Universities should be allowed to charge whatever level of tuition fees they believe the market will bear, according to a new report on the economics of higher education.
The report, by the National Institute for Economic and Social Research, concludes that higher fee income is the only way top universities in the United Kingdom can raise enough money to keep up with international competitors, particularly in research.
NIESR director Martin Weale, one of the report's authors, called on the government to lift the cap it placed on university tuition fees. This would require amendment of the Teaching and Higher Education Act, which threatens universities with financial penalties if they charge more than the annual limit, which is currently set at Pounds 1,025.
Mr Weale said that the cap on fees distorts the higher sector by forcing universities to play their part in implementing government policies aimed at widening participation.
Instead, he said, universities should be free to get on with what they do best, namely generating the research that underpins top quality teaching.
Mr Weale said: "First-division universities have to allow their costs to rise in terms of staff salaries. If we say that the state cannot afford to do this then, effectively, we are imposing a gradual decline in the higher education system."
He warned that failure to relax the cap could eventually force some institutions out of the state sector competely. There is little evidence showing that higher fees would lead to a significant decline in higher education participation rates among poorer people, he said.
The NIESR report concludes that both participation rates and fees could rise if there were scholarship schemes available for able students from poorer backgrounds.
Universities could have to provide scholarships as a condition of receiving public funding. The report urges ministers to consider the example set in the United States.
The 30-page report, co-authored by Jayasri Dutta and James Sefton, sets out in detail the benefits of higher education to both graduates, in terms of increased salaries, and society, in terms of increased economic growth and knowledge capital.
The report is due to be published next month in Fiscal Studies, the journal of the Institute of Fiscal Studies.
News analysis, page 6