Cuts to student places in 2012 could push tuition fee levels towards ?9,000 as demand outstrips supply, the government was warned as it revealed details of its university funding plans.

In its annual grant letter this week to the ÖйúAƬ Funding Council for England, ministers say that overall support for the sector via Hefce will fall by almost ?700 million next year - a cut in real terms of more than 10 per cent. A further cut of ?820 million is planned in 2012-13.

The teaching capital budget, which faces a cash-terms cut of more than 50 per cent next year, will take one of the biggest hits, while the main teaching grant is to fall by 6 per cent. The letter also reveals a "surprise" cut to quality-related (QR) research funding of 4.3 per cent next year.

As the headline figures were digested, it emerged that universities in Scotland are to see their teaching grant cut by more than 10 per cent next year - with some newer institutions such as Queen Margaret University in Edinburgh also suffering big reductions in research funding.

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In England, the grant letter reveals that the government wants to retain a strict cap on overall student numbers and plans to withdraw 10,000 extra places added to the system in 2010-11 when higher fees are instituted in 2012-13.

To explain the move, David Willetts, the universities and science minister, said that by 2012 the population would have passed a "demographic bulge". However, he admitted he was "very wary" about the cut given his own views on the "underlying social and economic trend" for wider participation.

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Bahram Bekhradnia, director of the ÖйúAƬ Policy Institute, agreed that there was "latent demand" in the system, which would lead to more students seeking places despite the demographic trend.

But he said the reason for the government's clampdown was "undoubtedly" the cost of subsidising higher student loans, which was ironic because by restricting supply, demand was more likely to push fees towards ?9,000.

"It is going to make it extremely difficult to create a market in ÖйúAƬ, and to produce lower fees, if the supply of places is going to be limited by the government," he said.

Stung by criticism?

Meanwhile, the coalition government appeared to be offering an olive branch in other areas.

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Mr Willetts says in the letter that he hopes Hefce will "continue to make dedicated provision" to support small and specialist institutions. He also asks funding chiefs to include the arts, humanities and social sciences in the list of subjects considered for targeted funding in the future.

One vice-chancellor - speaking anonymously - said that the language employed in the letter showed that Mr Willetts had been "stung" by claims that the coalition was taking a "philistine" approach.

Mr Willetts also reacted to suggestions from Steve Smith, president of Universities UK, that cuts to QR funding would have a "particularly negative impact" on the arts and humanities.

The minister said that the government's commitment to such subjects was demonstrated by a "better than average" settlement given to the Arts and Humanities Research Council and an increase in the British Academy's budget.

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On teaching funding, Professor Smith said that the 2011-12 cut of 6 per cent in cash terms - more than 8 per cent when adjusted for inflation - did not represent the "smoothing" that vice-chancellors were hoping for in the year before the advent of higher fees.

Next year's drop in funding, which applies from April 2011, is also likely to affect this year's university budgets due to the overlap with the academic year, which ends in July. A Hefce spokesman said that it would consider this at its board meeting next month.

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As state cash is replaced by fees income in 2012-13, the coalition expects cuts in teaching funding to approach 30 per cent in real terms.

simon.baker@tsleducation.com.