In the wake of the decision to drop plans to create a fast track for church schools to become grant-maintained, Prime Minister John Major is hinting that local councils will have to reduce the amount of the education budget spent centrally.

Mr Major told David Frost in a weekend BBC television interview: “I would like to direct more of the amount of money available for education to the schools rather than having quite as much as at present taken away by the education authority for one reason or another.”

Currently, local councils are obliged to distribute at least 85 per cent of education funding to schools as part of local management schemes. Gillian Shephard, the Education and Employment Secretary, 18 months ago postponed plans to increase the share to 90 per cent on the grounds that some local authorities might face problems in reaching the target.

However, Labour has since adopted as policy a plan to require councils to delegate 90 per cent of the budget. The Conservatives might top Labour by forcing councils to delegate 95 per cent.

Any further squeeze on local authorities would hit hardest the 54 that retain more than 10 per cent of spending at the centre. Only one council - Dudley - at present delegates more than 95 per cent of the potential schools budget.

Such changes would be opposed by the Association of Metropolitan Authorities. Alan Parker, its education secretary, believes the Government did not press ahead with the plan to force councils to delegate 90 per cent because of fears that it would affect the provision of special needs services.

“The move might be popular with the right wing of the Conservative party, but there is an increasing amount of feedback from schools saying that they do not want further delegation that involves them in complicated arrangements to buy back services from the local authority,” he said.

Heather du Quesnay, president-elect of the Society of Education Officers and director of education in Hertfordshire, believes that reducing the amount spent centrally could reduce the ability of local authorities to implement strategies for raising standards in schools.

* The Government’s abandonment of plans to boost the grant-maintained sector by creating a fast track for church schools to opt out is being seen as a major embarrassment.

Schools minister Robin Squire had to admit to MPs that the legislation was being dropped in the face of opposition from the Anglican and Roman Catholic churches.

He said the churches had not wanted special treatment and were in favour of parents being balloted on the issue of GM status.

The climbdown is particularly galling because it was a policy promoted by the Prime Minister himself. The Labour and Liberal Democrat opposition claimed that this latest climbdown, coming so soon after a setback over plans to hand over the student loans scheme to the banks, was evidence of an administration in disarray.

Government strategists have for months been warning that to go ahead with the “fast track” for church schools would risk a defeat in the House of Lords at the hands of the bishops. In addition the reduction in the Government’s majority caused by the defection of Emma Nicholson could have led to difficulties in the Commons.

However, the Education Bill given its first reading on Wednesday still contains controversial measures to introduce a voucher scheme for four-year-olds. The Bill also paves the way for GM schools to borrow money on the commercial market.

The 10 clauses cover legislation that will allow grants to be made to the private sector for providing nursery education. The nursery classes and nursery schools will be brought within the inspection regime of the Office for Standards in Education.

Mr Squire promised that all institutions able to redeem vouchers will have to provide good quality nursery education.

However the local authorities are concerned that the scheme will not generate extra places .

Shadow education and employment secretary, David Blunkett said: “The Government’s legislative programme is coming apart at the seams. John Major has been forced into a humiliating retreat on his plans for fast-track opt-outs in the teeth of overwhelming opposition from church schools and the bishops. ”