Heads will be forced to federate their schools over the next five years if they are to avoid firing teachers and teaching assistants, Schools Secretary Ed Balls told The TES this week.
Mr Balls warned that individual heads and governing bodies will have their own "choices to make" if they are to protect the frontline from "tougher budgets" as he attempts to find significant savings across the schools sector.
Federating schools locally or cutting staff numbers is the stark choice facing heads and governors, he said.
The Schools Secretary said he will not instruct heads on how to manage their budgets but said the choice will be clear once school budgets have been set.
Mr Balls said: "In the end, the way this (widespread use of school federations) will happen is that we'll have the budget set from 2011 to 2014, and there will be, I believe, rising budgets but tougher budgets than in the past.
"This will mean individual headteachers and governing bodies will have choices to make.
"If they want to keep the one-to-one tuition, which we're guaranteeing in the new legislation, and if they want to keep the extra teaching assistants and teachers - over 120,000 more teaching assistants, 40,000 more teachers - and if they want to keep the smaller class sizes, then they will have to look elsewhere for savings to make their budgets add up.
"If we don't do this (share ideas on how to save) now for next year at the end of this process under pressure in the final weeks before the budget round, headteachers on their own will be thinking `Well, what am I supposed to do?' And that's when they start thinking `Well, what's the easy cut?' The more far-sighted thing to do is to find ways to be more efficient."
The Department for Children, Schools and Families published a consultation document yesterday, Securing Our Future - Using Our Resources Well, which Mr Balls said would "start the debate" on how schools should consider making savings.
The DCSF has identified federations as a key area in which savings can be achieved - for example, using collective buying power to secure better procurement deals.
According to the Department, if schools could replicate the 10 per cent procurement savings currently being made in the private sector, approximately pound;780 million could be reinvested in the "frontline" in schools.
"That is where it will happen," Mr Balls said. "It won't happen by me making an announcement, it will happen by thousands and thousands of heads and governing bodies making their own decisions."
The Normanton MP denied saying in an interview two months ago that he was aiming to save pound;2 billion from the schools budget, but said he believes "substantial" amounts of money could be saved.
"We've talked about schools working together to drive up learning and standards and also to save money but I'm not going to put a number on it and I never have," he said.
"But if you take some of the individual examples we've seen in schools and replicate them across the schools system you could save substantial sums."
The Association for School and College Leaders (ASCL) has been in close dialogue with the Department since Mr Balls announced his plans for schools to make savings, but the union is concerned with the focus on federations.
ASCL general secretary John Dunford said: "It's inconceivable that the Government would be saying that schools cannot continue to work effectively without federating. A federation is a choice to be made for some schools in particular circumstances driven by the need to make improvements or to right a particular local situation.
"It is not a policy that should be driven by the need to save money and it's certainly not a reason to reduce the number of leaders in isolation, although this may sometimes happen."