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Schools: Funding

Lord Adonis: My right honourable friend the Minister of State for Schools and 14 to 19 Learning (Jacqui Smith) has made the following Written Ministerial Statement.

This Statement relates to schools' recurrent funding from 2006–07.
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In February this year my department launched a consultation on proposed new arrangements for school funding from 2006–07. The proposals were designed to deliver greater certainty and stability for schools, building on the package of measures that we put in place in 2004–05. In particular, they were designed to guarantee delivery of the government's commitment to increase spending on schools in every local authority area, to provide schools with the tools to take a strategic approach to their financial planning, to reduce bureaucracy and to give schools greater control over how they used the resources available to them for the benefit of their pupils.

I am today publishing a summary of the responses to the consultation and placing a copy of that summary in the Library of the House. I am grateful to all those who responded to the consultation, and in particular to our national partners with whom we have been discussing detailed implementation issues in parallel with the consultation.

For the most part, the Government's proposals were welcomed by respondents to the consultation, who recognised the significant benefits that they would bring for schools. However, it is clear from the responses we received and from our discussions with partners that some aspects of the proposals imply significant changes to the way in which local authorities manage the budget-setting process. The government also recognises that it is critical that changes to the school funding system—and in particular those which affect the distribution of funds between local authorities or schools—are introduced gradually, in order to avoid a repeat of the financial difficulties which some schools experienced in 2003–04.

We therefore intend that the two years 2006–07 and 2007–08 should be a transitional period, and that the new arrangements should be introduced in full from 2008–09. During the first two years we will review a number of aspects of the system to ensure that when the new arrangements are fully implemented from 2008 they will be on a sound footing, and that funding is distributed in the most appropriate way possible.

The introduction of three year budgets for schools was widely welcomed by respondents to the consultation. From 2008–09, schools will receive three year budgets in line with the Spending Review cycle.

In the short term, the Government's decision to review its spending plans using a zero-based approach, to report in 2007, means that schools will receive a two-year budget settlement in early 2006 to cover 2006–07 and 2007–08, but will not receive information for future years until after the spending review has reported. We intend to review the way in which the budget setting process has worked during 2006 and 2007, so that we can make any changes to the arrangements I am announcing today if necessary to ensure that the first full three-year settlement in 2008–09 is implemented smoothly.

It remains the Government's aim to move school budgets on to an academic year basis in due course. However, although many respondents welcomed this proposal, some practical concerns were raised which
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we believe we should discuss further with our partners before making a final decision. It also makes sense to let the other changes we are introducing in 2006 bed down before making this further change. School budgets for 2006–07 and 2007–08 will therefore be set on a financial rather than an academic year basis, but we will review during that period whether to move to an academic year basis for setting budgets from 2008–09.

In deciding on how to implement multi-year budgets at school level, it has been necessary to strike a balance between certainty on the one hand and responsiveness to changed circumstances on the other. So we will require authorities to make key decisions before the start of each multi-year period, including the transitional two-year period starting in 2006–07: for example, how their local funding formula should work, and what the split should be between the amount of funding delegated to schools and the amount retained centrally by the local authority. But we will also allow flexibility for these decisions subsequently to be reconsidered in exceptional circumstances, and where the local schools forum agrees. This will be important to allow authorities to deal with significant and unexpected changes in circumstances.

We have also considered carefully how far we need to be prescriptive in terms of how multi-year budgets for individual schools are put together, and how far we can leave this to local discretion. We have concluded that it is essential that budgets are updated annually to reflect changes in pupil numbers; and we propose to require authorities to use a consistent approach to this. However, we believe that other decisions—in particular the extent to which annual changes should be made to reflect changes in other data—should be taken locally in discussion with the Schools Forum, to ensure that local circumstances can be fully taken into account.

The Learning and Skills Council will be carrying out its own consultation in the early autumn on its arrangements for providing school sixth forms with a two-year settlement in 2006–07 and 2007–08.

Two key safeguards which were introduced into the system in 2004–05 will remain. The first is the minimum funding guarantee for schools, which will be the key guarantor of stability in schools' budgets during the transition to the new arrangements. There will continue to be a need for the detailed operation of the guarantee to be varied where it would otherwise produce an anomalous outcome due to local circumstances, and in future we intend that some variations of this kind should be agreed locally by the schools forum and come to the Secretary of State only where they cannot be locally agreed.

