We seem to be confusing two questions here.
1.Religious Correctness gone mad? to avoid singing an atheist song at a faith school concert?
Of course not.
2. Should faith schools be encouraged, and partly funded by the State?
IMO no. Though I don't think people should be prevented from educating their children in as they believe is right. I think the American idea of not teaching religion in schools is good, but our UK education system was started by the churches, so it is hard to change.