2020 annual report on education spending in England

In our annual series of reports on education spending, funded by the Nuffield Foundation, we bring together data on education spending per student across the life cycle and provide analysis about the major issues facing different sectors.

In this year’s report for 2020, we update our estimates of spending per student and analyse the challenges facing each phase of education due to the ongoing COVID-19 pandemic. We focus on the medium-term challenges facing providers as they respond to substantial changes in student numbers, as well as the loss of learning and increased inequalities that are likely to have emerged during lockdown.

The challenges facing each sector will be very different and our analysis partly draws on special reports we have already published looking at the financial challenges facing the early years and higher education sectors.

As our special report on the early years makes clear, the main challenge facing the early years is simply remaining open as parental demand remains well below pre-pandemic levels. The widespread closure of settings would represent a significant economic and social cost, particularly if closures are concentrated in certain areas of the country. Evidence suggests that the closure of schools to most pupils during lockdown has led not only to a significant loss of learning but also to a widening of existing educational inequalities. Mitigating these effects will be a major challenge facing the school sector over the next few years. Further education colleges and sixth forms will also face challenges around education catch-up, but may also need to expand to accommodate extra students as apprenticeship and employment opportunities dry up. As our special report on higher education demonstrates, higher education institutions are heavily exposed to financial losses as a result of pension scheme losses, declines in international student numbers and changes in domestic student participation. These calculations are updated in this annual report.

Key findings:

Early years

• Government spending on funded early education and childcare places for 3- and 4-year-olds stood at £3.3 billion in 2019–20 (in today’s prices). This is equivalent to £3,800 per child accessing a place, down almost £100 from its high point the previous year due to a real-terms fall in rate of spending per hour.
• Real-terms spending per hour has been falling since 2017–18; in 2019–20 it stood at the same level as in 2016–17, meaning that the boost to hourly spending alongside the introduction of the extended entitlement in 2017 has been eroded. Spending per hour for the 2-year-old entitlement has dropped even more sharply, falling 9% in real terms between 2018–19 and 2019–20. Most local authorities are due to see another small drop in real-terms hourly funding rates in 2020–21, though the impact of this on providers will be dwarfed by the financial consequences of COVID-19.
• Take-up of the free entitlement remains high, with 93% of 3- and 4-year-olds accessing a funded childcare place. But it has been falling slowly but steadily over the last 15 years, even before the COVID-19 pandemic. Policymakers should consider what factors might be making the free entitlement harder to access or less appealing to families; this is especially important if early education is intended to help level the playing field between children when they start school.
• During lockdown, providers delivering mostly or entirely free entitlement hours were financially well protected by the government’s commitment to continue to fund those hours based on pre-pandemic take-up. But most providers offer a mix of publicly and privately funded hours, so are exposed to financial risk from the steep drop in childcare demand.
• The end or reconfiguration of some of the programmes that support privately funded providers and the reassessment of free entitlement funding in January 2021 mean that providers are much more financially exposed, either to a second lockdown or simply to a rather slow and incomplete return of demand for childcare.

Schools

• School spending per pupil in England fell by 9% in real terms between 2009–10 and 2019–20. This represents the largest cut in over 40 years, but it came on the back of a significant increase in spending per pupil of over 60% during the 2000s.
• Over the 2010s, cuts in spending per pupil were lower in Wales (5%), but similar in Northern Ireland (10%). In contrast, spending per pupil in Scotland rose by 5% in real terms over the 2010s, reflecting extra funding to pay for increases in teacher pay totalling more than 10% over 2018 and 2019. Spending per pupil is highest in Scotland (£7,300), at similar levels in Wales and England (£6,100) and lowest in Northern Ireland (£5,800).
• The government has allocated an extra £7.1 billion for schools in England in 2022–23. This will increase spending per pupil by 9% in real terms between 2019–20 and 2022–23 (as measured against expected general inflation) and near enough reverse past cuts. If we account for expected increases in teacher pay, the real-terms increase in spending per pupil will be lower, at 6%. In any case, spending per pupil in 2022–23 is set to be no higher in real terms than in 2009–10.
• Secondary school spending per pupil in England (£6,000) was about 16% higher than in primary schools (£5,200) in 2019–20. This is down from a secondary/primary funding difference of 30% in 2010–11, partly reflecting large cuts to school sixth-form funding. It also continues a long-run trend, with the funding difference down from over 50% during the 1980s. Whilst empirical evidence shows high benefits to spending at younger ages, it is not clear evidence supports such a dramatic shift.
• The school funding system in England provides greater levels of spending to more deprived schools to help narrow the achievement gap between rich and poor. During the 2000s, the extra funding received by the most deprived schools compared with the least deprived ones grew from 20–25% in 2000–01 to 35% by 2010–11.
• Despite the introduction of the Pupil Premium in 2011, the deprivation funding premium shrank back to 25% in 2018–19. This can be partly explained by faster falls in deprivation inside London and a school funding system that did not adjust to such changes. In the long run, the new National Funding Formula should ensure the funding system is more responsive. However, the new formula will deliver funding increases of 3–4 percentage points less to schools in poorer areas up to 2021. We also see the fastest falls in spending per pupil of 13% for deprived secondary schools outside London since 2010–11. These patterns run counter to the objective of using school funding to ‘level up’ poorer regions.
• Given lost schooling and a likely widening of educational inequalities during lockdown, the government has announced a range of measures to help schools. These include a one-off extra £80 per pupil aged 5–16 and a National Tutoring Programme. Whilst the focus on tutoring is well aligned with empirical evidence, the plans are modest compared with the likely reductions in learning. Only the National Tutoring Programme is targeted at more disadvantaged pupils, making it harder to address the inequalities that have widened during lockdown.
• Faster falls in spending per pupil over the last decade, slower increases under the National Funding Formula, a likely widening of educational inequalities and higher costs associated with higher teacher starting salaries, given that deprived schools are more likely to employ new teachers, all provide a case for greater targeting of funding to more deprived schools.

