The LSC calculates that it will have 7.5 per cent more cash to spend on colleges in 20056. It will top this up with money saved by cutting lower-priority budgets. Five per cent will be added to the price paid for each course, leaving the rest of the money to pay for 3 per cent growth in student numbers. There will be no growth in adult student numbers but, equally, if the sums are right, no cuts in the overall totals. The LSC will cut funding for working adults on the assumption that colleges will raise fees by 10 per cent to compensate. Meanwhile, they will shift money saved to extend the level 2 entitlement and fund more basic skills courses.

Finally, the unloved system of performance-related funding will be reformed.

Underpinning all this is some extra money borrowed from the Department for Education and Skills. An extra pound;64 million - on top of the money announced in the November grant letter - can be used to limit adult course cuts. It is not as good as a late Christmas present but it would be churlish not to give credit to ministers and officials for listening to the evidence.

The college sector has lobbied hard to explain its central role in meeting national needs. Last week’s announcement is a sign that this message has got through. Back in the summer, it was difficult to see how the LSC could balance its 20056 budget without breaking major government promises or funding guarantees. There are lots of questions about the pound;64 million, but better to have the money than not at all.

The other news from the LSC is a new emphasis on assessing college performance before agreeing budgets going forward. The message here is targets, targets, targets. For all the rhetoric about a demand-led system, the reality is that the only demand that counts is that expressed in government targets. The Government has set these targets to achieve long-term goals for society. The LSC repeatedly makes clear that the cost of the targets leave it with little left for anything else. This puts the LSC and colleges on a collision course when local people and employers demand something else.

This clash is not really an issue in 16-18 education because the government targets coincide with individual demand. The issues in 16-18 education are the levels of funding in different sorts of institutions and the advantages conferred on school sixth-forms at all stages of the funding process. But for those involved in adult education, the conflict between government targets and local demand is ever-present. This year’s funding fix limits the damage but provides no longer-term resolution.

Furthermore, the emphasis being placed by the LSC on performance exposes the inadequacy of the data underpinning the funding systems. Decisions about 20056 will be made on partial data and forecasts, exposing colleges to considerable penalties if they get their numbers wrong. In theory, the LSC has abolished clawback and created a new, more stable system in which it can work with colleges to achieve shared goals. In practice, a system of automatic, end-of-year clawback has been replaced by a voluntary system in which the LSC asks politely for some of its money back several months after the college has already spent it.

Some 100 principals face these requests now, for 20045, and find themselves playing a form of funding blackjack with their local office. Do you show your cards now and take a bet you’ll get a better hand next round? Or carry on and hope you’ll meet your target without going bust? The analogy isn’t exact but the point remains. Some colleges were penalised in the 20045 funding round for being too pessimistic - for forecasting that they would miss targets that they subsequently hit. Other colleges are now being penalised for being too optimistic.

Moving forward, all colleges will be under pressure to forecast and deliver success, while making sure that they achieve this success with the right kind of students. It’s a systems issue which needs to be addressed in the LSC’s Agenda for Change, but it’s also a symptom of the gap between the LSC budget and its targets. If the LSC wasn’t under such financial pressure in 20045, it would find it easier to keep the promises in Success for All and plan-led funding.

Matching promises and budgets will become even more difficult in 20067.

Ministers have already pledged the education budget to schools, universities and childcare, leaving minimal increases for the LSC. An increase in the number of students or new initiatives cannot be funded without cuts elsewhere. Any good news for 20056 gets cancelled the year after. Unsurprisingly, the LSC has decided it cannot make any commitments beyond 2006. Colleges are being asked to prepare three-year plans but will get one-year budgets. The letter from Mark Haysom does not say this but, if you read between the lines, the message is clear. Prepare for the worst in 2006.

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