Treasury officials are calling a halt to the expansion plans of successful colleges after telling further education advisers all reserves have been used up in dealing with mad cow disease. Colleges stand to lose up to Pounds 30 million - plunging many into debt - as ministers threaten to renege on a scheme that pays substantial rewards for those who exceed tough growth targets.
The Further Education Funding Council faces a New Year battle with Gillian Shephard, the Education and Employment Secretary, who has had to go back to the Treasury for more cash following the autumn Budget.
Treasury chiefs are understood to have told Mrs Shephard and her advisers that the coffers have been drained bailing the Government out of the beef crisis, which has cost almost Pounds 1billion. But college chiefs have dismissed this as a cynical remark by a Treasury that wants to abolish a scheme that has no cash limit. They say it raises serious doubts about Mrs Shephard's efforts to introduce similar cash incentives and payment-by-results schemes for school sixth forms.
College principals were warned by the FEFC in the summer that the two-year-old incentive scheme would be up for review. They were urged to consider its abolition as "a risk factor" in estimating budgets. But there was then no question of abolishing it before 1998-99.
Big spending cuts from April next year are looming, following initial talks between the FEFC and Department for Education and Employment. A spokeswoman for the council confirmed that "intensive discussions on the demand-led element for 1996-97" were proceeding. The incentive is called the demand-led element because it is in addition to cash guaranteed if colleges hit their targets. It is meant to encourage college staff to create new demand from the public and industry for training courses. Colleges that succeed get only about one-third of the cash due to them in the first year. But if they can sustain the high recruitment, they get the full amount in subsequent years.
The scheme devised under the former FEFC chief executive, Sir William Stubbs, proved a remarkably cheap way of encouraging growth while giving ministers at least a year's notice of new spending levels. They praised it as "the engine for growth" that helped colleges to meet demanding targets for two years.
Treasury chiefs were never happy with what they saw as an open chequebook. They tolerated it while the cash clawed back from those who missed targets more than outweighed sums given out.
But this year recruitment has grown by a record 17 per cent, and winners substantially outweigh losers. The incentive scheme will continue for a year, but cash rewards will be much lower than promised if the FEFC loses the battle.
Roger Ward, chief executive of the Association of Colleges, said it would be "the worst possible New Year present". Colleges that recruited on the clear understanding that cash rewards were coming deserved nothing less, he said.
Even with the guarantee that the incentive would not be killed off this year, colleges will have no idea how much their cash their recruitment successes will be worth until March at the earliest.