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Lord Filkin: My Lords, I shall read Hansard with interest to see exactly what are the arguments being put forward by the noble Baroness, Lady Walmsley, on behalf of the LGA. A little like the noble Baroness, Lady Sharp, at an earlier stage, I would raise half an eyebrow at some of the assertions that it makes. Methinks there is a danger of protesting too much on some of these issues. It is certainly not our intention to make councils agents of central government.

Without repeating all our discussions from the many earlier stages, I shall summarise clearly where we are, and why it is right that we are there. First, I shall deal with the definition of the classes and types of expenditure allowed under the local educational authority budget and the schools budgets. These were decided on following a full-scale review in 2001–02 of funding for education. A working group, including officials from the department and a wide range of partners, looked at what made sense to be in the LEA budget and what made sense to be in the school budgets. The arrangements were introduced in 2003–04. We see no evidence which suggests that there is a need to alter them, in terms of changing the definition of those categories, so soon. That is not what people want.

What will change from 2006 in England is that a new ring-fenced grant will be introduced to ensure that the funding central government makes available for schools reaches them. Our intention is that the ring-fenced grant will cover expenditure that is currently within the scope of the schools budget, but not expenditure in the scope of the LEA budget.

The effect of the amendment would be to allow certain items that rest within the LEA budget to be paid for by funding from the ring-fenced school grant. The House will know why I shall resist the amendment. First, and most importantly, allowing authorities discretion to meet non-schools budget expenditure from the ring-fenced grant would mean that schools would no longer be guaranteed to receive their full entitlement from the ring-fenced grant. We would undermine the entire purpose of the ring fence. In other words, all this effort would become nugatory.

Secondly, the department believes that the current split between the LEA budget and the schools budget is appropriate. School improvement is a strategic function in so far as it consists of taking an overview of standards, intervening as necessary in failing schools and taking forward locally national initiatives. That is fundamentally different from the schools budget, which provides money for individual schools or for the various centrally provided pupil-specific services.

To allow school improvement in the schools budget would leave this strategic role vulnerable to the competing pressures of the school-delegated budgets
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and other pupil-related expenditure. What I would say, and I think I have said it previously, is that there is nothing stopping a group of schools locally deciding collectively to fund an initiative for their schools, either on early intervention—a matter mentioned by the noble Baroness, Lady Walmsley; and I agree with her on the importance of that—or on attendance.

There is increasing evidence that schools will behave in that way and work in a variety of federations to recognise that in some cases some of their budgets can get better value for them if they collectively pool them to fund X or Y initiative that benefits their schools. We think that that is absolutely right—and more strength to them in doing so.

Ring-fencing will not stop the kind of preventive work therefore referred to. We cannot use ring-fenced grants for intervention work—for example, failing schools. But we cannot use the schools budget for that now anyway.

To put the matter at its simplest: we think that there are enormous advantages in schools having a three-year forecastable budget. They would get certainty, clarity and predictability. We think we shall get enormous benefits in terms of them knowing what their resources are and being able to plan with confidence for the future. That is the bucket of three-year funding. We are not going to now start drilling a hole in the bottom of that bucket.

Baroness Walmsley: My Lords, I thank the Minister for his reply. It is one of the virtues of this House that we get the opportunity to reflect the views of outside organisations. The House of Commons does not get the same opportunity.

This morning in "Yesterday in Parliament" I noticed the conjunction of two interesting references to the House of Lords. On the one hand, it was being called the greatest Whitehall farce of the present day and the next news item was relying on the House of Lords to consider the proposed terrorism legislation forensically in a way that the House of Commons will not do.

That is a bit of a red herring, but relevant to the argument that we are having at the moment. There is no argument that the majority of the money should go to schools. I do not think that the LGA, to be fair to it, proposes that very large amounts should go elsewhere—and certainly to non-school activities, said the Minister. That suggests that it is being proposed that this money is being spent on something that is totally unrelated to schools. That is not the proposal; it is stuff that is to do with the whole range of schools.

