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Lord McIntosh of Haringey: My Lords, I ought to make it clear that at that point in his speech the Chancellor was summarising the action that the Government have taken. We are not claiming that there is a new allocation of 15 billion for education which has never been announced before. That was announced at the time of the Comprehensive Spending Review which covers a three-year period.

Lord Palmer: My Lords, as president of the Association of British Biofuels, I tremendously welcome a 20 pence per litre reduction for biethanol road fuel. I just hope that it really will be enough to stimulate production because the industry has desperately asked for a 30 pence per litre reduction. I hope that the Minister will have the kindness to pass those key thoughts on to his right honourable friend.

Lord McIntosh of Haringey: My Lords, I certainly shall. Having engaged previously in this debate with the noble Lord, Lord Palmer, I remind him that we are still in discussion with the European Commission about coal-based methane which I know is another of his concerns and the question of whether state aid is an obstacle to further support for that.

Lord Desai: My Lords, I join other noble Lords in congratulating my friend and colleague, Mr Mervyn King, on his appointment as Governor of the Bank of England. I believe that he is the first professional economist in this country to be so appointed. I am cheerful about that.

I congratulate the Chancellor on raising the limit for third world debt relief to 100 billion dollars and on his proposal for a new international finance facility. That is a welcome measure that should be displayed much more prominently.

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The Chancellor is rightly to be congratulated on having properly rediscovered and refurbished Keynes so that we can go through a recession without spending cuts and we can borrow prudently and still maintain both equity and growth in the economy.

Lord McIntosh of Haringey: My Lords, my noble friend is entitled to a certain amount of gloating with regard to the public recognition of his economic beliefs over a lifetime of service to economics.

Lord Northbrook: My Lords, I declare an interest as an investment fund manager. To the extent that any quoted company has to disclose its contingent liabilities in its accounts, is it not possible for the Minister to let the House know, or to write to me, on the total of contingent liabilities under PFI and PPP? He said that it is not 100 billion. But what is the figure?

Further, what assumptions have been made with regard to public sector pay in the PBR? How much extra borrowing would be needed if all the public sector settled at 16 per cent? Finally, I refer to the reform of the tax treatment of capital assets. How much extra tax might that raise for the Government?

Lord McIntosh of Haringey: My Lords, on the first matter I refer the noble Lord, Lord Northbrook, to the Red Book that is published at the time of the Budget and gives the details of all contingent liabilities. On the question of public sector pay, there is a global allocation to all departments and therefore to all public services. Any pay settlements that were significantly above inflation would have to be met within those budgets. Therefore, they would be awarded at the expense of some other expenditure head. On the matter of capital assets, I believe that it would be wise to write to the noble Lord.

University Finance

Debate resumed.

5.8 p.m.

Lord Butler of Brockwell: My Lords, in resuming the debate on the financial situation of British universities I start by declaring an interest as Master of University College Oxford.

I express my thanks to the noble Lord, Lord Baker of Dorking, for initiating the debate. I also congratulate him. No one in your Lordships' House has done more than he to bring attention to the looming crisis in higher education. The Government are now recognising that he is right. But former Cabinet Secretaries like to be politically even-handed and I agree with the noble Baroness, Lady Warwick, that he was less than fair to the present Government. Unlike their predecessors, the present Government recognised the problem sufficiently to take the crucial and difficult step of introducing tuition fees in 1998. The trouble was that they capped them at too low a level and by replacing the maintenance grant by

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student loans, built in a deterrent to the very students whom they wanted to encourage: able students from poorer families.

How, then, is the policy now to be carried forward and the Government's objectives achieved? They are not going to be achieved through general taxation; that appears to be generally recognised and I shall not spend more time on it. Apart from the fiscal situation that the Chancellor's Statement revealed, and which we have just been discussing, the story of the past 30 years has been that successive governments have reduced funding per student while expanding their numbers. The present Government, by requiring a contribution from the students themselves, stabilised funding per student for a time. However, stabilising funding per student is no good when costs go inexorably up; hence our present troubles.

