Colleges face pay freezes, redundancies and reduced student numbers following warnings to ministers that budgets next year may need to be cut by pound;200 million more than expected.
An internal memo from the Department for Business, Innovation and Skills (BIS) said funding pressures elsewhere in the department would require further savings from the skills and universities budget. It also admitted the pound;340 million efficiency savings announced earlier this year would affect frontline services.
"The impact of these changes will be felt by colleges and providers," the memo said. "As staff costs represent the most significant factor in a college budget, we would expect cuts to be passed on in the form of pay freezes andor redundancies and potentially reduced volumes of learners."
BIS disowned the threat of further cuts, made last month, but was unable to explain how the funding pressure had been alleviated.
A spokeswoman said: "The pound;200 million was part of an internal exercise to look at all our budgets intensively. As with all exercises, the final amounts change. As we have said, we are now looking at efficiency savings of pound;340 million."
Further cuts would have a drastic impact, ministers were told. If half the additional cuts were applied to FE budgets, 133,000 learners would lose their places. They suggested cutting the adult safeguarding learning budget by 10 per cent, reducing Train to Gain starts to a more "realistic and sustainable" level or withdrawing funding from more poor provision.
A BIS spokeswoman said the total figures for the 201011 budget show an overall increase to balance out the pound;340 million efficiency savings.
"We expect the budget to increase and we are expecting greater efficiency," she said.
If the budget follows the three-year plan outlined in 2007, it would imply a 1 per cent rise in funding, for which the Government expects an 8 per cent increase in provision.
The memo outlined how the pound;340 million savings could be achieved by a pound;100 million cut to FE quangos and delaying the full roll-out of the Adult Advancement and Careers Service.
The remaining money would be saved by reducing funding rates for adult learner-responsive budgets, Train to Gain, apprenticeships and Skills for Life. Employers would once again be required to pay for repeat level 2 qualifications in Train to Gain, and pound;88 million could be saved by axing provision that does not meet minimum levels of performance.
Barry Lovejoy, head of further education at the University and College Union, said staff would feel misled by promises that frontline education would be protected.
"You can't get much more front line than FE staff who are doing the main business of the sector, teaching students," he said. "This proposal is likely to have a dramatic, direct impact on those staff."
It would affect FE's work to alleviate the impact of the recession and lead to more local disputes over planned redundancies, he said.
Martin Doel, chief executive of the Association of Colleges, said: "This is an early version of the skills `investment' strategy. If these proposals were adopted in full, there would be serious consequences for colleges and an impact on their ability to support the skills strategy launched this week, in particular their important work assisting people and businesses in the recession and preparing the way for recovery."
More of those studying for advanced apprenticeships to go on to study in HE and is proposing pound;1,000 golden hellos for the 1,000 best apprentices.
It suggests composite honours and masters degree programmes that will incorporate elements of apprenticeships. It is understood these will be accredited and validated by universities and offered in conjuction with FE providers and employers.
New institutions called university technical colleges are proposed for 14- to 19-year-olds, which are designed to increase the numbers of young people entering the workplace with the skills required by employers and progressing to advanced Diplomas and on to study in HE. These will effectively be an extension of the academies programme run by the Department for Children, Schools and Families.
Throughout the white paper, the focus is on skills that matter for improving the prospects of individuals and the economy, with funding cut for "lower priority courses".
It proposes directing around pound;100 million of the skills budget, including Train to Gain, into areas that drive economic growth and jobs. The white paper highlights key areas such as the low-carbon industries and information technologies.
To achieve this, FE must be "driven by the demands of the market", the paper says. Businesses will be given the power to shape the provision and training.
The white paper confirms the role of regional development agencies in developing skills strategies that will "articulate employer demand and more closely align skills priorities with economic development".
A market-driven approach will also be underpinned by individual skills accounts, which will be available to everyone over 18 from next year. The money will be paid direct to providers.
Further embedding a market approach is the proposal to rate providers using a new national scorecard based on "traffic light" data that measures and makes public a range of information relating to providers and courses. These data will include quality ratings, customer satisfaction scores, course employability rates and ready reckoners on how courses subsequently affect people's wages.
Funding for quality improvement will be devolved increasingly to providers and, in return for improved performance, learning providers are promised greater overall funding autonomy.
This autonomy is two-tier: greater funding freedom and flexibility for all providers, and enhanced freedoms for providers deemed outstanding. It is understood that all providers will see a greater proportion of their funding delivered in lump sums, with less arriving in small pots tied to specific programmes.
The white paper promises to simplify the "skills landscape" by removing more than 30 publicly-funded skills bodies over the next three years. The UK Commission for Employment and Skills is tasked with this job, which includes reducing substantially the number of sector skills councils by 2012.