Level playing field? The implications of school funding

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Level playing field? The implications of school funding by Luke Sibieta, Haroon Chowdry and Alastair Muriel


Despite undergoing significant reform in recent years, the system of state school funding in England remains opaque and poorly understood. Yet the process by which schools are funded has important implications, both for the effectiveness with which funds are targeted and for the incentives schools face to attract pupils and improve quality.

The four chapters of this report discuss the following questions:

  • How have overall levels of public spending on education and schools in the UK evolved in recent years?
  • How does the English school funding system allocate money to individual schools?
  • How redistributive is the school funding system, and to what degree do funding variations reflect educational needs and parental background?
  • What incentives do state schools face to attract new pupils and to improve school quality?

The following summarises these four chapters:

Chapter 1 – Overall trends in spending

  • Education spending in the UK has seen increases averaging 4.3% a year in real terms over the past ten years, with particularly large increases over Labour’s second term of office. However, this rate of increase will slow to 3.4% a year over the period covered by the 2007 Comprehensive Spending Review (2008–09 to 2010–11). Schools spending in England has enjoyed larger increases than education spending as a whole over the past ten years (averaging 6.0% per year in real terms), with particularly large increases in schools capital spending.
  • School spending per pupil has increased by 6.4% a year in real terms under Labour to date, compared with increases averaging 4.7% in the private sector. As a result, state spending per pupil has risen from 50% of the private sector level in 1997–98 to 58% in 2006–07. Gordon Brown promised in Budget 2006 to increase state school spending per pupil to the level seen in the private sector in 2005–06, but there is no timescale attached to this pledge. Even if there were, it would not guarantee a further narrowing of the contemporaneous gap between spending in the state and independent sectors.

Chapter 2 – The current school funding system

While the provision of schools may be the responsibility of local authorities, the vast majority of schools’ funding comes from the central government’s education budget.

  • Changes to the system over recent years have gradually reduced the discretion local authorities have in distributing these funds. This is the result of increased ‘ring-fencing’ (whereby local authorities are forced to spend grants on specific purposes) and increased use of direct payments and grants that must be passed on to schools in full.
  • Other changes have also reduced the discretion local authorities have over school funding in their area, including the Minimum Funding Guarantee, which guarantees minimum increases in funding per pupil for nearly all schools. As well as reducing local authority discretion, the Minimum Funding Guarantee is likely to have made it more difficult to tackle funding inequalities between schools.
  • However, powers over funding decisions have not simply been transferred up from local authorities to central government; schools themselves now have an increasing influence on funding decisions via Schools Forums.
  • The bottom line is that reforms to the system of state school funding have largely ‘hollowed out’ local authorities, with powers being both transferred up to central government and transferred down to schools.

Chapter 3 – How redistributive is school funding?

  • Funding is skewed towards schools with relatively large numbers of pupils from deprived backgrounds. On average, pupils who are eligible for free school meals (i.e. pupils from low-income families) attract over 70% more funding to their school than those who are not eligible. This holds true for both primary and secondary schools, and the funding ‘premium’ that follows FSM pupils has grown over time.
  • This extra funding comes both from local authority funding of schools and from direct payments and grants from central government, but the latter are a disproportionate source of the FSM premium given their share of overall funding.
  • Local authorities only allocate around 40–50% of the extra funding they receive for pupils who are eligible for free school meals towards the schools these pupils attend. In other words, local authorities seem to spread the funding targeted at low-income pupils more widely (i.e. ‘flatten’ it). If local authorities did not flatten extra income in this way, the additional money following a low-income pupil would be roughly 50% higher in secondary schools and more than doubled in primary schools.
  • Under the current system, the amount of funding that schools receive does not respond quickly to changes in their numbers of pupils from deprived backgrounds or with additional educational needs. This persistence of historical funding levels  when pupil characteristics change may  have been exacerbated by the Minimum Funding Guarantee.

Chapter 4 – Incentives and school funding

  • Most money ‘follows the pupil’ in the English school funding system, with the majority of funding directly determined by pupil numbers (weighted by age and background). This pupil-led funding system is combined with a flexible demand side in which parents are in principle free to apply to any school, informed by school performance information that is published each year.
  • But the current system does not live up to the ‘school choice’ programme enthusiastically described in the 2005 White Paper, in which successful schools expand, new entrants compete with existing providers, and weaker schools either improve their performance or else contract and close. Proponents of such schemes argue that they would create strong incentives for all schools to put effort into maintaining and improving their performance.
  • However, rigidities elsewhere in the school system blunt the incentives created by parental choice. Of the three criteria often used to determine whether genuine ‘school choice’ exists (pupil-led funding, supply flexibility and management freedom), the English system probably ‘fails’ on the last two.
  • The supply side appears to be largely inflexible, with little threat of entry from new providers. New school entry is decided by local authorities, which have little incentive to encourage new entry – not least because they are placed under pressure from both the government and the Audit Commission to keep surplus places to a minimum.
  • School management is constrained by binding collective agreements covering many aspects of school operations, including pay and conditions. Where schools (such as Academies) have been given freedom from these agreements, they appear to have responded with innovation and experimentation. However, Academies supply only a tiny fraction of school places in England, and the success of these experiments is as yet unproven.

Read the report.