Conor Ryan: Why money must go straight to schools

Yesterday's Budget will again have been pored over by headteachers worried about balancing next year's books. But budgets no longer tell the whole story. Four months of ministerial arm-wrestling ahead of July's spending review matter much more, and their success will determine spending on schools, colleges and universities until 2008.

This year's negotiations will be tougher than before. Analysis by the Institute for Public Policy Research (IPPR) last week suggested that education spending could increase by just 2.5 per cent each year between 2006 and 2008 - well below than the 6 per cent annual rises the sector has enjoyed since 1999. IPPR chief economist Peter Robinson, who points out that UK education spending now compares favourably with other European countries, thinks all government departments except health (which is promised 7 per cent) will have tight settlements.

But three factors may mean those at the chalk-face faring better than expected. Firstly, the Tories now promise bigger increases for health and education than for crime and defence, and Labour can't let the Tories appear to outspend them. Secondly, it would be hard to justify a big disparity between education and health since Tony Blair has made education his top priority. Thirdly, cuts at the centre - a quarter of civil servant posts are going at the Department for Education and Skills - could allow bigger increases for front-line services.

Moreover, with an election likely next year, education offers good political mileage. The Tories are muddled over their "parents' passport" - a £3,500 voucher to spend on a chosen school. Shadow Chancellor Oliver Letwin suggested last week it could subsidise expensive independent school fees, while Shadow Public Services Secretary Tim Yeo wants to restrict it to state schools and the cheaper end of the independent market. Either way, the scheme faces problems. Nursery vouchers failed to expand places for the under-fives: that took careful local planning. Sufficient school places can't be created by just relaxing surplus-place rules - many good schools have little capacity or desire to expand. So, instead of improving school choice, the passport might increase red tape and transfer state-school money to parents who would pay for private schools anyway.

Labour can make political capital from Tory confusion. But to win the spending debate, the Government must tackle its own vulnerabilities. School spending must be transparent. We now know how local education authorities spend their money, and what proportion goes to schools. But ministers have balked at the logical next step: sending money directly to schools, bypassing local education authorities. A 10th of the funds should still go to education authorities for central units and school buses; the rest should go directly to schools.

Tony Blair's advisers favour this approach. But Gordon Brown and John Prescott oppose it, because rising school budgets have made local-authority spending increases seem more generous, a key weapon in the council-tax battle. During the 2003 education-budget crisis, schools faced hardship as a result of a new formula to distribute council grants. Schools, ministers and councils traded blows; parents were none the wiser. With direct funding, schools' money would not be top-sliced by councils and their budgets could be published online for all to see.

Other changes might improve front-line services within a tight overall settlement. Means-tested charging for childcare and school transport, as well as university fees, could allow better services without higher taxes. Fewer targets should avoid skewed spending priorities. A reduction in government-funded organisations that duplicate others or have ceased to be useful would free up much-needed resources.

The general election battle lines are already being drawn. The Tories want to cut overall public spending, though money would be needed to fund the extra cost of their education "passport". Labour supports extra public-service investment, though can't be seen to increase taxes further. Winning this tax-and-spend battle will be crucial to a third Labour term, so ministers must avoid entering next year's campaign facing school and college cuts. Doing so will require some tough and imaginative decisions before July's spending review.

The writer was political adviser to David Blunkett from 1993-2001

education@independent.co.uk