Schools Funding in London

School funding reform in England – a planned national funding formula

The Government is planning to introduce a national funding formula (NFF) to calculate the amount of core revenue funding that mainstream schools in England will attract in respect of primary and secondary (but not sixth form) pupils.

Currently, local authority areas get different amounts of money per pupil in the Schools Block element of the Dedicated Schools Grant. They then draw up their own local funding formulas to share the money out between schools, although they have to do this following Department for Education guidance.

The briefing paper School funding in England. Current system and proposals for 'fairer school funding', SN 06702, gives much more background to the proposed changes.

What is the national funding formula (NFF) and how will it work?

This is the formula that will be used to calculate and distribute core revenue funding for mainstream schools in England.

There will be separate formulas to calculate early years funding and high need funding (largely this is for high-cost provision for children with special educational needs and disabilities), as well as for some services still centrally provided by local authorities.

As well as money from the NFF, schools will also get income from other sources, including: the Pupil Premium which will remain outside of the NFF; 16-19 funding if they have a sixth form; early years funding if they have nursery classes; voluntary contributions and fundraising, to varying degrees; and capital funding for maintenance, renovations and new places, where appropriate.

When is the formula due to be introduced?

The NFF is due to be introduced in as a 'soft' format in 2018-19 and a 'hard' format from 2019-20. In 2018-19, the formula will be used to work out how much funding a school should attract. This will then be aggregated up to local authority level and distributed according to a local authority-determined funding formula, as now. From 2019-20 the formula would be used to calculate schools' core revenue funding directly, and the role of the local authority in deciding how funding is shared out would be significantly reduced.

The Government has consulted on the weightings in the NFF, and its phased introduction. The second round of consultations closed on 22 March 2017.

Potential impact of the NFF

The DfE says that as a result of its proposals:

• 54% of schools would be funded at a higher level than in 2016-17. Around three quarters of those gaining would see an increase of up to 5.5% per pupil.
• The remaining quarter of ‘gainers’ are due greater increases and consequently would take longer to attain their ‘target rates’.
• 46% of all schools would be funded at a lower level. For the majority of these schools, the reduction would be between 1- 3% per pupil.

Groups of schools the DfE says are more likely to gain are:

• Schools with low prior attainment.
• Schools with pupils who live in areas with above average levels of deprivation but who have not been heavily targeted through historic funding decisions.
• Schools in areas where funding levels have historically been low – but not every school in historically 'low funded' areas and not every 'low funded' area.
• Small rural schools.

The DfE says that the main group of schools likely to see reductions are:

1. Those in Inner London and some other urban areas that have particularly benefitted from historic funding decisions and where underlying levels of deprivation have fallen over recent years […] The main reason that this formula would reduce funding to schools in these areas is that we are using the most recent data about relative levels of socio-economic deprivation.[1]

Cost pressures and the wider school funding context

On 14 December 2016, the National Audit Office (NAO) published a report on the financial sustainability of schools in England.

This said that mainstream schools, overall, would need to find £3 billion of efficiency savings by 2019-20. This equated to a net real-terms reduction in per-pupil funding of around 8% for mainstream schools between 2014-15 and 2019-20. The NAO reported that:

• The overall schools budget overall is protected in real terms between 2015-16 and 2019-20, but this does not provide for funding per pupil to increase in line with inflation.
• This is partly because pupil numbers will rise significantly over the same period, and partly because schools are facing cumulative cost pressures from things such as pay rises, increased pension and national insurance contributions, and inflation.

Speaking in response to a debate on 25 January 2017, Schools’ Minister Nick Gibb said that core schools funding was being protected for the duration of the Parliament. The Government accepted schools were facing cost pressures.

He went on to say that the funding reforms were not about the overall level of school funding or the cost pressures that schools were facing, but about ending the "postcode lottery" and making funding fairer. Some of the cost pressures had “already materialised” and the DfE was providing high-quality advice to schools on better procurement, and budget management.[2]

Impact on London

Alongside the consultation  the Government published illustrative figures showing how schools and local authorities might fare in two hypothetical scenarios under the proposals:

• If the NFF had been implemented in full this year, 2016-17, without any transitional protections, with funding estimated using 2016-17 pupil data (2016/17 data for academies). The illustrative figure is then compared to a 2016-17 funding baseline. Figures are expressed in cash terms.
• If the NFF were implemented with transitional arrangements (maximum increase of 3% and maximum cut of 1.5% per pupil) as is planned, in the first year of transition, in 2018-19. Again, the figures are based on 2016-17 pupil data (2016/17 for academies). Results are then compared to 2016-17 baseline funding, and again, figures are expressed in cash terms.

