The Treasury has advised universities to stress their role in Britain's future prosperity rather than the funding gap when they bid for money in the spending review later this month.
New studies suggest that higher education is facing a cash shortfall of between £1 billion and £5 billion. Universities UK plans to make the lack of investment in teaching the focus of its bid.
Jeremy Taylor, who is responsible for higher education and lifelong learning in the Treasury, told a university planners' meeting in Loughborough last week: "The Treasury thinks about what outputs we want from higher education, not about funding gaps. The real funding questions are: What outputs do we want? What does it cost to provide them sustainably? How does this cost change over time? How much falls to the state to fund? What can we afford?
"The challenge for the sector is to make the link between teaching and academic performance. In ministers' minds, the overheads associated with teaching are not as high as with research. Many ministers went to institutions that did not spend a lot on teaching."
John Tarrant, vice-chancellor of Huddersfield University and chair of UUK's finance and management advisory group, said: "We have had a lot of investment in research but where the heck are the people going to come from? We need good graduates. The future of UK plc depends on producing students with the right skills.
"There is too little cash for adequate investment, especially in teaching infrastructure. If you look at research between 1999-2000 and 2003-04, then for every £1 of core funding there is a 91p investment in infrastructure. For teaching, the figure is 13p - and that is when you assume that everything that is not research is teaching.
"We need investment in change for staff and infrastructure to maintain and improve the excellent standards of higher education and assist the competitiveness of UK plc."
David Greenaway, professor of economics at the University of Nottingham, told last week's meeting of the Association of University Administrators in Loughborough that the United Kingdom would need to invest an extra £5 billion in higher education to bring its spending into line with the average figure for Organisation for Economic Cooperation and Development countries. The figure includes spending on student support.
Professor Greenaway said: "The benefits of higher education to graduates are significant and persistent and therefore graduates should make a contribution. The other point is that taxpayers have bigger priorities: £3 billion buys 100,000 teachers or 120,000 nurses."
Myriad studies are under way to inform the spending review, the outcome of which will be announced in July 2002 and will cover the period 2003-04 to 2005-06. The studies emphasise the need for the government to invest in sustaining higher education rather than providing remedial funding. The Treasury will consider the studies alongside the review of student support.
An investigation into underinvestment in university science research structure, due to report this month, will conclude that there is a "significant requirement for investment" above the £2 billion of government and Wellcome Trust funding put into research infrastructure since the first spending review in 1998.
Parallel studies for the English funding council and UUK are under way to establish the extent of underinvestment in infrastructure for teaching and arts and humanities research. But these will not report until the new year.
The price of rewarding the improvement in this year's research assessment exercise is put at £170 million.
The Treasury will also look at the results of the transparency review, which has identified the real costs of teaching and research. It shows that overseas students are subsidising tuition of home students and paying for public and privately commissioned research.
It costs £13.5 billion to run the UK's universities and colleges according to the review, which came about after the government demanded more transparency in return for more funding during a previous spending review.
Together, studies will show that the £900 million funding gap identified by Sir William Taylor for UUK earlier this year was a gross underestimate. Professor Taylor had called for an extra £75 million to maintain level funding, £100 million for disadvantaged students premium, £250 million for information technology and infrastructure, £195 million for staff recruitment and retention and £280 million for equal pay for work of equal value.