Governing bodies advised to set budgets that may run into the red rather than shed staff have been warned they may face surcharge or have their budget taken over by the local education authority.
The National Association of Head Teachers said governing bodies should not resign en masse or set deficit budgets. Instead they should draw up budgets that could result in overdraft.
David Hart, the union's general secretary, painted two possible outcomes of this action. In cases where schools go over their budget, this sum is deducted from the following year's settlement. Mr Hart said the next financial year will be close enough to a general election to gamble on the Government making a more generous settlement.
The alternative scenario is that when the thousands of schools who have set such budgets eventually run out of money, they will force a crisis with the Government because they will be unable to carry on teaching.
This high risk strategy would need the compliance of local authorities. Mr Hart said schools could devise a budget based on the minimum needed for heating, an optimistic view on damage caused by vandalism and staff sickness. There would be no attempt to put a false budget in to the local education authority.
He said such measures were needed because the situation is desperate. The Government will not fund the teachers' 2.7 per cent pay award, pupil numbers are rising and councils say they have no extra money to make up the shortfall.
Mr Hart said: "The statutory duty of delivering the national curriculum and other responsibilities, for example special needs provision, is totally incompatible with the statutory duty to set a balanced budget which can carry it out."
He said he hoped to work together with the local authority associations to present a united front to the Government. He said LEAs should not act as a conduit for Government policy. He admitted that it would be more difficult for grant-maintained schools, but said the NAHT would support any head who went down this route.
But David Whitbread, under-secretary of education for the Association of County Councils, said an LEA cannot allow a school to knowingly set a budget that will go into the red. And Adrian Pritchard, director of the Grant Maintained Schools Centre, said governors of a GM school which decided to set an "illegal" budget would risk being surcharged.
The National Confederation of Parent Teacher Associations has balloted its members asking whether they will support their governing body if it sets an "illegal" budget in the belief that the quality of education would otherwise suffer. The result is expected at the beginning of April.
This week saw reams of paper being used up by schools and local authorities as they wrote their pleas to Gillian Shephard, the Education Secretary, and John Gummer, her counterpart at the Department of Environment. Mayoral limos were despatched as councillors queued up for meetings at the Department of Environment, all of them arguing that they were a special case.
A number of councils, Gloucestershire, Newcastle-upon-Tyne and Shropshire, were expected to set budgets breaching the Government's capping limits this week.
In Gloucestershire secondary heads, mainly from grant-maintained schools have mobilised their governing bodies to vote on whether to withdraw their services from April 1 if they do not receive at least a standstill budget. One school has said it will have to close down on that date because it cannot afford to fulfil its health and safety requirements.
Mike Redman, chair of the Gloucester Association of Secondary Heads (GASH), said a few votes were still to come in but it looked as if the majority of the 50 schools were on course to vote to take such action.
Earlier this week Mrs Shephard said the money could be found from efficiency savings and school reserves. She congratulated Devon and Leicestershire on saying they will be able to find the money to fund the teachers' pay award. But a spokesman from Devon said it would cost Pounds 5.2 million to fund it; Pounds 4.8 million had been taken from a contingency fund for inflation and the rest would have to be found from elsewhere. He described it as "robbing Peter to pay Paul".
A Leicestershire official expressed surprise that the council had be praised by Mrs Shephard. While the council had made more money available it still did not cover the increase in pupil numbers and in real terms was a cut.