Can we afford not to spend more?

The report of the Independent Review of Higher Education Funding and Student Finance led by Lord Browne of Madingley, if implemented, will mark the end of a long chapter in the history of the governance of English universities. That chapter began in 1919 when the University Grants Committee began to distribute a block grant to the universities. Its repercussions were noticed even at the University of Oxford. In 1920, the Oxford Magazine carried the following quaint letter:

"The academical year which is now closing has witnessed three gigantic changes, which will slowly turn the course of the University into new channels. The accumulated effect will be as momentous in the eyes of future generations as that of the First Commission. I refer to the abolition of compulsory Greek, the admission of women to membership and degrees of the University, and the acceptance of money from a government department."

Until comparatively recently, the relationship between the state and the universities was regarded as beneficent. The relationship reached its apogee in the Robbins report of 1963, which legitimised a massive expansion of higher education. But soon after, doubts began to set in. In Malcolm Bradbury's novel The History Man, published in 1975, the vice-chancellor of the University of Watermouth comments: "That's Genesis - I suppose you might say we're in Numbers now. And, I'm afraid, getting close to Job and Lamentations."

The Robbins report had appeared three years after the report of the Anderson committee on student finance, which proposed a mandatory state award for all full-time undergraduate students resident in Britain who had achieved two A levels and been accepted by a university. The Anderson committee gave Robbins a blank cheque to fund university expansion. Perhaps if this committee had reported after and not before Robbins, the latter would have been more cautious.

The Robbins report was published and presented to Parliament in October 1963, just after Sir Alec Douglas-Home became prime minister. Anxious to rebut accusations that his government was dominated by aristocrats more at home on the grouse moors than in the universities, the Douglas-Home government immediately accepted the report. Modernisation and expansion were indeed the order of the day. With a general election due in 12 months, the Labour opposition attacked Douglas-Home for doing too little, not too much.

During the 1960s, few doubted that most problems could be solved by the injection of more money and, if possible, more sex as well. Few bothered to question whether a system of finance that might work perfectly well when just 6 per cent went to university could cope with the expansion proposed by Robbins.

Because Robbins failed to consider the consequences of the Anderson recommendations, the committee was somewhat complacent about the relationship between the state and the universities. Looking at foreign systems, including the American one, it concluded: "We have seen nothing that has induced envy of the position of other systems and much that has led us to prefer the British."

Indeed, the British system was one that could itself be exported to the US. When in the 1960s Kingman Brewster, the president of Yale University, sought to modernise the institution by admitting women, ending discrimination against Jews and African-Americans and expanding both scientific education and the graduate school, two Oxonian visitors - the economist Thomas Balogh and the comparative lawyer Otto Kahn-Freund - said that Yale had become too dependent for its finance on alumni and corporations. For Brewster had decided that only one-third of Yale's income should be derived from federal funding; the remainder was to come from student fees and endowment. Tenured appointments would be financed only from the latter two sources so that if federal money dried up, no tenured faculty would be lost.

The two British visitors said that it would be better for their counterparts to adopt a US version of the UGC. The Americans asked whether such a body might come to dictate to the universities. Of course not, the British visitors replied; British universities were self-governing corporations, and the UGC was a salutary buffer between them and the state, not an instrument of the government. No administration in Britain would ever dream of seeking to deny the universities the funds they needed, much less tell them how many students they could take, or what they should be charged.

A second question that Robbins failed to ask was how a first-class system of universities, fully funded by the state, could be reconciled with parity of esteem. Paragraph 542 of its report rejected diversity:

"We believe any such disparity between the incomes and prospects of persons doing similar work in different universities, which are all in receipt of public funds, to be unjust; and we consider its effects to be harmful."

Nobel prizewinners such as Amartya Sen were to be paid the same as a jobbing economist at Malcolm Bradbury's Watermouth. It was the same philosophy that, under the beneficent aegis of Anthony Crosland, was to produce the one-size-fits-all comprehensive school. The task in life of the wise, Isaiah Berlin once told me, was to undo the mistakes of the good.

The Anderson/Robbins settlement proved immutable until, in 1998, the Blair government introduced top-up tuition fees. It was buttressed by two of the most powerful pressure groups in Britain, pressure groups far more powerful than the trade unions - the liberal intelligentsia and the middle classes, who were to prove the prime beneficiaries of the system and were able skilfully to use the plight of the poor to justify their subsidies.

