The far-right BNP would put children in care into a boarding school and vulnerable families on to a "caravan site" in Barking if it won power.
Labour councillors have attacked the plans for the £20million school, which would also take excluded pupils, as "heartless" and the caravan site for families staying in temporary accommodation as a "ghetto".
Barking and Dagenham's BNP party says the plan would combat "extortionate" fostering charges, adding £6million was spent on keeping 600 families in emergency accommodation.
Labour executive member for children, Cllr Jeanne Alexander, denounced the boarding school plan as "heartless" and a "kick in the teeth of vulnerable people".
Labour executive member for housing, Cllr Liam Smith, said the caravan site idea was reminiscent of 1960s South African policy and called it a "ghetto".
But BNP leader Cllr Bob Bailey denied the temporary "static site" would be a ghetto, adding the boarding school for primary and secondary children would be a "beacon" for other local authorities.
He told the Recorder: "Lot of children are excluded from school and placed with foster parents. They don't necessarily want to be with foster parents. We feel they could be looked after better in a school run by the council and receive proper care."
Both facilities would be built on the Barking Riverside site, currently earmarked for 10,800 homes.
The plans were crushed at Barking and Dagenham Council's budget meeting at Barking Town Hall, Town Square, on Thursday. The Labour majority instead pushed through a four-year £434million capital programme to help tackle the acute primary school crisis in Barking and Dagenham.
Barking and Dagenham Recorder