Mr Darling told the House of Commons: "The alternative is a return to the days when a whole generation of young people found themselves abandoned to a future on the scrapheap.

"We will not repeat that mistake. So I want to offer a guarantee. From January, everyone under the age of 25, who has been out of work for 12 months, will be offered a job or a place in training.

"Those in work will receive a wage. Those in training will receive additional money on top of their benefits."

In addition, he signalled over £260m in funding to help young people gain skills and experience in sectors showing strong future demand. The Budget also announced an extra investment of £250m this year, and £400m in 2010-11, to keep young people in education or training should they wish to.

The Chancellor believes these are measures that should result in an additional 54,000 places in sixth forms and FE colleges from September 2009.

The move was welcomed by the Association of Colleges (AoC), which had called for more Government support to help tackle the recession.

AoC's President, Dr David Collins, said: "The announcement of an extra 54,000 funded places for 16-19 year olds is particularly welcomed as colleges will now be able to play their full role in supporting the government's September guarantee."

Martin Doel, chief executive, said: "This is excellent news and is expected to cover the shortfall. Two thirds of these students are in college so this announcement is very welcome.

"This is a positive move too in terms of tackling youth unemployment. We are pleased that Government has recognised the critical importance of funding 16-18 education adequately, particularly in such economically troubled times and as Government prepares to extend the leaving age."

The Budget also unveiled further plans to support FE college building programmes and infrastructure with "an additional £300m of capital funding for investment in Further Education colleges in the 2007 Comprehensive Spending Review (CSR) period".

The Budget statement declared: "This will enable the Learning and Skills Council (LSC) to fund a limited number of further projects through the Building Colleges for the Future programme starting in 2009-10, based on prioritisation criteria to be agreed with the LSC and the sector.”

Dr Collins added: "We are pleased that the Government has been able to find an extra £300m for capital spending at a very difficult time. It does mean however that many colleges will be disappointed in that their projects will inevitably be delayed until the next Spending Review period which starts in 2011."

Solange Berchemin

FE News will being you more analysis and reactions as key players continue to review Budget 2009 in depth