The stakes are high, the proposals must be firm

Ron Dearing outlines the factors the Government should consider in its promised funding review in 2009.

The Review of Higher Education I led ten years ago was prompted by the compelling need to resolve the financial crisis that had overtaken the sector.

At the time, the unit of resource for teaching was heading for 50 per cent of its level of 20 years earlier. And research was in deep trouble from the decay of infrastructure.

Part of the committee's response was what became known as tuition fees. In fact, we came down against upfront payments. Our proposal was income contingent contributions by graduates of £1,000 for each year of full time study and continued maintenance grants of up to £2,000 a year.

We examined the longer-term case for differential fees, and this was what the Government envisaged in 2004 when it proposed graduate contributions of up to £3,000 a year. In fact, the full £3,000 is being charged in almost all higher education institutions. But note, more than half of further education colleges do not charge that much.

Gordon Brown's Government has confirmed the promised review of funding in 2009. Meanwhile, it has announced a welcome improvement in maintenance grants for full-time students, promised a real-terms increase in research funding by an average of 2.7 per cent a year over the period 2008-09 and 2010-11; but for teaching, significantly, it has only given an assurance to maintain the current unit of resource.

Looking ahead, against an expectation that the Government will not increase its contribution for teaching, the big issue on that front for 2009 is how to increase resources to maintain the international standing of British universities, and not least those in the world's top ten and top 100.

We lack the big endowments of the US institutions that dominate the world rankings. The £200 million the Blair Government put on the table to match private endowments was an excellent move. The response should be a top of-the-agenda item for vice-chancellors, who may need to redefine their role and their personal accountability, to realise the potential and thus persuade the Government that the £200 million should be seen as a first stage.

Realistically, this can be only part of the answer. Inevitably, an increased contribution from graduates must be on the agenda. But this is not straightforward. The demography points to falling numbers here and across Europe, and hence to increased competition from the mainland universities. Apart from the general drive to widen participation, the most obvious offsetting potential area for growth lies in the foundation degrees and in the part-time market, to achieve the Leitch agenda. Further education colleges will be strong contenders in these markets. However, the need and justification for a higher graduate contribution in the interests of quality learning is compelling.

Turning, therefore, to higher graduate contributions, one way forward is to increase the interest on loans to the Government cost of borrowing, the prospective income from which would add about a third to the graduate contributions. In equity, the argument for that is strong and becomes even stronger if some move to differential fees is on the cards. The disadvantage is that there is no certainty the money would go into higher education.

Apart from a graduate tax, the remaining way forward is a rise in graduate contributions, subject to increases in bursaries and strong action to widen access. An uncapped contribution would undoubtedly lead to differential fees, and hence to a market providing real financial choice for students. That is desirable in principle, but it is full of difficulties that would need to be resolved - for example, the implicit differences in levels of public support for universities, the risk of an unstable market with some institutions going under, and a risk of such strong opposition that any increase is put in jeopardy.

In a world where, as never before, educated talent will be the basis for job security and a decent income, as well as national economic wellbeing, the stakes are too high to duck the issue. Right now, the universities would be well advised to do their homework on all options and work for as wide a political consensus as they can get.

So much for 2009. The immediate issue, in the light of the Government's response to Leitch last week, is the invitation to come forward with proposals over the next few months to develop a new funding model, co-financed with employers, for innovative engagement in the skills market. Perhaps some new thinking in Government on its role in financing part-time provision should be on the same agenda.

Lord Dearing was chair of the 1997 committee on the future of higher education.