School funding

What the future of school funding looks like under Liz Truss

Despite today's humiliating U-turn, there's still a huge funding black-hole - and public sector spending looks set to take the hit

Despite today's humiliating U-turn, there's still a huge funding black-hole - and public sector spending looks set to take the hit

14 Oct 2022, 15:29

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Slashing public spending was reportedly one of the options on Liz Truss’s table as she scrambled to fill a £45 billion unfunded tax-cuts blackhole that sent financial markets into meltdown. 

But the prime minister pledged on Wednesday that public spending cuts would “absolutely” not happen.

However today, after a humiliating U-turn on some of her mini-budget and sacking her chancellor, Truss now says spending will “grow less rapidly then previously planned”. So what does all this mean for schools?

Former chancellor Kwasi Kwarteng said his mini-budget would drive growth to get the economy back on its feet. 

But the huge tax cuts – worth about £45 billion then – were announced without a plan for what would pay for them. 

The pound fell, interest rates soared and pension funds tottered before the Bank of England intervened with a £65 billion cheque book.

Three weeks later he was sacked, with £20 billion worth of the tax cuts junked. But previous estimates suggested £60 billion needed to be found – so there’s still a huge black hole that needs filling.

Reports have centred on “trimming the fat” in public sector spending as the solution.

Main estimates for Department for Education funding show its budget expenditure limit was £94.8 billion in 2021-22.

But of this, £84.1 billion goes straight out the door to fund schools, colleges and universities. Another £5.6 billion is capital funding for building upkeep – which leaves just £5.1 billion (5 per cent of the whole DfE budget) for any cuts to be made without impacting education spending.

As education is one of only three areas with government funding above £50 billion, it would likely be a target to recoup such big sums.

However, in a surprise move on Wednesday, Liz Truss pledged to “absolutely” not cut public spending.

“What we will make sure is that over the medium term that debt is falling. But we will do that not by cutting public spending, but by making sure we spend public money well.”

Protecting budgets won’t solve woes

Taking her at her word, this means the education pot of cash will be protected in cash terms. But this is still hugely problematic. 

Rampant inflation and rising costs such as energy mean that pot will continue to shrink in real terms – with schools feeling the squeeze.

Take teacher pay. The government had proposed a 3 per cent rise for experienced teachers from this September, before agreeing (after schools had set their budget for this year) to sanction 5 per cent rises.

Schools will be 3 per cent worse off in real terms by the next election than they were 15 years previously, despite the extra cash

This was a reaction to demands for a bigger pay hike to keep up with inflation, with school staff caught up in the cost-of-living crisis.

However, there was no extra cash to fund that two percentage point change. Schools had to absorb the hit from their current budgets.

Core school funding will rise to £56.8 billion in 2024-25 from £44.4 billion in 2019-20, But despite this, the Institute for Fiscal Studies (IFS) says the government will no longer meet its original promise to restore per-pupil funding levels to 2010 levels, when the Conservatives first gained power.

In fact, schools will be 3 per cent worse off in real terms by the next election than they were 15 years previously, despite the extra cash.

‘Top up cash or services will deteriorate’

A major study this week by the IFS tried to work out the real-world implications of not topping up public spending to meet inflation.

If there is no compensation to fund this year’s 5 per cent pay rise and inflation-matching pay rises in 2024-25, staying within existing budgets will cost £60 billion. This could mean a cut of 220,000 public sector staff cut, equal to about 50,000 workers in education, the IFS said.

The report warned Kwarteng “must either top up those spending plans to fund these higher-than-expected pay awards or accept that the quality of public services will (further) deteriorate”.

“This is one of the central fiscal choices for this autumn. Indeed, this could be among the defining decisions of the remainder of this parliament.”

To further complicate, and compound, matters: Truss said in her seven-minute press conference today that public sector spending would now “grow less rapidly than previously planned”.

In the meantime, schools’ woes worsen. Keeping on the recruitment example, the IFS gives a glimpse into why schools are both struggling to recruit and why higher wages are necessary.

The difference between public and private pay is down from 7 per cent in 2011-12 to slightly below zero for 2021-22. The think tank says this is “now less favourable to the public sector than at any point in the past 30 years”. 

(This is based on the IFS’s conditional public-private pay differential, which controls for the fact public sector workers tend to be more educated, older and more experienced).

Reserves and pensions – solutions?

Academy trusts boosted their reserves and surpluses – despite Covid upheaval – in 2019-20, official figures released last year show.

Average academy trust reserves rose by 20 per cent up to £1.15 million. Accounts from last year for some larger trusts suggest such increases held up. So, is there room to soak up pressures?

Unlikely. Many trusts say their increased reserves are down as cash has had to be allocated to rebuilding projects delayed because of Covid. 

This could be among the defining decisions of the remainder of this parliament

Many of those projects have either started or are going ahead, so using those reserves to cover funding pressures would mean shelving vital repair work.

Plus, the reserves in any trusts that did manage to boost their financial health during Covid are being wiped out by soaring energy bills – even with the government’s six-month “guarantee” factored in.

A small-scale government survey suggests gas bills will more than double in some schools under the new price cap – and this was based on older energy costs that have since surged again.

Delta Academies Trust has been quoted new gas prices for next year of more than 500 per cent what they are currently paying. This would cost an additional £7.7 million on utilities a year, as the current price cap ends in April.

The IFS suggests an option could be to make public sector pensions less generous. 

Whereas nearly half of public sector staff received employer pension contributions of 20 per cent in 2021, this was true of just 2 per cent of private sector employees.

Decreasing employee pension contributions alongside a decrease in pension generosity would “increase take-home pay for public sector employees with no change to the costs for their employers”, the report said.

Times are tough for schools. No cash, no teachers and strikes looming.

The bad news is, things don’t look like getting any better. While the tax cut blackhole may be a little smaller, something has to give to fill it – and public sector spending, be it through cuts or a freeze – is looking likely to take that hit.

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