What can be done about the situation? Since universities make a loss on every UK and EU student, one course is to replace those UK and EU students with foreign students for whom our fee is not capped. But, of course, such a course would not help to achieve the Government's objectives.

What else can we do? The Secretary of State for Education and Skills published some commendable reflections on the choices in the Independent 10 days ago and invited a public debate; an invitation which, I note, his senior colleagues in No. 10, Downing Street and the Treasury at any rate have not been slow to take up. Let me endorse two comments in the Secretary of State's article, which were well made in the speech of the noble Baroness, Lady Warwick. First, whatever solution is adopted, it must offer a way forward for all the diverse institutions in the higher education sector and not be geared to the needs of just one type of university. Secondly, it must promote, not hinder, the aim that access to higher education should be open to all and be based entirely on merit and not on ability to pay. If the funds are not to come from general taxation, the two other sources most frequently discussed are higher fees paid by students or their parents—so-called top-up fees—or deferred payments in the form of a graduate tax.

Higher fees are criticised on the grounds that they are a deterrent to poor families and would produce a two-tier system. So they would, unless they are means-tested or accompanied by bursaries that protect families with low incomes or with many children from their effects.

I cannot see any objection to means testing, which has already been introduced for the present tuition fee. Here I disagree with the noble Lord, Lord Smith of Clifton. By protecting the poor from costs, which the richer families have to meet, fees that are accompanied either by bursaries or which are means-tested make higher education relatively more accessible, not less accessible, to the poor.

A graduate tax, by contrast, is simply a deferred liability, like a loan. In fact, it is in addition to a loan because poorer students frequently take out loans to meet living costs, which richer students or their

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families can avoid by paying up front. That seems to be more divisive than means-tested fees or higher fees accompanied by bursaries. And of course a graduate tax would not provide the funds that universities need so sorely now. As the noble Lord, Lord Baker of Dorking, said, they would take some 12 to 14 years to build up and we simply do not have that time.

In his article, the Secretary of State for Education and Skills referred to a third source of funds: gifts from alumni. He said:

    "Could the Government help to get contributions from alumni, particularly as many former students would be happy to put something back?".

I believe that the culture is changing in Britain in that respect. At my college, the proportion of old members who have given to the college has been rising sharply in recent years, encouraged by incentives that the Government introduced, although they still do not reach levels in the United States. Old members who enjoyed free university education are particularly willing to help fund bursaries for today's and tomorrow's students, who do not have that advantage. With that help, my college is now giving bursaries to one in five undergraduates who joined us this year.

As the noble Lord, Lord Baker, said, one sure way to stop that progress is by the introduction of a graduate tax. I cannot believe that alumni would be willing to give funds voluntarily to their old university if they are also being forced to pay a graduate tax.

I believe that none of those measures by itself is a solution to the universities' problem. I am not in favour of a graduate tax, which seems to be a way of deferring the solution. But we will need a combination of: somewhat higher fees—not at the extreme levels that have been bandied about—with bursaries or means testing to protect students from poorer families; loans to cover living costs, which are repaid from the higher earnings that university degrees make possible; and support from alumni for those students who follow them. I hope that the Government will give some flexibility to universities, which are, after all, under the pressure of competition with each other, to combine those sources in ways that are fair to all concerned.

I believe that the Government's help should be concentrated on those universities that take a higher proportion of students from poorer families. That help should be by means of contributions to the cost of bursaries or by increasing the "T grant" to such universities, or by a mixture of the two.

As the noble Lord, Lord Baker, said, the Prime Minister and the Secretary of State are surely right to say that we must face those choices, and do so now, and not let our universities down. If we continue to under-invest, we need look no further than the railways for a terrible example of what may happen. The problem of under-investment may create a problem that is beyond the power of any government to solve. Then our universities, now still offering a

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product that ranks high in the domestic and international marketplace, would have such a product no longer. That would indeed be a disaster.

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