An internal market in school services would make a “significant difference to education funding”, raise standards and boost innovation, according to the Institute for Public Policy Research (IPPR).

It argues that the benefits of an internal market would outweigh potential problems which could be caused if schools’ commercial ventures failed.

Labour attempted to boost schools’ commercial activities by giving them new powers to band together to form companies in last year’s Education Act.

Joe Hallgarten, associate director in education at the IPPR, likened the education economy to a leaky bucket with money flowing through it.

If just a small amount of the extra cash promised to schools was retained in the system it “could make a significant difference to education funding,” he said.

“We have nothing to fear from the school-to-school market. For all the talk of ‘earned autonomy’, the best way to liberate yourself from central control is to find alternative, additional income streams,” Mr Hallgarten said.

Currently only a few schools are making money through selling services.

A company run by former staff at Varndean school in Brighton sells software and after-sales support to schools and colleges. The profits, which totalled pound;400,000 in its first year, are shared with the school and other Brighton schools get the software for free.

Critics of market involvement claim that children’s education could be damaged if a company run by a school ran into trouble and that the profit motive works against increased collaboration between schools.

Thomas Telford city technology college is praised by the IPPR for its information technology curriculum package which has made an estimated pound;4 million. But other specialist schools are privately critical of the Shropshire college.