Could Government funding cuts rob Britain of its enviable reputation in higher education?

After 10 years of growth under Labour, Britain's universities are facing the prospect of retrenchment as a result of government cuts. Last week Surrey University, which is highly rated for science and technology, announced that it was making 65 staff redundant – and that it couldn't rule out compulsory job losses.

The talk among vice-chancellors is gloomy. Staff cuts raise the spectre of industrial action – and the University and College Union has been balloting for industrial action that could hit students at exam time. But there is darker talk about institutions having to close – by merging with others – and about Britain losing its stellar global reputation for higher education.

"These are very challenging times over the next few years, it is clear that higher education in the UK will suffer great turmoil," said Surrey's vice-chancellor, Professor Christopher Snowden, in an address to staff last week. "Many universities will be reduced in size or scope, deprived of research opportunities, or forced to merge."

Not many university bosses are as honest as Snowden but all agree that higher education is in for a tough time thanks to a combination of £180m cuts announced in the recent Budget, the axe falling as a result of the 2008 research assessment exercise (RAE), and the recent cap on the number of students they can take, not to mention the extra money that universities are having to find for a staff pay rise.

There is no question that money for teaching students will take a hit: the Higher Education Funding Council has announced that savings of £65m will have to come out of the teaching budget next year.

"I have been predicting this for some considerable time," says one vice-chancellor. "Many universities put a lot of money into the RAE and it didn't work out for them."

In a major speech last week, Professor Nigel Thrift, vice-chancellor of Warwick University, predicted substantial government cuts in the academic year 2010-11, no matter which political party is in power: "Cutbacks will probably last for several years," he went on. "The result is clear. British universities will have to retrench, sometimes quite severely, if they are to survive, right at the point where they have become world-leading."

The University of Surrey, for example, suffered badly in the RAE. It saw £500,000 chopped off its research in electronic engineering, even though it came second in the UK for this subject. And it lost a further £1.8m from subjects allied to medicine, in which it came third. All this happened even though the Government protected the STEM subjects (science, technology, engineering and maths).

"It is probably going to affect everyone," says Snowden. "I have been talking to vice-chancellors across the country and this pattern of loss of posts is going to be very common. The question is how open and honest people are going to be. There will be a disproportionately large impact on research-intensive universities because of the change to the RAE methodology."

Surrey has decided to move swiftly on the grounds that acting sooner rather than later is the right thing to do. It wants to cut just under 3 per cent of the workforce in areas in which it is weak and build on its strengths.

Unlike some universities, it is in a relatively strong position because it attracts money from outside sources, from overseas students and spin- out companies.

Other even more highly rated universities are also feeling the pinch. Warwick's vice-chancellor has written to staff saying that £12m worth of cuts are needed. All merit pay for senior staff has been stopped, senior managers' pay has been frozen and academic departments have been asked to cut costs further by 5 per cent.

Some redundancies will be needed, says Warwick's boss, Professor Thrift. Therefore Warwick is offering enhanced redundancy terms. Other universities, however, are not so badly affected and the University of East Anglia is actually hiring 50 new academic staff. Tim Wilson, the vice-chancellor of the University of Hertfordshire, says he does not see the sector fragmenting but he does think that universities will focus on certain things, and slough off others.

Last week the Universities and Colleges Employers Association conducted a survey, asking 153 universities and colleges how many jobs they planned to cut over the next four months. They received responses from 100 and found that just over 1,700 job cuts are planned. That is 0.45 per cent of the full-time workforce, a relatively small proportion of the whole.

That is why many observers are bemused by the University and College Union which is demanding that the universities sign up to a national agreement to say they will only consider sacking staff as a last resort. Vice-chancellors point out that this is the procedure they follow anyway but that they can't give a national undertaking because each university's circumstances are different.