David Blunkett, the Secretary of State for Education, said yesterday that he had not ruled out removing councils' spending powers over education budgets if they diverted cash intended for schools to bureaucracy or other services.
Any such move would represent a considerable tightening of central control over councils, which remain free to set local spending priorities.
Next week Mr Blunkett is expected to name and shame about 25 councils for failing to pass on this year's budget increases for education to local schools. A number of councils will also be censured for holding back too much money for town-hall bureaucracy.
Mr Blunkett said yesterday:"There would be no point in us, as a government, allocating a very large increase in spending on children and schools, only to find it went instead on roads or skating rinks."
He told delegates at the Local Government Association education conference in Nottingham: "It is time to stop the cynicism of every time we do something everybody is automatically agin it. By all means be agin things you really do not like, but be very careful. We don't want a battle over castles in the air.
"Why have I got so much stick for asking local education authorities actually to passport the money that I have spent many days, weeks and months battling for in cabinet? Why is everybody against money allocated for a policy being spent on it? Why is everybody against letting people know the figure for local authority spending?
"When I publish next week tables of how much is being spent on bureaucracy or how much is being spent in schools it's not with malicious intent. It's trying to make sure that what's being done by the best is spread to the rest."
But local authority leaders insisted they were spending more than pounds 500m above government targets on education. They attacked Mr Blunkett for singling out councils for criticism, accusing him of basing his remarks on flawed figures.
Graham Lane, the Local Government Association's education chairman, said: "There is certainly an agenda out there that works to damage local government. They want to feed notions that we are not working in partnership with government. It's all part of an agenda to remove education from local government or centralise more at the Department for Education and Employment. It's a very dangerous agenda.
"Local government is delivering the national government's agenda and this constant naming and shaming is very damaging."
The dispute centres on how councils assess the amount they spend on education, and how much they pass on to schools. Council leaders say their spending on the ground far outstrips government calculations, and insist that schools are getting a good deal.