The toilet roll market

In the late 1990s, I worked at a school with a formidable Headteacher. Her reputation had been partly forged during the era of Thatcher cuts to school funding. Legend had it that, at the height of the crisis, she had announced at a meeting of staff that from this point on everyone must bring in their own toilet roll as the school could no longer afford to buy it for them. The toilet roll story was evidence of her uncompromising approach to leading the school. The Iron Lady had nothing on this Headteacher.

Of course, saving a few quid on toilet roll wasn’t going to help save much money then, and it won’t now. The action was symbolic. In one sound-bite the extent of the funding problems was laid bare and gave a clear signal to everyone in the school that money was tight; very tight. I imagine that after that point, no-one dared spend money on anything they didn’t absolutely require.

We find ourselves once again in an era of limited school funding. However, the educational landscape has changed considerably in the intervening three decades, or so. Looking at the historical records on school funding, my rational brain tells me that today’s problems are not as severe as back then. Per-pupil funding is much higher in real-terms now than in the 1980s. However, it feels just as bad, if not worse. Even during the great Oxfordshire toilet roll shortage, I don’t recall people losing their jobs.

One possible explanation for why the current financial constraint is so painful for schools relates to the existence of a market system which didn’t exist thirty years ago. The marketisation of the state school system in England has magnified the impact of limited funds and introduced high-stakes competition to access the money that is available.

A ‘market’ for schools began to be created in the late 1980s by:

• opening up admissions so that parents could choose which school their child could attend, rather than be restricted to their ‘catchment’ school
• introducing information on school quality so that parents could make an informed decision, in the form of Ofsted and league tables of exam results
• funding schools increasingly according to the number of pupils attending the school, rather than providing a significant core-funding element.

In making these reforms, the intention was to incentivise schools to perform well, therefore attract pupils and secure higher income as a result.

Just how strong is this financial incentive?

When I took on my current post as Headteacher five years ago, the new Year 7 intake were 30 students below our published admissions number. To consider the impact of this, let’s imagine this happened to a school under the new minimum funding arrangements, due to be phased in over the next couple of years. The new funding formula has a minimum funding guarantee of £4,800 per pupil for secondary schools. A shortfall of 30 students will therefore mean a reduction in funding of at least £144,000 a year, assuming that none of these students attract additional funding such as Pupil Premium. Over the five years to GCSE, this means a shortfall of £720,000. That’s a lot of toilet roll.

Now imagine that scenario in reverse. A school able to attract an additional 30 students will receive at least £144,000 a year extra funding. To teach 30 more students, you need just over one more full-time teachers. A full-time teacher will cost on average about £40,000 per year, therefore the premium attached to attracting these extra students is significant. Equally, the school losing 30 students will have to cut by much, much more than one teacher to balance the books. The incentive to grow school size is significant.

For schools with a Sixth Form the problem is worse. Sixth Form students now attract less income than KS3 or 4 students, about £3,800 each if they study a standard range of A Levels. However, an expansion in Sixth Form student numbers will not necessarily lead to any additional costs. For example, now our small year group (and the one before it) has reached Sixth Form our numbers have inevitably fallen. Our Sixth Form had decreased in size from about 250 to 200 students over two years. However, the number of courses we offer has remained the same as to cut courses would mean even fewer students would want to stay on; it would be largely self-defeating. As numbers rise again, it is equally true that we will not need to expand the number of courses and classes; the additional numbers can be absorbed in to the already small class sizes. An additional 50 students will lead to another £190,000 income, with virtually no additional cost.

These examples serve to illustrate the immense difficulties caused by falling pupil numbers and benefits as schools are able to expand. The relationship between pupil numbers and income is, economists would say, ‘elastic’ i.e. there is an exaggerated change in income in response to small changes in pupil numbers. Schools with a stable intake (those which are over-subscribed) can maintain and predict future income, avoiding the damaging swings which lead to sudden culls of staff numbers. These are schools with good Ofsted ratings and strong results, which in turn are disproportionately schools with privileged intakes, or they are schools with few competitive pressures (such as Grammar schools).

