The Department for Children, Schools and Families and the Department for Innovation, Universities and Skills are also putting £4bn towards a new agency to provide training and skills for adults.
A joint white paper Raising Expectations: enabling the system to deliver, outlines measures to help young people stay in education or training at 16 and 17 through apprenticeships, diplomas, A-levels and GCSEs.
Children's Secretary Ed Balls said: "Local authorities are in the best place to respond to the needs of young people locally. So by giving them responsibility for funding we are putting the final pieces in place to ensure they can offer this choice."
Local authorities will be able to deliver education, commission out services, and work with national agencies and the Regional Development Agency to support further education colleges.
There will be a consultation on the plans until Monday 9 June.
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