Further education

• Further education colleges and sixth forms have seen the largest falls in per-pupil funding of any sector of the education system since 2010–11. Funding per student in further education and sixth-form colleges fell by 12% in real terms between 2010–11 and 2019–20, while funding per student in school sixth forms fell by 23%. The latter will have partly driven cuts in school spending per pupil.
• Funding is lowest in school sixth forms and sixth-form colleges. In the 2019–20 academic year, we calculate that funding per student was £4,600 in sixth-form colleges, £5,000 in school sixth forms and £6,100 per young person in further education colleges. Higher funding per student at further education colleges mainly results from a funding system that provides more for students taking vocational or complex courses, as well as to students from deprived backgrounds.
• Since the early 2000s, there have been large falls in spending on adult education. Spending is nearly two-thirds lower in real terms than in 2003–04 and about 50% lower than in 2009–10. This fall was mainly driven by the removal of public funding from some courses and a resultant drop in learner numbers, which fell from 4.4 million in 2004–05 to 1.5 million by 2018–19.
• Part of the fall in adult education spending has been replaced by higher spending on apprenticeships. However, total spending on adult education and apprenticeships combined is still about 35% down on 2009–10 in real terms.
• There has been a large rise in the number of adults (aged 19+) participating in apprenticeships (from 460,000 in 2010–11 to 580,000 in 2018–19). The share of young people (aged under 19) taking apprenticeships was about 5.6% in 2019, about the same level as in 2010 but down on a high point of 6.7% in 2016. 
• There could be a sharp increase in student numbers in colleges and sixth forms in 2020. Population projections imply a 3% growth in the number of 16- and 17-year-olds in 2020 and growth of 13% between 2019 and 2023. The economic downturn itself could then lead to an increase in the rate of participation. In previous recessions, young people’s participation in further education has increased (by 3.8 percentage points during the Great Recession of the late 2000s). Any rise seems likely to be smaller this time around given already high participation in full-time education. However, a fall in apprenticeship or training places of 15–20% could generate a 1.5–2 percentage point increase in the participation rate in full-time education.
• Responding to these changes in participation will be challenging given that providers’ funding is set based on lagged student numbers. The government has already provided an extra £400 million for 16–18 education in 2020–21. This implies real-terms growth in spending per pupil of about 2% based on population forecasts. However, exceptional growth in student numbers could easily erode much, if not all, of this planned real-terms increase in spending per student. The 16–19 funding system does have mechanisms to address significant within-year growth in student numbers. However, this is ‘subject to affordability’ and it is not designed to address significant sector-wide growth.
• Despite additional incentives, training and apprenticeship opportunities for young people are likely to reduce significantly due to the economic downturn and COVID-19 social distancing restrictions. This is likely to be especially challenging for vocational courses that include significant industry placements, which include T levels, which began to be rolled out in September 2020.
• A White Paper on further education is expected in Autumn 2020. The government has already committed to restore public funding for first full Level 3 qualifications for all age groups from April 2021. Further proposals are expected to increase funding for Level 4/5 courses, as proposed in the 2019 Augar Review of post-18 education and funding. 

Higher education

• Long-run government spending on higher education is set to be higher as a result of the COVID-19 crisis. For this year’s cohort of students, we estimate the government contribution to higher education could increase by around 20% – £1.6 billion – under the Office for Budget Responsibility’s (OBR’s) pessimistic scenario for future labour market conditions. Around a quarter of this increase is due to there being around 15,000 extra UK students, while the rest is due to lower expected earnings and employment prospects for the 2020 cohort after they graduate.

• The costs are much higher when we also factor in the effects of COVID-19 on previous cohorts of university students, as their current and future student loan repayments are likely to be lower too. In total, we expect long-run additional spending (or the reduction in student loan repayments) to be as high as £12 billion for university entrants up to the 2020 cohort under the OBR’s pessimistic labour market forecast, and around £5 billion under its central scenario.

• Universities face several risks to their finances, including pension deficits and reduced income from accommodation, conferences and catering. While student numbers appear to have held up for now, universities might still lose income if large numbers of students drop out before completing their degrees.

• By far the largest source of financial risk is staff pensions. Reduced interest rates and depressed rates of return have significantly increased the expected cost of pension promises, further increasing the already large deficit on the main university pension scheme. New deficit figures for that scheme suggest the long-run cost to universities could be as high as £8 billion, double our previous central estimate of around £4 billion. The long-run cost to universities could be reduced by changes to the structure of the scheme or by significant increases in employee contributions.
  
  
• All of these projections are subject to a high level of uncertainty given the unpredictable nature of the COVID-19 pandemic.