These illustrative figures don’t show what any school will get in any particular year, but are intended to inform the consultation and give an idea of how the formula might work.

The maps contained in this briefing summarise the overall change data for constituencies under the first scenario (without transitional protection) nationally and for inner and outer London. These are entirely based on the Government’s illustrations and hence all the limitations of these figures (set out in the briefing paper) need to be considered when interpreting this data.

They clearly show that schools in inner London constituencies are expected to see the biggest fall in funding under the consultation proposals. Those in outer London are more mixed, with some gaining and some losing. Overall schools in inner London would see a 2.4% cut in funding under scenario 1 compared to a 1.0% increase in outer London a national increase of 0.9% and average increases of more than 2.0% in the East Midlands, the South East and the South West.

The NFF proposals result in bigger cuts to funding in inner London than anywhere else in the country because of a combination of factors including changes in the labour cost element of the formula, lower levels of deprivation in the capital and how deprivation is included.

The consultation said[3]:

The schools most likely to face reductions under the proposed formula are those in Inner London and some other urban areas that have particularly benefited from historic funding decisions and where underlying levels of deprivation have fallen over recent years

[…]

The main reason that this formula would reduce funding to schools in these areas is that we are using the most recent data about relative levels of socio-economic deprivation. For example, while inner London schools still have the highest concentration of disadvantaged pupils in the country, the gap is narrowing and London is becoming more affluent overall … These changes have not been reflected by the current funding system, which has ignored such changes in pupil characteristics since 2005-06.

Historically, schools in Inner London and many other highly deprived areas also received a number of targeted revenue funding grants, such as the Excellence in Cities and Specialist Schools Grant … Under the national funding formula, the total available quantum in the DSG schools block will be allocated fairly through the national formula. This means that some funding that was disproportionately or indeed only received by a limited number of areas is now spread consistently and fairly across the country as a whole, in line with the latest data about socio-economic deprivation and levels of need.

Another factor explaining the reduction in funding to London is how area costs are calculated. Historically these used a general labour market approach, assuming that the additional costs of recruiting teachers across the capital would parallel the additional costs of recruiting general workers. However, we know the differentials on teachers’ pay between London and the rest of the country are smaller than general labour market differentials and thus the historical GLM ACA gave higher levels of funding to London than could be justified by the actual costs faced by schools. Moving to the hybrid approach better reflects actual costs, slightly reducing the level of additional funding provided to London.

In a recent report the Institute for Fiscal Studies said:[4]

Funding is diverted from schools with very high levels of deprivation to those with average levels. There is also a shift in funding towards small primary schools and large secondary schools. Schools in inner London are among the biggest losers, with average cuts of around 2.5% in cash-terms per-pupil funding between 2017–18 and 2019–20.

[…]

…the government has set out a new Area Cost Adjustment (ACA) in order to compensate schools that face higher costs of running a school. This new adjustment combines two main elements: (i) actual differences in teacher salary scales across areas and (ii) differences in average wages across areas to account for differences in the costs of employing other staff. This adjustment is applied as a proportional uplift to all funding (except that which is determined on a historical basis, such as actual rates bills). This approach appears more sensible than the old adjustment, which only took account of average wages. The main effect of the formula is a lower uplift for schools in inner London, which is now around 18%, having been about 28% in the old formula.

[…]

Figures 4 and 5 show the average effect across the regions of England for primary and secondary schools respectively, with and without protections. Unsurprisingly, the clear result is again the impact on inner London. In 2019–20, primary funding per pupil in inner London will be 2.5% lower in cash terms than in 2017–18 as a result of the proposed NFF, and secondary school spending will be 2.4% lower. However, this is not the whole story. If the funding protections were not in place, funding per pupil would have fallen by 9.2% and 8.3% in cash terms in primary and secondary schools, respectively. Therefore, after 2019–20, it seems likely that funding per pupil in inner London will continue to be constrained below the national increase until such schools reach the main formula.

[1] Schools national funding formula Government consultation - stage 2, DfE

[2] The short- and long-run impact of the national funding formula for schools in England, IFS (March 2017)

[3] Department for Education, Schools national funding formula. Government consultation - stage 2, 14 December 2016, p52

[4] HC Deb 25 January 2017 cc403-4