Have you checked your pending tray, Mr Blair?

If you don't scratch our backs, Tony, you'll rub the country up the wrong way, warns Ron Dearing

The present decade is one of emerging peril for the UK. Economic peril comes from a growing squeeze from the high-tech research-based industries of the US at the top end of the market, and in the middle-market from China and India as they emerge ever more powerfully into world markets with wage rates a fraction of ours. Socially we face the risk of an increasingly divided society polarised between the haves and have-nots.

If the government plays its cards wisely in the forthcoming triennial funding round, higher education can be part of an effective response.

Our future lies in the high-tech research-based service and manufacturing sector and not at all down market. The wellbeing of the research base is fundamental to our economy. In that context, we should be seeing an increasing proportion of gross domestic product being invested in it. But over the past 20 years, public investment in university research as a proportion of national income has not risen at all.

Looking more broadly at public expenditure in research, we are at the bottom of the Organisation for Economic Cooperation and Development and G7 league tables, Japan apart.

When the Committee on Higher Education, which I chaired, reported in 1997, there was a crisis in the decay of our university research infrastructure. We are in the toils again with Universities UK saying that we need another major injection of capital into the research infrastructure, this time of £2.9 billion during the triennium. And in the latest research assessment exercise, we found the 3bs getting nothing and the 3as suffering a 65 per cent cut.

I am very much with those who say that we must invest in excellence. But we must be worried about a system in which there is little scope for new centres of excellence to emerge. Maybe my committee of inquiry had something when it argued that there should be the possibility of opting out of the RAE in return for per capita funding for scholarship and applied research. I do not say we got it right, but with hindsight there is some regret that our suggestion was shouted down, now that the 3bs and the 3as are in the wilderness.

But if the cause of research is to be warmly adopted by government and if it is to contribute to the national wealth, then we need more of what Sir David Watson recently described as the Faustian compact between higher education and society. By that I mean "I'll scratch your back if you'll scratch mine". To be specific, higher education should commit itself in a way that has already been evident in recent years, but with increasing vigour, to the cause of translating the product of the research into wealth.

Turning to the social peril, we are all committed to increasing the proportion of people coming into higher education from non-traditional backgrounds. But the proportion remains obstinately stuck. Given the close correlation between achievement in education and a decent wage, we are heading for a society that is increasingly polarised between the haves and have-nots unless we can make a big impact on these critical percentages.

Part of the answer lies in extending nationally the government's pilot scheme of financial support for 16 to 19-year-olds. A further part lies in making sure universities have the funding they require to meet the needs of students without the normal entry qualifications. For 20 years, the government has had the benefit of a falling unit cost curve for teaching: those days are past. We have to recognise that one of the consequences of students who are less prepared coming into higher education is that the unit cost will rise. We must meet the cost of serving these students. If we do not, we are going to be faced with increasing dropout rates, poor results and too many failures.

It is not possible to leave this subject without addressing the issue of student finance. Perhaps students do spend too much on socialising, but that is the way they are. I stand by my committee's recommendation in 1997 that while all students should make an income-contingent contribution to tuition costs after graduation, maintenance grants for those coming from the least well-off homes should be maintained.

With hindsight, we should have argued for grants to those coming from the poorest homes to be higher than they were. Now, I think, that should amount to something like £2,000 a year. We must not allow the opportunity to remind the government that there is still much in the pending tray slip by.

Lord Dearing was chair of the 1997 inquiry into higher education.