England’s universities are set to face significant financial challenges over the next three years, according to a report.

It says that while figures for 2012/13 show that overall the higher education sector is in a good position, this includes a wide range of financial results across institutions.

The report, published by the Higher Education Funding Council for England (HEFCE) reveals that universities’ income is expected to rise, but that increases in staff costs and other operating expenses will cause projected surpluses to drop to £769 million from £943 million in 2012/13.

It goes on to say that while projections suggest that the sector will be financially stable up to 2016/17, this is on the basis that universities will meet their targets for recruiting and students and there will be no further cuts to government funding.

As part of a major overhaul to higher education, ministers announced last year that 30,000 extra places would be available at universities this year, with the cap on student numbers lifted completely next year.

HEFCE says that projections show only a small increase in the total number of full-time undergraduates this year (2014/15). Greater rises are expected over the next two years, but institutions’ projections vary a great deal.

The report also says that universities as a whole are expecting to see a rise in the money they get in fees from overseas students – rising from £3 billion in 2012/13 to £4.2 billion in 2016/17.

But it warns that the growth of international full-time students coming to the UK slowed in 2012/13 and if this continues there is a risk that institutions will not reach this level of income.

This would have an effect on the higher education sector’s projected surpluses.

At the same time, institutions are having to pump more of their own money, or raise more funds to maintain and improve their campuses, buildings and facilities, HEFCE suggests.

It says: “While the sector has shown itself to be adaptable in coping with change, there continue to be some significant challenges and risks for the future.

“These include the sector’s capacity to generate enough financial headroom to sustain the investment in infrastructure and student services necessary to respond to increasing domestic and overseas competition.”

HEFCE chief executive Madeleine Atkins said: “Higher education is vital to economic and social prosperity.

“In a globally competitive environment, universities and colleges in England must maintain and build on their reputation for excellence in research, teaching and knowledge exchange.

“It remains crucial to secure long-term financial sustainability and to maintain confidence in the financial health of the sector so as to stimulate increased investment.

“There is a wide variation in the projected financial performance of institutions, and there are risks that need careful monitoring and mitigation if institutions are to be sustainable in the long term.

“There is a continuing need to invest in new facilities to support a high-quality experience for students which will in turn require continued government support.”