University funding in the UK could be cut by a quarter and up to ?200 million could be lost each year in extra VAT after this week's emergency Budget confirmed some of the sector's worst fears.

Delivering his "unavoidable Budget" for cutting the deficit, George Osborne, the Chancellor of the Exchequer, said that departmental spending would fall by an extra ?17 billion by 2014-15 compared with Labour's plans.

On average, this equates to a 25 per cent cut in unprotected budgets such as that overseen by the Department for Business, Innovation and Skills - exactly matching the prediction made by the Institute for Fiscal Studies earlier this year.

Mr Osborne did not specify where the axe would fall, but noted that there were "particular pressures" on education and defence.

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He added that the government would "look at options" for the early repayment of student loans, a policy the Conservatives had included in their manifesto as a method for paying for more university places.

All eyes in the academy will now turn to the outcome of the Comprehensive Spending Review (CSR), which is due to be unveiled on 20 October.

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Paul Marshall, chief executive of the 1994 Group of smaller research-intensive universities, said the Budget was "distressing" news for ÖйúAƬ.

But he issued a rallying cry for the sector to lobby for a cut lower than 25 per cent.

Mr Marshall, who said universities were facing the "most exciting, dramatic and completely terrifying" five years for a generation, said: "Taking VAT and the 25 per cent cut together is particularly distressing news for our universities.

"However, we knew for a long time that this was coming, and the sector needs to pick itself up and make its case ahead of the CSR."

One university finance director said that the VAT increase of 2.5 percentage points would have a "significant impact" on the academy, adding ?70 million to ?100 million a year on to universities' day-to-day operating costs.

Higher education institutions cannot charge VAT on most of the services they provide, meaning, for example, that they cannot pass the rise on to students in tuition fees.

Steve Large, director of finance at King's College London and chair of the tax panel at the British Universities Finance Directors Group, said that about 10 per cent of VAT was recoverable - although teaching-focused institutions claim the figure is nearer 5 per cent.

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Either way, most of the ?9 billion spent by universities each year on costs other than staff pay will be affected by the hike.

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Universities will also need to shell out an extra ?250 million to ?300 million on short- to medium-term capital projects over the next three to five years to accommodate the VAT rise, Mr Large said.

He added that most finance directors had allowed for the increase when planning for the next academic year and would also have some leeway, given that the hike will not come into effect until January 2011.

However, he continued, other uncertainties plaguing the sector were causing major worries.

"Most of us would like to know what the cuts are going to be, even if they are significant: then we can carry our institutions with us," he said. "I would rather have certainty, even if the number is not something we would wish upon ourselves."

The fees question

Income may flow back into ÖйúAƬ if the government decides to ratify any tuition fees increase recommended by Lord Browne of Madingley's independent review of fees and funding.

However, the timescale is unclear: many believe that 2012-13 is the earliest point at which any increase could be implemented.

There is also uncertainty over how the Liberal Democrats will react to any proposed fees increase.

Les Ebdon, chair of the Million+ group of new universities, said of the Budget, which was delivered on 22 June: "The net effect is that there will be less opportunity for people to go to university. The only way to square the circle is a huge increase in fees."

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simon.baker@tsleducation.com

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