" I would think that assignments/homework, other exams, general attitude in class, rising number of unexplained/authorised absences would also be good indicators of a downwards slope."
I think you said upthread that your child/ren isn't/aren't yet of school age. That would seem likely, given you appear to believe that YR and Y1 are filled with assignments, homework and other exams which might be used for formative assessment. If there's going to be money attached, that assessment needs to be standardised, as otherwise canny schools will simply say that everyone is behind, and the history of early years standardised testing is not happy.
Let's try again: I asked for an efficient mechanism to assess potential academic shortfalls in early years, which means YR and Y1. FSM works well for that, as parents can and do claim it from the day their children start school (estimates vary as to takeup, but they're all high). It's standardised, it's difficult (not impossible, but difficult) for individual schools to game (about the most they can do is encourage people who are eligible to claim) and the assessment mechanism is cheap, reliable and in place. You're proposing, in place of that, exams and a standardised system of assessment for academic progress. In YR and Y1. The return of KS1 SATS, perhaps.
I thought most people who'd thought about early years education were of the opinion that there was too much testing? If you think the stigma of FSM is too much for your liberal conscience, do you think testing children in Y1 and then marking some of them as needing extra help on the basis of those tests is likely to be less stigmatising? Seriously? Do you think that, say, publishing figures for the number of children eligible for this assistance on a per-school basis would be less divisive that the published numbers for FSM? Why? Schools can't be held to have failed on the basis of their FSM numbers, but they could, and would, be held to have failed if the numbers eligible for targeted help on this basis rose.