The minimum funding guarantee will be set in advance for the whole of the period covered by schools' budgets. The Government's intention is to set the guarantee for 2006–07 and 2007–08 at a level which covers anticipated average cost pressures on schools in each of those years, including the full-year costs of implementing workforce reform, subject to a final assessment of those pressures. The precise level of the guarantee in each year will be announced in the autumn. We intend to review the way
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in which the guarantee should operate from 2008–09 onwards, including the link to cost pressures, with a view to ensuring that it leaves sufficient scope to redistribute funding in a way which responds to changing needs and priorities.

The Learning and Skills Council has confirmed that it will match the minimum funding guarantee for secondary schools in 2006–07 and 2007–08. The Learning and Skills Development Agency has however today published a report which identifies some technical anomalies between the school sixth form and further education funding systems: we intend to examine the scope for addressing these, and will announce our conclusions in the autumn.

The second key safeguard for schools in the current system is the limit on centrally retained expenditure within the schools budget: this ensures that the local authority's centrally retained budget cannot increase at a faster rate than funding delegated to the authority's schools, unless there are exceptional circumstances. This limit will continue to operate in essentially the same way as now; but in future any proposal by an authority to exceed the limit because of exceptional circumstances will need agreed locally by the schools forum and only come to the Secretary of State where it can't be locally agreed.

The introduction of a ring-fenced grant for schools, or dedicated schools grant (DSG) is an essential precursor to three-year budgets for schools. Grant will be allocated to authorities to cover the same period for which we will require them to give their schools budget allocations, in line with the spending review cycle. That means we will allocate grant to cover 2006–07 and 2007–08 initially, and in late 2007 we will give authorities a three-year settlement covering 2008–09 to 2010–11.

The baseline for the DSG at national level will be the total of authorities' budgeted expenditure on schools provision in 2005–06. I can confirm that, as set out in the five-year strategy for children and learners, the dedicated schools grant for 2006–07 and 2007–08 will increase by 6 per cent over that baseline in each year. Every authority will receive an increase of at least 5 per cent per pupil in both 2006–07 and 2007–08. To protect schools in authorities with rapidly falling rolls, there will also be a minimum overall increase for authorities in cash terms: we will announce in the autumn the level at which that will be set.

The baseline for each individual authority will also start from its existing level of spend: there will be no need for authorities to add to the schools budget from their own resources in order to maintain spending at the current level. It nevertheless remains true that if we use the existing schools formula spending share (SFSS) distribution methodology to distribute the DSG as proposed in our consultation document, schools in authorities which currently spend above their SFSS allocation will, over time, see their funding level reduced in relative terms. A number of authorities have raised concerns about this. We have also been considering further whether the current approach, using a single formula, remains the most appropriate
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method for the distribution of DSG, under a system in which it determines far more closely the overall level of funding received by schools.

These two considerations have caused us to consider a modified method of distribution which takes the existing level of spend as the baseline, and gives every authority a minimum increase in its per pupil budget each year: as I have explained, this will be 5 per cent in 2006–07 and 2007–08. The remaining grant would be distributed according to criteria which would be determined by Ministers in advance of each multi-year budget period. Distribution against these criteria would be through a formula based on objective data.

It would be possible for the existing SFSS formula to be used to determine the distribution of some or all of the increase above the minimum per pupil increase. We propose to keep the formula running in its current form, subject to some minor technical changes.

We believe it is important to seek the views of local authorities and others on this proposal before deciding whether to go ahead. We therefore intend to publish a consultation document shortly which will set out the proposals in more detail. We expect to announce final decisions, along with provisional allocations for individual authorities, in the autumn.

Because the modified method of distribution which we are proposing is in part a response to the problems of transition to the new system, we would propose to review its operation, to consider what lessons can be learned from the first two years of operation of the DSG, and also to work up proposals for the longer term. Equity of funding will be a key consideration in that review. We intend to complete that review by the summer of 2007, in time for the first three year allocations of DSG later that year.

The purpose of the ring-fenced grant is, of course, that money intended for schools reaches schools. The dedicated schools grant will therefore be paid to authorities on condition that it is allocated in its entirety to the authority's schools budget. However, an issue raised in the consultation was whether local authorities should be able to include money from the schools budget along with money from other local authority services and other agencies in combined budgets in support of Every Child Matters work. We have concluded that they should be able to do so, where they can demonstrate that there are clear benefits for schools and pupils, and so long as the educational benefit is broadly proportionate to the contribution made and the schools forum agrees.

