John McTernan: Nettle of university funding must be grasped

Yesterday, senior industrialists wrote to the Daily Telegraph, arguing that universities should be protected from cuts because their knowledge creation needs to be a central part of economic recovery. These responses differ because higher education is devolved and the interventions reflect policy differences. At the heart is the same question – what is the right relationship between the state, the student and the university?

Let's start with the unarguable. A university education is a substantial personal benefit for any student who successfully concludes it. Graduates, it has been estimated, earn 400,000 more over a lifetime than non-graduates. In itself, this makes a powerful case for asking students to make some form of contribution to the cost of providing universities.

Then let's look at the social composition of university graduates. Survey evidence shows that middle-class young people take the lion's share of places. Despite the expansion of universities over the past four decades, there has not been an equivalent increase in access for students from working-class backgrounds. So what we have is system which provides a massive personal advantage for those who have already been massively advantaged by the education system – to those who have, let even more be given. This is the crux of the choice.

Government always has limited resources, and politics is about the allocation of those resources between competing priorities. Research has shown that if your objective is to increase opportunity and to tackle deep-seated social and economic advantage, then the best place to spend money is in the early years – that is when the gap between working-class and middle-class kids starts to grow and become unbridgeable.

So, any government that sought to be social democrat in values would choose to direct spending to the early years as Labour did in England, and as the Labour-led administration did in Scotland. Tuition fees or the graduate endowment – they're just two ways of getting something back from those who get most out. The tragedy of the situation in Scotland is that the modest contribution from students has been scrapped and even before Danny Alexander's cuts come in next year, child care has been systematically starved of money.

Free university education in Scotland is a central plank of the middle-class welfare state that has been built up since devolution. A sort of couthy collectivism – here's tae us, wha's like us, damn few, for it's all free.

Of course, university education is not free – it's just extraordinarily subsidised by taxpayers. Even in England, tuition fees pay for a fraction of the true costs of courses, there is massive taxpayer support of both sunk costs and running costs. But there's another challenge – both here and across the UK. There is a global market in higher education – just as in any service industry – and to be the best, you have to invest in staff, in research, in kit. Even before the "age of austerity", there was agitation among elite English universities for the opportunity to introduce variable tuition fees and at least to raise the cap. This was rooted in the knowledge that universities needed more investment to thrive. (In the 2009 Academic Ranking of World Universities, only Oxford from the UK was in the top-ten world universities, and no Scottish university was in the top-ten European ones.) But that there was virtually no chance of that extra income coming from government, so universities had to find it from their customers. Even were there no fiscal imperative, the coalition government would be going down this route ideologically. Universities minister David Willetts has plausibly argued that tuition fees with student loans are in effect a deferred lump-sum graduate tax. It will not feel fair to those students, often with support from their families, who pay for a degree that their parents got for free. But the current structure of fees, loans and grants in England is redistributive in impact – a third of students pay no fees, a third get full grants.

Greater development of endowments would, as Michael Fry argued in these pages recently, give universities greater freedom – freedom to give bursaries to able students from disadvantaged backgrounds, and freedom from government. One of the paradoxes of discussions about universities is that it is conducted almost entirely through the prism of state funding, yet universities are private institutions. They don't act as though they are autonomous, but they are. Though they bow and scrape to Scottish ministers – as transmitted by the Scottish Funding Council – they are a private provider and don't simply have to accept whatever terms are dictated by the monopsonist purchaser.

Where should universities in Scotland be going? First, we cannot afford for them to fall further behind in England, let alone globally. Funding needs to match our economic ambitions – in modern manufacturing, in bioscience, in creative industries, and in the low-carbon economy. Second, that money cannot possibly come from the taxpayer. In the straitened budgets we will see in coming years, it is impossible to prioritise universities over early years education. And it is actually right for a contribution to be made by those who benefit most. Up-front fees or post-graduate payment are equally fair – but to do nothing is both wrong and unjust.

Finally, we need to address the underlying cost base. Do we have too many universities? The merger of Manchester University and UMIST shows what can be leveraged. And when are we going to face the fact that we cannot justify four-year degrees? Supporting six years at secondary school and four years at university is double funding. Why not take nearly a quarter of the running costs out of universities in the most painless way possible? Talk to any academic and they say privately that university funding is the greatest unaddressed issue in Scottish politics. The tragedy is that this debate is raging everywhere in Scotland except in the parliament.