Revealed: fatal flaw in top-up fees

Nor will it raise student numbers as the Government wants. That is the verdict today in a damning report from the influential Institute for Fiscal Studies which warns Mr Blair is taking "a big gamble for a relatively small return".

The IFS report, commissioned exclusively for the Evening Standard, will be a severe blow to the Prime Minister and Education Secretary Charles Clarke as they struggle to quell a growing Labour revolt.

It comes amid increasing speculation at Westminster that defeat in a Commons vote next month could end Mr Blair's reign at No 10.

At the same time, the Government, desperate to hold its policy together, issued a stern warning to the universities to go out and win more money from the private sector, and streamline their out-of-date management systems.

The IFS, a highly regarded independent think-tank, says that if all universities charge the maximum top-up fee of £3,000 for each student it would bring in an estimated £1.4 billion.

But it says half the amount raised from top-ups "will be swallowed up subsidising the loans most students will use to pay them".

Ministers have in fact arranged for universities to vary the fees they charge, to the fury of many Labour MPs who say it will create a two-tier system.

The result of that, says the IFS, is that the net amount raised would be even less, amounting perhaps to £500 million. It says that is "pretty small" against a total higher education bill of £9billion next year.

And, crucially, it is nowhere near the extra money required to expand student numbers in line with government targets.

The IFS report looks certain to hearten the rebels who are out to reject the plan when it comes to the Commons. The number signing a critical Commons motion, the rallying point for the rebels, stood at close to 160 and rising.

Defeat on the Bill's second reading would be followed within 48 hours by a vote of confidence, which Mr Blair, with his paper Commons majority of 164 would win.

But some of the rebels were predicting that with his authority shattered, a flagship measure shot from under him and his public service reforms a mockery, Mr Blair would choose to stand down.

The Chancellor has thrown his support behind Mr Blair. Today Mr Brown publishes a report urging the top universities to strengthen their links with business.

It praises the steps taken by universities over the past decade in "casting off their old ivory tower image and playing a more active role in regional and national economies".

But the report's author, Richard Lambert, says there is "much more to be done" if universities are to "exploit their new opportunities in the most effective manner".

The warning was seen as directed particularly at Oxford and Cambridge, which the Chancellor believes remain elitist and out of touch.

Today, writing in The Times, Mr Brown says that in the key area of research "Britain still lags far behind America" particularly at putting research discoveries to practical use.

The Lambert Report points out that Cambridge enjoys funding of £446 million - but just four per cent came from the private sector. The private sector contribution to Oxford's budget is little better, at six per cent.

A spokesman for Oxford said: "It is not the function of a university to be a consultancy for business. We are an academic institution."