92 NEW ECONOMY

The Labour government was elected inMay 1997 with the promise that educa-tion would be given a higher priority

than ever before.In its Þrst year in ofÞce the Government

undertook a Comprehensive SpendingReview (CSR), as a result of which increasedresources were provided for key priorityareas, including education.In return for these extraresources, Public ServiceAgreements (PSAs) werepublished, setting out whateach department woulddeliver.

The aim of the DfEEÕs PSAis: ÔTo give everyone thechance, through education,training and work, to realisetheir full potential, and thusbuild an inclusive and fairsociety and a competitiveeconomyÕ. Performance tar-gets include:● increased attainment in literacy and

numeracy● a reduction in school truancies and exclu-

sions● an increase in the proportion of pupils who

achieve one or more GCSEs

● an increase in the proportion who achieveÞve or more GCSEs grades A* to C.

Two major aims of government policy, then,are to improve overall levels of attainment onthe one hand and to achieve a more sociallyinclusive education system on the other. Ade-quate resources are fundamental to achievingthese aims. However, this article argues that

the current system does nottarget resources adequatelyon disadvantage and, as aresult, the Government mayfail to meet its own statedobjectives. A new mechanismis required based on deter-mining the actual costs ofeducating pupils of differenttypes to enable them to fulÞltheir potential.

Funding schoolsMoney for school-based edu-cation reaches schools

through various means. Most comes from cen-tral government and is distributed to localauthorities via the Department of the Envi-ronment, Transport and the Regions (DETR)and then to schools by local authorities. Coun-cil Tax accounts for just 20 per cent of thefunds spent by local authorities on service

ANNE WEST & HAZEL PENNELLCentre for EducationalResearch, LSE

ROBERT WESTDepartment ofPsychology, St George’sMedical School

Ònot all schools indisadvantaged LEAshave disadvantaged

intakes; similarly notall schools in

advantaged areashave advantaged

intakes. It is vital forthe Government to

ensure that resourcesgo where the need is

greatestÓ

New Labourand education

spendingThe need to reform

the funding of schools

1070-3535/00/02092 + 05 © 2000 IPPR

NEW LABOUR AND EDUCATION SPENDING 93

provision. All community, foundation andvoluntary schools then receive most of theirfunds via their local authorities, althoughthe principal source of these funds is centralgovernment.

Each year the GovernmentÕs view of theappropriate amount of revenue expenditurefor all local authorities is set out in the Rev-enue Support Grant (RSG) settlement. Foreach service area there are Standard Spend-ing Assessments (SSA) with education beingthe largest service area. Within the educationSSA there are various sub-blocks, with pri-mary and secondary education being thebiggest. Most of the funds are allocated on thebasis of the numbers of pupils on roll inschools in the authority.

However, there is an element designed tomeet the additional educational needs ofpupils in the local authority area. This needis gauged by the Additional EducationalNeeds (AEN) index. This is based on the pro-portions of children aged under 18 from loneparent families or who are dependent onincome support, and the proportion of chil-dren aged under 16 born outside the UK, Ire-land, the US or Old Commonwealth, or whosehead of household was born outside theseareas. To determine the proportion of moneythat will be allocated on the basis of thisindex, a statistical technique called multipleregression is used, which relates the index topast expenditure. The assumption is that pastexpenditure gives a benchmark of the levelof need within an authority. It is not difÞcultto see the obvious weakness of this approach.

A further adjustment to the education SSAis made for population sparsity as schoolsize and home-to-school transport costs arehigher in rural areas. The higher labour costsin London and the South East, comparedwith the rest of the country, are allowed forin an area cost adjustment.

Pupils whose families are in receipt ofincome support are entitled to free schoolmeals and milk and the additional costs asso-

ciated with this entitlement are allowed forin the education SSA. The education SSA isnot earmarked, so local authorities do nothave to spend a speciÞc amount on education.They can spend above or below it, but theGovernment can prevent what it considers tobe excessive increases in Council Tax (knownas capping under the previous Conservativeadministrations).

