Department for Education officials are secretly working on a national funding formula which, if implemented, could end local authorities' role in school funding and hand control to Whitehall.
The Education Secretary Gillian Shephard has asked civil servants to look at the options for a national formula that would eliminate funding variations which mean schools in some authorities receive hundreds of pounds more per pupil than schools elsewhere.
Because of the acute sensitivity of the issue, which would have major constitutional implications, Mrs Shephard has not yet put the plan to her Cabinet colleagues. No commitment is likely before the next general election, but it could be included in the Tory manifesto.
The initiative, if implemented, would cast renewed doubt over the future of education authorities as well as remove responsibility for local education spending from the Department of the Environment.
Mrs Shephard is also acutely aware of the difficulties of moving to a national funding formula unless money is provided to cushion schools which stand to lose. Only five months ago she appeared to rule out a national formula, warning it could become another poll tax, creating more losers than winners.
But she has been under increasing pressure from heads of grant-maintained schools to move to a national formula, and has privately told GM heads she favours the idea.
Last week she told the GM Schools annual conference in Birmingham that it was "an attractive - not to say seductive - idea." She said: "Eliminating the present variations in funding levels around the country would either be very costly - increasing public spending by more than Pounds 500 million a year - or many schools would be losers, some by perhaps 20 per cent of their budgets. "
She said a national funding formula was "not something I see on the near horizon," but added: "I am sympathetic to the idea of greater standardisation over time. My department is already looking at possibilities for this, but it is very clear that we must proceed with caution."
The move is supported by the Funding Agency for Schools and the Secondary Heads Association. SHA has played a leading role in advocating a national formula, administered by the DFE, but it wants LEAs to retain a role in funding, raising up to 10 per cent through local taxation.
Peter Downes, SHA president, who is to meet Mrs Shephard for talks next week, said: "We are very pleased to hear that there might be progress.
"The shambles of this year's funding round has highlighted more than ever before the need for a national and rational funding system; one which is equitable and everybody understands."
David Hart, general secretary of the National Association of Head Teachers, said: "There are profound democratic worries about having a national funding formula."
According to Tony Travers, a local government analyst at the London School of Economics, a national funding formula in an ideal world would be driven by pupil numbers with extra cash built in for additional needs.
In the real world, however, schools start from a huge range of different bases.
Next week the Audit Commission will publish a series of performance indicators for local authorities, including how much each spends on primary and secondary education. The tables are expected to show stark disparities between LEAs.
News that civil servants are working on a national formula comes as the Common Funding Formula (CFF), the new system for grant maintained schools, is also revealing startling differences between the five education authorities where it is being piloted.
Figures being worked on by civil servants are understood to reveal that a key stage 3 pupil in Gloucestershire is worth Pounds 1,387 compared with Pounds 2,500 in Lambeth, two of the pilot authorities.
With so much at stake, civil servants within the DFE face some fairly delicate behind-the-scenes negotiation with other departments before any scheme emerges and is put out to consultation.