Now that the full implications of the Budget statement have had time to sink in, the reality seems even grimmer than before and it is worth spelling out exactly why.

For 1996/97 the ³ÉÈËVRÊÓƵ Funding Council for England grant is a single allocation, for both recurrent and capital purposes. The recurrent element is broadly unchanged from last year's budget (ie the anticipated reduction of 3 per cent is carried forward).

It is the so-called capital element that bears the brunt of the latest additional reduction. There is to be a cash reduction of 31 per cent in one year which, when taken together with the recurrent element, amounts to a 7 per cent fall overall in real terms for 1996/97.

For the period 1996/97 to 1998/99 the reduction in capital funding is a staggering 52 per cent and for recurrent and capital funding together is 12 per cent in real terms.

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In seeking to disguise this, the Government has argued that capital projects could just as well be funded by the Private Finance Initiative and as this is simply an alternative mode of funding rather than a cut, no harm will be done. Let us examine that argument more closely.

Firstly, it assumes that the "capital funding" distributed in universities via HEFCE is used principally for major capital projects. While it is true that there are still, for 1996/97, a small number of genuine capital projects partly funded by HEFCE (for example, the reorganisation of medical education in London and the Follett libraries initiative), "capital funding" is now a combination of two previously separate formula-based grants, one for equipment and the other for estate formula funds (minor works). They are used mainly for the equipment needed for teaching and research, and for the refurbishment of laboratories and other facilities, to enable them to keep up-to-date and to comply with the law.

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It is this provision which has been drastically reduced and the 31 per cent reduction announced for 1996/97 could rise to over 40 per cent when allowance is made for the funding required for those genuine capital projects referred to above.

What damage will that inflict on minor works programmes already pared to the bone? And how do institutions respond to recommendations arising from the multiplicity of teaching quality visits which are increasingly pointing to shortfalls in this area as undermining the quality of provision?

Did ministers realise that the reductions in "capital" would actually fall, as they will inevitably do, not on capital at all but on equipment and minor works? And if they did, did they really expect the PFI to assist us?

I have no problem in principle with the PFI. For those major projects, such as residential accommodation, refectories or sports facilities, which will generate their own income stream, then the repayment of a loan derived from the private sector with that income seems quite acceptable.

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But HEFCE money is never now used for such projects, which are already funded by variants of the PFI. But how will the PFI help, for example, with the refurbishment of a major set of science laboratories? Even if a loan were forthcoming (secured against what?), where would one find the additional income stream to repay it?

The truth is, the Chancellor has delivered a further savage cut in the resources for teaching and research, in the context of which the PFI is little more than a red herring.

Martin Harris is vice chancellor of the University of Manchester.