An official investigation should be launched into why more than a fifth of academy trusts are building up reserves worth 20 per cent or more of their annual income and “spending less” on their pupils, the National Audit Office has said today.

In a new report published today, the watchdog says that the Education and Skills Funding Agency (ESFA) should investigate the reasons behind academy trusts building up these surpluses.

It adds that there is concern that the trusts are building up reserves instead of spending income on their pupils.

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“The concern in relation to the academy sector is that a sizeable minority of academy trusts are building up substantial reserves, meaning they are spending less than their annual income on their pupils,” the NAO report says. 

In 2019-20, 22 per cent of trusts built up reserves worth 20 per cent of their annual income or more.

School funding: More academy trusts reporting a surplus

The proportion of trusts with a surplus has also risen, with 93 per cent of trusts reporting a cumulative surplus in 2019-20, up from 88 per cent in 2017-18.

The report finds that the school system “has faced considerable financial pressures in recent years”.

While most schools - 88 per cent - were in surplus during 2019-20, the proportion of maintained secondary schools in deficit was 27 per cent, nearly three times the proportion of primary schools in deficit, at 10 per cent. 

And 11 per cent of maintained schools reported a cumulative deficit - up from 5 per cent in 2014-15, the NAO found.

The proportion of maintained secondary schools reporting a cumulative deficit peaked at 30 per cent in 2017-18, falling to 27 per cent in 2019-20.

While the report concludes that school finances have “held up well” over recent years despite funding pressures, the data does not yet reflect the impact of the pandemic on the sector.

For school finances at local authority level, the report shows that the total deficit, for local authorities reporting a deficit, was £675 million in 2019-20 - an increase of £664 million since 2014-15.

And the NAO report notes that while Ofsted has consistently graded 80 per cent of mainstream schools “good” or “outstanding”, both the inspectorate’s research and feedback from stakeholders consulted by the NAO shows that “the steps schools have taken to remain financially sustainable have affected aspects of their provision”, including reduced staffing levels and changes to the support provided to pupils with SEND. 

Gareth Davies, head of the NAO, said: “A financially sustainable school system is vital to the learning and development of the country’s children. The Department for Education implemented a range of sensible programmes in recent years that have helped schools to achieve savings.

“However, until it improves the reliability of its data, it will not be able to make fully informed decisions about the support it offers to schools.”

The NAO also recommends that the Department for Education and the ESFA should investigate why maintained secondary schools are under particular financial pressure and develop performance management systems so it can evaluate its support programmes.

The NAO found that the DfE was lacking in “reliable data” to assess the impact of its financial support.

Meg Hillier, chair of the Commons Public Accounts Committee (PAC), said: “There are worrying signs that this surplus has come at the expense of services. Many schools have been forced to tighten their belts by cutting back on staff or reducing support for pupils with specialist needs.

“Government needs to understand whether this surplus genuinely shows better financial sustainability, and isn’t just a ticking timebomb in the education system which will end up failing children - particularly those with the greatest needs.”

She added that the “true impact” of the Covid-19 pandemic on school finances is still not yet known.

Headteachers described schools’ financial situation as “extremely challenging”.

Geoff Barton, general secretary of the Association of School and College Leaders, said: “Schools have worked very hard to manage their finances under extreme pressure because of the government’s woeful underfunding of the education system.

“This has necessitated making cuts to their provision, and in an increasing number of cases deficits have been unavoidable.”

He added that the government had improved funding since 2020 but that the ASCL remained unconvinced that this would be enough to reverse the damage done, while the financial situation remained “extremely challenging”.

Mr Barton said the pandemic had “heaped more pressure on the sector” because of the government’s “abject failure” to support schools and colleges with additional costs, such as cover for staff absence and introducing new safety measures.

“It is of paramount importance that the government treats education as an investment rather than a cost and that it improves the level of funding for schools, colleges and young people,” he said.

Paul Whiteman, general secretary of school leaders’ union the NAHT, said: “The NAO is right to highlight the very significant cost pressures schools have faced in recent years.

“With many local services disappearing, schools have had no choice but to step in and fill the gap - but this comes at a significant cost.”

Mr Whiteman added that lack of investment in SEND and other associated costs with managing the pandemic were putting budgets “under even more strain”.

“We need to be very careful when drawing conclusions about the apparent financial health of the schools based on budget surpluses alone,” he said.

“The reality is that many schools will simply not be allowed to go into a deficit budget position and will be forced to make cuts before that point is reached.

“With that in mind, it is very alarming that the number of maintained schools facing a budget deficit has doubled. The real question is what have schools had to cut to arrive at this point?”

Kevin Courtney, joint general secretary of the NEU teachers’ union, said:  “Schools have been coping in very difficult circumstances, but the NAO report shows all too clearly that this is not a sustainable way forward.

“Even before meeting the costs of Covid safety with little support from government, schools were struggling to make ends meet with successive real-terms cuts to funding over many years.”

He added that school budgets were often only balanced through staff cuts which damaged provision for pupils.

“The NAO report finds that almost half of primary schools and four-fifths of secondary schools had been forced to cut the number of teachers to balance their books in 2017-18 and 2018-19,” he said.

“These are staggering figures and should act as a wake-up call for a government which, throughout this period, denied there was any issue with school funding.” 

A Department for Education spokesman said: “During the pandemic we have invested millions in additional support for schools and our ambitious education recovery plans, and this report shows the majority of mainstream schools and academies are in surplus despite the challenges faced.

“Core funding for schools and high needs will rise by £4.7bn by 2024-25, going over and above the previous Spending Review settlement for schools in 2022-23 - which provided the largest cash boost for a decade.

“Through this rise, state-funded secondary schools will see an average of £6,150 per pupil in 2022-23, £160 more than this year.”

Leora Cruddas, chief executive of the Confederation of School Trusts, said: “It is really important to understand that trusts are strategic organisations that plan in the long term.

“Reserves accumulated will be allocated to projects including responding to the Covid-19 education recovery effort. We should not assume that the accumulation of reserves is a negative, but rather that it reflects the capacity of trusts to plan strategically.”