The council has protested that it spends pound;8.7 million annually on school transport, but receives only pound;4.25 million in grant aid.

In common with other authorities, Highland also believes that current legislation, brought in in 1980, is now outdated: children under eight years of age should live more than two miles from school to be eligible for free transport, with three miles the set distance for older children.

Highland transports 10,000 pupils a day and has 650 private transport contracts as well as public service provision. But there is no statutory requirement to provide transport for pre-school children, which has created problems in rural areas.

In his response, Mr Peacock acknowledged the disparity between the Scottish Executive’s grant and the council’s expenditure but added the refrain which used to infuriate him when he was a leading Highland councillor - that funding support for councils is “unhypothecated”.

It is therefore not earmarked for specific services and “it is for councils themselves to determine how best to use unhypothecated funds within their own spending priorities”. Ministers cannot intervene.

Mr Peacock also dismissed calls for a review of school transport legislation, pointing out again that authorities have discretion in fixing distances.

“Several authorities apply either a one or two-mile reference point to primary pupils regardless of their age,” he said, “and, in some cases, free transport will be provided for lesser distances. Moreover, authorities can now charge parents of non-eligible children for vacant places.”

Local authorities could use childcare strategy funding for pre-school children as well as the regular council grant support. Financial assistance is also available through the rural community transport initiative.

Andy Anderson, Highland’s education chairman, expressed his disappointment, commenting pointedly: “Mr Peacock knows the situation with Highland Council better than most.”

Mr Anderson said: “Most of the money we get from the Executive is already spoken for, and it cannot be shifted from one area to another just like that, or other services will have to be cut.

“Highland Council faces difficulties because of the sparsity of population and long distances which are not fully covered by the funding formula worked out for local authorities.”

A little of the “pound;50 million windfall” reportedly made available to the Executive by the Chancellor of the Exchequer would have helped and he added acidly: “We were looking to the Executive for a lead, not an unnecessary lesson in balancing the books.”

Highland was now “struggling” to fund school transport, Mr Anderson said, and he pledged: “We will not give up on this issue, and we shall be contacting Highland MSPs and MSPs in other areas with similar problems to raise the matter in the Scottish Parliament.”

* The benefits of opting out of school transport and walking to school were stressed by the education and transport ministers this week during Walk to School week. The Executive said regular exercise would improve health and fitness, and reiterated its commitment to make routes to school safer with up to pound;27 million in funding for local projects.