Schools which have stockpiled cash will be forced to spend it or hand it back in a ground-breaking move by a West Midlands council.
Sandwell will next month become the first authority to use new powers to claw back school balances and redistribute the money to others.
Schools in the Labour-run authority, where test results for 11-year-olds were the second lowest in England, have balances of more than pound;5 million which are expected to rise to more than pound;7m this year.
The council will pursue schools with surpluses of more than 5 per cent of their budget or pound;20,000, whichever is greater.
Schools whose plans to spend the money are approved by the council will be allowed to keep it. Money will be clawed back from schools whose proposals are rejected and the cash used to help raise standards in struggling schools, or to help those with deficits.
Ian Jones, Sandwell cabinet member for education, said: "This money is provided to educate children, not for sitting in bank accounts. If schools have not got any plans to spend it, it should not be there."
Powers allowing councils to recover money from schools which do not spend it were introduced in the Education Act 2002.
A survey of schools by the National Association of Schoolmasters Union of Women Teachers found that across England and Wales schools' total reserves exceeded pound;1.15 billion in 2002-3.
Brian Clegg, NASUWT assistant secretary, called on other authorities to follow Sandwell's lead.
"In spite of the so-called funding problems of the last year unspent balances have gone up not down," he said.
David Hart, general secretary of the National Association of Head Teachers, said: "This is using a sledgehammer to crack a nut. It attacks the independence of schools. If schools are holding an excessive balance they should be persuaded to spend it."
In last week's Budget, Chancellor Gordon Brown pledged to increase education spending by a further pound;8.5bn by 2008.
But the Government faced fresh accusations of exaggerating the money schools will receive.
An email sent by the DfES to schools said that direct grants averaging pound;55,000 to primaries and pound;180,000 to secondaries are a continuation of existing grants and will be delivered in 2004-5 rather than the following year as set out by the Chancellor.
The cash is a combination of school standards grant and devolved formula capital currently received by schools but increased to cover inflation.
Tony Woodward, head of Athelstan primary in Sheffield, said: "I feel very angry. I regard this as a deception."
A spokeswoman for the DfES said: "Schools should now have had their individual allocations for 2004-5 confirmed by their local education authority.
"The Chancellor's statement shows that for 2005-6 this will increase further."
The National Union of Teachers said the increase - promised by Mr Brown by 2008 - would only make good on previous promises.
Meanwhile, the Public and Commercial Services Union yesterday met Charles Clarke, the Education Secretary, to discuss plans for 1,460 job cuts at the DfES.