School budgets? What school budgets?

Over recent weeks, alongside a divisive debate about the return of grammar schools, there has been increasing public debate and media coverage about potential cuts to the budgets of schools in England. Almost all newspapers and other media outlets have had extensive coverage about opposition to the government's proposed funding deal for schools.

A report last week by the Education Policy Institute shed light on what the proposed changes are, and what impacts there are likely to be.

It's important to understand that two quite separate developments are behind these stories about school budgets—one relates to the government's decision to introduce a new, "fairer" funding system for schools, from 2018 onwards. The second development relates to the implications for school budgets of general cost pressures for schools expected over the next few years.

Our Institute found, strikingly, that after these two sets of changes, every school in England will experience cuts in real per pupil funding over the next three years. In other words, even schools which are supposed to gain from the new funding formula will see their real budgets contract because of the other cuts and cost pressures. Around half of primary and secondary schools will be faced with real cuts in per pupil funding of between 6 and 11 per cent by 2019/20.

For the average primary school in England, these pressures are equivalent to losing around £74,000 in real terms (around the budget for two teachers), and for the average secondary school the loss would be around £291,000 (around the budget for six teachers). It is not the case that exactly this number of staff per school will be lost—some schools will cushion their funding pressures by using existing cash reserves. Other schools might be "bailed out" by experiencing rising pupil numbers. But the next few years will represent the toughest for school budgets for at least 20 years.

For some schools, a major part of the budget pressure comes from the new funding formula. This is designed to ensure that a pupil with the same characteristics receives the same amount of funding wherever he or she is being educated in England (leaving aside that schools in areas such as London receive higher funding to cover higher staff costs). You might think that we would already be funding pupils consistently in this way—but this is not the case, both because of historic variation baked into the current formula, and because at present local authorities have flexibility about how schools are funded.

Creating a fair funding formula, in a time of public sector austerity, means that some schools will "win" while others "lose.” Unsurprisingly, the losing schools are not very enthusiastic—in my experience, no school considers itself to be overfunded. So "levelling up" is much easier politically—but this would require extra money which the Department for Education currently does not possess.

A second problem for Education Secretary, Justine Greening, is that "fair funding" does not mean the same funding for all pupils. The government still plans to spend a lot more money on disadvantaged pupils, for example, in order to help schools to close the "attainment gap.” Justine Greening has actually, and commendably, proposed a new formula which continues to allocate a large share of funding to these less advantaged pupils—probably disappointing some Tory backbenchers, who hoped for a re-distribution towards some of the lower funded shires.

This decision means that higher funded areas such as London do not lose as much money as had been expected by some commentators and politicians—potentially a good outcome for social mobility, but one which raises risks of a conservative backbench rebellion.

It would be challenging enough to implement a new funding formula with absolute winners and absolute losers. But the task for Greening is even harder because these changes are taking place at a time when the amount of money allocated for each pupil is being frozen in cash terms, while costs are rising significantly. This means that schools are not being compensated for higher pay, higher pension costs, higher national insurance costs, cuts to the Education Services Grant, and other economy-wide pressures on costs. It is these additional cost pressures that wipe out the gains for the winning schools, and push the losing schools into even greater losses per pupil. No wonder we are presently seeing quite a political backlash.

What could the Department for Education now do? It has basically four options. It could scrap the new funding formula, but this would cause even more anger amongst the schools which are due to gain from it. Secondly, the DfE could choose to move more money away from disadvantaged schools—but while this would please many Conservative MPs, it would be widely criticised as being socially regressive. The third option—the "fudge" utilised by the Coalition government—would be to put the extra money already made available as part of the reform into raising funding for the most underfunded areas, while completely protecting all areas from outright cuts. This might work, but would involve rather small gains for the winning areas. Finally, Philip Hammond and Theresa May could decide to bail-out the education department with a large dollop of extra cash. This could be used to reduce the impact on losers and increase the gains for underfunded schools.

But will May and Hammond want to spend more money on schools? Both were Ministers in a Coalition government in which schools spending was largely protected from cuts, but where the departments they headed (Home Office/Defence) were often less privileged. It will be interesting to see how the government squares this circle.