The coalition government has announced ambitious plans for a new generation of schools inspired by the Swedish model of "free schools", set up and managed by parents and other non-state providers. Creating these new schools will clearly involve a capital cost: acquiring land, building the facilities, and so on. However, under the previous Labour Government's budget plans, net capital investment was due to be halved in real terms across the public sector between 2010-11 and 2014-15, so the coalition already faces tough choices on investment in school buildings - existing or otherwise. Unless the new schools programme is to be very modest, these plans for overall capital spending will have to be revised upwards or the cuts to investment spending elsewhere will be extremely deep.

According to the most recent statistics, the previous government planned to spend £6.5 billion on investment in school buildings in 2009-10, across various programmes including Building Schools for the Future (BSF) and the Primary Capital Programme. This was set to fall to £5.8 billion in 2010-11 as the fiscal stimulus was withdrawn. Labour did not announce departmental spending plans beyond April 2011, but as part of its strategy to reduce the deficit, it did announce a planned reduction in overall investment spending. This reduction, from 2.7% to 1.3% of national income between 2010-11 and 2014-15, represents a cut of roughly 50% in real terms.

Although the coalition government has yet to say whether it will adhere to these plans, neither the Conservatives nor the Liberal Democrats stated that they would accelerate or reduce the planned cuts to capital spending in their election manifestos. To avoid such large cuts to capital spending would require difficult decisions elsewhere, such as new tax-raising measures or even larger cuts to non-capital spending (which are already likely to be significant). The planned reduction over the next four years may therefore be difficult to avoid. How the eventual burden would be shared across departments is unknown, but most departments will come under pressure to make significant cuts to capital spending, education included.

The coalition's plans for new schools therefore seem to add further pressure onto what is likely to be a tight schools capital budget. These plans were put forward by the Conservatives in the run up to May's general election, but neither the coalition programme for government nor the Conservative manifesto explained how many new schools would be created or how the capital costs would be met. A Conservative Party policy paper from 2008 suggested that 220,000 new school places would be created using 15% of the BSF fund. However, this paper was written before the financial crisis in late 2008 and subsequent rise in the deficit; it was also written before the previous government announced plans to cut capital spending over the next four years. If the coalition was to keep to these plans, then 15% of the BSF budget from April 2011 is highly unlikely to be sufficient to create 220,000 new school places.

In response to such funding challenges, the government is likely to try to keep the capital costs of these new schools down. For instance, many of the Swedish free schools used refurbished office blocks and commercial premises, and the coalition government could choose to do likewise. However, while such a move would reduce capital costs, converted premises may struggle to offer the same breadth and quality of facilities as a newly built school. Alternatively, the government could limit capital costs by establishing free schools on the site of the small number of schools that would otherwise have closed, or it could replace existing schools, though the latter would clearly not add any new capacity to the system.

Therefore, the coalition government will probably need to be very modest in its plans for new schools, or use an even greater proportion of the shrinking schools capital budget to fund them, or increase schools capital spending at the expense of other departments already facing a tight squeeze. We will need to wait for further details in the spending review due in the autumn, or the upcoming Budget, to see how the coalition government plans to respond to these challenges.