Margaret Hodge outlines the government's long-term strategy for addressing the key issues facing higher education.

The year 2002 will be one of challenges for higher education - challenges for us in government as well as for universities and colleges. I hope we can rise to them together.

Important improvements are already taking place. By 2003-04, funding will be 18 per cent more in real terms than in 1998. The 2001 research assessment exercise results were testimony to the strength of research at our universities. And we have welcomed the debate started by the Higher Education Funding Council for England on whether to lift the cap on student numbers at institutions to enable popular courses to expand.

But we still face some big issues. Widening participation is among the most important. To meet our target of 50 per cent of those under 30 participating in higher education by 2010, we need more young people from poorer backgrounds to achieve good A levels. They are no less bright than their middle-class counterparts, but they often need the extra motivation being provided through our Excellence Challenge programme. It is something we will also address in our forthcoming green paper on 14-19 education.

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It is also about striking the right balance in student support between contributions from students, their families and the public purse. The introduction of loans has not deterred more young people from going to university. But you are still five times more likely to do so if you are from a middle-class rather than from a working-class background. We have introduced opportunity bursaries, with 8,000 more for students starting university or college in 2002, as well as more help for student parents and part-timers.

The budget for widening participation will increase from ?175 million this year to ?189 million in 2003. And the second phase of our Aim Higher campaign kicks off next week to encourage 13 to 18-year-olds to think about going on to university as a realistic option.

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However, I am aware that we must do more while retaining the principle that those who benefit from higher education should continue to contribute to its costs, given graduates' significantly higher earnings. So we are looking at ways to simplify the existing system of hardship support and provide more upfront help for poorer students. Doing so will help tackle the issue of real and perceived debt. However, our review has not yet reached its conclusions.

Some argue that we do not need more graduates. Yet the National Skills Task Force forecasts 1.73 million more professional graduate jobs by 2010 - 80 per cent of total employment growth. Increased participation is also about encouraging more adults into higher education. Take-up of foundation degrees has been encouraging so far, with 85 per cent of places filled on the prototype courses. They will help us address serious skills gaps and complement reforms of modern apprenticeships and vocational education in schools and colleges.

Universities are crucial drivers of local and regional development. So we need improved business links and an improved partnership with industry to exploit research excellence in universities and colleges. The government's Higher Education Innovation Fund, worth ?140 million over three years, is designed to build the capacity of institutions to transfer knowledge and expertise to industry and commerce. We also need to improve the low level of business research and development, which is half the international average.

For students, the quality of teaching is a key issue. With the extra funding for academic pay, universities and colleges can recruit and retain staff of the highest calibre. Good teaching is often fostered by good leadership, so we must also improve management and leadership, building in part on Hefce's special funding support for good practice. We have just announced a new mentoring scheme to link 25 vice-chancellors with business leaders to exchange advice and expertise.

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Education secretary Estelle Morris told vice-chancellors in October that she wanted to look together at how to incentivise and fund improvements in participation, research, industry links, teaching excellence and leadership. I recognise that the academic community too will wish to secure the right level of resources for higher education in the spending review. We have always recognised that investment should go with reform, and I will work with the sector towards that objective.

But if we are to make a strong case for university funding, we must think beyond even the three-year cycle of the forthcoming review. We need a strategic view of higher education for the next decade and beyond. If we get that right, then the UK higher education sector can build on its international strengths while addressing its weaknesses. We will all gain if we meet that challenge.

Margaret Hodge is lifelong learning and higher education minister.