is clearly with the governing body. With three-year flexibility, they have been given more opportunity to ensure they use that discretion wisely. When it comes to the overall funding level, the responsibility is clearly with central government.

Is it not better to be straight, rather than to have the traditional approach where so many bodies are involved? It is very difficult for the punter to know to whom they should go.

Lord Smith of Leigh: As complex as education funding is, I am sure that it is not quite as complicated as health funding. My point is that when schools have lost money because of decisions from central government, they have looked to local authorities for additional support. In the new arrangements that will not happen. We should be clear about that.

I would welcome clear responsibility. Responsibility is not quite clear because when the money gets to the schools, who takes direct accountability? At the moment, it is difficult enough to get sufficient people of quality to fill governing bodies. Most authorities in my area have a number of vacancies, which we do our best to encourage people to fill. If more responsibility is being given to school governors and heads, we must ensure that they can exercise it.

I will not bore Members of the Committee, but for as many rogue local authorities, I can quote many rogue head teachers—one of whom decided that the best way to solve the home-to-school transport situation was to use school funding to put a deposit on a new car for himself.

My noble friend should remember that, like financial investments, this should come with a health warning that spending on education can go down as well as up. We are assuming that it will always go up, which cannot be the case.

Perhaps I may just press my noble friend to reflect on these two points, which he did not really cover. First, how can we be certain that we can continue to get management efficiency in the money going to schools? Secondly, would he be supportive of trying to make sure that schools are involved in the wider agenda beyond the school gate, so that some kind of responsibility for schools is in the Bill?

Lord Filkin: I shall be brief. My noble friend Lord Hunt's interjection about it being better to be straight got to the nub of it. This has clarity and a certain intellectual honesty as a consequence. I take the noble Lord's point about governance. It is important that governance can cope with those issues, to which I am sure we will return in the future.

On three-year budgets for local government, I agree with him. My right honourable friend the Deputy Prime Minister has as one of his objectives the
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introduction of three-year budgets for local government because it would be good for local authorities as well. However, I should not refer to "three-year budgets" because those will be set by local government; rather, I refer to greater certainty about the forward grant from central government.

On management efficiency, my noble friend Lord Smith was not able to be with us when we considered other parts of the Bill and therefore missed our many happy hours spent looking at the very strong relationship between the new Ofsted inspection system and the performance of the school. We are confident that the new system will continue to drive greater efficiency forward.

I turn to my noble friend's comment that local government will stop putting any money into schools, that it will never do so again. I do not know how he can say that. I cannot speak for 150 local authorities or predict the future, and I do not know who can. We will see what happens. I expect that local authorities will think that they do want to do things with their schools because their children are being educated in them. They will want to put forward initiatives that they believe should be supported. However, we shall let that pass.

I hope that my noble friend will withdraw his amendment.

Lord Lucas: Perhaps I may ask a couple of brief questions about the reply given by the Minister. Am I right in understanding that the ring-fencing will apply to the entire school budget; that is, the money given to schools and the funds spent centrally by the LEA, and that the starting point will be what is in the budget at the moment? An LEA which has been contributing an extra £10 million a year to its schools is effectively now stuck with that commitment because it will become part of the central ring-fencing. They will lose any ability to cut back on the commitment if children's services need it.

Let us take two local authorities with budgets of around £200 million. One has been spending £100 million on schools while the other has been spending £110 million. It is at that point where the ring-fencing will be set. In effect, therefore, in two all but identical local authorities, one will have a budget for £100 million for non-school services while the other will have a budget of £90 million. That is the position in which they will find themselves stuck. In other words, past generosity will come back to hit them in the face, which will give them a jolly good reason not to do it again. Am I right in my understanding of how things will work?

Lord Filkin: Perhaps I may put it like this: up to a point, Lord Copper—and I mean no disrespect. In the situation described by the noble Lord, if for the sake of argument a local authority has been putting money into schools over and above the schools formula spending share, the SFSS—let us say £10 million, a rather large amount—while in the medium term the
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level of central government grant will be set at the level of the SFSS, in the short term—to avoid exactly the problem envisaged by my noble friend Lord Smith; that of a school finding that its grant is suddenly reduced—central government will protect the school from that by providing funding at the level that the school had been receiving in total prior to the changes. That will not mean that the local authority itself will be putting its hand in its pocket to sustain that school's budget, a point of concern for the noble Lord, Lord Lucas; it will be provided as part of the damping arrangements for the totality of the changes.

Lord Lucas: Perhaps I may press the Minister a little further. If an LEA has been spending an extra £10 million, those schools will do relatively badly because that extra £10 million will be absorbed over time. The government grant will start at £10 million higher and that particular authority will get the money. However, will it receive the extra funding in each budget?

I want to find out how this will work. Will additional government grant be provided to local authorities to cover their extra funding or will the ring-fencing be set high so that local authorities will find that some of their own money is ring-fenced, as it were? Will the ring-fencing then squeeze school funding? Moreover, if a local authority does put additional money in, am I right in interpreting paragraph 3(7) as providing that the Government will have control over how the money is spent or will the local authority be entirely free in how it spends the additional sums? In other words, will local authorities be constrained by considerations such as how much of the budget should go to schools or how allocations should be made between schools? Are these decisions to be left entirely to local authorities? Will they be able to distribute these funds as they wish?

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