Lift the cap and let them spend

Tony Travers

Tony Travers suggests a cunning escape route for the Government as it faces up to a new spring of discontent. Education could yet provide one of the main battlegrounds for the next general election campaign. The expansion of nursery education, the fate of grant-maintained schools and the funding of higher education will all come to the boil during the next year or so. But overwhelming all of these issues is the question of how much money schools will have to spend in 1996-97. The answer to the question could significantly influence the result of a 1996 or 1997 election.

Remember the spring of 1995. A comprehensive alliance of school governors, parents, teachers, opposition political parties and (from all accounts) the Secretary of State took on the Government and won a decisive moral victory. Can that victory be turned into extra cash for 1996-97?

The annual struggle between Whitehall spending departments and the Treasury is now under way. Unless Kenneth Clarke can be convinced that Labour's idea of a windfall tax on utilities is a good thing, the 1996 budget and spending settlement will be tough. Despite the leaks of Gillian Shephard's concerns about the state of schools' funding, it is just possible that 1996-97 could be a re-run of 1995-96.

As far as schools' funding is concerned, the Government has a number of conflicting pressures to contend with. First, there is the need to keep public spending down. Second, industrial strife among teachers must be avoided during what may turn out to be a general election year. Third, the newly-powerful education alliance must be appeased. It is virtually impossible to imagine a political future in which all three of these objectives could be achieved.

For example, if the overriding objective is to keep public spending down it would be very difficult to single schools' funding out for special treatment. Worse still, money for schools is fed through local government. Convincing the Treasury to add 3 or 4 per cent to existing schools spending will be made doubly difficult because any new cash will have to be put into the Revenue Support Grant. Once handed out in this way, councils will be free to use it as they wish - and not necessarily on education.

Local authorities drew on their reserves in 1995-96. Many would find it hard to do so again next year. So the problem of financing a teachers' pay rise of, say, 3 or 4 per cent in 1996 would be compounded by the need also to fund that part of spending which had been financed in 1995-96 - in a one-off way - by reserves.

So the Treasury will fight to hold local government spending down. In so doing, education will be caught along with other council services. The Chancellor's recent speech stating that public sector pay awards in 1996-97 will once again have to be funded by productivity improvements does not appear to herald a change in policy. Capping is the main weapon in the Treasury's armoury: doubtless it will argue to hold local authority spending down to a 0 to 1 per cent cash increase, as in the current year. If it succeeds, we can expect a re-run of the spring of 1995, but with the real risk of industrial action by teachers.

Avoiding industrial unrest in the classrooms is the Government's second objective. In the light of recent poll evidence showing that there appears to be public support for the teacher unions' campaign for smaller class sizes, the Government would be mad to pick a fight with the newly-respectable teachers.

Teachers have carefully nurtured the support of parents and governors during the past couple of years, to the point where the lobby for schools is far more powerful than ever before. If the Government upsets the teachers it now risks angering millions of parents.

So teachers will have to be given a decent pay rise in 1996. The pay increase of just under 3 per cent in 1995 was significantly higher than local authorities' capped budgets had been allowed to rise. It was this gap between teachers' pay and local government spending caps that led directly to the Government's woes during early 1995. Moreover, if teachers' pay is squeezed too much and for too long, there is a risk that shortages will occur.

At that point Mrs Shephard has a problem: spring 1996 looks just like spring 1995, with teachers' pay likely to outstrip councils' capped spending. Something will have to give, or the Government cannot fulfil its third objective of pacifying parents and governors. It is a regularly-leaked secret that the Education and Employment Secretary is fighting hard for extra cash for the service, but how can the Treasury be fought off?

One possible way forward would be by the Government abandoning local authority expenditure capping. There has been much debate during the last year or so about the desirability of removing authority-by-authority caps. Such Tories as are left in local government believe that capping has lost them votes: the differential between lower-taxing Conservative authorities and the opposition parties has been removed. Without big differentials between Tory and Labour or Liberal Democrat tax levels, Conservative politicians concede it is harder for them to win council seats.

So from the Conservatives' point of view, getting rid of capping would be a big political plus. Moreover, if capping had been abandoned, local authorities would find it far harder to blame the Government if there turned out to be insufficient resources for schools. Gillian Shephard could, with at least some justification, argue that LEA spending decisions were wholly a matter for them. The Government could sit on the sidelines during any battle over the adequacy of funding for education in 1996-97.

In fact, from the Tories' point of view, abandoning capping next year would offer yet another advantage. Only a handful of LEAs are now Conservative-controlled. If the pressure to fund teachers' pay led council spending to rise by 2 or 3 percentage points more than it would under capping, the highly-geared impact on council tax levels could be dramatic. All over the country, Labour and Liberal Democrat authorities would find themselves having to raise council tax by over 10 per cent. In some cases, increases might exceed 15 or even 20 per cent.

What a wonderful political escape route this would offer the Government. With one bound it would be free of the constitutional odium of capping. It would be able to distance itself from blame for much of the pressure on schools' budgets, while also making almost certain that many Labour authorities would have to raise local tax by large amounts. Tony Blair must be praying that capping is retained. The Treasury will try to keep capping. Recent press reports have stated that so great is the disagreement between John Gummer and Kenneth Clarke that the Prime Minister will have personally to decide whether to drop expenditure limitation.

Nor would abolishing capping completely save the Government's bacon over the adequacy of resources for schools. The public has come to understand that Whitehall provides most of local government's money. If LEAs argue that central grants in 1996-97 are inadequate (which they always do) it is possible that the Government would still be blamed for the lack of resources for schools.

There is no easy way out for the Department for Education and Employment. But abandoning capping does appear to offer a way forward for both schools and the Conservative party. Conversely, the opposition parties and local authorities may privately prefer to keep capping. As someone once said, it's a funny old world.

Tony Travers is director of a research centre at the London School of Economics.

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