Coffee House

Gove to Treasury: let schools borrow!

28 December 2012

For all the good intention of Michael Gove’s school reforms, there have been only a few dozen new schools so far. When I interviewed him for The Spectator earlier this month, I asked if there was much point to all this if the successful schools could not expand (and, ergo, add capacity to the system). Crucially, Academies cannot borrow because the Treasury doesn’t allow it – a relic from the Gordon Brown control freak days. How much of an impediment is this? I didn’t run his answer in the magazine version of the interview as this is a fairly technical point. But as Brown knew, it’s on seemingly dull issues like borrowing powers that can decide the success or failure of public sector reform that he so loathed. Anyway, here’s the exchange.

FN: Even a corner shop can’t expand without the ability to borrow. Is this not a huge, obvious and unnecessary restraint on the expansive creative abilities of the good schools to who you have just given freedoms?
MG: Yes, it is. But because Academy schools are regarded as part of the public sector we can’t allow them to borrow according to the accountancy rules.
FN: Well, change the rules then.
MG: You’re telling me, I’d love to change the rules but I have to accept the fact that these accountancy rules are set by bodies, statistical and other bodies, over which I don’t have control. I think that we should allow Academy schools and other organisations which are essentially social enterprises to borrow but the rules on public sector borrowing overall prevent us at the moment from doing so. It’s a point I’ve tried to address. There are a number of institutions in the UK which exist to safeguard public money. You have the Office of National Statistics, the National Audit Office and the Public Accounts Committee. The ONS say, for understandable reasons, you can’t have or you should not have borrowing which affects the public sector which is off the public sector balance sheet. You can’t be an Enron government, okay…

The whole point is the focus of all these organisations is on, or can be on, inhibiting innovation and preventing experimentation occurring within the public sector in order to drive up standards. They can say: hey, look, we’re responsible for saving money because there’s a risk that if you were to allow the public sector or public sector institutions to borrow in this way, that that would contribute to an increase in public sector borrowing overall which would undermine the confidence that credit rating agencies have in the viability of the government so therefore don’t do it.

And the National Audit Office similarly say, as they said recently, look at all these new Academies! Some have not been absolutely perfect from the word go therefore there is an inherent risk, therefore you should have better regard for public money. The National Audit Office cannot investigate local government and how it spends its money and how it’s failed in particular areas with school, so you get an unbalanced picture of accountability.

Combine that with some of the other constraints on policy innovation, and you find that we have – overall – created is an inbuilt culture of risk aversion in the British political system and the British political culture. Whenever anyone tries to do anything different, then there are always a group of institutions, a chorus of critics and an opposition all ready to denounce a change before it has had a chance to succeed,

If you’ve got an organisation like Harris which has proven itself, [allowing it to borrow] should be a no-brainer. There has to be a way, I believe, of saying: these are reputable organisations which have had a transformative effect on children’s education, treat them like grown-ups.

It was Brezhnev who observed that the public sector shies away from innovation ‘like the devil shies away from incense’. Gove is saying, in effect, that the Treasury’s borrowing laws (policed by all of these institutions) reinforce these stifling instincts. To give borrowing power to school chains of a certain size is a fairly easy change for the next Budget. And given the potential of England’s education sector to blossom into an education industry, there’s every incentive to do so,

Sure, letting schools borrow involves an element of risk. But not letting them borrow risks the supply of schools failing to keep up with the increasing demand – which is arguably a greater risk.

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Show comments
  • Mike Stallard

    I was there when Michael Gove, sitting next to Rachel Wolf, promised that Free Schools would be allowed. This was in London, just before the 2010 election. He also, in response to a direct question, said that for profit schools could also be arranged by delegation.
    Silly me – I trusted his word.
    There is not one free school. They are all just under the DfE instead of the County. Admissions, teachers, principals, buildings, syllabus, examinations are all strictly controlled by the government directly. Then the there is Ofsted.
    In Sweden in 1992, the government allowed anyone to set up a school and ask for custom. The parents were each given a voucher and the schools ran completely independently. There was no disaster. There was no chaos. Today in Sweden, despite all the canards, misrepresentation and lies, free schools are as normal as comprehensives are here. I checked this with some Swedish friends whom I met on holiday.
    That is why I do not hold a candle for Michael Gove. He is not a genius he is not courageous. He is just another politician.

