A ministerial review of the way education is funded could lead to a radical overhaul of the local management of schools formula.
Options being considered by senior civil servants at the Department for Education and Employment include funding schools according to actual, rather than average, teacher salaries and removing pay from local councils' control.
The review comes at a time when Prime Minister John Major is pressing for radical measures to reduce further the role of local education authorities.
Downing Street is believed to be forcing the pace of the review and is understood to be behind press reports this week that Mr Major wants the cash delegated to schools increased from a minimum 85 per cent to 100 per cent, leaving councils with a role only of selling services.
The DFEE and the Funding Agency for Schools - the quango which oversees grant-maintained finance - are already working on a national funding formula for schools. Civil servants and ministers have hinted heavily that an announcement could be expected in the "not too distant future".
The review, likely to be influential in forming Tory plans to fight the general election, comes amid growing criticism from parents and teachers that more experienced - and expensive - school staff are being sacked to balance budgets .
Mr Major has already said he wants all schools funded directly from Whitehall - but that would be politically risky, laying the blame for underfunding and rising class sizes directly at the Government's door. Civil servants admit in private that problems of funding will only be solved if extra money is found.
The Education and Employment Secretary Gillian Shephard, who is thought to be resisting Mr Major's more radical proposals, warned a conference of grant-maintained heads and governors this week that any national funding formula would produce winners and losers. A revised formula for funding schools according to actual, rather than average, teacher salaries would benefit schools with more experienced teachers, often in middle-class areas where staff are reluctant to leave. But it could cause problems for those with a high turnover of young staff, many of them in the inner cities.
Removing teachers' pay from LMS - currently 80 per cent of the equation - would limit governors' spending flexibility and leave local authorities with responsibility for support and services only.