In fact, the percentage of students from the families of unskilled workers attending universities remained almost static in the 40 years after Robbins. The parents of public-school children, who secured a disproportionately high share of university places, saw the mandatory grant as a just return for the benefits they had forgone in paying for the education of their offspring. When in the 1980s, the Education Secretary, Sir Keith Joseph, proposed means-tested university fees - innocently believing that Tories meant what they said about the market - he was beaten back by outraged Conservative constituency associations and disowned even by his protector, Margaret Thatcher, who claimed that she had not been properly briefed. By 2010, however, the two pressure groups had been driven back to their last redoubts - the Liberal Democrats and Old Labour.

Lord Browne is the nearest we have to a British Kingman Brewster. The remit of his committee was less sonorous and its terms of reference less wide-ranging than those of Robbins. But its conclusions are, in some respects, even more radical. For it seeks to replace one model of higher education, a statist model, with an alternative one, that of a self-regulated market in which the students rather than the state provide the dynamic that powers the higher education system.

The central insight of the report is that it is not possible to have a system of world-class universities unless the role of the state is drastically reduced and the principle of parity of esteem abandoned. Browne's leitmotif is diversity.

Hitherto, the block grant for teaching has meant that each university receives the same amount of money for a particular course, whatever its academic value and whatever the quality of the teaching. Thus the University of Cambridge receives as much for an economics student as the University of Watermouth does for its Mickey Mouse course. Although the demand for places to read economics at Cambridge is greater than the supply, the university is unable to recruit more students. A university that exceeds its quota is fined £3,800 per excess student. The consequence is that Cambridge, a successful institution, is stifled, while Watermouth, an unsuccessful one, is insulated from competition.

It was predicted in 2004 that the introduction of higher fees would deter young people from seeking a university place. On the contrary, this year has seen, according to the Universities and Colleges Admissions Service, a record number of applications - 688,000 - of whom 200,000, nearly one in three, have failed to secure a place.

This is Alice in Wonderland economics, of which the planners in the Soviet Union would have been proud. As the Oxford economist Rui Esteves has pointed out, the excess of demand over supply in university applications shows that we may be suffering not from too many students but from too few. Young people might well, as Browne suggests, be willing to pay more for their higher education upon graduation, when their incomes reach £21,000. Higher education is a wonderful privilege, and the more who can benefit from it the better. It is the market, not the state, that should decide how many are to go to university.

The universities have been constrained not only by the block teaching grant, but also by funding mechanisms that provide incentives for research but not for teaching. Browne would make it possible for each university to decide upon its own mission, with the reformed funding system underpinning its choice. Research no doubt will come to be concentrated in a more limited number of institutions.

It does not, of course, follow that prestigious research institutions will necessarily prove the best at attracting students. In The Times Good University Guide for 2011, the university rated 63rd in history had a higher rate of student satisfaction than that rated second. The private University of Buckingham, which charges undergraduates £8,640 per annum for a two-year degree, has topped The Sunday Times University Guide for student satisfaction for the past five years. With Browne's reforms, liberal arts colleges on the American model may come to be developed, and students may choose to pay to attend institutions that explicitly concentrate on teaching.

In America, many students choose Amherst College over Harvard University. Existing universities may decide to privatise themselves; new private universities may spring up, able to provide good teaching at lower cost, and without necessarily sticking to the system of three-year degrees with long summer vacations during which gentlemen traditionally did their reading.

The experience of America, and indeed Australia, shows that a system in which student contributions provide a large part of university funding need not harm access. Fifty per cent of the lower-income quartile in the US go on to higher education, 30 per cent in Australia and 17 per cent in Britain. Whatever the merits of the Anderson/Robbins system, it did little to improve access.

Since the Higher Education Act 2004, by contrast, research by the Higher Education Funding Council for England has shown that there has been "a significant and sustained increase in the participation rate of young people living in the most disadvantaged areas".

Critics may argue that high participation rates in the US result not from institutional or funding differences but from cultural differences, since Americans value education more highly than we in the UK do. But culture cannot be divorced from institutions. A culture that requires students themselves to weigh up the value of the university experience might lead to their valuing it more highly than one based on central planning. Competition can generally be relied on to raise standards; central planning and uniformity usually depresses them.

There are, admittedly, legitimate fears concerning access that Browne has not resolved. Prestigious institutions such as Oxford and Cambridge will find it much easier than Watermouth to raise money from wealthy alumni for bursaries and other means of improving access. But Watermouth's need for cash will be greater if it attracts more students from lower-income groups. That is a problem that can be resolved only by central government. It must mean more government money to Watermouth, not to fund teaching but to sustain access.

Perhaps Browne underestimated this problem because his committee did not contain any representatives of the post-1992 universities that are likely to be adversely affected. The government has already proposed £150 million for a national scholarship scheme to improve access and more generous maintenance for students from poor backgrounds. But this may not be enough. There are still too many pupils from disadvantaged homes who are perfectly capable of benefiting from higher education but leave school at 16 or 18. More of them should be going to university.

