Education is set to reap the financial rewards of Labour’s promise to make it the top priority.

The Government is preparing to give local authorities a rise almost double inflation for nursery schools and to lift the cap on council spending.

Ministers will next week unveil rewards for local authorities with good under-fives services as part of their manifesto commitment to give every four-year-old a nursery place.

They will also announce that they are to relax the limit on council spending. This should help make sure that councils spend the Pounds 835 million extra for education announced in the July Budget on their schools.

The cash boosts come as Chancellor Gordon Brown this week unveiled a huge expansion of childcare services. A total of Pounds 300 million is to pay for 30,000 out-of-school clubs over the next five years, providing places for nearly one million children.

Details of the extra money for education have been revealed to The TES and chief education officers by Stephen Byers, the school standards minister, ahead of official announcements on Tuesday.

He said Labour wanted to be able to fund schools according to their needs rather than pupil numbers.

From April ministers will also change the way under-fives services are funded. Currently money is allocated per head of population and this would alter to mirror what is actually available in a borough.

This would mean rewards for councils with good nursery services such as North Tyneside - which includes Mr Byers’ Wallsend constituency - Leeds, Liverpool and the London borough of Ealing.

Authorities with a minimal service, such as Gloucestershire, Essex and Oxfordshire, will be eligible for a grant to support early-years development plans. The money for the grants was set aside by the Conservatives for the nursery voucher scheme.

Previously, cash allocated by Government for under-fives did not have to be spent on them and many authorities used it to either keep the council tax down or to prop up other services.

Mr Byers said: “We want to move to a system where local authorities are rewarded if they provide a good service.

“We are placing great reliance on local authorities. They are going to have a key part to play in raising standards.”

When the Government lifts the cap on council spending, each local authority will be told how much extra money should be available for education.

Ministers hope that the Pounds 835m - taken from Government reserves - will be spent on the day-to-day running of schools. However, it is not ring-fencing the money which will go into the general council kitty and education will have to fight for it.

Some of the hardest battles are likely to be with social services departments which feel that they have been squeezed while education has been protected from the worst effects of cuts.

The relaxation of Government rules on council spending is a crucial test for local authorities. It is an open secret in Whitehall that many senior civil servants are anti-local government and want it abolished.

If councils handle their new financial freedom well, though, their future will almost certainly be assured.

Graham Lane, education chair of the Local Government Association, welcomed the moves and said: “The cash for under-fives means that the promise of giving every four-year-old a nursery place is going to be a reality.”

He cautioned, however, that a pay rise for teachers above 2.5 per cent not funded by Government would spell serious financial trouble for councils. Inflation is currently running at 3.7 per cent.

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