The cuts, coupled with an extension of the cap on student admissions, seem to confirm that the Government’s great expansion of higher education, which began in the late 1980s, has been halted. David Triesman, general secretary of the Association of University Teachers, claimed it was the biggest cut in 20 years.

The capital grant to the Higher Education Funding Council, which distributes money to English universities, has been set at Pounds 234 million for 1996-97, a cut of Pounds 107 million (or 31 per cent) on last year. By 1998, this will be down to Pounds 189 million - a cut of 52 per cent over three years in real terms, the HEFCE says.

Education and Employment Secretary Gillian Shephard said she expected universities to seek private funding through the Private Finance Initiative to make up the shortfall. The total grant to the HEFCE, covering both capital and recurrent expenditure, will be Pounds 3,439 million - a cut of Pounds 174 million over the previous year. Student admissions have been capped for another year. Access funds have been frozen, and Mrs Shephard has warned universities that failing to abide by the Chancellor’s cap on public sector pay will result in “an adverse effect” on the grant for 1997-98.

The Committee of Vice-Chancellors and Principals protests that the Private Finance Initiative is “neither robust nor streamlined enough to replace the capital lost”. Projects such as new libraries, equipment and teaching blocks will be threatened, and there will be knock-on effects on research. The CVCP also says that Government now looks very unlikely to fulfil its target of a 33 per cent participation rate in higher education by 2000.

David Triesman said that the Chancellor was “boosting schools by taking an axe to higher education” and insulting the university teachers who had worked hard to make the expansion work. The HEFCE has written to universities saying that it cannot even guarantee current commitments will be met. This could mean that unfinished buildings would have to be completed using money diverted from revenue budgets which, it fears, could mean redundancies.

“Vice-chancellors are beside themselves with anger. Business people on university governing bodies have worked very hard advising on how to build up reserves, now they will see them stripped away - nobody would run a business like this, yet the Government expects universities to attract business investment,” he said.

The cuts followed the second reading of the Student Loans Bill on Monday - the latest attempt by the Government to get the private sector to run the loans scheme. So far, the banks have shown little enthusiasm. The disclosure by the National Audit Office that Pounds 142 million of the Pounds 1.18 billion lent so far may never be recovered cannot have inspired confidence. Almost 70 per cent of starting salaries for graduates this year were below the threshold at which repayment of loans is triggered (85 per cent of average income).