Provisional cash allocations for 1996-97 reveal almost one-third of colleges will have their funding cut. Those hardest hit will be high spenders and those who failed to meet student number targets.
The rest will have enough in theory to stand still or expand slightly, but will have to absorb inflation and salary increases.
For the first time, a majority - more than four-fifths - will not get all the money they bid for to fund growth. While a few received as much as 20 per cent more, the average cash rise is just 1.6 per cent.
Hopes of a record expansion in student places have been dashed, after a similar disappointment last year. Bids for growth cash for 1996-97 were double the Pounds 334 million available, showing a trend of ever greater overbidding.
Principals say the tough limits on growth will make it harder than ever to absorb stringent cuts demanded by the Government. In previous years, economies of scale through expansion have helped them meet targets.
Colleges are not prevented from growing - they can still claim money from a separate "demand-led" pot - but these programmes are less well funded.
Principals predict it will limit their capacity to run costly courses in vocational subjects such as construction or catering - areas already badly hit in many colleges. Where they hoped to offer franchised courses, those sub-contracted out and run off-site, they will have less cash to pay the provider.
The Further Education Funding Council, which distributes Government cash for FE, says it has done what it can with the limited funds available.
It has kept the same criteria as in previous years, rewarding colleges which already run economically and those which are on course to meet their expansion targets for this year.
But for the first time it has been been unable to fully protect colleges which, under the FEFC's complex funding formula, receive funding at a higher rate. Next year, high spenders will be hit, even if they meet growth targets.
FEFC funding director Roger McClure said: "Everybody is having to feel the pinch. In each category the squeeze is that much greater this year."
The FEFC has dropped its proposal to penalise colleges hoping to grow mainly through franchised programmes.
David Gibson, principal of City College, Manchester, and former president of the Association of Principals of Colleges, said colleges feared the consequences of limits on growth.
"On the one hand we are being told to be more efficient, but you have got to grow to stay more efficient. Now they have stopped that expansion."
Pointing to new data from APC and other bodies revealing three-quarters of colleges are in deficit or with falling surpluses, he said: "The prediction seems to be that this will exacerbate the problems of colleges already in deficit."
Adrian Perry, principal of London's Lambeth College which has a high unit of funding, said he had applied for 6 per cent growth and received 2.3 per cent. "For us, things are grim, but not catastrophic," he said.
"To borrow a phrase, these days I go straight from incredulity to implementation, with no energy for indignation in between."