Colleges face cuts of millions of pounds as changes are made in the way budgets are adjusted in expensive parts of the country.

Worst affected are those in the London boroughs of Haringey and Newham, which face cuts of 10 per cent in funding. Colleges in eight other London boroughs are threatened with cuts of nearly 5 per cent.

However, colleges in 12 inner London boroughs would receive funding increases of up to 5 per cent if the recommendations on area weightings are adopted.

The proposals could affect colleges throughout the country, with many winners and losers, though, in most cases, the changes will only amount to differences in budgets of around 1 per cent.

The Learning and Skills Council is considering bringing its “area costs adjustments” in line with those used by the Office of the Deputy Prime Minister for other public services such as the police and fire brigade.

Martin Tolhurst, principal of Newham college, said the proposals would mean a “catastrophic” pound;2.9 million reduction in his budget, while colleges in the neighbouring boroughs of Hackney and Tower Hamlets would get an increase.

He said: “It is a completely flawed methodology based on average wages in individual boroughs. “It is treating each borough as an isolated labour market assuming that colleges in some boroughs can pay lower wages. The reality is that colleges operate in a London-wide labour market.”

He said colleges were promised funding stability under the Success for All strategy introduced by Charles Clarke when he was education secretary.

His college faces the challenge of training people for jobs connected to the Olympic Games, which is being staged in the borough in seven years time.

“In the context of the Olympics, it’s absolute madness,” he added.

“They are proposing to take vast amounts of money out of our budget which is going to cripple any opportunity we have to invest in new provision centred on the Olympics.”

Paul Head, principal of the College of North East London in Haringey, estimates that he will be forced to sack 80 staff if the proposals are implemented.

“It will have a huge impact, costing us about pound;2m,” he said. “We have to compete with City and Islington college just two miles away and they are getting an increase. It’s crazy. I fully accept there has to be a boundary line drawn, but this is a cliff,” said Mr Head.

Sid Hughes, principal at Newham sixth-form college, described the proposals as “unfair and unreasonable”.

He said: “It would make a difference to us of about pound;1.2m. We would have to remodel what we do and it would inevitably have an impact on jobs.”

Several colleges outside London also face a cut of around 4 per cent in area weighting, one being Harlow, in the constituency of further education minister Bill Rammell.

Harlow’s principal David Ellerby said: “We will be responding to the consultation and it may be a matter I will want to raise with our local MP.”

Colleges who attended an LSC focus group meeting about the proposals urged that no changes in area weightings should be made until 2007-8.

Julian Gravatt, director of funding at the Association of Colleges, said:

“The clear difficulty is that the best available evidence seems to produce significantly different outcomes every time there is a new look at the data.

“The low operating margins in almost all colleges make such swings and roundabouts difficult to handle.

“The AoC will continue to work with colleges and the LSC to help them find the best method of collecting and applying weightings data.”

Geoff Daniels, the LSC’s director of funding and strategy, said no decision to change the existing formula would be considered without widespread consultation in the sector.

He said: “Area cost adjustments are needed so that similar institutions can provide similar services wherever they are located.

“It is inevitable in such a complex process, wherever it takes place in the public sector, that some institutions will feel that they have not fared as well as institutions in other areas,” said Mr Daniels.

“During our review, we are taking account of alternative options for calculating area costs, including the method used by the Office of the Deputy Prime Minister.”