Cabinet clash over plan to end schools' local funding

Downing Street advisers are pressing for the Government to take over direct funding of schools, which could spell the end of local education authorities. Two of Tony Blair's senior aides want him to "nationalise" school spending, channelling money to headteachers and governors through a central agency that would "cut out the middle man".

Andrew Adonis, the Prime Minister's adviser on public service reform, and Michael Barber, the head of his delivery unit, believe the change would ensure that the Government's education priorities were met and avoid a repeat of this year's funding crisis in schools. They believe the move could, at a stroke, end growing public hostility to the council tax, because this could cut those by up to 40 per cent.

But the Downing Street proposal has met fierce opposition from cabinet ministers. Gordon Brown, the Chancellor, is worried about the transitional costs, and John Prescott, the Deputy Prime Minister, believes the change would underminethe Government's recent conversion to "localism".

Charles Clarke, the Education Secretary, toyed with the idea months ago, but allies say he is now against the idea.

Opponents of the proposal believe the Government would be blamed for all funding difficulties faced by individual schools. "You can't run every school from Whitehall," said one minister, who predicted that the Cabinet would block the plan. "We may make some changes but I don't think we will accept the 'big bang' approach. If you got rid of local education authorities you would probably need to reinvent them."

But one aide, who backs the idea, said: "We already get the blame for the funding problems in schools. We might as well enjoy power as well as responsibility." Ministers admit privately they have been slow to realise that council tax has become a political problem.

Mr Brown announced an extra £406m for local councils this month in an attempt to prevent a repeat next April of this year's record 13 per cent average increase. In a letter to cabinet colleagues, Mr Prescott, who is responsible for local government, has said he will not hesitate to "cap" the budgets of high-spending authorities, forcing them to trim big increases.

Yesterday town hall leaders warned they would fight the proposal. Sir Jeremy Beecham, the Labour chairman of the Local Government Association, said: "Local government would be entirely opposed to nationalising education spending. That would make it more difficult to address local needs and circumstances. The present system already makes it hard to move resources around to meet local needs. A centrally funded service would make it even more remote. We need more influence at local level than we have currently, not less."

Opponents of central funding said such a shake-up would create winners and losers, warning that the losers would criticise the Government, reducing the political benefit of lower council tax bills.

The Government has already bypassed town halls by making annual payments direct to every school. These total £800m this year and are worth £50,000 for a primary school with 500 pupils and £90,000 for a secondary school with 700. Local authorities said the growing amount of money from Whitehall "ring-fenced" for particular projects and so not available to meet local priorities is one reason for the steep rise in council tax bills in recent years.

Mr Clarke and Mr Prescott clashed over the financial crisis in schools this spring, which caused a record £2.7bn increase in government spending. Mr Clarke, who accused councils of not passing on the money to schools, asked his officials to look into the idea of a national funding agency but stopped short of announcing one. "This is not part of our agenda," one Clarke ally said.

In a report this month, the Audit Commission called for an overhaul of town hall funding and blamed ministers for this year's rise in council tax.

Because 75 per cent of council funds come from Whitehall, a 1 per cent shortfall in central funding causes a 4 per cent increase in council tax. A review set up by Mr Prescott is considering the balance of funding council services borne by central and local government.