Until the deficit is brought under control, argues Mark Corney, there can be no rise in funding for universities. The taxpayer should contribute less and graduates should pay more

The £200m cut in higher education spending during this financial year by the new government demonstrates that higher education is not immune from the fiscal crisis. Thankfully, tuition funding appears to have been spared. Nonetheless, David Willetts, the higher education minister, hinted strongly last week that tuition fees would have to rise when he warned that the cost of students' degree courses was a "burden on the taxpayer" and that the way students pay for universities needed to be thought about "more creatively".

While the fiscal deficit has to be brought under control, the only realistic policy objective is to maintain funding per student in real terms. Once the fiscal deficit is down to sustainable levels, attention can turn to increasing funding.

The total resource for tuition funding to universities is made up of two parts: deferred fees of up to £3,290 a year repaid by graduates through income-contingent loans, where interest rates are fixed to inflation; and the grant funding by the Higher Education Funding Council, averaging £4,500 a year per student.

For the Russell Group, the starting point of the Browne review is how to increase the total resource per student for tuition. Until the fiscal crisis, the presumption was that income-contingent loans would underpin an increase in fees to, say, £7,000 a year. Only the cost of the interest-rate subsidy and write-offs would appear as departmental spending instead of the whole cost of the loan and, so the argument went, the Treasury could easily raise the extra cash to give to universities from the money markets. But the parlous state of the public finances at least until 2015-16 has cut off this option. The best universities should hope for is a maintained level of total tuition funding per student.

Yet, the crisis dictates that the taxpayer should contribute less and graduates pay more. Consequently, the initial challenge is to identify existing expenditure paid as grants but which can be turned into loans, since this would reduce departmental spending without requiring the Treasury to borrow more from the money markets.

One example of turning grant funding into loan funding has already been identified, namely the £1.3bn maintenance-grant budget. Yet this example refers to living costs rather than tuition costs.

Although necessary, the bigger prize is turning the £5bn Hefce teaching and learning grant into income-contingent loans. This would cut departmental spending by around £3.5bn, although some of the savings should be used to offer fee and learner support loans to part-time HE students. Obviously, different options exist if Hefce funding is turned into income-contingent loans.

Students should view repayment of these loans as a tax increase rather than debt. Many of their parents, fearful of the times ahead, would love to repay their mortgage on an income-contingent basis.

During the fiscal crisis, both universities and students must lend a hand to the taxpayer so that overall funding is maintained in real terms, with graduates contributing more but cushioned by income contingency.

Only when the deficit has been brought firmly under control should the next stage of radical reform take place. Then, and only then, should attention turn to charging real rates of interest on loans or introducing second "fee" loans to increase resources in real terms to universities and colleges.

• Mark Corney is author of Funding Upskilling and Reskilling in the 21st Century, published by CfBT Education Trust

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