    • eyebeams

      I love the fact checking process.

  • Colonel Mustard

    Crikey! I’ve stumbled into the New Statesman by mistake. The stench of lefties gathering is unmistakeable.

  • kevinlynch1005

    This is nonsense. The govt should be the borrower as it is the entity that can borrow most cheaply. Secondly, in the absence of sustainable ‘profits’, how on earth can such borrowings be paid back (assuming the academies are non fee paying)? Sure, the academies can get an allocation from central govt and then try to cut costs to the bone, creating an apparent ‘surplus’ from year to year, but how will that affect standards in the future (when required expenditure is instead diverted to loan interest and principal repayment)?! It’s all crazy. These core services, like state-provided education are NOT commercial services, but essential services.

  • Steven Efstathiou

    Didn’t some schools ‘borrow’ money to buy IT equipment before being shafted by the suppliers and then having to have the debts cancelled by the taxpayers? There’s a lesson there, not that Gove will notice…

    • mikewaller

      That was exactly the example that sprang to my mind. There is no doubt that something needs to be done about our less well performing schools. A picture used about the post-Christmas sales inadvertently encapsulated the enormous challenge we now face as a nation. The shot was taken from behind the counter of a London store and showed a crowd of would-be purchasers grabbing for bargains. Fifty years ago, the crowd would have almost exclusively comprised what are now known as “white British”. In this photograph such a creature was scarcely to be seen.

      So it is with the world economy. We have some wonderfully able citizens of all racial backgrounds who are unquestionably world class in their chosen spheres; but we do not have enough of them. No doubt the big is problem is the kind of support many young children get from their parents, a significant minority of whom seem to think that “welfareism” is good for another 50 years or so. It ain’t and means of driving this home to people have to be found,

      Were I Cameron, I would take a leaf out of FDR’s book, institute monthly “fireside chats”, ignore the fantasists that make such a large contribution on this site and drive home to people the fact that the Coalition is a product of the appalling economic situation we are in. I would then seek to explain that the happy days have gone for good and that we had better get used to it.

      As for schools, what is needed is to stick with league tables and OFSTED and take maximum advantage of the number of very talented people who in a very difficult jobs market, can now be drawn into teaching far more easily than in the past. As an obvious corollary to this a much harder line needs to be taken with teachers who are ineffectual and students whose behaviour impedes the learning of others. It may sound corny but we are in a situation comparable with war and need to behave accordingly. Messing about with market models isn’t going to help. Sadly we have too many folk after the quick buck and too many parents who, for whatever reason, lack the skills necessary to play the essential role of demanding client effetively

  • Mr Arthur Cook

    Schools make their income from pupil enrollment. Their income is effectively calculated by the per pupil sum they receive multiplied by the number of pupils they attract. The former is decided by government and subject to no-notice change. A school role might fall dramatically due to a new school opening near by. Who would lend on this basis?
    And if a school goes bankrupt…..where do the pupil’s go? Do parents “shop around” as if they were buying fish fingers?
    Schools are not coffee shops or supermarkets.
    Innovation aversion in the public sector comes from a need to pander to the endless political tinkering and posturing of politicians who ambitions transcend their knowledge.
    As we move from the “mid-term” towards “the beginning of the end” it is increasingly clear that the “cheeky chappie” at the DfE will leave behind him a few bibles in schools and a system which has been plunged into chaos fermented from a toxic mix of haste, poorly articulated dogma and political opportunism.

    • Rahul Kamath

      I think this article is further evidence that Fraser is a hack.

  • Daniel Maris

    Just demonstrates that if you are going down this (mistaken in my view) road, you might as well invite in the private sector to develop, own and run schools, wtih operating money coming from the state.

    • Rahul Kamath

      Why do you think it is mistaken?

  • Rockin Ron

    Ha! Funniest line is Gove, the expenses fiddler saying “You can’t be an Enron Government…” What this Government has done with the economy is way beyond the dreams of Enron. They make Enron look like an atom compared to the Universe.

