Almost a quarter of the pound;1 billion extra that ministers believe local authorities should have spent on education last year has been used elsewhere, according to the Government’s own accounts.

Instead of increasing education spending many English councils have chosen to give more cash to other areas, such as social services, or to keep down council tax bills.

The figures contained in the Department for Education and Employment’s annual report suggest that schools have missed out on pound;240 million of extra funding. They undermine ministers’ claim to have increased spending by an average of pound;540 per pupil since 1997. That figure is based on the amount that central government says local authorities should spend on education (known as their standard spending assessment or SSA) rather than what they actually spend.

Although councils set their own budgets in line with local or political priorities, ministers have put pressure on them to ensure that education budgets keep pace with increases in the SSA. But a recent local referendum in Bristol, where residents rejected higher spending on education in favour of lower council taxes, highlighted their dilemma.

During the past few years a majority of councils have spent above wat the Government recommended. In 1999-0, ministers expected councils to spend a total of pound;20.4bn on education but their combined budgets were pound;20.8bn - an overspend of almost pound;400m.

But at a time when overall local authority settlements are still tight, they have taken advantage of an increase in the amount allocated for education to reduce that overspend. By 2000-1, the figure had fallen to less than pound;150m. The number of councils spending below the SSA has also increased from 15 in 1995-6 to 48 last year. During that time the number of local education authorities has increased from 109 to 150.

Ministers have attempted to ensure that announced increases in education spending reach schools by increasing the amount of money given directly to headteachers. Central government spending on schools and early-years education has increased to more than pound;6bn and will be four times higher this year than it was in 1996-7. But local authority spending still makes up around three-quarters of school funding.

A DFEE spokesman said that changes in the way local authority budgets are calculated had “exaggerated” the amount of money lost to education. Mike Grealy, deputy director of finance at the Local Government Association, agreed but admitted that some local authorities have diverted money to other areas.