In a confidential letter sent to Cabinet members and the Prime Minister in the run-up to the November local government finance settlement, Mrs Shephard made a strongly-worded plea for extra spending. She warned that the promise of improved relations with the teaching unions in the wake of Government changes to the curriculum and testing would be put “in immediate jeopardy if we now offer teachers either a provocatively low pay settlement, or acceptable pay levels only at the cost of sharp increases in class sizes.”

The letter, written as part of negotiations over the department’s budget for 1995-6 and leaked to The TES, shows Mrs Shephard’s clear concern about school finances, and her fears that an inadequately-funded pay settlement could undermine her strategy of restoring peace and persuading teachers to implement the curriculum and testing reforms.

“It would be a great pity to lose the ground we have gained recently and face new disruption.”

In her letter to David Hunt, Chancellor of the Duchy of Lancaster and chair of the relevant Cabinet committee, Mrs Shephard warned that up to 10,000 teaching posts could be lost if the education standard spending assessment were to rise by only 0.3 per cent as proposed.

In the event, the Government decided on a 1.1 per cent increase on the 1994-5 education SSA - just 0.5 per cent up on current spending levels. This is not enough either to fund the teachers’ pay award, due to be announced next month, or the cost of the extra 120,000 pupils expected in September.

Both Labour and the Liberal Democrats are likely to seize on the leaked correspondence to renew their attack on Government underfunding. David Blunkett, Labour’s education spokesman, said: “Gillian Shephard has clearly admitted that the Government is going to force up class sizes as a result of the cuts it has imposed on schools. We have been saying this since the Budget and we now have clear confirmation from the pen of the Secretary of State herself.”

Mrs Shephard’s fears about job cuts and increased class sizes are borne out this week by a TES survey of local education authorities in England and Wales which suggests that just 11 councils will be able to afford a pay rise for teachers in line with the current 2.6 per cent rate of inflation.

Teacher unions are now warning that the honeymoon period between the profession and Mrs Shephard could be over and will advise members not to take on the extra work that may result from increased class sizes. Peter Smith, general secretary of the Association of Teachers and Lecturers, said: “If this adds to the workload because of bigger classes we will not expect our members to take it on.”

The TES survey shows that nearly half of all authorities are budgeting for a 2 per cent or less pay increase and are expecting schools to fund the difference. One authority, Barnsley, has told schools for the second year running they will have to fund the pay rise in full themselves while Leeds and Dyfed have earmarked just 0.5 per cent.

Compared to last year, it is estimated that LEAs on average will have to cope with a cut of Pounds 50 per primary pupil and Pounds 194 per secondary pupil.

David Hart, general secretary of the National Association of Head Teachers said: “The situation is a recipe for confrontation. If the Government passes on the consequence of the STRB’s rise to the local authorities and schools we will make it public where the fault lies.”