Universities should be free to charge whatever fees they like to improve the quality of teaching, a report commissioned by John Denham, the universities secretary, has recommended.

The study, conducted by chairman of the Medical Research Council and defence company, QinetiQ, Sir John Chisholm, reccomends substantial differences to the current system with the most expensive subjects, like medicine, possibly costing £20,000 a year. Whilst lower ranked universities could stay the same, this would creating a greater hierarchy between universities considered "affordable" and those with sky high fees.

"The fixed cap on student fees provides little scope for demand to influence the quality of supply,” said Chisholm.

Figures from the Universities and Colleges Admissions Service (Ucas) show that applications by December 16 were up 0.2% on a year ago. In 2007 applications rose by 7.8%, while in 2006 it was 5.3%.

The latest figures from UCAS show that the number of university applicants has fallen in the past year.Stephen Williams, the Liberal Democrat universities spokesman, said worries over debt and the value of a degree may be putting off applicants, “particularly at the margins”.

Rob Wilson, his Conservative counterpart, said “the growth in student numbers is depressingly flat” .

The Government is due to review the current grants and fees system in 2009 and any changes, including allowing universities to charge higher fees, could be implemented as soon as 2011.

Read more in The Times.