More than two fifths of England's universities are in debt, official figures indicate.

A total of 57 higher education institutions, 44% of the total, are forecasting operating deficits for 2000-01, once the final figures are known.

This is expected to improve to 38% for the current academic year.

But the Higher Education Funding Council for England (Hefce) said margins were slender and adverse changes of even one percentage point in pay increases, other inflation or funding levels could have "significant financial consequences".

It said students were being taught in larger groups as institutions struggled to make ends meet.

Bigger classes

For 2002-3, 42 institutions, or 32% of the total, have predicted they will end the year in the red, with 25% expecting to do so in the following year and 28% the year after.

In its Analysis of Corporate plans, and outcomes of 2001 financial forecasts and annual operating statements, Hefce said: "The sector forecasts have a history of reliability with actual results being close to forecast."

It gave a warning that efforts to keep income and expenditure in balance involved, among other things, increasing student-staff ratios.

It said universities faced financial risks, including the increasingly diverse range of income from both the public and private sectors and more competition for students.

Fees

Potential solutions included increases in money from the taxpayer "to reverse past under-investment" and charges which more closely reflected the costs of the services being provided.

"The financial strength of the sector is satisfactory when viewed in aggregate but a small number of higher education institutions are facing a tough operating situation with limited financial resources," it said.

The report does not spell out which these are, but "new" universities - the former polytechnics - have typically struggled financially compared with longer-established institutions.

Government sources have indicated that universities which cannot attract enough students will be encouraged to merge or could be closed.

Hefce covers 71 universities, 17 directly-funded schools and institutes of the University of London and 44 higher education colleges.

A spokesman said: "These forecasts reflect a wide range of different factors. In some cases deficits may reflect decisions to invest now for the future.

"Universities and colleges have to keep tight control of costs given the constraints on resources.

"We are discussing the sector's future funding needs as part of the current spending review."