The huge increase in claims for educational support is "an expenditure time bomb", says the report, which was backed with Government money.
The Society of Education Officers, which commissioned and helped to compile the study, believes the situation is reaching crisis point, with 5 per cent of children heading for a regime of expensive extra support by the year 2000.
Spending on special educational needs has emerged as the key problem for town hall finance officials. The Department for Education and Employment estimates that SEN already costs local authorities Pounds 2.5 billion, or 12.5 per cent of their schools' budgets.
The consultants' report says councils are left with a bleak choice: penalising the majority of children still further, or cutting support for the few with problems.
It says councils should consider "re-cycling" - giving financial help to more pupils, but over shorter periods.
"The situation is reaching breaking point," said one of the authors, Mike Nichol, a consultant with Coopers Lybrand and former chief education officer with the Wirral. "We are facing a big moral problem which needs to be sorted out politically."
The report, which is not yet public, comes amid calls from leading SEN figures for a national debate to define "special needs". "It's a nettle that has to be grasped now," said Professor Ron Davie, from the National Association for Special Educational Needs.
Statements of special educational need are formal accounts of a child's educational need and often bring extra money. In theory, they are given to only the most vulnerable 2 per cent or so.
But the number of statements has risen by more than two-thirds since 1986 covering more than 3 per cent of children. The rise shows no signs of abating as parents and schools grow ever more anxious to find additional help. Last year saw a 13 per cent increase.
The Coopers Lybrand report looks at ways councils can come to terms with the huge spending involved.
It says they should reach their own "first principles" definition of who is entitled to extra help, but only in co-operation with schools and parents.
It backs councils deciding to introduce tighter budget controls - a source of controversy with some parents. But it appears some LEAs still don't know exactly how much money they spend on special needs.
The report recommends unified SEN budgets, pointing the way towards single children's departments.
"LEAs should be explicit with schools about how any SEN budget overspends will be managed," says the report. "They also need to be aware of any increases in the average duration of statements or any lowering of the age profile of pupils with statements, either of which will cause special needs expenditure to rise. This is an expenditure time bomb for some local education authorities."
Vincent McDonnell, chair of the study group which wrote the report and principal education officer with Staffordshire, said: "Since 1991 the number of pupils with statements of need has increased by 38 per cent overall. Also, the young people coming forward seem to be getting younger. Not only do we end up with an increase in statements, but the committed costs are longer term.
"If one took the trends, we could find ourselves in the year 2000 approaching 5 per cent."
According to the SEO, authorities are caught between a rock and a hard place. Concerned to allocate money as fairly as possible, they find the new special needs appeal tribunal overturning their decisions - because the law says children have a right to help irrespective of financial problems.
"When a young person gets to the tribunal, it is obliged to put to one side things like LEA policy decisions or agreed custom and practice," said Mr McDonnell.
"The difficulty is that parents are looking to care for the individual needs of their sons and daughters. The LEAs are looking to do the best they can by the children in the authority as a whole."