Will your college survive to 2020? Lord Leitch’s review is due next month and will look at the need for skills in the UK up to 2020. The questions for people in colleges are more pointed.

The funding good years came in the first half of the decade and are clearly on the way out. This is something to remember if you read the Learning and Skills Council’s new publication Raising our Game. This statement of LSC priorities sets out the ground rules for the 2007-8 budget round.

The council reports a 6.8 per cent budget increase for 2007-8 but does not expect future increases to continue at this level. Although this increase compares well with growth in other public sector budgets, it is still not enough for all government priorities. Educating more 16-year-olds, eliminating poor courses and pushing through a major training programme for low-skilled workers does not come cheap.

The council’s budget in 2006-7 is bursting because of expanding demand and rising success rates. Each year, there are 10,000 16 and 17-year-olds in colleges who are effectively unfunded. The money set aside for 26,000 additional places in 2007-8 will go first to colleges and schools with the extra students already on their books.

Expansion, inflation and new initiatives, like the level 3 (A-level equivalent) entitlement, cost hundreds of millions of pounds. This is why the council needs to save pound;190million in spending on adults to make its budget balance. Further education fees are expected to increase by 15 per cent, with the council withdrawing a similar amount in funding. Money will be withdrawn from English for Speakers of Other Languages. Funding for adult asylum seekers will be cut on the assumption the Home Office will process claims in less than a month.

The council machine has become efficient at pushing money towards its targets. Primary schools, secondary schools and universities may miss their Treasury targets. Further education does not. Yet despite this success there is dissatisfaction with the council’s funding machine in Westminster and a major overhaul is scheduled for 2008-9.

The Department for Education’s FE white paper called for the system of adult funding to become demand-led. Lord Leitch’s review of skills is expected to emphasise competition. We’ll know more about the Government’s plans by Christmas but some implications are already clear. Back in September, the council postponed its plans for a new funding system in 2007-8. It is expected to go ahead with these plans for 16 to 19-year-olds but something different may apply for adult further education and skills.

In the LSC’s agenda for change, the council described its plans as “priority-led funding”.

Annual priorities agreed nationally, regionally and with sector skills councils would drive funding decisions. By contrast, the FE white paper talks about how employer and individual demand will drive funding. Instead of a planned market in which colleges and training providers compete for funding, but have some security about their budget, we could have a more open market in which organisations licensed by the council compete for every pound.

This is the funding approach taken with the pound;450million Train to Gain budget. A demand-led approach will be extended to more of the pound;3billion budget for adults.

This will not be an easy set of reforms for the council because its budget is already creaking with current demand. Adding new demands from individuals and employers will require a different way to control costs.

Some people might suggest that savings could come from ending national funding rates and allow colleges and training providers to undercut each other. We had this in the 1990s. The Further Education Funding Council and training and enterprise councils supervised races to the bottom, which left bankrupt organisations, declining quality and postcode lotteries.

This would not sit well with the white paper plans. The other way is to tightly define the courses that the Government will fund. Employers and individual demand will drive the system but only if they demand the right things.

Julian Gravatt is director of funding and development at the Association of Colleges