Whilst the Government distributes fundsto local authorities, local education authorities(LEAs) are responsible for the allocation offunds to schools. LEAs set their own educa-tion budget but then delegate funds to schoolsaccording to their Fair Funding formula. Thisis devised in accordance with government reg-ulations, with resources determined largely onthe basis of pupil numbers.

It is important to note that additional gov-ernment funds are also available for speciÞcinitiatives. These, too, are generally chan-nelled through local authorities, but are ear-marked for speciÞc purposes and are mostlyrelated to the DfEE targets. They usuallyrequire a signiÞcant contribution of fundsfrom the LEA.

The outcome of the present system of edu-cation funding, is that some types of localauthorities, and thus schools, receive moremoney for education than others. This dis-parity has engendered pressure for change.

Reviewing the education SSADuring 1997 and 1998, there were discus-sions between the DfEE, the DETR and var-ious associations representing localgovernment about possible changes to theeducation SSA. Much of the debate concen-trated on a review of the allowance for AEN.The statistical technique of multiple regres-sion was used to construct alternative indicesto measure additional educational needs.Numerous options were considered. Manywould have resulted in a redistribution ofresources away from areas with high levelsof deprivation to areas with lower levels. In

94 NEW ECONOMY

the event, no major changes were made to theeducation SSA. The 1998 Budget Statementexplains:

This year we did a great deal of workÉ on theAdditional Educational Needs of some chil-drenÉ and the Area Cost AdjustmentÉ Butthere was no clear front-runner, either on mer-its or on its support within local government.It would not have been right to take decisionson [these issues] now, when it was clear thatthere were unresolved issues raised by localgovernment which need further work duringthe period of SSA stabilityÉ We also need tolook at the case for more radical reform, to pro-duce something which is clearer and morerobust than the existing system. We need a sys-tem which is more easily understood by thevoter, and accepted as fair and stable.

Whilst the Labour government carried out areview of the funding of school-based edu-cation via education SSAs, it did not addresssome of the most fundamental problems asso-ciated with the present system:

● Out of date expenditure data: data used by theGovernment to determine weightings wasfrom 1990-1. At this time inner LondonLEAs received additional money as a resultof the abolition of the Inner London Edu-cation Authority and the transfer of edu-cation to the inner London LEAs. Theamount was thus artiÞcially inßated.

● Use of past spending to determine the weightinggiven to the AEN index: the flaw in thisapproach is that it assumes that past spend-ing is determined by need. Our researchrevealed good evidence that other factors areparamount. These include: the level of gov-ernment funding; the level of Council Tax tobe levied; the capping level; pressures fromother services (such as social services); polit-ical considerations; debt repayments andthe balances held by the local authority.

● The appropriateness of the Additional Educa-tional Needs index: in examining the rela-tionship between different measures ofdisadvantage and national test and exam-ination results at a local education author-ity level, it was found that the relationshipbetween poverty and low academic attain-ment was extremely high. It was closerthan the current Additional EducationalNeeds index to which this indicator con-tributes. Poverty is thus the key variablethat affects national test and examinationresults and is a better predictor of attain-ment than the Additional Education Needsindex currently used to allocate funds tolocal authorities. Thus poverty itself, not anindex including poverty as a variable, is thecrucial factor.

● Use of census data: census data is used todetermine two elements of the AEN index(those relating to lone parents and ethnici-ty). The main difÞculty here is that the cen-sus is only carried out every ten years andis not responsive to short-term changes inthe characteristics of the population. Anoth-er difÞculty is that census data may notshow the level of need in schools in localauthorities where the school population ismore deprived than the local population.

● The Area Cost Adjustment: this aims to com-pensate local authorities for the higherlabour costs in London and the South Eastof England. However, the distribution offunds on this basis to some authorities out-side London and not to others in closeproximity to them, has been seriously ques-tioned by many commentators.

Clearly there are problems with the methodsused to allocate resources to local authoritiesand schools, with funds not being targetedwhere they are most needed as a result of themethodology used and the indicators select-ed. Before looking at possible ways forward,

NEW LABOUR AND EDUCATION SPENDING 95

the way in which the Government is increas-ingly focusing funds on its key initiativesshould be examined.

