Tough talk by ministers about clamping down on the amount of money spent centrally by councils on special needs has serious implications for local authorities.
For the Law Lords have ruled that arguments of penury are no excuse for failing to provide services for some of the country's neediest children.
In a crucial hearing in the summer, the House of Lords said local authorities could not escape a legal duty to provide for special needs because of a shortage of resources.
Their ruling came after East Sussex County Council cut the home tuition of a 16-year-old girl suffering from ME from five hours to three hours a week to save money.
The Lords said the council was in an unenviable position - prevented from getting the cash it needed from either central government or local taxation, but added: "To permit a local authority to avoid performing a statutory duty on the grounds that it prefers to spend the money in other ways is to downgrade a statutory service to a discretionary one."
As the cost of special needs continues to spiral, authorities will find themselves caught between the Government and the law courts. Graham Lane, education chair of the Local Government Association, said: "We would certainly have to consider our legal position."
Ministers are determined to curb local authority spending and have targeted the Pounds 2 billion spent centrally by councils on special needs,school transport, strategic management and school improvement - the four areas the Government is considering capping.
The bulk of the money - 60 to 70 per cent - goes on school transport and special needs which has seen an explosion in demand during the past six years.
Levels of statementing have risen by 35 per cent while the proportion of the general schools budget - the amount spent by the local authority on schools - allocated to special needs has increased by a quarter.
A confidential draft report of LEA services by the Audit Commission, obtained by The TES, reveals that individual schools are now shunting the costs of special needs on to councils. They in turn are dipping into money formerly delegated to schools to meet the shortfalls.
The public spending watchdog warned this was "an unsustainable trend in the long term".
The report notes said: "The competitive nature of the performance-driven system that emerged after 1988, is not naturally sympathetic to resource-intensive special needs pupils and this has placed pressure on the relationship with local education authorities."
Councils have called for a meeting with David Blunkett, the Education and Employment Secretary, to discuss the Government's capping proposals.
They predicted less parental choice, warned of cuts in school transport and claimed that capping would limit their ability to meet their responsibilities and raise standards.
No decision has been made on capping though the Government has reserve powers to do so.
Schools are unlikely to be affected directly if the Government decides to implement the caps - the first targeted on a specific service. But they will feel a knock-on effect. Cuts in transport could spell declining pupil rolls for some schools, with the subsequent loss to their budgets.
The Catholic Church said any move to cap school transport budgets would be fiercely resisted. The Church of England said it would be monitoring the effects of any capping "both on services provided by the local authority and funds available to schools".