Unsupported budget cuts put education at risk, says National Audit Office

13/12/2016

The Department for Education (DfE) is failing to manage the financial situation faced by
schools around the country, according to a new report published today by the National
Audit Office (NAO). This is putting pupil’s educational outcomes, as well as schools’
financial sustainability, at risk.

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The NAO, which independently scrutinises public spending for Parliament, criticises the
DfE for not preparing schools well enough for the sheer scale of cuts needed by 2019-20,
which are estimated to be £3.0 billion (8.0%).

While the Government has protected the overall schools budget relative to some other
public services, budgets will reduce in real terms over the course of this Parliament.  
Despite increasing the schools budget from £39.6 billion in 2015-16 to £42.6 billion
in 2019-20, the number of pupils is also expected to rise over the same period.
Funding per pupil will therefore only rise, on average, by £72 in 2019-20, which represents
a real-terms cut once inflation is taken into account.

The NAO says that although the Department has used benchmarking tools to show that
schools should be able to achieve savings without affecting educational outcomes, officials
do not know whether schools will actually achieve them.  It notes that in the previous
Parliament the Department’s aspiration for schools to save £1 billion in back-office costs failed. 
The NAO has also criticised the DfE for not clearly communicating to schools the “scale and
pace of the savings required” or provided the necessary support to help schools secure
procurement and workforce savings: “Without such support, there is a risk that schools may
already be making poor decisions about how to cope with the financial pressures.”

Emma Knights, Chief Executive of the National Governors’ Association, said: “Funding is now
the biggest concern for governing boards across the country. Unless there is urgent reform an
increasing number of schools will be unable to balance their budgets in 2017 without significant
staffing reductions which will affect the quality of education provided to pupils.  

“Governments must control public spending but the education of our young people is fundamental
to the future prosperity of the country. We urge the government, on behalf of governors and
trustees, to make additional money available for 2017-18 and to get on with reforming the funding
formula.”

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Analysis by the NAO indicates that while the financial position of primary schools has
been relatively stable, secondary schools are already facing challenges. The proportion
of maintained secondary schools spending more than their income increased from 34% in
2010-11 to 59% in 2014-15, and the average size of deficit for those in deficit increased
in real-terms from £246,000 to £326,000 during the same period. For secondary academies,
the proportion spending more than their income rose from 39% in 2012/13 to 61% in 2014/15.

The NAO says that the Department does not know why schools are overspending, or
underspending to build up reserves, or for how long these patterns are sustainable.

Amyas Morse, Head of the National Audit Office, said: “Mainstream schools have to make
£3.0 billion in efficiency savings by 2019-20 against a background of growing pupil numbers
and a real-terms reduction in funding per pupil. The Department is looking to schools to
finance high standards by making savings and operating more efficiently but has not yet
completed its work to help schools secure crucial procurement and workforce savings.

“Based on our experience in other parts of government, this approach involves significant
risks that need to be actively managed. Schools could make the ‘desirable’ efficiencies that
the Department judges feasible or could make spending choices that put educational
outcomes at risk. The Department, therefore, needs effective oversight arrangements that
give early warning of problems, and it needs to be ready to intervene quickly where problems
do arise.”

The NAO also recommended that the Education Funding Agency (EFA), which oversees the
financial management of schools on the Department’s behalf, should intervene earlier and
more often with local authorities when it has financial concerns about maintained schools.
At the moment, EFA has a process for assessing financial risk in academies but “its records
make it difficult to gain assurance that all academies at potentially high risk have been dealt
with consistently.” Nor has the AFE evaluated the impact of its different financial
interventions, whether it has improved academies' longer-term financial sustainability or which
interventions are most effective.

Recommendations:

The NAO makes a series of recommendations for the DfE and EFA. They are:

The DfE should publish, as soon as possible, its assessment of the financial challenges to be
faced by schools between 2015-16 and 2019‑20. The Department should keep this information
up-to-date as its assumptions change.

The DfE should provide clear leadership to support schools and to ensure that all parties
are open about the opportunities to make efficiency savings, are realistic about timetables
and the implications of cost savings, and understand each other’s concerns. The DfE must
take responsibility for supporting schools to meet cost pressures in a financially sustainable
manner, which takes educational outcomes into consideration.

The DfE should move faster to set out how it envisages mainstream schools will achieve
savings of £3.0 billion by 2019-20, together with the information and support schools will
need in order to do so. Experience shows that it takes time to secure savings in a way that
does not damage services. Schools will need time to examine the DfE's guidance on procurement
and workforce in particular, and to develop and implement savings plans.

The DfE should work with the schools sector to gather evidence to assure Parliament
that school spending power can reduce at the same time as educational outcomes are
improved. This should be a core priority for the Department in evaluating its School Financial
Health and Efficiency programme.

The EFA should develop further its approach to oversight and intervention with a renewed
focus on preventing financial failure. The EFA should continue to develop its preventative
approach to identifying academy trusts at risk of getting into financial difficulty and consider
with local authorities whether a similar approach is feasible for maintained schools. As with
the maintained sector, the Agency should intervene when academy trusts are building up
surpluses and develop its understanding of why trusts are doing so.

The EFA should improve its central records to provide assurance around its decisions whether
or not to intervene and use its information to learn from what works. The EFA should use its
new records system to record better its decisions on whether to intervene. It should follow up
and evaluate its interventions and share learning on what works best to address risks to schools’
financial sustainability. The Agency could also develop the analysis we have undertaken about how
trusts’ financial risk has changed over time, coupled with its planned risk projections.

The NAO report, ‘Financial Sustainability of Schools’ examines whether the Department is well
placed to support state-funded schools to manage the risks to financial sustainability.
You can download the full report here

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