The Government will seriously undermine the pay structure devised by the teachers’ review body if it fails to fund next year’s pay settlement, a union leader has warned.

Earlier this year Gillian Shephard, the Education and Employment Secretary, accepted John Gardiner’s review body recommendation of a 2.7 per cent pay increase but did not provide the money, saying schools and education authorities must fund it by making efficiency savings.

But the consequence of this, according to David Hart, general secretary of the National Association of Head Teachers, is that schools are so financially squeezed by paying the overall pay increase they cannot afford discretionary payments to retain and recruit staff or reward classroom excellence.

He said: “I will be very disappointed if the review body is not more upfront about the necessity for the Government to find the money. It is very clear that its own pay structure is in grave danger of collapsing if it is not properly funded.”

New figures show a dramatic decline in applications for teacher training, particularly in the shortage areas of maths, science and modern languages. But Mrs Shephard, in her remit to the review body, points to the continuing low level of vacant teaching posts and says that flexible pay systems which allow extra payments are the most effective way of tackling recruitment and retention.

At the teachers’ union conferences during Easter, Mrs Shephard, who met severe criticism over school budgets, turned on the charm and asked the unions to work with her to put pressure on the Government to be more generous. She has argued for an extra Pounds 1 billion but has to vie with Stephen Dorrell at the Department of Health and other spending ministers in discussions with the Treasury. Last year in a letter subsequently leaked to The TES, Mrs Shephard warned a pre-budget committee that thousands of teachers’ jobs could be lost.

This year the Chancellor’s public spending target of Pounds 263.5 billion does not leave much room for manoeuvre. But with the Prime Minister making education a campaigning priority, it would appear that money will be made available. It is so far unclear whether this would be used to honour the pay recommendation or to fund further incentives to schools to opt out.

In a recent newspaper interview John Major said he would like to see all schools become grant-maintained, despite his Education Secretary being against any sort of compulsion. The Government is also preparing legislation which will allow GM schools to borrow against their assets.

David Blunkett, Labour’s shadow education secretary, this week said he would “trump” any offers made by the Tories, but would make sure that anything on offer would be provided equally to all schools. He said he will look into ways local authorities and schools can raise capital on their assets.

In her remit to the School Teachers’ Review Body, Mrs Shephard says that any settlement must have regard to affordability given the “overall state of schools’ and local education authorities’ finance and the level of Education Standard Spending which will be determined later this year.

When the Government refused to fund the review body’s recommendation of a 2.7 per cent increase it argued that many schools and LEAs had reserves and could afford to make up the difference. But Local Schools Information, a local authority-funded organisation, said many have now spent these.

According to analysis by Tony Travers, senior research fellow at the London School of Economics, for the Commons education committee, local authority reserves fell by more than Pounds 850 million between April 1, 1994, and April 1, 1995. Local management of schools reserves, held by LEAs, fell by Pounds 100m during the same period and it is projected a further Pounds 20m will be used before the next financial year.

For example, LMS reserves held by Avon County Council fell from more than Pounds 12 million at April 1, 1994 to just under Pounds 5m a year later. In Barnsley, LMS reserves fell from Pounds 3m to Pounds 1.7m and Wigan from Pounds 4.2m to Pounds 2m. There were some increases in reserves, for example in Cambridgeshire, Staffordshire and Lambeth, but the majority of councils saw them reduced.

These figures show that Government figures about the levels of reserves must be read with caution.

And Mr Travers says that in the wake of the so-called war of words over education funding the Department for Education and Employment, or the Office for Standards in Education, or the Audit Commission, or the National Audit Office, must create an effective database on the use of resources in schools.

Alan Parker, education officer for the Association of Metropolitan Authorities, calculates an 8 per cent shortfall in education spending from last year which does not take into account this year’s increase in pupil numbers and special needs provision. If the review body makes a recommendation of, say, the going rate of 3 per cent, councils will not be able to fund it from “efficiency savings”.

The other option is for the Government to end council-tax capping. There is growing support among Conservatives for this, if only to give Labour councils a free rein and regain reputations for profligacy and high council taxes.

The review body remit, which also asks the teachers’ review body to investigate ways to make pay more attractive for teachers in deprived areas, has been dismissed by the National Union of Teachers.

“It’s been tried in the past and didn’t work,” said Barry Fawcett, NUT assistant secretary. “About 20 years ago there was a plan to designate social priority schools and1 per cent of the pay bill was to be used for retention and recruitment in these schools.

“But it didn’t meet the needs of the schools. Schools in deprived areas need a whole package of measures, including smaller classes and more training for teachers.”

As the unions and the DFEE put the finishing touches to their submissions to the teachers’ review body, other groups are gearing up to lobby MPs and the Government.