The latest Ofsted report paints an alarming picture of what is happening in our schools. The education watchdog claims to have uncovered a widespread over-diagnosis of children with special educational needs, with at least 475,000 pupils wrongly placed in this category. Ofsted says this fixation is distorting teaching priorities and contributing to a culture of low expectations in the classroom.

Still worse, the report suggests that some schools have been wrongly classifying children as a means of boosting their league-table performance and unlocking additional resources from local government.

Ofsted's conclusions have not gone down well with the teaching profession and parts of the educational establishment. The National Union of Teachers has vehemently rejected the the report, calling it "insulting and wrong". Brian Lamb, who examined the special-needs system for the previous government, also questions Ofsted's conclusions, suggesting that schools have simply become better at identifying children with problems, from autism to mild deafness.

In fairness to schools, there is a considerable grey area when it comes to children with particular educational requirements. It is often hard to distinguish between a child who has a genuine learning difficulty and a regular pupil who is badly affected by an unstable home life.

And there is no evidence that the increase in special needs designations is being driven entirely by schools attempting to manipulate the system. Many schools bear the costs of funding the additional help required by special-needs children themselves. That said, there does seem to have been over-diagnosis in recent years. And there is certainly a wide variation in the definition of special needs in different schools across the country.

The special-needs system should be tightened up and simplified, with clearer guidelines handed down to schools on which pupils should qualify for the status. There should also be more focus in schools on the outcomes of special-needs designation, rather than the classification itself. The test of whether the system is working lies in whether the extra resources are helping a child to progress relative to where they would have been without the additional help.

At the extreme end of the spectrum, existing restrictions need to be lifted. It is a disgrace that at the moment so many parents of severely disabled children are forced to fight with local councils to acquire a "statement" of their child's needs which enables them to get the help they require.

Some have suggested that this report provides cover for education spending cuts. In fact, the opposite is true. Ofsted says children classified as having special needs often simply need better teaching and pastoral support. Yet this is an area of the education budget that is already under pressure. The Coalition Government is cutting budgets for one-to-one tuition. That is likely to mean less money for teaching assistants, who provide the kind of supplementary pastoral care that Ofsted is keen on. And these findings bolster the case for the Liberal Democrats' "pupil premium", which would ensure that extra resources follow children from poorer backgrounds through the education system. One statistic that is not in doubt is that pupils presently classified as having special needs are disproportionately from disadvantaged homes.

In the end, this is an argument about classification. No one disputes that a minority of children, whether or not they should be designated as having special needs, require extra attention and a tailored approach to their education. The challenge facing schools and ministers alike is to put the structures and resources in place to ensure that they get it.

* This article originally reported the numbers of children wrongly classed as having 'special needs' as totalling at least 700,000. This figure arose from ambiguities in the OFSTED report, and the accompanying press briefing. In the light of OFSTED's answer to a Parliamentary Question on this issue, it transpires that the OFSTED report's findings were that half of children identified for 'School Action' under the Special Educational Needs [SEN] umbrella, were possibly wrongly classified by schools, but that there was no widespread mis-classification of children identified under the SEN umbrella as School Action Plus. The figures have been altered accordingly in this article.