The teachers' pay review body will report this week and is expected to recommend rises of between 2.7 and 2.8 per cent on the £12bn pay bill. But Jonathan Aitken, Chief Secretary to the Treasury, last week refused Mrs Shephard's demand for money to fund the award.
However, ministers will also announce this week that they will fund in full pay rises of around 2 per cent for "top people", including judges, senior civil servants and high-ranking military personnel.
Mrs Shephard was said to be "exercised" after her Cabinet battle, in which she got some powerful support, but was defeated by the Treasury.
It is the third year in succession that the Government has refused to fund a teachers' pay award, arguing that the money must come from increased productivity. Local authorities will now have to find the money from their own resources.
But most have set aside enough for only 1.5 per cent and some have budgeted for nothing. The councils are already coping with what they describe as the worst spending cuts for 30 years.which they say will mean the loss of thousands of teachers' jobs.
Earlier during the negotiations with the Treasury , Mrs Shephard warned, in a leaked letter, that 10,000 teaching posts could be lost and that class sizes would "shoot up". But the Treasury said it would set a bad precedent to change last autumn's spending settlement.
MPs are already receiving hundreds of letters protesting about education cuts. Some large secondary schools face cuts of £100,000 in their budgets and governing bodies in Shropshire, Warwickshire, and Merton (south London) are threatening to resign. However, ministers say that councils have an extra 1.1 per cent in cash and this should be enough to allow them to spend adequately on schools and to increase teachers' pay.
They argue that councils can still make efficiency gains and that schools and local authorities have enough reserves to see them through the year.
One minister said councils had windfall savings from earlier reductions in interest rates. Last year's report from the Chief Inspector of Schools said some schools were holding six-figure balances.
While Mrs Shephard's Cabinet colleagues accept that class sizes will rise, they are sceptical of claims that many teachers will be made redundant.
However, Peter Smith, general secretary of the Association of Teachers and Lecturers, said: "Local authorities' incapacity to pay is real. It is misleading to say that difficulties arise from local authorities' incompetence. It is also misleading to suggest that schools have enough in reserve to meet the shortfall. In the past local authorities can be accused of having cried wolf. This year the wolf is real."
Some teachers' unions are already forecasting unrest in the schools, which could include staff refusing to teach classes which have more than a specified number of pupils.
Local authorities will take the brunt of unrest in the schools if they are unable to find the money for the pay award. Graham Lane, education chairman of the Association of Metropolitan Authorities, said that, if Mrs Shephard was unable to fund the award, she should sack the review body for proposing an unrealistic figure. If she could not veto the award, she should resign.Reuse content