10th April 2016

The Education White Paper & Budget 2016: financial implications for schools

Over the last few weeks, we’ve seen some totemic policy proposals from the Department for Education. First, a consultation on the National Funding Formula (NFF), followed by the Budget and an education White Paper, ‘Educational Excellence Everywhere’. This White Paper, the first since 2010, announced a range of changes, including a plan to move to a fully academised state-funded school system in England by 2022.[1]

The key question is whether this upheaval and change will be worthwhile in the long term.  The Education Policy Institute will be looking at this question in the coming months. More immediately, this briefing looks at:

  • Recent reports on the cost of academisation;
  • New estimates of the pressures on school spending over the next 5 years; and
  • The extent to which the White Paper is likely to help the school system deal with these pressures.

Underpinning the White Paper is an ambition to build on the progress claimed to have been made over the last Parliament. Namely, to extend and embed successes in to parts of the country still lagging behind, deliver against higher expectations from employers, and keep up with other countries who continue to improve.

This ambition is of course welcome. The analysis in the Education Policy Institute’s Annual Report demonstrates how far we have to go to keep up with high-performing countries and the need to better target efforts to improve schools given patterns like the North/South divide in attainment.[2]

However, a closer look at the financial implications of the White Paper reveals a challenge in meeting an even more pragmatic aim: maintaining current standards with the fewer resources that will be available.

Reports of a £1.1bn funding gap for full academisation are not backed up by strong evidence

The Labour Party has estimated that the Government’s plan to convert all state schools to academies could cost over £1.3bn, leaving a shortfall of £1.1bn.[3] That was based on an assumption that only £140m of the £640m announced in the Budget for full academisation and implementing the NFF would be used for academisation.  Their cost estimate assumes £206m in legal fees for local authorities and that each of the implied academy conversions would cost the same as the average for those between 2010-11 and 2015-16 implied by a Parliamentary written answer: £66,000.[4]

The available evidence does not support this estimate. The Government has suggested that, in fact, some of the £500m required for the NFF had already been put aside, and that there is £500m available in this Parliament to ‘build capacity in the system’ for academisation.[5] A closer look at the Parliamentary written answer that the £66,000 figure was based on also shows that the average cost has reduced significantly over time, to £32,000 in 2015-16. There is not enough information provided on what these costs include to explain the trend, but a reduction over time is likely to have reflected the emergence of converter academies after 2010-11. These tend to involve a less costly process than sponsored academies, where the conversion is associated with intervention for an under-performing school. There was also a reduction in some of the grants required to support new academies after the initial period of the programme, as outlined in a National Audit Office report on the matter.[6]

In addition, speculated legal fees may, as recently reported in the media, be paid for by academy trusts out of the government grants anyway.[7] It is unclear whether they would be able to absorb this pressure but, for illustration, if these legal costs are discounted and the latest figure for the cost per conversion used instead, the total estimated costs would fall to roughly £540m.

In reality, the true cost is highly uncertain, will extend beyond this spending review period, and probably lies somewhere in between.

Trusts can be awarded various start-up grants for sponsored academies, including school improvement funding in addition to paying for administrative costs, capacity building, and environmental improvements. Even though the basic grant to support conversion is only £25,000, in all these can amount to hundreds of thousands of pounds depending on circumstances, as outlined in the Department’s guidance.[8] Some of this pays for school improvement work that local authorities might have otherwise provided anyway through other funding. In other words, some of this expense would have occurred regardless of the academies policy.

The net cost of this policy will depend upon the balance between accelerating school interventions with grants to convince sponsors to step in, or expecting schools to convert on their own terms. With the focus of conversions switching to primary schools, which are much smaller, and an ambition to quadruple the number of academies in 6 years, the whole delivery model will have to change and we expect to see more ‘batch’ conversions.

New estimates of the pressure on school spending in the coming 5 years

In monetary terms at least, pupil growth and pensions changes will prove to be the most significant pressures on school budgets.

At the 2015 Spending Review, the Institute for Fiscal Studies estimated that, despite a Government commitment to protect core schools revenue funding in real terms, schools will face what will feel like cuts of 7.5% per pupil in their budgets between 2015-16 and 2019-20.[9] This is due to an expected increase in pupil numbers across the period, and increases in Teacher Pension Scheme and National Insurance contributions coming into force over 2015 and 2016.

This briefing provides an updated analysis[10], taking into account the Office for Budget Responsibility’s (OBR’s) new economic forecast, the Department’s latest pupil projections, and the Budget announcements. We don’t know how much of the extra £640m announced in the Budget will be used to implement the NFF (money schools will actually have to spend on education), how much will be for academisation (much of which will be spent on building management capacity and administration), or exactly how either will be spent. For simplicity we assume that half of it will support normal school functions, though as we will see this assumption makes little difference to our conclusions.

