Cable launches graduate tax and targets 'disconnected' institutions

Universities will face deep cuts in government spending, some will fail and students will have to pay more in fees, Vince Cable said yesterday in speech that called for radical change in higher education.

Speaking at South Bank University in London, the Business Secretary said that elite institutions like Oxford and Cambridge should not become disconnected from society and asked whether colleges should reserve places for a certain number of pupils from a wide range of schools.

Mr Cable outlined the case for further upheaval of student funding by floating the idea of a controversial new graduate tax – to be called "a contribution" – to replace tuition fees. By forcing a graduate tax onto the agenda, Cable is heading off a potential backbench rebellion by Lib Dem – and Labour – MPs hostile to top-up fees.

"It isn't a tax," Cable said. "I have discussed this with the Chancellor and the Prime Minister who are very happy to see this explored." But the move received a mixed reception. The Russell Group director general Wendy Piatt said: "We are particularly concerned that it would be many years before revenue from a graduate tax becomes available, so until then there would need to be a very major upfront investment by government – a very costly solution."

The Business Secretary said that universities must do better with less. The market should be opened up to new providers; two-year degree courses, as revealed in The Independent earlier this week, should be examined; and there should be more distance learning as well as more higher education in further education colleges; and more students should live at home and attend their local university. More emphasis was needed on good teaching, he said. "What we can't afford is a system in which everybody tries to do everything – badly and at high cost.

"We already know there are some universities that are struggling financially. We're going to have to devise a system in which some institutions can fail without damaging the students that are going through.

"It's a bit like the banks. They have to be allowed to fail. So do the universities. It's going to happen," he said.