Colleges must choose between halting building repairs or sacking staff after the Government demanded savings of 5 per cent a year over the next three years and capital spending cuts of Pounds 100 million.
Principals say they have no option following Chancellor Kenneth Clarke's autumn Budget. The average college must cut costs by Pounds 500,000 next year and the largest by Pounds 1.5 million. Principals say there is little scope other than to cut staff.
Colleges, ordered to expand student numbers by 50,000 next year, made an 11 per cent efficiency gain this year - understood to be a record for any public-sector group. It is the third year running that they have had to make cuts of at least 5 per cent.
Michael Austin, chairman of the Association for Colleges, called the latest cuts cynical. "Colleges have been cut to pay for schools and hospitals because ministers think students are not election vote-winners."
The decision to slash capital spending by two-thirds, leaving private capital to bail out colleges, was widely condemned. The Labour party and Colleges' Employers' Forum called it "a disaster".
Sir William Stubbs, chief executive of the Further Education Funding Council told colleges they have two weeks to offer views on the review of capital funding.
"It would no longer be possible for the council to maintain the equipment allocation at its current level, let alone provide separate allocations to support building works, unless it chose to transfer funds from the recurrent budget," he said.
An FEFC consultation paper suggests colleges prioritise capital funding, day-to-day spending or balance the two. Most principals would prefer the third option if they get control over the more flexible funding arrangements.
Any significant new cash must come from the Private Finance Initiative, the Government's latest scheme to inject private cash into the public sector. Education and Employment Secretary Gillian Shephard said in her departmental budget statement that Pounds 650 million in private money is available. .
Sixth-form college leaders rounded on junior education and employment minister James Paice at their annual conference, saying they had already been forced to squeeze extra students into packed classrooms this year.
Chris Fulford, principal of Blackpool Sixth Form College, said morale had fallen and staff sickness had increased as overcrowding worsened.
But the minister insisted that new cash must come largely from the PFI. "There is not a sector in the country that is not having to do more for less," he added. Efficiency gains would continue to be part of the funding formula, he warned.
Access funds for adults hoping to move from FE to HE have been frozen at Pounds 6 million for three years and there will be cash penalties for colleges which breach the Government's pay guidelines.
An extra Pounds 116 million will go on youth training and the Modern Apprenticeship scheme, but training and enterprise councils will have to double the number of apprenticeships to 60,000.