Leader: A fair wind, but not plain sailing

It would be a brave investor who put money into a business that had profit margins of half a per cent. But for English universities, which are recording surpluses of this size, such an outcome should be regarded as a success. The funding council says that although more fat would be nice, most institutions are setting enough aside to meet future needs. And there is relief that by 2007 fewer than 30 of the 131 institutions funded by the council will be losing money, compared with 50 last year.

The figures show that although universities are not allowed to go bust, it is permissible for them to run indefinitely while generating either losses or surpluses that are in the accountants' error margins. They confirm that English universities need a significant new source of money. Badly paid staff, ill-maintained estates and, at some point, a slide in world esteem are the alternative.

Gordon Marshall, vice-chancellor of the University of Reading, expects that the higher education bill now before parliament would add 10 per cent to his university's income. But even if teaching UK and other European Union students becomes a paying proposition, university finance will remain problematic. Institutions have long practised cross-subsidies.

But, as their accounts become more transparent, they will be less able to sustain loss-making activities. Alongside teaching, the principal activity of a university is research and it, too, is subsidised by other activities in many institutions. Moving research cash from the funding councils to the research councils will make the problem more visible, but it will not solve it. The answer will probably involve concentrating research in fewer projects and in fewer places, along with more international collaboration and higher charges for industrial and commercial research.

Government will argue that this change merely continues an existing trend since most of the research money already goes to a small number of major players. But such a reshaping of the landscape for universities would, in time, be as fundamental to their ethos and mission as the introduction of variable fees. And, unlike the fees proposal, it would affect the whole of the UK, not just England.