  • Fred Kite

    1. A school is not a business, least of all a corner shop.
    2. Would you like to see a school have 5,000 pupils once it has done as you suggest?
    3. You write alot about state education whilst displaying scant evidence of what goes on inside these buildings. How many teachers do you consult/interview when writing about matters educational?
    4. You make the tired and predictable assumption that all who work in state schools must share the views of an ex-Soviet leader. Go and speak to teachers and stop making knee-jerk assumptions based on what you think is happening. There is alot of innovation going on in schools. Go and look.

    • Rockin Ron

      Brilliant response, Fred. We can’t assume FN has any capacity for analysis – he is after all a modern journalist and all that seems to matter is instant reaction, not research.

    • Fraser Nelson

      This is happening in Sweden already: schools are borrowing and being run for profit. Result: the schools run as businesses expanded, taking new schools to communities where demand was greatest. The not-for-profit schools expanded slowly and reluctantly, preferring the easier life of waiting lists. This is not a theoretical discussion. Sweden’s state secretary for education believes the question is whether non-for-profit schools should be allowed, as schools run as businesses have proven the surest guarantor of social justice. Business is not a dirty word in education, and anything has to be better than the current state school setup where the poorest pupils get the worst results.

      • Fred Kite

        I do like the way you keep using Sweden as a model. Look at how much investment there is in schools; look at how much teachers are valued and paid. So we adopt that system and your magazine starts screaming about higher taxes.

        If school pupils costs x, then private company needs to make a profit from that. Either that means less is spent per pupil (because of profit deducted) or the private provider charges the state more per pupil. Result? Same service, less spent per pupil or higher cost to the taxpayer. Can’t wait for 40 plus per class because the private company has to make efficiency savings. At the same time, what are the odds that directors of these firms (ex politicians and spads) see their pay rocket?

        Before you add that government will ensure contracts do not allow the above, just have a look at how companies ‘competing’ for private sector contracts run rings around civil servants. Think several train operators, PFI et al.

      • Duke of Earl

        Please reply to my point above on moral hazard Fraser.

  • Davey12


    The problem is we have millions of little commies who do not give a shit about capitalism, about it collapsing. We have many middle class, Islington commies. They will borrow without a care in the world. They will expect the state to pay back. If a school closes because of this they will blame the Tories, Grove, Capitalism on and on.

    This is such a bad Idea.

    Show’s how out of touch the Tories are with the hatred they face.

  • Harold Angryperson

    An alternative longer-term policy might be to reduce the demand for school places…

    • Davey12

      Why do we have such demand?

      That will make us racist. We have to keep paying higher and higher taxes for new schools, hospitals, welfare and benefits.. We have to keep creating more and more jobs.

      Only when it collapses can we have a re-think.

    • Tishri

      The King Herod approach?

  • Duke of Earl

    Actually Fraser the reason MG stated earlier in the piece is the exact reason why the schools shouldn’t be allowed to borrow, as they won’t bear the cost if they go bust (realpolitikhome is spot on).
    The solution for this is to privatise/mutualise schools so that the owners bear any risk and not the taxpayer. Then if the govt insists on publicly funding pupils, they can do so by a voucher system that follows the pupil and not the school. This would create an effective market for pupils and gives parents choice.

    • Rahul Kamath

      Your recommendations seem very sensible generally. But how do you ensure that every student gets educated? What happens if a private/ mutualised schools industry creates less supply for places than there is demand? I doubt we would see these imbalances at the macro-level but they are likely to occur at the micro level (no places at the neighbourhood school, free spots at the primary school level but not in the 6th form).

      I’d suspect that demand has a lot of structural short term changes (new families move into neighbourhood etc.) whilst supply is fairly inelastic. In the public sector this is handled by reducing quality (increased class size). But a private sector school would not have incentives to do that.

      • Duke of Earl

        I’m not sure you’ve thought this through. Any economist knows that when there is demand, producers I.e. private school providers, will move to fill that demand. If there is excess capacity, they withdraw from the market. Private institutions are also a lot more nimble that the DfE.

        Your last point makes no sense. If there is oversupply in the short term, private schools will have every incentive to fill their schools. Like I said, they would be paid PER PUPIL. Same fixed costs but higher sales=profit.

