Those are among the findings of the Higher Education Funding Council for England¡¯s annual overview, , which covers 2011-12 university accounts and forecasts for 2012-13 - the first year of ?9,000 fees.

The release of the figures comes amid negotiations between the Treasury and the Department for Business Innovation and Skills on the level of cuts to be made in the 2015-16 spending review, with some in government suggesting universities are perceived as being ¡°awash with cash¡±.

The sector¡¯s income rose to ?23.3 billion in 2011-12, a below inflation rise of 1.5 per cent on the previous year. Hefce¡¯s accompanying press statement describes this as ¡°the first real-terms reduction in total income¡± since records for the sector were first collected in 1994-95.

The overall operating surplus was 4.2 per cent of income, or ?974 million, down from 4.6 per cent in 2010-11. But based on institutions¡¯ estimates, the sector¡¯s operating surplus is projected to shrink in 2012-13 to just 1.6 per cent of total income, or ?381 million.

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Hefce says in the report: ¡°The projected financial results for 2012-13 indicate that the sector will remain in sound financial health overall, although the reductions in public teaching grant funding, shortfalls in student recruitment and projected increases in expenditure will cause surpluses to reduce sharply.¡±

Sir Alan Langlands, Hefce chief executive, says in the press statement: ¡°Universities and colleges took a responsible approach to financial stewardship in the year before the new funding arrangements for higher education were introduced, reducing costs while maintaining excellence in learning, teaching and research.¡±

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But he adds: ¡°It is important to recognise that past performance does not guarantee future success, and recent talk of universities being ¡®awash with cash¡¯ is ill-informed.¡±

Hefce says in the report that the 2011-12 financial results are ¡°sound overall¡­but not as strong as the results reported for 2010-11¡±.

It suggests the sector ¡°made good efficiency savings during the year. The most significant of these savings related to staff costs, which fell in real terms for a second consecutive year in 2011-12¡±.

Given the reduction in public capital funding, institutions are now funding more capital investment from internal cash reserves or other sources, Hefce says.

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¡°Some institutions will need to increase surpluses in future years above current levels to ensure that the quality of the infrastructure in the higher education sector does not deteriorate, which would harm its long-term sustainability,¡± it adds.

john.morgan@tsleducation.com