Hamish McRae: So how will we fund our universities?

Surely spending more money on higher education is good, with benefits to society

University fees are third-rail stuff: touch them and you get a horrible shock. And so it is with the efforts of the university vice-chancellors to get the present fee cap of £3,500 a year raised. According to a BBC survey, more than half of them want students to pay at least £5,000 or for there to be no upper limit on fees at all. Unsurprisingly, student representatives disagree, with the National Union of Students calling a protest today at Parliament, while Labour backbenchers are repeating their treats of five years ago when they blocked further increases.

Given the political sensitivities it is equally unsurprising that David Lammy, the higher education minister for England, should tread carefully. "There is," he said, "an important debate to be had now, which is about how we maintain the world-class status of our higher education sector."

His get-out-of-jail card was to say that the Government would not comment until the independent review due at the end of this year. But the issue will not go away; indeed as we near the next general election it will become even more fraught. So what can sensibly be said?

The first point surely is that spending more money on higher education is good. It brings benefits both to students and to society as a whole. Maybe in some other countries, Germany for example where students frequently don't graduate until their late 20s, there are economic costs to higher education which need to be regarded. You don't want to keep great young people out of the job market for so long. But in the UK, with the three or four year undergraduate courses and one or two year postgrad ones, society is adding to its human capital at reasonable costs.

The second thing is that our universities are very good by world standards. At the top they are wonderful, as results from the survey of the Jiao Tong University in Shanghai show. Both Cambridge and Oxford are in the top 10 and Imperial and UCL join them in the top 30. By contrast the next highest-ranked European university is the Pierre & Marie Curie University in Paris at 42. Even a little lower down, UK universities do well, with Manchester, Edinburgh, Bristol, Sheffield, Kings, Nottingham and Birmingham all in the top 100.

That index is a somewhat rigid one and there are other universities, such as the LSE, that are also world leaders. We are pretty much the only country that can go head to head with the best American universities. There is profound soul-searching going on across Europe (where higher education is generally free) as to how to compete, with Germany, for example, currently agonising as to whether it should reintroduce fees to fund universities better.

That leads to the third point. Our universities need more money to stay competitive. We do very well with what we have got but it is a struggle to get the best professors and we do lose some to the US, partly because of pay, partly facilities. Anecdotally we may be doing better than we did a decade ago as our best universities have learnt that they have to bid for talent rather than believing that their professors should be honoured by the offer of a job. But it is fragile, we may be living off our heritage, and other countries would love to have a slice of the action for obvious reasons.

If we can agree on the above, the question is how to get more money into higher education. Since both the individual and society reap benefit it is reasonable to propose that the cost should be shared by both the individual students and the general taxpayer. In the past, those distant days when not only were there no fees but also there were grants, the system was profoundly regressive. Money was taken from general taxpayers to fund the 10 per cent or so of school leavers that went to university. Even now most students are subsidised. Broadly, therefore, it is the middle classes that gain most.

There is a further point about equity. The higher-ranked the university, the greater the subsidy. I was fascinated to see an advert on the London tube offering students a rebate on their fees. It came from one of the lesser-known universities, which evidently found it could make a profit on the £3,500 it was charging. By contrast, a student at Oxbridge costs double the fees received to be educated. So there is at least a prima facie case for allowing universities to charge different rates.

Universities that have used philanthropic donations to square the books (particularly Oxbridge) will suffer as the loss of global wealth cuts their income. This is very serious in the US, where alumni have provided much of the finance, but it is potentially serious for some universities here too. The idea that philanthropy can replace government funding is for the birds.

So what will happen? Well, one outcome would be to squeeze the universities: keep the cap on fees and starve them of funds. The result would be slow decline. There might have to be rescues and amalgamations so there would be some drama, but the more general result would be more of what has been happening on some campuses over the past couple of decades.

Another would be to allow a greater degree of freedom to set fees but couple that with much better support for those who might be excluded from higher education as a result. Done well, that would be the most attractive option but I personally worry that it would not be done well. It is very difficult to administer and intrusive too: when you are allocating scarce resources it is hard to decide who gets support and why.

In theory the US system is an attractive outcome. It has great diversity, reasonable access for less well-funded students, and for the most famous universities a "needs blind" admission policy. But getting from here to there will be difficult, particularly in a harsh economic climate, and we are not ready to doit. So I suppose there will have to be some form of compromise, involving some rise in fees but not enough to satisfy the vice-chancellors or more important, to sustain our great universities. But in moving to that compromise, let's not lose sight of the objective. Let's in the medium-term figure out how to fund our universities better because that really matters to all our futures.

h.mcrae@independent.co.uk