Councils will have to choose between squeezing spending on other services and making teachers redundant.
Ministers say school spending should rise by 4.5 per cent, compared with an increase of 3.3 per cent in overall spending.
Education spending is not ring-fenced, so councillors must decide whether they are prepared to allow larger class sizes or to close old people's homes.
The Government's strategy is to divert the anger of parents and governors - who last year campaigned so vigorously against cuts - away from itself and towards local councils.
Under new rules announced by John Gummer, the Secretary of State for the Environment,Government restrictions on what councils can spend - the cap - will be eased for all councils by between 1.5 and 3 per cent.
Councils which are also local education authorities will be able to break their cap if it is below their standard spending assessment - the amount the Government says they should spend.
Kenneth Clarke, the Chancellor, told the Commons on Tuesday that parents must insist that money intended for education was spent on schools.
But Simon Goodenough, chairman of the National Governors' Council, said: "Governors and parents don't want education to be boosted at the expense of other vital services."
The full picture for schools will not be clear until next spring, when the teachers' pay award is decided. Government policy is that public sector pay rises must be funded out of efficiency savings.
Gillian Shephard, the Secretary of State for Education, hinted yesterday in a letter to the Teachers' Pay Review Body that she expected councils to fund teachers' pay out of the extra pounds 770m announced for schools in the Budget.
Nigel de Gruchy, general secretary of the National Association of Schoolmasters Union of Women Teachers, said the 10,000 teacher redundancies this year could be repeated. "I would expect it to be as last year and I would expect more pressure on class sizes."
Local authorities said last night that about pounds 300m would be taken up by the teachers' pay award. A further pounds 300m will be needed to cover inflation for books, equipment and non-teaching staff costs, while the rest will be taken up by a rise in pupil numbers of around 87,000 pupils.
That still does not take account of the additional costs councils must pay for children with special educational needs and for fitting seat belts to school coaches.
David Blunkett, the shadow Secretary of State for Education, said the Government's proposals meant a reduction in spending per pupil of pounds 41, compared with this year's actual spending. "Gillian Shephard has been trying to make out that education has been a winner in the Budget. With today's piece of the jigsaw unveiled , it is clear she has been a budget loser."
Councils already spend pounds 700m above their standard spending assessment, so any extra money for schools will have to be raised through council tax revenue.
Sir Jeremy Beecham, chairman of the Association of Metropolitan Authorities, said: "The Government appears to be giving us the choice between raising tax locally and taking the blame for that, or not raising it and accepting that services will suffer."
- More about:
- Homes For The Elderly With Nursing Care
- London Metropolitan University
- Social Work