Browne argues not for raising the cap on tuition fees but for abolishing it entirely. Some universities may well decide that they need to charge more than £7,000 a year so as, for example, to retain a first-class tutorial system. A liberal arts college may well come to the same decision. These institutions should not be prevented from charging high fees. Moreover, if the cap is set too low, at, say, £6,000 per annum, then the vast majority of universities may well come to charge it, as they did with the £3,000 cap set in 2004. This would mean that the benefits of diversity would be lost and central planning would be reintroduced by the back door.

Nick Clegg, the deputy prime minister - who of course himself pledged during the general election campaign to vote against any proposed rise in fees - has already argued that reform should be "restrained" and that there should be a cap. That is a high price to pay to salve the consciences of the Liberal Democrats.

Browne proposes that if universities charge more than £6,000 per student, they must pay a levy on income from charges above this amount "to cover the costs to government of providing students with the upfront finance". As the fee rises, so the marginal benefit to the university declines. With a fee of £7,000 a year, 40 per cent of the extra £1,000 is paid, and the university receives 94 per cent of the total fee; if the fee is £12,000, 75 per cent of each additional £1,000 over £6,000 is paid, and the university receives 73 per cent of the total fee.

The levy, Browne suggests, will "deter institutions from transferring costs to the government by charging fees that do not match the employment returns from their courses". But this goes against the liberal spirit of the report. Students should be perfectly capable of judging for themselves the potential value of different courses. It is wrong to prevent elite institutions, capable of providing first-class teaching, from using their comparative advantage to do so.

It is not clear whether the Browne reforms would lead to the universities enjoying additional income. The report seems to concede that they will not. The levy is to begin at an annual charge of £6,000, at least £1,000 below what is probably needed to break even. Browne admits that "this may be less than the charge that institutions need to make to replace the Hefce funding that is removed from the system", but argues that "the purpose of starting the levy at a lower point is to instil a focus on efficiency throughout the system".

The words "focus on efficiency", like "efficiency savings", are likely to send a chill down the spine of every vice-chancellor in England. They are euphemisms for a worse student-to-teacher ratio and a worse deal for students, quite contrary to the raison d'être of the report. Moreover, less prestigious institutions may well find that they cannot attract enough students if they charge £6,000 a year. So they will not be able to replace the funding that Hefce has removed and will lose money. That, too, is a problem that Browne failed to confront.

Hard on the heels of Browne came the Comprehensive Spending Review, which cut 40 per cent of the higher education budget. The cynic would suggest that Browne has been used to legitimise this massive cut. But, if the Browne vision of the future for higher education is to become a reality, the higher education budget has to increase, not diminish. More public money is needed both to sustain access and to help the post-1992 universities, and it is the government, not the universities, that should pay the cost of providing students with upfront finance.

It is often forgotten that, in America, not only do the universities receive a much higher proportion of private money than British universities, they also receive a higher proportion of public money - from both the federal and state governments. Student contributions to university finance should complement public funding, not obviate the need for it.

The Browne report is, in the best sense of the word, a liberal document. It recognises that the quality of universities cannot be guaranteed by the state, which can do no more than supply incentives, nor by any particular set of structural or institutional arrangements. In a free society, quality depends on the decisions of free individuals, and, in the system proposed by Browne, on the decisions made by young people, from whom so much is expected. But the Browne report offers a challenge not only to the young, but also to the universities and to government.

The challenge to the universities is for them to use their new freedom and extra resources to run a market-based and diversified system, combining, as in America, world-class research universities and top teaching institutions. The challenge is to replicate both Harvard and Amherst.

But the fundamental challenge is to the government, which needs to reflect again on what is meant when it is said that public spending on higher education can no longer be "afforded" in England (fortunately the British government's remit on universities no longer runs in Scotland, Wales or Northern Ireland).

The effect of the Comprehensive Spending Review and other government cuts will be to put the level of government expenditure back to the level of 2008. Why is it that we can no longer "afford" to maintain, let alone increase, the 2008 level of public spending on higher education? We could, after all, "afford" much less in the 1940s, when we were so deeply in debt to the Americans and struggling to recover from a war-ravaged economy, with exports and investment an absolute priority. But this did not prevent the Attlee government from developing a National Health Service and a universal system of national insurance and national assistance.

What a nation can "afford" is, all too often, what it wants to afford. As the Oxford economic historian Avner Offer has pointed out, there is a class of government expenditure where, so it seems, money is no object - the Millennium Dome, the London 2012 Olympic Games, payments to rescue misbehaving banks. Sadly, higher education does not belong to this class of expenditure. Until it does, can we really regard ourselves as belonging to a civilised society?