Universities told they must reform

The Business Secretary risked inflaming tensions by saying if staff numbers have to be reduced then "so be it", in response to concern over the impact of brutal budget cuts announced by the Government.

Despite warnings from Leeds University vice chancellor Prof Michael Arthur the cuts threaten to bring one of the world's greatest education systems "to its knees", Lord Mandelson said the institutions must take their "fair share" of economic pain.

"Universities have to reform and change what they offer and deliver to students both to meet continued demands and employment needs of the economy," he told regional journalists. "If that means changes in employment, so be it.

"If you remain still and static and don't adapt or respond to anything happening around you ... if you think you can stand still, you can't. You will just roll backwards into relative decline – not good enough."

Pulling no punches, he accused universities of failing to invest enough in producing skilled graduates who can fill the jobs of the future, building the next generation of nuclear power stations and leading a green energy revolution.

"Our further education colleges and universities are still not investing in the courses and supplying skilled graduates that these new business activities are demanding," he said.

"That mismatch is fatal for people's jobs in the future. If they don't have the skills to work in these faster growing sectors and markets – and we are talking about quite specific engineering skills, for example, in civil nuclear build - then those individuals are going to miss out and the economy as a whole is going to miss out because we will not be able to build the supply chain we want on the back of those new technologies and sectors and markets.

"It will mean these things might happen but they will be importing labour skills and components from other countries."

Lord Mandelson was speaking after the latest meeting of the Government's regional economic council yesterday – which includes university vice chancellors and economic leaders – and after taunting universities in the House of Lords by telling them cuts could help them improve.

He said universities must not see themselves as isolated "ivory towers" and had to work with businesses and regional development agencies to ensure the economy prospers. The Government is desperate to ensure the UK does not miss out amid concern other countries have stolen a march in "green" industries.

Relations between the Government and universities have been strained since the Government announced a series of funding cuts for higher education amounting to 915m over three years, sparking union fears of up to 700 job losses at Leeds University alone.

Lord Mandelson played down the scale of the cuts, insisting they amounted to less than five per cent of budgets over three years.

Professor Steve Smith, president of Universities UK, said universities were realistic about the strain on public spending and accepted they had to take their fair share.

But he warned against more cuts which would "risk" quality.