One of Britain’s most globally successful industries is under financial pressure. More than a third of higher education institutions are running at a loss, a handful are at risk of government bailout and some have had to shed staff and courses. While Labour’s recent decision to allow a small increase in university tuition fees in England to £9,535 a year is not a complete solution, it sent a signal that the government is listening to the sector. Universities are part of a delicate post-18 education system, and they cannot be considered in isolation. Encouragingly, this gesture was one of a series of steps in the right direction. It started with the creation of Skills England just weeks after the general election. This new arm’s-length government body will administer the growth and skills fund, a levy on large employers now extended to other forms of training as well as apprenticeships. Then came further education. Although recent Conservative governments raised the profile of technical and vocational education through a modest capital injection and reforms to qualifications, real-terms funding for further education still remains at 2004 levels. This denies opportunity to the more than half of young people who don’t go to university, prevents older adults from re-skilling and is part of the reason the country has an alarming skills gap. The sector has historically been neglected in Westminster, and it is extremely rare for it to get a mention from the chancellor. But there it was in the autumn statement: an extra £300m in revenue and £950m in capital spending for further education. Labour has put the building blocks in place for an improved system of post-18 education, but the funding settlement was part of a one-year spending review. Discussions next year between the Treasury and the Department for Education will determine how much money is available to the sector over the following three years, and whether these early steps lead anywhere. There is work to be done in every part of the system. Skills England must build relationships with employers, local government, colleges and universities. The autumn statement included an impressive 8.5% real-terms increase in research and development funds for the new Department for Science, Innovation and Technology, but academics and industrial scientists are now waiting for the detail behind this. In further education, some colleges simply cannot afford to meet demand in the most strategically important subjects. Half have put on extra courses in construction, engineering, digital, health and social care, but there are still waiting lists for places because colleges cannot afford to run courses. Meanwhile, the adult education budget, which currently sits at a miserly £1.4bn, has to stretch to support nearly a million students over the age of 18. Rather than setting this according to demand for courses, the budget is set in advance. It should be uncapped to reflect demand, and the rate per student – which has not increased for 14 years – should be linked to inflation. In higher education, there are many people who would like to see Labour scrap tuition fees altogether. But until taxpayers who don’t go to university are offered high-quality, properly funded technical and vocational options, this will seem unfair. A panel I chaired in 2019 proposed freezing universities’ income per student until 2023, then increasing it in line with inflation and changing the mix between student fees and the government grant that is paid directly to higher education institutions. Students would have paid less, while taxpayers would have paid more. I still favour a fee and grant mix, but from the Treasury’s perspective, student loans are more attractive. Whereas grants cost the exchequer the full, upfront payment, the public purse is liable only for the written-off portion of student loans. The last government’s changes to the terms and conditions, including a 40-year repayment period for students in England, mean that a bigger proportion of student loans will be paid off, leaving the taxpayer picking up less of the bill. This creates a substantial saving for the exchequer, and it also gives room to index-link the tuition fee and maintenance loans and to bring back maintenance grants for disadvantaged students, which would address one of the most regressive elements in the current student loan system. This would fundamentally reform university finances, and these reforms should come with increased obligations. Students need protecting from the minority of courses that fare worse on graduate employment and continuation rates compared with similar courses at other universities. Taxpayers need to know that their money is being spent sensibly. With more of university income coming directly from the government, regulators would have much more leverage over the institutions. The passive resistance that some universities have shown towards module-based lifelong learning, where adults can draw down their student loan in bite-sized chunks, should end. The extra money should come with minimum standards of financial performance and student outcomes, enforced by the Office for Students, and a commitment from the sector to look at its operating model. University managers need to look harder still at their operating costs, and consider radical options, such as sharing support services with other universities and colleges. Governing bodies have to ask difficult strategic questions, modelled for a population of young people that is declining in the medium term and changing patterns of learning. The optimistic bias that has characterised university governance in the past decade needs to be replaced by hard-headed realism. The teaching and research model will still be right for many universities, but for others it won’t. That will be painful for some institutions that may need to shrink or partner, but is a price worth paying as part of a properly funded, coherent tertiary education system. The government has started that job – it should now finish it. Philip Augar is a former banker and the author of several financial history books. He chaired the May government’s review of post-18 education and funding