Universities face funding cuts unless they attract private sponsorship

Gordon Brown is threatening to cut government funding for universities unless they agree to sweeping management reforms and attract more sponsorship from industry.

The Chancellor believes universities have been largely immune from the pressure for change that has been imposed on other parts of the public sector.

He will use an inquiry into collaboration between higher education and business, commissioned by the Treasury, as a lever to demand reforms of universities. Its terms of reference have been widened and it will now "ask business for its views on the present governance, management and leadership arrangements of higher education institutions".

The move threatens to open a new rift between the Government and vice-chancellors, who guard their independence fiercely. Universities are already complaining that they lack the resources to meet the Government's targets for increasing the number of school leavers who go into further education. Mr Brown has also clashed with them over his determination to ensure they widen access to students from working-class families, and is more sceptical than Tony Blair that higher education faces a funding crisis.

Mr Brown is worried that a 6 per cent a year increase in real terms in state funding for universities will be soaked up in higher pay or channelled into research. Although the rises are due to last until 2006, the Treasury will review all government spending again next year, and will take universities' performance into account.

The Chancellor believes outdated practices act as a barrier to working closer with business and wants a "more responsive" approach to boost innovation and economic growth.

The review of universities' links with business is being led by Richard Lambert, a former editor of the Financial Times soon to join the Bank of England's Monetary Policy Committee. It will report by October and was said by a Brown ally yesterday to be more important than the public had realised.

Charles Clarke, the Secretary of State for Education, is taking an interest in the review and is also keen to ensure fundamental reforms to the way universities are run.

The impact of the Government's public-sector reforms was called into question yesterday after figures suggested that most of the extra money was being soaked up by higher salaries and extra staff.