Direct expenditure by the Government on specific initiatives

Since it was elected, the Labour governmenthas increasingly directed funds to supportspeciÞc initiatives, designed in many cases tomeet the DfEE targets. In the Þnal year of theConservative government (financial year1996-7) 2.6 per cent of the total expenditureon early years and school education (exclud-ing capital expenditure and credit approvals)was for speciÞc initiatives. In 1998-9 the per-centage was 3.9. Looking speciÞcally at theStandards Fund (funding initiatives such asthe literacy and numeracy strategies, schoolimprovement and the reduction of truancyand school exclusions), there has been anincrease in expenditure of over 80 per centbetween 1996-7 and 1999-00 Ð from £285 mil-lion to £522 million.

Moreover, as a result of the recent Budget,direct grants to all maintained schools will bemade on the basis of the number of pupils onroll. A typical secondary school will receive£40,000 extra Ôto help in the drive to improvestandardsÕ (DfEE, 2000). Additional fundsare also to be made available through a rangeof other government initiatives, includingthe ßagship Excellence in Cities programmeintended to improve the quality of educationin inner cities.

The increasing use of central governmentresources to fund education in a targetedway enables funding to be concentrated onspeciÞed priority areas, so increasing gov-ernment control over expenditure on educa-tion. However, it is not clear what theconsequences will be for local governmenteducation expenditure. As matched fundingfrom local education authorities is requiredfor many government initiatives, it is possi-ble that, at a local authority level, the mainbudget received by schools (through the Fair

Funding formula system) will be reduced. In this case, schools could be left in a posi-

tion where funds for DfEE initiatives areavailable for earmarked expenditure butwhere the main school budget is reduced,with a consequent reduction in the quality ofeducation on offer. This is because not allDfEE initiatives cover teaching staff costs.Even where they do, the funds are earmarkedto be spent in speciÞc ways. This is alreadyhappening in some local authorities and couldhave damaging effects for schools in receiptof large amounts of Standards Fund grants Ðalthough it is possible that it will be offset bythe new direct DfEE grant to schools.

Once again, there are problems with themethods used to allocate resources to schools,with government funds being dependent onmatched funding by local authorities whichdisadvantages schools in spurious ways. So,how should the government distributeresources to schools?

Objective assessmentThe way forward is to allocate on the basis ofan objective assessment of the type andamount of provision required to meet pupilsÕneeds Ð a completely new approach to the sys-tem of resource allocation.

Evidence suggests that authorities withhigh levels of disadvantage need to spendmore on schooling. Whilst an approach thattargets funds on poverty levels (which arestrongly related to low levels of attainment)would be relatively easy to administer, thereare problems in terms of the data to be usedto measure poverty. A school-based measureÐ such as eligibility for free school meals Ð issubject to manipulation. It may also under-record the number of eligible pupils, as thesystem requires parents to confirm theirchildÕs eligibility. On the other hand, a localauthority-based measure does not necessar-ily relate to the school population.

A more transparent measure would be totarget funds on low attainment. As with

96 NEW ECONOMY

poverty, the links between low levels of priorattainment and later attainment are clear, butthere is more transparency about a fundingsystem based on attainment levels.

Clearly it would be important not toreward schools and LEAs for poor perfor-mance Ð the Government would not wish tobe seen to be acting in this way. However, iffunding were distributed to LEAs on thebasis of the characteristics of the aggregateintake to their schools, this would not beproblematic. Moreover, the stakes are so highfor the tests at the age of 11 Ð when leaguetables are published Ð it ishard to imagine there beingincentives for primaryschools to work at reducingpupilsÕ attainment level sothat secondary schools gethigher levels of funding. Thesituation is less straightfor-ward at entry to primaryschool as there are no nation-al tests on entering compul-sory education. Nevertheless,a well-moderated testingprocess would enable a sim-ilar system to be used.