The Minister has suggested other ways in which these things can be funded—by groups of schools getting together. It is true that that could happen. The Minister often talks about the strategic role of LEAs and yet the way the funding is being structured takes away their ability to undertake that strategic role. That is not how I feel about it but how they feel about it. The Minister may not believe that this feeling is justified, but the reality is that that is how an organisation that
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represents all local authorities does feel about it. That is why I am happy to reflect their concerns in our debates today. However, the Minister has said a number of helpful things about other ways in which those important services could be managed by local authorities. It may not satisfy the LGA, but that is the situation. For the moment we have to live with that, so I beg leave to withdraw.

Amendment, by leave, withdrawn.

[Amendments Nos. 106A and 106B not moved.]

Baroness Sharp of Guildford moved Amendment No. 107:

"After section 48 insert—
Regulations may provide for the establishment by the Secretary of State and by the National Assembly for Wales of bodies to be known respectively as the School Funding Review Body for England and the School Funding Review Body for Wales with the functions of reviewing from time to time and of coordinating and advising local education authorities in England and in Wales, as the case may be, on matters relating to the equitable distribution of funds available for use in schools according to the ages, abilities, aptitudes and needs of pupils.""

The noble Baroness said: My Lords, in Amendment No. 107, we are still on the whole question of financing schools. The amendment is relatively self-explanatory; it is asking for the establishment of a school funding review body. Looking back over the period since 1997, there has been a welcome increase in investment in education. We admit that additional investment has made a material difference in schools, both in terms of school revenue budgets and to improvement in school building. However, analysis shows that the trajectory of increase may have flattened out. The Government objective was achieving spending of 5.6 per cent of gross domestic product on education by 2006. It was 4.5 per cent in 1997, and I regret that it is still hovering about the 5.2 per cent level. The Government have some way to go.

In addition, the School Teachers' Review Body report states:

It is also noted that the latest findings of the Education and Skills Select Committee, which criticise the lack of evidential base for introducing changes in the schools funding formula, commented that,

While the mechanism for funding education in England at local authority level has been somewhat clarified, the fundamental question of how to quantify
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and meet the basic and additional needs of schools has yet to be resolved. Quality of access to education cannot be subject to short-term changes in funding. The Government's three-year spending reviews have eased abrupt changes in public spending levels, but more sustained mechanisms for supporting education spending are needed. In this sense, we welcome the guaranteed three-year funding for schools—although as my noble friend Lady Walmsley suggested, we have to see how it works itself out.

The amendment argues that the Government should set up a funding review group to establish a funding mechanism for schools and local education authorities which is based on costing the requirements placed on schools. That group will draw on previous work conducted by the Government's Education Funding Strategy Group. One priority for such a group would be to establish a single mechanism for schools, replacing the two current funding streams for secondary schools with sixth forms. It would also be important for such a group to provide a proper examination of the role and capacity of local authorities to sustain across all services the needs of socially and economically disadvantaged communities.

The Education Funding Strategy Group was a joint group of representatives from central and local government, teaching and support staff unions, schools' and governors' organisations and the churches. That group was responsible for overseeing the development of a new school and LEA funding system, based on greater transparency in line with the Government's proposals set out in the local government Green Paper, Modernising local government finance, published in September 2000. The group was as inclusive as possible, which had distinct advantages—as highlighted by the School Teachers' Review Body in relation to consultation on changes to teacher's pay and conditions. It stated:

Given the critical importance of the guidance, all the main parties must be involved in such consultation. For example, school governor representatives and the NUT have much to contribute, and their involvement should help to improve understanding and assist effective communication and implementation. As I said, there is a strong case for some kind of review body to consider how the new arrangements are sorted out, and we recommend that the Government think in terms of an inclusive body of that sort. I beg to move.

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