The rocky road to a National Funding Formula

Education Secretary Michael Gove is right to aim for a National Funding Formula, where schools are directly funded by Whitehall. When it is in operation it will bring greater clarity to school funding, remove unjustifiable anomalies and make it easier to ensure that specific funds like the Pupil Premium get directly to schools in a manner that is fair. But getting there will be a huge problem, and the obstacles en route could derail the policy. Gove will need to model the effects very carefully - and insist that his civil servants produce such models - to ensure that as some schools gain, other schools don't have their budgets cut.

In government, Labour took several steps towards a national formula. Local management of schools was extended so that schools now typically receive 87-90% of all funding (with the remainder for local authority services) delivered through a Dedicated Schools Grant (DSG). The only reason Tony Blair did not go further was because of opposition from both John Prescott and Gordon Brown to the loss of local authority responsibilities. However, while the DSG must go to schools, local authorities have the freedom, in agreement with local heads and governors through the Schools Forum, to impose their own formula on how it is distributed between local schools. In addition, schools have benefited from other funds outside the DSG including formula funding for revenue and capital, money to improve standards and money for specialist schools. The coalition said it plans to wrap these grants into the DSG to create a single revenue pot for schools. The assumption until today had been that this money would be distributed by the local authority according to its own formula. That will still apparently be the case in 2011-12.

And that's where the trouble could start.

The coalition will have at least two years of major funding upheaval at a time when budgets are likely to be almost frozen. In 2010-11, the misguided decision to scrap specialist school and other budgets will see these funds redistributed by local authorities on different formulae, while the first tranche of pupil premium funding will also start to filter through. If the coalition has any sense it will impose a rigid Minimum Funding Guarantee so that school receive at least an extra 1% extra per pupil (jncluding the pupil premium). Otherwise, the whole raft of changes will make Charles Clarke's troubles in 2003-4 seem like a picnic.

Moving to a National Formula a year later will require much greater skill. And while head teachers' leaders may welcome the principle of the NFF, their support will be sorely tested when schools that have done well out of the existing formula start to lose teachers. Put simply, if two similar schools are receiving funding that differs by as much as £1000 a pupil, then any equalisation will require one school to lose £500 for the other to gain £500 at a time of limited funding growth. The only way to make the change will be to freeze the better off school's budget while gradually increasing that of the less well off one. That is much harder in the current climate, as there is little spare money to achieve such growth or fund any damping measures. Changes will also be needed at sixth form level, as colleges get less per student than schools, and there can be no further reason for continuing this anomaly. And then, in inner city areas which currently receive far more for poorer pupils than the maximum pupil premium, will schools see their funding slashed to equalise funding, and how will that affect coalition claims of fairness?

Nevertheless, I'm all in favour of a National Funding Formula. Labour should have introduced one in government. But there will be a very rocky road getting there. And as Sir Humphrey has no doubt advised, it is a very brave minister indeed who tries to introduce one at a time of virtually no spending growth.

This posting also appears at Public Finance.