The finances of English universities are ¡°weakening¡±, with the future trend towards lower surpluses and record borrowing ¡°unsustainable¡±, according to England¡¯s funding council.

Operating surpluses across ÖйúAƬ institutions are forecast to fall from 3.9 per cent of total income in 2014-15 to 2.4 per cent in 2015-16 and 2016-17, says a .

The report, which comes ahead of the spending review, says that public funding cuts of 5 per cent a year over the next three years ¡°could see the sector in a deficit position by 2017-18¡±.

Hefce¡¯s report, based on financial forecasts from institutions and titled Financial Health of the ÖйúAƬ Sector 2014-15 to 2017-18, is the latest edition of its annual report on financial forecasts, but offers a far gloomier outlook than usual.

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¡°Although currently financially sustainable, reducing surpluses and cash levels and a rise in borrowing, all signal a trajectory that is not sustainable in the long term,¡± it says.

Although there has been ¡°a general weakening of financial performance¡±, the sector is expected to ¡°remain financially sustainable in the forecast period¡±.

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Hefce adds that future financial uncertainty ¡°is likely to lead to continued volatility and growing variability in the financial performance of institutions, together with a widening gap between the lowest and highest performing institutions¡±.

The report follows a paper published by the right-of-centre Policy Exchange thinktank, which argued that the government should cut ÖйúAƬ funding and shift it into further education, as universities have ¡°substantial cash reserves which could?be much better utilised than sitting in banks¡±.

However, Policy Exchange was criticised by Andrew McGettigan, the writer and researcher, and Universities UK representatives for citing Hefce figures that did not describe cash reserves, but instead were a measure of reserves covering all assets, including property.

Hefce says that given reduced levels of public capital funding, institutions are having to use their own resources accumulated through surpluses or borrow externally to ¡°enhance their infrastructure¡±.

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And it adds that ¡°forecast cash inflows from operating activities will be insufficient to fund the planned level of investment for the period 2015-16 to 2017-18. This may indicate that HEIs will either have to change their plans or raise additional funds through cash reserves or additional borrowing.¡±

Borrowing is forecast to rise from ?6.7 billion at the end of July 2014 to ?9.2 billion at the end of July 2018. Hefce describes this increase as going to ¡°record levels¡±.

Overseas student income is projected to grow from 13 per cent of total income in 2013-14 to 14.8 per cent of total income in 2017-18.

But Hefce warns that just a 5 per cent shortfall per year in projected income from non-European Union students ¡°would see the sector in a deficit position by 2016-17¡±.

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john.morgan@tesglobal.com