The Budget also announced £690m to enable a quarter of secondary schools to extend their school day and up to 1,600 schools to expand breakfast clubs, £490m to double the primary school PE and sport premium, and £80m for extra school improvement work in the ‘Northern Powerhouse’. To provide a conservative estimate of funding pressures we assume these will support school finances, though in practice they come with extra obligations. On the other hand, there will now be a further increase in public sector pension employer contributions from 2019-20, with an annual cost to schools of over £400m.[11]

We estimate that by 2019-20 schools will be experiencing an average funding gap of 7.5% compared to 2015-16, assuming that they’d otherwise seek to increase staff numbers and other inputs in line with pupil numbers. The result of this will be £3.2bn of annual savings (in 2015-16 prices) that will need to be made by increasing the number of pupils per teacher and making other efficiencies. On top of this there will be a £600m reduction in the Education Services Grant provided to local authorities and academies announced at the Spending Review.[12] This is used for jointly-commissioned services like occupational therapy.

This pressure is not likely to ease after this spending review period

The Budget also set out that spending constraints would continue for at least another year in order to meet the Chancellor’s fiscal targets. Total departmental resource spending is planned to grow in line with inflation from 2019-20 to 2020-21. Given other Departments will be running out of opportunities for further cuts and will similarly be facing demographic increases in costs, it seems likely that a real protection for school budgets would be the most that could be expected for funding in 2020-21. The added pensions cost is already confirmed to continue.

The future of the funding for extending school days and breakfast clubs – which will only benefit a minority of schools and only for specified purposes – is also uncertain. Indeed, the Soft Drinks Industry Levy used to pay for them is forecast to see falling revenues (from £520m in 2018-19 to £455m in 2020-21) as consumers and businesses respond to the new incentives.[13] We might hope, of course, that this will come with an improvement in the health and capacity for learning of pupils at the same time.

If we were to assume that school budgets were protected in real terms for another year to 2020/21 and that these new sources of cash were discontinued, the implications are plotted in the chart below. Indexes show the change in nominal total school costs (in pink) and funding (in purple) from 2015-16, and the gap that opens up between them over time. The solid lines show the situation without the Budget announcements, and the dotted lines the situation with them. Clearly, the Budget announcements do not significantly alter the overall picture and we estimate that schools would be left with a funding gap of 10.7% in 2020-21, or £4.8bn in 2015-16 prices.


Schools will need to change the way they work in order to maintain standards

These funding pressures are no greater than those faced by most other public service providers are dealing with at the moment (not least post-16 education institutions). They also follow significant increases in education spending over the decade to 2010 and a protection of funding since then.

However, they will still require changes in the way schools operate. These pressures are calculated on the basis that teacher pay awards are limited to 1% for four years, as announced in the Summer Budget 2015. Even allowing for some increases in average salaries beyond this due to changes in workforce composition and movements across pay scales, teacher pay is set to lag behind that of private sector professions, with economy-wide wages forecast by the OBR to increase by an average of 3.3% per year to 2021.[14]

That will mean schools will find it harder to attract and retain staff, and there are frequent reports that this is already proving difficult, as highlighted by a recent National Audit Office review of teacher training.[15] They will have less choice of candidates for vacancies and may have to rely more on less experienced and qualified teachers deployed beyond their subject specialisms. The more schools can make cost savings elsewhere and deploy their teachers more efficiently – in bigger classes where appropriate – the more they can protect teacher salaries, maintain professional development and procure wider support for learners to compensate.

The pressing need for savings is acknowledged by the White Paper but the proposed structural reforms are unlikely to help

The White Paper details new tools for schools trying to take a strategic view of their operations and become more efficient. There is an ‘Efficiency Metric’ to provide a basic self-assessment for schools, ‘Benchmarking Report Cards’ for leaders scrutinising their costs, help in identifying financial health-check services, and a forthcoming package of training and guidance on workforce efficiencies. A new procurement strategy aims to help schools determine how to minimise non-staff costs.

These are all sensible measures, but the new announcements on extending the school day, expanding breakfast clubs and increases to the PE and sport premium will lead to more grant applications, additional bespoke Ofsted accountability measures, and further ring-fenced spending. Because of the obligations they come with, they may not help shore up school basic finances as assumed above, and the associated decisions all take up the time of school leaders and business managers. These policies may prove to be worthwhile in their own right, but the Government must recognise that changes in priorities and funding streams are not likely to help schools deliver efficiencies. The White Paper itself claims that best practice involves “setting a 3-5 year budget based on a clear vision for delivering school improvement”.

The White Paper does, however, recognise that schools will need to work with others to reduce costs, and sees Multi Academy Trusts (MATs) playing a key role. An evidence review published by the Department last year suggests that, indeed, collaboration between schools can help them achieve efficiencies by sharing resources and generating economies of scale.[16] However, the previous experience of sponsor academy chains suggests that geographical proximity can be important for realising this.[17] With the Department keen to avoid ‘local monopolies’ according to the White Paper, there is some tension here. Whilst some back office functions can presumably be shared over a wide area, it will have to be the more local cooperation, with competitors, that enables the sharing of teachers or premises.

Unless this leads to vastly more effective schools, the ambition to create 500 free schools could also reduce efficiency in the short term. The White Paper confirms this to be the case, as many will not be in low capacity areas, creating unused pupil places and smaller institutions, which make it more difficult for the system to reduce the number of teachers needed per pupil. Current free schools are much smaller than the average and some of the new ones may provide specialist provision. However, with the focus of free school provision likely to be skewed more towards the basic accommodation of rising pupil numbers than in the past, we should expect this to change somewhat. Either way, this aspect of the reform programme is likely to put pressure on costs per-pupil.

