Current school funding is a “disorganised mess” that has left deprived pupils behind, Policy Exchange concluded this week.

The solution proposed by the think-tank with close links to the Conservatives is a radical one.

It would introduce a national funding formula that reduces the influence of local authorities by sending the proportion of the schools budget they now spend straight to schools.

Schools would also be free to opt out of the national teachers’ pay deal under the plans.

The Tories have already gone a long way to accepting this idea by proposing thousands of new academies that would be outside the deal, and said the “best” comprehensives would get the same freedoms.

But most radical is the recommendation that the party’s pupil premium policy, which attaches extra school funding to disadvantaged pupils, should be funded by redistributing money from schools with wealthier intakes.

With Pounds 3,000 attached to the most deprived pupils, that represents a lot of extra cash for schools serving the most disadvantaged areas.

The think-tank said: “The extra pupil premium money would be typically spent on hiring qualified teachers - offering higher salaries if necessary.”

But would spending most of the extra money for schools with disadvantaged pupils on teachers’ wages help the system as a whole?

Sam Freedman, Policy Exchange’s education director and author of the report, believes it would attract more talented people into teaching.

“Premiership footballers get paid a lot more, but we have got the best league in the world,” he said.

But it may not be such good news for teachers in more than a third of schools which the think-tank says would lose out under its funding system.

Lindsay Wharmby, the Association of School and College Leaders’ funding expert, said it could force them into job and pay cuts.

“Staff costs make up about 80 per cent of school budgets,” she said. “If you are looking to find significant reductions, there is only one way to make savings - through staffing.”

Schools in more affluent areas would face a double hit. Not only would they have less money, but they could lose their best staff to state schools with more financial muscle.

Policy Exchange says the impact of this could be lessened by cutting the pupil premium at primary level and taking cash from local authorities spending more than average on education centrally, and giving it to schools in wealthier areas.

But the report admits: “Even if these measures were introduced, there would still be some serious losers. We estimate it would be in the region of 1,000-2,000 schools.”

For these schools, it suggests setting up a transition fund to phase in the budget cuts over a number of years. But this would cost around Pounds 250m and would reduce the impact of the pupil premium.

The think-tank says much of the cost of the premium would come from the funds now allocated to schools mainly according to pupil numbers rather than deprivation.

It also proposes scrapping the National Challenge school improvement scheme and the education maintenance allowance to help pay for it.

Policy Exchange recommends paying for the premium by cutting:

- School Development Grant Pounds 1.84bn

- School Standards Grant Pounds 1.17bn

- Personalised Learning Grant Pounds 356m

- Other Standards Fund Grants Pounds 426m

- Education Maintenance Allowance Pounds 550m

- National Challenge Pounds 133m

- ContactPoint Pounds 100m

ANALYSIS

William Stewart, TES political reporter

“It’s basically progressive and should be a Labour party idea.”

It’s easy to see what prompted this comment from Fiona Millar, the left-wing education campaigner, about the pupil premium this week.

For a party usually committed to helping the poorest in society, the policy is a perfect fit.

And with Professor Julian Le Grand, Tony Blair’s former public services policy adviser who wrote the foreword to this week’s Policy Exchange report, a keen advocate since 1989, it is not as if it hasn’t been suggested.

But it is the Liberal Democrats and latterly the Tories that have adopted the idea. Beautifully simple, it uses the idea of providing more funding for the most disadvantaged pupils to stimulate a market that should see schools competing to admit them.

But it presents politicians with a tricky choice. They must either find the extra money via tax rises or spending cuts elsewhere, or face having to redistribute existing school funding with the inevitable result that the electorally vital middle classes will lose out.

The Lib-Dems have chosen the former option and say they would fund a Pounds 2.5 billion pupil premium through changes to the tax credits system and non-schools public spending. It believes the money could bring funding for the country’s 15 per cent most deprived pupils up to levels near independent schools.

But despite adopting the pupil premium in principle, the Conservatives have yet to say anything about how much they would spend or where the money would come from.

The internal party pressure for tax cuts mixed with a reluctance to penalise any schools makes their reticence is understandable.

But this week Policy Exchange, the Conservative’s favourite think-tank, concluded that redistribution of existing schools funding is the only realistic option.

If the Tories want to provide schools with deprived pupils with more money, it is schools serving the affluent middle classes that will have to pay for it, the report effectively says.

Painful? Yes. But the market could then work its magic. Elite state schools with wealthy pupils that found themselves at the losing end of the funding regime would have to compete for lucrative disadvantaged pupils, creating more mixed, healthier intakes.

It sounds neat. But the idea of penalising the middle classes is political dynamite and the Tories are adamant they can find another way. But with public borrowing spiralling, if they are serious about their pupil premium, then it is a bullet they may yet have to bite.