Schools' reserves to ease budget freeze

Local authority leaders are urging ministers to use schools' balances to help fill a pounds 1bn hole in the education budget. One scheme being drawn up would set up a system in which local authorities pooled rich schools' balances to allow poor schools to borrow money against them.

An estimated pounds 600m is held in reserves by schools throughout the country but the amounts vary widely. While some schools are thousands of pounds in debt, others have up to pounds 500,000 squirrelled away.

Education ministers fear that the Government's refusal to abandon the Conservatives' public spending targets for the next two years will make it impossible for them to fulfil their manifesto pledges. However, there were hints last night that there could be more money for education before that time is up.

At the G7 group of nations' summit in Denver, Colarado, British officials said that if the Government's Welfare to Work programme was successful social security budgets might fall next year and that money could be put into the education service.

However the Chancellor, Gordon Brown, squashed speculation that there could be a public spending round later this year. Any shift of resources between departments would come after a full review of government spending, he said. But he predicted: "We can be far more flexible within and across departments as a result of this public spending review."

Meanwhile, ministers will be under pressure this year to do what the Conservatives used to do - use school and local authority balances as an argument against bigger increases in education spending.

Councils are warning that the position will be even worse than it was two years ago when parents and governors took to the streets in protest against education cuts. Around 10,000 teachers were either made redundant or not replaced. Figures in an unpublished report from the Local Government Association show that, while existing government spending plans allow for a rise of only 1 or 1.2 per cent on local government spending next year, an increase of 2.8 per cent will be needed to maintain services and a further 2.5 per cent to keep pace with inflation.

A survey of local authorities shows that they are are spending around pounds 19bn on education this year. They estimate that they need about pounds 1bn more just to stand still. The association calculates that money for capital - this year pounds 422m - will need to more than double if any inroads are to be made into the backlog of building work.

For the last two years, authorities have cut back on social services such as old people's homes to pay for education. They have also raided their reserves. Even so, class sizes have risen.

Graham Lane, of the Local Government Association, said: "The Government has to find a way of funding the teachers' pay settlement this year. Otherwise, the situation will be worse than it was in 1995. It would mean massive increases in class sizes."

He said the money in schools' balances could be used to tide over the education service until more cash was released at the end of the two- year freeze. Under schemes already operating in one or two authorities such as his own, Newham, in east London, the authority holds school balances collectively and allows all schools, whatever the size of their contribution, to borrow against the total.

Authorities would like the system to extended nationwide. But Don Foster, the Liberal Democrats' education spokesman, said: "This would mean asking schools to take a risk now against the very uncertain promise of more money in two years' time. It would be tough on those schools which have deliberately saved money for projects."

Mr Lane said schools should keep some money in reserve but believed that anything over 3 or 4 per cent should be clawed back and redirected to another school.