In a letter to the School Teachers’ Review Body this week, Charles Clarke warned that funding difficulties meant “we are now facing two very tight years”. The Education Secretary restated the need for teachers’ pay to rise with inflation, forecast at 2.5 per cent, until August 2006.

Rises needed to be pegged back, he said, because the cost of shortening the main spine and “normal pay drift” could push the total average increase in wage bills above 3 per cent. Schools with many teachers on the main scale could face considerably higher increases, he added.

Mr Clarke also underlined the need to limit the number of senior teachers moving to point three of the upper pay scale to around a third of those eligible. He wants standards for points four and five to be “even more challenging”.

He also said that, although there was a case in principle for varying pay by region, doing so in practice would create unwelcome new turbulence in school budgets.

Doug McAvoy, National Union of Teachers general secretary, said: “It looks as if Mr Clarke is saying that the reality for teachers will have to be even less than 2.5 per cent or teachers will have to lose their jobs.”

The news came as local government leaders warned of council tax hikes unless the Government provides more cash to meet its pledge to increase per-pupil funding at every school in 20034.

The County Council Network has written to Mr Clarke warning that school deficits from this year’s funding problems could eat up much of the extra funding he provides. Nick Skellett, network chair and Tory leader of Surrey Council, fears taxpayers will have to foot the bill for the pledge with rises of more than 10 per cent.

The Department for Education and Skills has told councils that, to allow a per-pupil rise at every school, they will need to put a ceiling on the funding increase any school can get and accept lower rises in their centralised schools budgets.