School funding is set for the biggest shake-up in a generation with a new "equity index" to replace the current decile system from 2021 or 2022.

Education Minister Chris Hipkins says the Cabinet has "agreed to the in-principle replacement of deciles with an Equity Index" - a new system allocating more funds for children with risk factors such as their parents being on benefits.

"This is subject to the results of a widespread consultation with principals and sector stakeholders in 2019, public engagement on the replacement in 2020, and additional funding in Budget 2020 or 2021 being available to allow the Equity Index to go ahead," he said.

The announcement confirms that the Labour-led Government will go ahead with a risk-based funding system which appears to be very similar to a proposal developed by the former National government, which Hipkins put on hold last year.

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The Ministry of Education said the new index "estimates the extent to which each child grows up in socio-economically disadvantaged circumstances that we know to be associated with their likelihood of achieving in education".

It said the index would include:

• Proportion of time the child has been supported by benefits since birth.

• Child has a Child, Youth and Family [Oranga Tamariki] notification.

• Mother's age at child's birth.

• Father's offending and sentence history.

• Ethnicity.

• Youth Justice referral.

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• Mother's and father's average earned income over previous five years.

• School transience.

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The decile system, which has been in place since 1995, allocates about 3 per cent of total school funding to schools based on the socio-economic status of the areas where students live.

In contrast, Hipkins said the new equity index would be based on anonymised data about the family backgrounds of the actual children attending each school, regardless of the socio-economic status of the area they lived in.

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"The methodology has strict measures in place to protect children's privacy," he said.

He said a bigger share of school funding would be based on the new index.

"Currently, 2.9 per cent of resourcing for schools, or around $150 million, is targeted for equity," he said.

Education Minister Chris Hipkins, pictured in Tauranga this month, has unveiled details of a new 'equity index' for schools. Photo / George Novak, Bay of Plenty Times
Education Minister Chris Hipkins, pictured in Tauranga this month, has unveiled details of a new 'equity index' for schools. Photo / George Novak, Bay of Plenty Times

"However, it is clear to the Government that current equity resourcing is not enough for schools to reduce the impacts of socio-economic disadvantage for many of our students. I consider that the Equity Index should be introduced with additional funding to help ensure success for more of these students."

A spokesman said the Government would no longer go ahead with a planned recalculation of school decile ratings for the 2020 school year, and there would now be no change to decile ratings until they are replaced by the equity index.

The previous National Government proposed a "risk-based" funding system paying more for students who had one of four risk factors: a parent who had been to prison; if they or a sibling had suffered child abuse; if their family had relied on a benefit for a prolonged period; or if the child's mother had no formal qualifications.

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Its 2016 Budget began to implement the policy by giving schools an extra $12 million for about one in six students whose parents had been long-term welfare beneficiaries.

The targeted approach meant more than 1300 schools got less money than they would have received if the extra $12m had been allocated on the former decile-based system.

About 816 schools received more, and information on a further 242 schools was suppressed for privacy reasons because fewer than five students were at-risk.

Hipkins said last year that he planned to keep the decile-based system at least until 2020 while he reviewed National's funding formula.

A taskforce led by former school principal Bali Haque recommended last December that funding based on student disadvantage should be doubled from 3 per cent to 6 per cent of total school funding, including funds for teacher salaries.

Government decisions on the Haque proposals are expected in the next few weeks.

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National Party shadow education minister Nikki Kaye said Hipkins had effectively made schools wait two years before confirming that he would implement the new funding system that National had planned.

"National had proposed a Risk Index and had even drafted legislation, which Labour voted down last year, to implement the new system," she said.

"At the time National committed that no school would lose out but the Government has been light on the detail today around specific funding, which will leave some schools wanting greater guarantees around their future funding.

"This is a Government that has been slow to address issues of equity for some of our most disadvantaged students, in some areas it has embedded further inequity through donations policy and learning support facilitators."

NZ Educational Institute president Lynda Stuart welcomed the new equity index and agreed that it "should be introduced with additional funding to help ensure success" for students facing disadvantage.

"The need for extra support for our students is enormous," she said.

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"With current equity, or decile, funding making up just 2.9 per cent of school resourcing, there's a clear need for greater resources to address the issues of inequity."