Before making any policychange, empirical research needs to be con-ducted. This should establish how much itcosts to educate children with different lev-els of prior attainment to meet speciÞed andexpected levels of attainment in terms of thenational tests set at ages 7, 11 and 14 (see Westet al, 2000). Once such data is available, afunding approach could be adopted allocat-ing funds to LEAs on the basis of attainmentlevels prior to compulsory schooling andprior to secondary transfer. Funds to schoolswould likewise be allocated, using a similarneeds-based approach. Clearly, the level ofprior attainment will affect the amount andtype of provision necessary.

Whilst an input indicator (of attainment)would be a crucial element in a new funding

system, process information is also essential.We know that poverty is linked to levels ofattainment, but we know little about how. Ifresearch were undertaken, it would be impor-tant to address this issue. Far more knowl-edge about the effects of such difÞculties onthe delivery of education within schools isneeded.

We also need to know more about theways in which concentrations of disadvantageaffect school processes Ð as they clearly affectexamination results. Such questions must beaddressed, but they can only be answered

empirically. Once more evi-dence is available, govern-ment will be in a position tomake more informed choicesabout where and how to tar-get resources in order to max-imise opportunities for allpupils.

This approach would alsoprovide a more objective wayin which to determine levelsof need in schools with dif-ferent intake characteristicsthan the current, much criti-cised, use of multiple regres-sion. It is likely that an

element of judgement would come into play,as it does with the current system.

Moreover, at a time when governmentexpenditure is set to increase year on year,there are sound reasons for making changesto ensure that all authorities gain, but to vary-ing extents. It would be important to ensurethat no LEA lost funds as a result of thesechanges. It would also be vital for schools withdisadvantaged intakes not to lose resources,at a time when they are under increasing pres-sure to improve the academic attainments oftheir pupils and to reduce truancy and schoolexclusions.

Research designed to make the allocationof funds to local authorities more transparentand related to objective measures such as

ÒPoverty is the keyvariable that affects

national test andexamination results

and is a betterpredictor of

attainment than theAdditional EducationNeeds index currently

used to allocatefunds to localauthorities.Ó

NEW LABOUR AND EDUCATION SPENDING 97

attainment, would have implications for thedistribution of resources to schools by localauthorities under Fair Funding. At present,there are many anomalies in the system.Schools that have relatively advantagedintakes continue to beneÞt from a range ofgovernment funding initiatives.

For example, the former grant-maintainedschools (now mostly foundation schools) stillreceive signiÞcant transitional funding Ð overand above that received by communityschools. In addition, schools with selectiveadmissions criteria (either overt or covert),that perform well in the DfEE examinationperformance tables, benefit from fundsdesigned to improve inner-city educationunder the Excellence in Cities programme.They will also beneÞt from the new directgrant announced in the Budget. A school thatis merely located in an inner-city area is notde facto in need of additional resources to off-set the effects of disadvantage.

Finally, we need to ensure that local author-ities spend up to their education SSA. The

education SSA should be seen as the mini-mum requirement, to which authorities canadd. If expenditure is below this level, theintended gains for children in schools will notmaterialise. With a national funding systemin place, along the lines advocated above, itwill be clear whether or not individual schoolswithin LEAs need higher or lower levels ofresources. In our view, it is important thatfunds are not further targeted on schools thatare already Þnancially more secure than oth-ers and/or have relatively advantaged pupilintakes.

In short, not all schools in disadvantagedLEAs have disadvantaged intakes; similarlynot all schools in advantaged areas haveadvantaged intakes. It is vital for the Gov-ernment to ensure that resources go where theneed is greatest. A more redistributiveapproach is clearly required, one which willensure that schools with disadvantagedintakes, wherever they are located, receivesufÞcient funds to meet the needs of theirpupils ●

AcknowledgementPart of the work reported here was supported by the Economic and Social Research Coun-cil (ESRC). The research was funded by ESRC award number R000236559. We would liketo thank the ESRC, the DfEE, the DETR and the local government associations who pro-vided data and other helpful information. The views expressed are the authorsÕ own.