        • Rahul Kamath

          Hmm, I could say the same about you.

          The point I’m trying to make, possibly poorly expressed, is that there will be short term imbalances. Possibly private schools would take the position you suggest of simply increasing spots (marginal cost 0, marginal revenue large). They could also have sold their product to parents as ‘only X number of students per class’ which would not allow them to expand on a whim.

          Yes private schools are likely to be more nimble than the DfE. They will certainly do better at making their product more market responsive (again this can be problematic – we don’t know whether grade inflation would be higher in private schools).

          But they also would have multiple priorities/ success outcomes vs. the DfE which simply looks to enroll and educate all children within their budget. Therein will problems arise.

          • Duke of Earl

            There are already imbalances in the system with zero local accountability. The products that private schools sell is a good education if they fail to deliver, parents won’t go there and the providers go bust. Unlike the current system where no one is ever held responsible for poor schools.
            Don’t pretend like this would occur in a vacuum. After all we already have private schools in the UK which are excellent. An international league table of private schools put the UK at #1 in the world! These schools have no issues prioritising the education of pupils while still making a healthy profit.

            • Mr Arthur Cook

              Does your ignorance know no bounds!
              We have private schools which are far from “excellent”.
              The “excellence” in outcomes comes from the fact that they select their pupils.
              Many private schools DON’T “make a healthy profit” …. they are corrupt fake charities subsidies by tax exemptions.
              Regarding “zero local accountability”. Why don’t you enroll as a school governor. School governing bodies are sort of local consisting of parents, school staff, local authority representatives and community governors.
              Basically you know nothing about schools or how they are run.

            • Tishri

              But would the voucher that the government provides be expected to cover the cost of an education at a top private school? If so you are talking about a serious amount of public money being put into this system. If not then presumably the vast majority of people will only be able to choose between the same sort of schools that they have now.

        • Mr Arthur Cook

          And this miracle of the market worked for you with a privatised rail network did it?

          • Duke of Earl

            Of course it is easy to pick on individual private failing schools, but if the parents aren’t happy with the quality they can leave. Or the school will lower its prices to match its level of education.
            It is a fact that our state schools are shite and have failed generations. Even non-selective private schools perform better. The only way to fix this is to allow parents to choose. I’m not wholly against state funding for primary and secondary education, but I’m not sure what the issue with private provision is.

            PS- the rail network is not private, it is owned by Network Rail and fares are regulated. It is also heavily subsidised.

            • Mr Arthur Cook

              1. “It is a fact that our state schools are shite and have failed generations”.
              Where do you get such nonsensical “facts” from?
              2. Re. the rail network. But I thought the train I get everyday was provided by a private company which pays dividends to its shareholders. It say it’s owned by the National Express! Certainly these private companies are subsidised and the subsidies flow abroad.

    • Tishri

      But this would only work if there was excess capacity in the school system. If a school with 400 pupils went bust then would there really be 400 spare spaces available in neighbouring schools? Or would only a handful of them get spaces while the others spent months sitting at home while their parents (who would also have to take time off work to look after them) desperately rang around trying to find somewhere, possibly miles away, that would be willing to take them? And you can bet that it wouldn’t be the best schools that would have spaces available, just the ones that nobody wanted to send their kids to in the first place.

  • realpolitikhome

    Not sure letting schools borrow is such a great idea if you look at this a bit more closely. If a cornershop can’t pay back its loan, it goes bust. Tough luck.
    If a school goes bust, surely it’s the government that needs to step in to bail it out. Headmasters might be many things but they’re not exactly selected for their business acumen or on the basis they have an MBA.

    • Mr Arthur Cook

      Stage 1 – Schools get extra funds to bribe them to become academies.
      Stage 2 – The annual funding is then reduced.
      Sage 3 – Academies become bankrupt.
      Stage 4 – Bankrupt academies are taken over by for profit organisations.
      Stage 5 – State vouchers send taxpayers money flooding into the for profit schools.
      Stage 6 – Ex ministers and their “advisers” get juicy directorships on the boards of the “for profit schools” companies.

      We are milked like cows.

  • @SRPercival

    It’s these quangos and red tape that are forcing our schools towards privatisation.

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