If they start, let's make sure that they finish

The risk in widening participation on a tight budget ias a decline in graduation rates, warns Howard Newby.

In the late 1970s, a prevalent theme of social-science analysis in the United States and in Europe concerned the looming "fiscal crisis of the state".

Based on common neo-Ricardian assumptions about the distinction between the productive and the non-productive economy, it united the neo-Marxist left and the neo-liberal right in anticipating a crisis in the ability of nation states to generate sufficient financial surpluses to re-invest in the "collective consumption" of public services at a rate that would satisfy spiralling public demand.

Until recently this looked as much a period piece of political sociology and institutional economics as the flared trousers and long sideburns of many of its advocates. Greater fiscal discipline and new technology combined to circumvent the worst excesses of financial collapse and paved the way for the economic boom of the 1990s. But with the recent economic downturn in the US, there is talk of a new fiscal crisis of the state - this time with higher education at its heart.

This is not simply a rerun of the situation that, more than 20 years ago, paved the way for Reaganomics. For one thing, the economic structure has moved on. The US is firmly in the era of the knowledge-based economy, and with it a recognition that human resource development is a key component. Rather than being viewed as part of the non-productive economy, higher education, even where it is publicly funded, is seen as being at the centre of it. The physical manifestations of this in Silicon Valley, along the Boston beltline and around San Diego are known throughout the world. High-tech has been the engine room of the new economy, both here and in the US.

From an educational standpoint this has fuelled a growing demand for "college". In the US, as in the United Kingdom, a degree is increasingly regarded as a sine qua non of participation in the new knowledge economy and the lifestyles that it confers: "Get a degree to get a life." The recognition that higher education offers a passport to American-style prosperity is particularly acute among many minority communities, especially the booming Hispanic population congregated in the Sun Belt, where the knowledge economy predominates.

California, for so long the state that British commentators have lauded for the quality and flexibility of its mass higher education, is a classic example. California is facing the prospect of accommodating 700,000 more students by the end of this decade. They are predominantly from second-generation minority communities - Hispanic and, to some extent, Asian. A new campus of the University of California is being constructed at Merced, but this will accommodate only a small fraction. No one is clear where the remainder will go. The state is embarking on a review of its much-admired master plan, but where the expansion will go and who will pay for it are unclear. Already the plan is under strain. Thus, although a high proportion of young people commence some form of higher education, graduation rates are lower than in the UK. Similar stories could be told about Texas and Florida.

Meanwhile, the US is suffering an economic downturn. Most states are taking action to balance their budgets. Tuition fees are being raised in the public universities, prompting a rising demand for bursary support from poorer students. But this, too, is being cut, while spare funds are diverted to higher priorities: defence, healthcare and transport. The downturn is creating a sharp rise in demand for college places as students, actual or potential, seek to upgrade their employability. All of this, together with the changing ethnic demography of student demand is set to provide a combustible political mix. Already the Democrats have cottoned on to this. After all, whoever wins the vote in California, Texas and Florida in 2004 is on the way to the White House.

A fiscal crisis of this type is now emerging. To remain globally competitive in a knowledge-based economy, governments need to invest in higher education. But, to be globally competitive, governments also feel the need to limit public expenditure. Translated into higher education policy, this means that countries all over the world are willing the ends of widening participation and fairer access, but struggling to find the means to deliver.

If the revision of the California master plan can solve the conundrum, we shall all wish to copy it. In the meantime, we in Britain need to observe closely the reality of American higher education. The trick for us is to widen participation rates to American levels while sustaining our world-class graduation rates.

Sir Howard Newby is chief executive of the Higher Education Funding Council for England.