Under proposals to be launched in the new year the Government wants to release some of the #163;500 million held in school reserves so pupils can benefit immediately from new or revamped facilities without putting an extra drain on the Treasury.

Local authorities have already been invited to consider the move, which will be included in new Government regulations intended as the first major shake-up of local management of schools (LMS) since it was introduced in 1988.

At a time when heads and local authorities complain of under-funding, some schools have come under fire for holding huge reserves, either through financial naivety or because they are saving for a major project.

Most schools bank their reserves with their education authority for easy access and to avoid bank charges. Some authorities, including Newham and Haringey in London, use those deposits to lend cash to schools interest-free so they can carry out the work immediately.

A Government source said ministers wanted to encourage schools to pool their resources - although he stressed there was “no question” of compulsion. “A number of authorities are already operating a voluntary system whereby they agree to pool resources from strong balances,” he said.

The council can get high rates of interest from the schools’ combined reserves - interest which it is willing to then divide among them. Normally, an individual school banking with the authority receives no interest.

“For schools, as well as making a contribution to the wider family of schools, it would also often mean they gain benefit from a better return.” But if the school suddenly needed its money it could take it back from the authority, he said.

Graham Lane, education chairman of the Local Government Association and of Newham Council, said schools found inflation eating away the value of their savings because they are not paid interest.

He said of the scheme: “There’s no new money involved and the advantage is we get things done now instead of waiting five years.”

Labour’s wider plans for LMS - first reported in The TES in August - should give schools even greater financial control by making authorities delegate more of the money they get from Government.

Amid Tory criticisms that some Labour authorities are “cooking the books” to retain more money, the Government says it aims to make school funding “more transparent”. It also wants to move authority schools closer to the funding levels and freedom currently enjoyed by grant-maintained schools.

The School Standards and Framework Bill published this month requires every authority to draw up a scheme for funding their schools.

The Government source said: “We are developing a clear set of proposals on a new and more transparent LMS framework. The principle of it is that schools will have greater control. We’re trying to get a system where schools have greater delegation, approaching the level GM schools enjoy.”

Mr Lane said he knew of a GM school with reserves of #163;1 million and a primary school with reserves equivalent to 25 per cent of its annual budget.

Some schools build up reserves because they worry about their budgets being cut, while others save for specific projects. However, the Audit Commission found that many had no firm ideas on how they would spend the money.

A spokeswoman for the National Union of Teachers said that the level of overall surplus has been declining as the system is squeezed. “While it may seem a good idea it could bring difficulties because of the differing needs of individual schools.”