The call for cuts in university places has provoked synchronised shroud-waving from the University and College Union (on behalf of academics) and Universities UK (for institutions).

They warned yesterday that next year more young people will apply for places than there are places available. This is true, but hardly a shock:that is always the case. For each year of the past decade, about a quarter of university applicants have not received places.

It is likely that the proportion of disappointed applicants will rise next year to about a third, given the increase in applicants announced yesterday. But that is a temporary and inevitable effect of the recession (which has driven up the number of applicants) and no argument for a big increase in public spending Given rising drop-out rates from universities, which now vary between 0 and 28 per cent, there will certainly be plenty of unfilled places in many institutions next year.

Most young people will consider a 66 per cent chance of winning a place as very good odds. It clearly compares very favourably with every other competition in life. Young people are hardly up in arms about the much lower probability of (say) winning The X Factor. Just like that contest, the chance of success in university entry is in the applicants' own hands, depending on their academic ability, assiduity and other qualities. It may be a competition, but it is not an unfair one.

What is unexpected is that higher education should be the sector pioneering the debate on public sector cuts and efficiency. Perhaps the Government feels that it has some cover from the forthcoming review of tuition fees under Lord Browne of Madingley. (The review is widely expected to say that any cut in taxpayer support now will be outweighed by higher student fees later.) Perhaps there is simply no extra money for universities, as the Government has already announced that the schools budget will be protected for the next three years.

Whatever the reason, ministers from Lord Mandelson down have announced that budgets will be cut by hundreds of millions of pounds, with the number of places frozen and universities having to make more of the resources that they have.

It was the right thing to do, given the size of the budget deficit, which all parties have pledged to tackle to maintain economic credibility. Higher education is smaller than some other parts of the public sector (its annual budget of £15 billion a year compares with an NHS budget of well above £100 billion) but ministers have rightly judged that it should not be immune from the drive for value for money.

The shroud-waving case weakens significantly when one realises that all the "cuts" are, in fact, absolutely reasonable ideas that any organisation in a funding crisis should consider. There is a warning about "campus closures", for example. But many universities - like many schools - make very poor use of their estates. They should be closing some facilities and getting more value out of others.

Equally, institutions would be right to ditch unpopular courses, ask postgraduates to undertake more tuition (they are talented people) and seek, as Lord Mandelson suggests, to teach some courses in two years rather than three.

The university budget has risen by 15 per cent in real terms in the past five years alone, and numbers of academic staff have risen by the same amount. It is not plausible for Sally Hunt, the general secretary of the University and Colleges Union, to say, as she did yesterday, that her sector "simply cannot do more for less". Institutions that specialise in part-time and adult courses, such as Birkbeck London, show how to teach courses intensively, keep facilities to a minimum and use them for both daytime and evening tuition.

Where I would agree with Ms Hunt is that the university sector cannot carry on as before.

The deal agreed between universities and successive governments - more taxpayers' money for more students and more government influence - has been revealed to be a Faustian pact. Politicians have pursued an agenda of relentless expansion, no matter what the cost or the impact on quality.

They have allowed the idea to emerge that university education is an entitlement rather than a meritocratic achievement. University leaders have looked to governments for greater finance only to discover that the well has run dry.

As Terence Kealey, the Vice-Chancellor of the University of Buckingham, has pointed out, the solution is for institutions to raise more of their revenues privately, whether from tuition fees or alumni.

We need more of the big fundraising appeals launched by Oxford and Cambridge. We need more plans to establish private universities.

We need the UK to become seen as the global centre for higher education. That's why the decision by both the Government and the Opposition to toughen the rules on visas for students from outside the EU is particularly short-sighted.

Universities cannot offer more places this year because of the limit imposed by the Government - they will be fined £3,700 per place if they go over their quota. A genuine market in higher education would allow the number of places to rise if there is demand for them. And such a free market would also build on the introduction of tuition fees - one of new Labour's greatest achievements.