The arguments about the funding of schools reached a new intensity last week. The Government announced that it would not fund the salary increases its own pay review bodies had recommended. This was hardly because the awards were generous. For the third year in a row, the public sector was to receive less than inflation. The reaction of many school governors and teachers has been anger. Thousands of jobs will go; class sizes will be even higher, or illegal budgets will be set.

At the same time, the Joseph Rowntree report on income and wealth showed the appalling state of this country. Inequality between rich and poor is at its widest for 50 years. The report demolishes the Government's claims about the consequences of economic growth. The poorest third of the population has actually suffered from the way economic growth has been managed.

Inequality has grown faster in this country than in any comparable nation. Many of those who manage to find paid employment for the first time do so at wages below that of their predecessors. Changes in tax benefits have increased the burden on the low and middle paid, while the high earners have seen their contribution fall significantly.

The report is a devastating critique of the "trickle-down" effect of increasing prosperity for the minority. It actually demonstrates the opposite effect, showing the terrible impact of the " me generation" on our country.

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The report makes proposals for sustained "positive investment" in infrastructure, employment, social policy, child care and education and training. Howard Davies, director general of the Confederation of British Industry and one of the authors of the report, argued that unprecedented widening of inequality was "a sign of a malfunctioning of the economy", which "was an issue of growing concern to business".

Mr Davies insisted that too many people in paid employment are not receiving education and training, and that too many people out of work are not being trained. The price paid by everyone was very high, because "one way or another we pay the price, through taxation for benefits, the health service, or the criminal justice system".

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Most crushingly for this government, the report warned that market mechanisms alone will not deliver the levels of positive investment needed for the future of this country. The three remaining pillars of wisdom of Government economic and social policy are thus each systematically demolished by the report: the trickle-down; the need for widening inequality as a prop for efficiency; and the role of the market.

The Government's response on public sector pay makes it clear that there is to be no change. But what surprises me is the complete silence from the further and higher education sector on the consequences of Government policy on pay for universities and colleges. With the "efficiency gains", the impact will be cuts of some 25 per cent over the next three years.

How many people in further and higher education will lose their jobs in the next three years? Will governors in our sector threaten to set illegal budgets? How is this investing in education and training for the knowledge society of the new millennium?

For me at least, the answers remain a mystery, but the prospects are all too clear.

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Mike Fitzgerald is vice chancellor of Thames Valley University.