There are a range of factors which make a school more susceptible to changes in pupil numbers. These include schools which:

• Have a high number of disadvantaged students for whom it is more difficult to secure strong exam results
• Are in a geographical area where there are surplus school places
• Are a secondary modern school where the local grammar schools are increasing their intake (usually to gain financial advantage)
• Have recently been rated poorly by Ofsted
• Are relatively small, so that small changes in terms of pupil numbers are proportionately large
• Have a Sixth Form in a competitive market, perhaps near a college with an aggressive marketing strategy

There are also factors which make it more difficult for schools to cope with swings in funding levels, including:

• Having low staff turnover so that staff reductions must be achieved through redundancy rather than natural turnover
• Having limited or no financial reserves meaning the school cannot buffer short-term changes in income
• Having above average per-staff costs (usually related to low staff turnover) which means that expenditure on staff as a percentage of income is already high

These funding arrangements mean that individual schools have very different experiences of the current funding cuts. The reported 8% fall in real-terms spending since 2010 (recently reported by the IFS) may feel ‘uncomfortable’ for one school, whilst tipping another over the financial cliff. Cuts in Sixth Form funding have been even worse (over 20% by some estimates), and this has magnified problems for schools with Sixth Forms even more. In the case of our Sixth Form, the funding cuts coupled with a fall in student numbers has meant income has fallen by over 25% in two years.

The rational way for schools to respond to such incentives is to recruit students. If this means doing so by raising the standard of education then perhaps the system if justified. We know that in any market the response of suppliers to competition will be to increase quality, but also to ensure the product has the reputation of quality. In the case of schools, the two key ‘signals’ of quality are their Ofsted rating and their rank position in league tables. It is no surprise that schools have invested considerable effort in pursuing both these ‘badges’. If these indicators are reliable, like a well-designed ‘Kite Mark’ in industry, then the achievement of a high ranking position would only be possible through the achievement of high standards. However, in reality these indicators introduce perverse incentives for schools to behave in ways not necessarily in the best interests of their students, staff or community. There are signs when schools prioritise ‘perceived quality’ over ‘actual quality’. Staff will begin to complain of everything being done ‘for Ofsted’ rather than in the best interests of students. Students will have their curriculum choices curtailed to ensure that all the Progress 8 baskets are filled. Teachers will be increasingly required to teach revision sessions at lunch, after school and during the holidays to address any sign of students achieving less than the value added data says they should. The ‘Ofsted Outstanding’ banner will maintain its permanent position on the school gates.

It is easy to be critical of such behaviour, but it is a rational response to the incentives and disincentives of the market. You can say that Headteachers should be ‘brave’ and resist such action, instead focusing on the actual quality of education in the school. It is possible to do this, and one would like to believe that the reputation of a school based on the word-of-mouth of parents, happy with what the school provides, should be enough to ensure the school maintains popularity, but to make this leap of faith is possibly closer to insanity than courage.

If you isolate each component of our education system, it is difficult to understand why Headteachers make such a fuss. From Amanda Spielman’s perspective, Ofsted are doing their best to give the public accurate information about the quality of education provided by schools; what could be wrong with that? From Phillip Hammond’s perspective, education spending today is so much higher now than it was twenty or thirty years ago; what’s the problem? Lord Agnew tells us to renegotiate energy contracts, bulk-buy stationary and cut back-office costs to save a few quid. He’s just trying to help. The DfE deliver a more nuanced measure for league tables so parents can make informed choices about which school performs the best in their local area; what is there to hide?

Unless you understand the whole picture, and until you try to run a school within the system we have created, it is difficult to appreciate the feeling of vertigo one gets by walking constantly on a cliff-edge. The stakes of putting a foot wrong are too high.

If we want to apply the economics of the market to education then let’s do it intelligently. Parents need information which is accurate, reliable and nuanced. Schools need incentives to improve which are targeted, proportionate and fair. Headteachers need support as well as challenge, and to feel like the system is designed to help, not hinder. Above all we need an open and honest dialogue between government and the profession about the faults of the current system, and ideas for how to address these.

And if you want to come and talk, bring your own toilet roll.