UK higher education is at a crossroads and we face a stark choice: either diminution across the board as universities struggle to respond to the financial challenges or a major restructuring of the sector to play to our diverse strengths.

There have recently been two major speeches by government ministers on the research base and on university funding. We are gratified to see that Vince Cable, the business secretary, is considering reforms to university funding. The current economic climate and fierce international competition require that we think seriously about how we can sustain a world-class higher education sector. He is right to recognise that “we cannot have an economically dynamic, socially mobile or culturally rich society without strong universities”. Equally, it is reassuring to hear such a strong affirmation of the value of science from the universities minister, David Willetts.

One of the benefits of having a minister for universities and science – and of having the same department responsible for both higher education and research funding – should be that a coherent strategy can be developed for the funding of the higher education sector. However, to date there has been little mention by ministers of the importance of research funding mechanisms or the critical importance that university research plays in developing the knowledge base that underpins a healthy and vibrant society. We have already seen announcements of a £1 billion reduction in funding for higher education and further tactical disinvestment in higher education and research seems to be a real possibility.

Research and innovation should be at the heart of rebuilding the economy, as Willetts has rightly pointed out. However, it is important to remember that UK universities already are at the heart of our economy and are a highly successful industry, generating £59 billion of output every year and creating almost 670,000 full-time equivalent jobs throughout the economy (equivalent to 2.6 per cent of the workforce in employment).

Investment in universities is just that – an investment that accrues a direct benefit to the economy. In fact, in 2007-08, universities’ direct contribution to the economy was equivalent to 2.3 per cent of gross domestic product (more than the proportion of GDP that was invested in higher education). We must acknowledge that any action that weakens UK universities’ position will have an immediate and deleterious impact on our economy and will put at risk the UK’s short-term recovery and long-term sustainability as a global leader.

It is also important that we do support genuinely world-leading excellence, that we do strive to be the first to make new advances and discoveries in research. Willetts questioned why this latter aspect matters, overlooking that being a world leader in research cements our status as a political and economic power. It also makes us the partner of choice for international research collaborations; draws global business investment to the UK’s hubs of research and innovation; and attracts talented people – academics and others – to live, study and work in the UK (overseas students contribute an estimated £4.3 billion to the UK economy).

More specifically, the reputation of leading universities is vital to the success of UK higher education overall – if we want to be globally competitive in higher education generally, we need to invest appropriately in our leading universities. It should be noted that with 1 per cent of the world’s population, the UK produces 8 per cent of publications; despite being 25th in the world for public expenditure on research and development, the UK has four of the world’s top 10 universities. This is a position that other countries seek to emulate through major investment in their universities. If the UK government’s response is a reduction in support for universities just as our competitors are ratcheting up theirs, then it is inevitable that we will lose our dominant position. Disinvestment in universities at this time would be a high-risk, no-reward strategy.

Given the importance of universities to the UK’s economic prosperity and our social wellbeing, how best can the UK fund universities to support both a world-class higher education system and safeguard the UK’s position as a world leader in research?

The abiding principle should be to fund excellence. This is broadly agreed and has driven UK research funding policy for decades. We argue that two further maxims should guide policy:

• Fund research that is internationally competitive in institutions that are able to compete and leverage their UK funding by collaborating on the global stage

• Recognise the unique importance of research-intensive multi-faculty universities. They can stimulate the cross-disciplinary working that enables the dynamism of the research base as well as the capacity to tackle systemically complex global problems by applying knowledge and insights achieved from working across different disciplines.

It is worth therefore considering whether, in this new age of austerity and intensifying international competition, there is a need to restructure our university and funding system. In particular, as Cable has suggested, we will need to explore further (non-hierarchical) diversification of the sector to support different institutions to pursue different missions of excellence. Put simply, the coalition government expects us to do more with less.

In terms of university research, therefore, we suggest the creation of a limited number of collaborative research clusters led by research-intensive universities, which would provide world-class infrastructure for research and high-quality research support services; support concentrations of research excellence across broad disciplinary areas; and establish regional hubs for research collaboration and doctoral education (funding for which should be linked to research quality).

Those less research-focused universities would focus on provision of undergraduate and taught master’s degrees. Academic staff in such institutions would, where appropriate, be provided with access to world-class facilities through flexible part-time affiliation with the most appropriate regional research-intensive university. This would provide opportunities for the whole pool of UK academic labour to be involved in undergraduate teaching and research within a highly supportive environment, but without wasteful duplication of capacity and dilution of research funding within a region.

Rather than Cable’s suggestion of a two-year degree model, with degrees taught at local colleges but examined by prestigious universities (the implications for quality assurance alone are daunting), we suggest implementing a system of flexible credit transfer to facilitate greater student mobility between institutions. This would enable students to study at their local college in the first instance and to move to more appropriate research-intensive institutions as their study progresses – particularly for postgraduate study. Such a model would be a much more effective mechanism of widening access to the leading research-intensive universities than any of the recent attempts.

To support this new structure for higher education, it would be appropriate to consider changes to the distribution of public funding for research. We support Willetts’ endorsement of the dual-support mechanism but suggest restructuring to enhance efficiency and to cut out unnecessary waste. Thus research councils should be streamlined to allow a focus on nationally strategic activities, including national facilities and large-scale collaborations. Elements of their funding that are currently distributed via the costly responsive mode mechanism should be transferred to the funding councils, which have an excellent track record in distributing public funds with great efficiency (with running costs at less than 1 per cent).

It is clear that UK universities have a good track record in deploying research funds strategically in support of world-class research. The resulting enhanced quality-related grant would enable universities to continue that work by strategic investment and efficient planning decisions. This switch would also eliminate the highly wasteful research grant treadmill (now almost a lottery) in which researchers compete against each other for funds rather than focusing on their research. This approach would allow research councils to take a much broader, strategic view on building national capacity and infrastructure for research, while enabling universities to concentrate on developing and supporting leading researchers to pursue innovative and creative research. Some form of research assessment would of course be necessary to ensure that outcomes of this public investment were properly monitored.

Such a restructuring of our university and research funding system would maintain and enhance the quality of higher education and that part of the UK economy. It would ensure that research funding is concentrated on excellence with short, medium and long-term gain to the UK. It would improve the efficient exploitation of valuable and unique research infrastructure and research capacity. Additionally, it would offer a model for continued widening access in post-16 education by enabling greater student mobility between different institutions. Finally, and crucially, it would sustain our leading research-intensive universities in the face of intensifying funding pressures and international competition, and enable them to leverage international investment and fulfil Cable’s ambition of remaining among “the global elite”.

The diversity of UK higher education is one of its key strengths. Why not play to that strength in a way that sustains our globally competitive institutions while enhancing access and student mobility, concentrating limited funds on research excellence, increasing efficiency and fostering greater collaboration within the sector?

David Price is the vice-provost (research) and Stephen Caddick is the vice-provost (enterprise) at University College London.