The 1996 teachers’ pay settlement puts another piece of the schools finance jigsaw into place. It is a large piece and one that helps to see how all the other bits are likely to fit together. The pay award is, predictably, the most generous since the last pre-election hike and will leave many local authorities and schools awkward budget decisions.

Once again the Government has sought to make its own life as easy as possible by passing the difficult decisions to others. A pay rise of 3.75 per cent (albeit “staged” and therefore costing 3.1 per cent in a full year) will exceed the maximum spending increase most councils have been allowed for 1996-97. A reduction in the number of teachers seems inevitable. Pupil:teacher ratios will rise again.

Although the teacher unions do not see a staged rise of 3.75 per cent as good enough, it will be the most generous increase since 1992 when an incredible 7.8 per cent was pumped into teacher’s pay packets. The 1992 rise was so large that the Government agreed to put an extra Pounds 50 million into local authority funding (on top of the Revenue Support Grant) to help pay for the settlement. It is almost inconceivable that a top-up will be made to the 1996-97 RSG.

Whitehall now controls each local authority’s spending. In addition it sets teachers’ pay. If pay rises by more than overall expenditure, there must inevitably be reductions in teachers numbers. In 1995-96 spending was allowed to increase by between 0.5 and 1 per cent while teachers’ pay rose by 2. 7 per cent. As a result most local authorities and schools came under pressure to reduce teacher numbers.

Although final figures for teacher numbers during 1995-96 are, as yet, unknown, it is almost certain there will have been a slight reduction (probably about 1 per cent of the teacher force) during the year. The all-embracing political reaction to the 1995-96 financial settlement - which brought together a rainbow coalition of governors, teachers and parents - has acted as a powerful lesson for ministers.

The Government’s objectives for 1996-97 were simple. First, there should be no repeat of the 1995-96 middle-class revolution over schools’ funding. Second, there should be no teachers’ pay dispute. Third, local government spending should be kept in check. The solution found to these seemingly irreconcilable aims was to increase education’s share of Standard Spending Assessments (on which RSG allocations and capping limits are based) while giving teachers a real terms pay increase, though not by much more than the permitted increase in council spending. Above-average council tax rises will be tolerated as part of the price for setting 1996 spending caps slightly more generously than those for 1995-96. Inner-London boroughs will probably set the biggest increases, with several well above 10 per cent. The country as a whole will see an average increase of 7 to 9 per cent - three times the rate of inflation. The Labour party leadership’s desire to keep local tax rises to a minimum will put additional pressure on the budget decisions of many authorities.

Local authorities have, as always, been left to juggle with the inconsistency of funding a teachers’ pay rise of 3.1 per cent within budgets capped at levels that are in most cases to be held at 3 per cent or less. The Association of Metropolitan Authorities estimates that 83 out of 119 education authorities in England will - within expenditure caps - be able to raise their spending by 3 per cent or less. 31 authorities will be constrained to 2 per cent or less. Inner London boroughs have been hit particularly hard by the 1996 RSG and capping settlement. In the words of the Treasury’s local government team, quoted in the Treasury Civil Service Committee’s recent report on the 1995 Budget: “What will happen in the local authority sector is for them to decide”.

Some councils will be able to use reserves to avoid reductions in teacher numbers. Individual schools will also - in some cases - be capable of raiding their balances. But, the Treasury Committee also stated that no local authority “has a reserve which may be run down year after year”. Indeed, the all-party committee was pretty circumspect about the Government’s overall spending projections for education in 1996-97, claiming the extra Pounds 770 million to be channelled through local authorities “does not. . . have quite the substance the Chancellor claimed for it. The Government’s intention that the additional money should be allocated by authorities to schools is not one which could readily be enforced”.

The SSAs for services other than education have been held to zero (or close to it) in an attempt to encourage authorities to shift their spending priorities away from social services, fire, highways and “other services” and into education. The fire service and highway maintenance had a zero cash increase in their SSA in both 1995-96 and 1996-97. On the basis of the Government’s priorities, fire stations should be closed and pot holes left unfilled in order to pay for the teachers’ pay increase.

In political terms, the 1996 spending settlement and teachers’ pay deal should just about achieve the Government’s objectives. There will be less pressure to cut teacher numbers than in 1995-96, though there will almost certainly be a small fall. There will be little enthusiasm for industrial action among the unions. Council tax rises will be blamed on Labour and Liberal Democrat profligacy. What happens to the fire service and roads is something the DFEE can quietly ignore. Politically, Mrs Shephard will have pulled it off, just.

Tony Travers is a local government analyst and director of a research centre at the London School of Economics