The consultation document also proposed a rationalisation of standards-related grants, to reduce complexity and bureaucracy and give schools greater freedom over how they spend their budgets. These proposals were broadly welcomed by respondents.

We therefore propose to combine a number of existing grants into a single school development grant from April 2006, as set out in the consultation document. To ensure stability for schools as we move to the new arrangements, the distribution of that grant in 2006–07 and 2007–08 will reflect the current distribution of its constituent grants. The grant will be increased each year in line with the
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minimum funding guarantee, and this will be funded through a transfer from the DSG: that amount, and the allocations available to individual authorities, will be announced in the autumn. We intend to end matched funding for school grants through a transfer from the dedicated schools grant to specific grants.

Respondents to the consultation also agreed that it was necessary to retain some separate grants. Some will remain separate because they are targeted at particular schools, or time-limited. We have an existing commitment to keep the ethnic minority achievement grant separate and ring-fenced until at least 2008. And some grants are spent at local authority level and are not devolved to schools: grants in this last category are being considered as part of a separate exercise to rationalise local authority grants.

The school standards grant will remain separate from the consolidated grant in 2006–07 and 2007–08. We will replace the existing distribution methodology with a fairer formula based on a flat rate per school plus a per pupil amount, with transitional arrangements to ensure that no school loses out. Details will be announced in the autumn. Additional resources were allocated to the school standards grant in the Budget to help schools meet the challenges of developing extended services. As a result, from 2006–07 schools will be able to spend their school standards grant to support extended services.

From 2008–09, we will consider bringing the school development grant and the school standards grant together into a single standards grant. We will consult fully on how that grant should be distributed in due course.

The consultation document proposed that it should be possible, with schools forum agreement, for authorities to increase the amount they held back from the single grant from 2008–09 onwards. On reflection, we have decided not to go ahead with this proposal: we believe we should be working towards a position where schools decide for themselves whether to buy into additional central support from their authority.

Schools forums will have a key role to play both during the transitional period and in the longer term. They currently have an important role as an advisory body, and this will continue. But from 2006–07 we will also be giving them a number of decision-making responsibilities. These powers will relate to areas where we are providing some flexibility for authorities to move away from the requirements of the school funding regulations in order to take account of specific local circumstances: in the past it has only been possible to exercise such flexibilities with the approval of the Secretary of State. The government believes it is right that it should be possible to agree to the exercise of these flexibilities locally if a consensus can be reached. Where that is not the case, the authority will retain the right to apply to the Secretary of State for a decision.

The evidence is that many schools forums are already working effectively. However, as their role changes from a purely advisory one to one in which they will also be asked to make a range of important decisions on behalf of schools, it is clearly essential
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that schools can have confidence in those decisions. That means ensuring that forums' constitutions and proceedings are appropriate to their new role, and that they have access to appropriate support and guidance.

We therefore intend to make a number of changes to the existing regulations governing forums' constitution and proceedings, and draft regulations are being issued for consultation today. In addition we will publish, early in the autumn term, a good practice guide for schools forums and a range of other guidance to support them in exercising their new responsibilities.

In advance of the first three-year budget settlement in 2008–09, we propose a wider review of the role of schools forums, and the way in which they are working. We will want to look in particular at the question of whether Forums are properly representative of the schools in their areas, and ensure that they have access to appropriate advice and support to ensure that they exercise their responsibilities effectively. We will also want to consider whether the remit of forums remains right given changes in the school system since they were established: we might for example want to consider whether they should have a role in considering capital as well as recurrent funding issues.

Once they are fully implemented, the new arrangements I have outlined today will give schools greater certainty over their future budgets than ever before. And in doing so, they will provide schools with the tools they need to plan ahead with confidence, to improve their financial management, and to link their financial planning to the outcomes they are aiming to achieve. Taken together with other measures under the New Relationship with Schools which will provide a sharper focus on priorities for improvement specific to individual schools, these measures will ensure that each pound spent on school funding will have a greater impact in terms of delivering better education for our children.

My department is issuing detailed guidance on the new arrangements to local authorities and others today. A copy of that guidance will be placed in the Library.

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