Campaigners have raised fears that children with special needs, such as autism and attention deficit hyperactivity disorder, could lose out from new government rules that will prevent councils from subsidising education spending from other parts of their budgets.

The failure of government funding to match growing demand has led many councils to overspend on their education budgets and raid their reserves, with the situation particularly acute in special-needs education.

From next month councils will no longer be able to reduce education budget deficits by taking money from other areas of spending. Instead they will have to clear their education overspending with money from within their education budgets, unless they get special permission from the government. Critics fear this will squeeze funding for early years and special-needs education – two areas already financially stricken. Growing numbers of parents have to take legal action to get councils to provide special-needs support for their children, while nursery closures have risen sharply in recent years.

Gillian Doherty, of the special-needs campaign group Send Action, told the Observer: “Last year the government argued at the high court that local authorities must ‘rob Peter to pay Paul’, using reserves and general council budgets to plug inadequate high-needs budgets.

“The Department for Education’s new funding proposals will close off this flexibility. They have decided to forge ahead with these plans despite serious concerns raised through their own consultation about the impact on children and young people with special educational needs or disabilities.

“Local authorities that are already failing to meet their legal duties are now being pressured to make further Send cuts in order to reduce deficits and stay within budget. A number of local authorities have identified cuts to Send provision, with the main targets being Send transport and funding levels for Education, Health and Care Plans, a move that will further undermine inclusion.”

The government argues the changes are needed because, if councils can use general funds to cover education overspends, auditors will require them to increase their reserves in response – which would force them to cut spending in other areas such as social care. Councils backed the plans during consultation.

Jonathan Broadbery of the National Day Nurseries Association said that some councils were already taking money from early years to cover gaps in special-needs funding. “While additional school funding should make overspends in school budgets less likely, these reforms make it harder for councils to cover these from other sources of funding. If school budget overspends have to be carried over to future years we could see more early years funding diverted to plug these gaps.

“We want to see proper investment in early years and that budget ring-fenced to ensure that all the funding that is allocated for our youngest children goes to ensuring they have the highest-quality early education and care. Otherwise overstretched councils will just be moving money around in their schools budget.”

A Department for Education spokesperson said: “We are increasing high-needs funding for local authorities by £780m next year. We have made clear councils are not required to cover the deficits from general funds. The department will work with councils with the largest deficits to agree plans to reduce deficits while ensuring that young people with special educational needs and disabilities continue to receive the support they need.”