The responsibility for improving day-to-day efficiency will rest with school leaders and it will not be supported by an expansion of investment

The launch of the NFF consultation is likely to be the most positive step on this front. Distributing scarce resources in a more sensible way is possibly the biggest contribution the Department can make to improving efficiency in education spending in the round, even if for many parts of the country it will increase the pressures on funding. The variation in pupil attainment across the country highlighted by the Education Policy Institute’s Annual Report suggests that targeting resources well will be vital.[18]

Combined with some significant reconfiguration of provision as a result of full academisation, there might be opportunities to change the ways in which pupils are distributed and schools are run in order to improve efficiency. Such changes might normally be expected to require some capital investment in the short term, if premises have to change and new, merged, schools need to be created. However, whilst the Budget announced some ‘acceleration’ of capital spending affecting schools, this will mainly involve reshuffling of spending across years. The Spending Review announced that the Department for Education’s capital budget will be slightly (2%) lower in real terms across 2016-17 to 2020-21 than it was between 2011-12 and 2015-16.[19]

Giving school leaders, governors and trusts more certainty over future funding will at least help them make the strategic decisions necessary to improve efficiency and better plan the investments they are funded to make. Given the wider context, funding reform could not come soon enough. The Department’s plans to strengthen, support and professionalise school leadership should be implemented with a focus on improving efficiency within schools as well, ensuring scarce teachers are deployed effectively.

[1] ‘Schools national funding formula’, Department for Education, March 2016 (https://consult.education.gov.uk/funding-policy-unit/schools-national-funding-formula/supporting_documents/Schools_NFF_consultation.pdf), ‘Budget 2016’, HM Treasury, March 2016 (https://www.gov.uk/government/publications/budget-2016-documents), ‘Educational Excellence Everywhere’, Department for Education, March 2016 (https://www.gov.uk/government/publications/educational-excellence-everywhere)

[2] ‘Education in England: Annual Report 2016’, Education Policy Institute, April 2016 (http://epi.org.uk/report/education-england-annual-report-2016/)

[3] http://www.bbc.co.uk/news/education-35945542

[4] http://www.parliament.uk/business/publications/written-questions-answers-statements/written-question/Commons/2016-03-16/31449/

[5] As reported in BBC article.

[6] ‘Managing the expansion of the academies programme’, National Audit Office, November 2012 (https://www.nao.org.uk/report/managing-the-expansion-of-the-academies-programme/)

[7] http://schoolsweek.co.uk/authorities-charge-for-academy-conversion/

[8] ‘Sponsored academies funding: advice for sponsors’, Department for Education, March 2016 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/511128/sponsored_academies_funding_advice_for_sponsors.pdf)

[9] ‘School Funding Reform’, Institute for Fiscal Studies, October 2015 (http://www.ifs.org.uk/tools_and_resources/budget/509)

[10] Our methodology differs to that of the IFS by calculating costs separately for different school sectors (which have different costs per pupil and different pupil growth forecasts) and using staff salary and headcount data from the School Workforce Census instead of separate surveys. It similarly uses OBR assumptions on public sector wage growth, taking into account public sector pay commitments from the Summer Budget 2015.

 [11] http://www.bbc.co.uk/news/uk-politics-35838493.

[12] ‘Spending review and autumn statement 2015’, HM Treasury, November 2015 (https://www.gov.uk/government/publications/spending-review-and-autumn-statement-2015-documents)

[13] ‘Budget 2016’, HM Treasury, March 2016 (https://www.gov.uk/government/publications/budget-2016-documents),

[14] ‘Economic and Fiscal Outlook’, Office for Budget Responsibility, March 2016 (http://cdn.budgetresponsibility.org.uk/March2016EFO.pdf, Table T1.1)

[15] ‘Training New Teachers’, National Audit Office, February 2016 (https://www.nao.org.uk/report/training-new-teachers/)

[16]  ‘Effective school partnerships and collaboration for school improvement: a review of the evidence’, Department for Education, October 2015 (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/467855/DFE-RR466_-_School_improvement_effective_school_partnerships.pdf)

[17] ‘The growth of academy chains: implications for leaders and leadership’, Hill, R., Dunford, J., Parish, N., Rea, S., Sandals, L., January 2012 (http://dera.ioe.ac.uk/14536/1/the-growth-of-academy-chains%5B1%5D.pdf)

[18] ‘Education in England: Annual Report 2016’, Education Policy Institute, April 2016 (http://epi.org.uk/report/education-england-annual-report-2016/)

[19] 2015-16 to 2020-21 capital spend figures from ‘Budget 2016’, HM Treasury, March 2016 (https://www.gov.uk/government/publications/budget-2016-documents), 2011012 to 2014-15 figures from ‘Public Expenditure Statistical Analyses 2015’, HM Treasury, July 2015 (https://www.gov.uk/government/statistics/public-expenditure-statistical-analyses-2015)