Next week MPs will make a crucial choice. If they choose wrongly, the consequences will be dire, argues Charles Clarke

When I was appointed secretary of state, I made clear that investing in the future of universities was one of my priorities. Next Tuesday, the House of Commons will vote on reforms that will ensure that this is the case. The higher education bill will inject extra resources into universities in a way that is fair to students, fair to taxpayers and fair to universities themselves.

British universities have a great deal to be proud of - they produced 44 Nobel prizewinners in the past 50 years and forged closer links with industry, while expanding places beyond the preserve of a tiny elite.

But universities have done so against the odds, surviving on dwindling resources. I have seen for myself how stretched many are: facilities in decline, teaching staff poorly paid, the latest technology out of reach. It is a tribute to the commitment of universities - their staff and students - that they have achieved so much with so little.

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The bill will reverse the previous years of funding decline. Additional investment from variable fees, based on 75 per cent of universities charging the full ?3,000 fee, will deliver ?1 billion extra income each year. Universities already generate ?800 million through existing fees. With our reforms, they will receive ?1.8 billion a year in fee income.

But universities cannot survive by fee income alone. This year, public investment in higher education is ?7.5 billion. We will increase this to ?10 billion by 2005-06. This will not solve every problem overnight but it will make a substantial impact.

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I know that some people within higher education fear that variable fees will result in a two-tier sector. I disagree. We already have a highly diverse higher education system. If anything, I want to encourage diversity and innovation as something to celebrate. The fee structure should fit this diversity, allowing universities to vary according to their provision.

Perhaps the best example of this diversity is the growth in foundation degrees. I have been encouraged by the enthusiasm of many universities and businesses for these two-year vocational courses. It would be quite wrong if, under a fixed-fee system, 25,000 foundation-degree students were forced to pay the same as everyone else.

Investing in our universities is one half of the answer. We have to do so in a way that is fair to students, graduates and their families. Again, the bill meets this test.

Indeed, the Organisation for Economic Cooperation and Development agreed this week that the bill is the right and fairest way forward. It is right to ask graduates, who have the highest rate of return on their investment in higher education than any other OECD nation, to make a bigger contribution towards university funding. But to protect the poorest graduates, they will start paying back their debts only when they earn more than ?15,000 and their debt will be real-interest free. A graduate earning ?20,000 a year will pay ?8.65 a week.

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This principle of "pay when you earn, not when you learn", means we can do more to help all students, particularly those from the poorest backgrounds.

Maintenance grants of up to ?1,000 a year in 2004, rising to ?1,500 in 2006, will be reintroduced. The first ?1,200 of fees will be waived and universities will provide a minimum of ?300, through a new bursary scheme, for the poorest students on courses costing ?3,000 a year.

Some universities will go beyond this. Cambridge and Exeter universities have set out plans for bursaries of up to ?4,000. But we have struck the right balance between support for the poorest students and extra resources for universities.

The reforms will deliver greater investment and freedom for universities to compete in the world, while protecting students and graduates, particularly those from the poorest backgrounds. But it would be naive to think that this alone will prepare Britain for the future. We have also to build better vocational courses in schools and colleges, increasing the number of modern apprenticeships and helping industry develop its own training. Our Skills Strategy, built with the Confederation of British Industry and others, has this at its core. And, more importantly, we are actually getting on with delivering it.

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Next week is a decisive moment in the future of higher education. Do we invest in universities or not? Do we open up opportunity to all or not? And do we put in a better system of support for students or not? But it is not simply the future of universities that is at stake, it is our nation's ability to compete in the world.

Charles Clarke is secretary of state for education and skills.

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