No matter how you look at it, our future will be built on a skilled workforce.

At a time when employers are finding it increasingly difficult to source the skills they need to get the economy moving, it is becoming increasingly clear that we need to invest in the dramatic upskilling of our workforce to defend ourselves against, and benefit from, the emerging economic giants to our north.

We have the advantage of being first movers, we already have the tertiary eduction structures in place, but our neighbours are investing massively in improving their education market, and we should be looking at moving further up the value chain to retain competitive advantage.

What is very important is that the prosperity we are enjoying now was built on the educational achievements of our predecessors. For the economy to prosper we need to ensure that those who are going into the workforce have first had access to excellent schooling, so they are ready to take on the challenges and learn throughout their lives.

Trades are important, there's no denying that. However, a modern economy is demanding ever higher levels of skilling in order to continue to be productive. The mining boom has been built on trades people, the technology now used in mines is such that semi-skilled labour is hardly required anymore. But the mining boom has also as much or more been built on engineers, architects, financial planners, logistics experts, lawyers, accountants and managers-all of whom need the services of doctors, dentists, teachers, bankers, social workers, nurses and more.

We were reasonably early in transitioning into a service economy, and in adopting the microeconomic reforms necessary to create a competitive modern economy. Although difficult at first we've taken big benefits from those changes, and are now competing on all levels with the rest of the world. We had the relatively educated work-force that facilitated this, compared to most of our competitors.

But for the last decade, or longer we have neglected to invest in the people and the innovations needed to take our economy into the next phase. The most recent increases in funding to the eduction sector have resulted in the support of 450 000 apprenticeships, but just 19 000 new university places funded at loss-making rates.

With public funds scarce universities themselves have become  Australia's largest services exporter. This is the up-side of reduced government support. Similarly postgraduate full-fee courses have grown substantially, as part of executive education and life-long learning requirements. This too is appropriate and good.

We now attract tens of thousands of international students each year from all around the world, and are third only to iron ore and coal as an export industry for Australia. But as a service exporter we are labour employment intensive with jobs in attractive and sustainable employments with high value-add.  Indeed Australian public universities are the least reliant upon public funding by the general taxpayer in the whole of the OECD. In 2007 only 41% of university revenue was from government- behind the subsidy share for even private schools today in Australia..

In many ways 2008 represents a turning point for our economy. The number of people graduating from high-school this year and next will plateau. It will then begin to fall. At the other side of the economy the participation rate will fall as the baby boomers retire at increasing rates.

The very best way to respond to this crisis is to ensure that every one of these young people come into the workforce as highly efficient and effective and well-rounded  individuals. The productivity gains from micro-economic reform have been largely delivered. The China Boom has helped us to continue for now  the prosperity that reform and digitalisation have provided. But sustainability is an issue. Productivity growth has slackened substantially. We are an open competitive economy-but we need the capability securely in place to keep competing well no matter what the opportunities and challenges are ahead.

Yet in the last decade we've reduced our real funding per domestic place within universities by 30 percent. We are the only OECD country that has decreased the share of GDP in public funding for higher education. The average increase in other countries is 49 percent over the last decade. We have taken the savings imperative too far.

Eventually overseas students will realise this and they will find alternatives, because it means rising class sizes, less attention and services, and facilities that are struggling to keep up. We have the highest student-staff ratios across our major competitors. Our own domestic students  will soon, as a consequence, be left with a university sector unable to prepare them as well as the country requires for an efficient productive future. Shake-out has been good, but some rebuilding is now overdue- lest short-term benefit lead to long-term loss.

The overseas students are also a source for our future. Our ability to deliver skilled migrants depends centrally on the universities. Over half of the increase in skilled migrants to Australia over the last decade comes from former students here. For both domestic and overseas students, we need the guarantee of a world-class system.

Universities are an investment proposition. The rate of return on that investment is high for public revenues and for private prosperity. And there are benefits that go well beyond cash. But some rebalancing of public and private funding is overdue so that universities have the incentives to be entrepreneurial, but the public good contribution is adequately supported as well.

Universities themselves have come up with ever more creative ways to respond to the funding shortfall, international students, corporate partnerships, new and different ways to structure the curriculum. We're looking for new ways to partner with government and business, and different approaches to ensure that the students we send out into the work force are as creative and as productive as they ever were. We are also partnering more and more with the wider community under increasingly articulated engagement strategies.

The economic challenges Australia now faces are greater than in most recent memory . But with more support, from government, business and community we can move forward strongly and create a knowledge-based future for Australia. The contribution of universities to economic progress, social understanding and environmental enhancement is all very obvious really, if we just pause to reflect. It can be much greater with new investment and partnership-and with recognition by universities of the mutual obligation that goes with that.

And while the detriment to the universities will be greater, if we fail due to neglect, the price of that failure will ultimately be paid by the rest of the economy and our society. Our present skill shortages would not be holding us back as much as they are, had we addressed these needs earlier. They were evident and yet our response was wanting. Now is the time to learn the lessons and ensure that high quality, flexible, progressive institutions of teaching, learning,  and engagement can be sustained in Australia to help deliver a skilled future for Australians.

Formerly Professor of Public Policy, ANU Dr Glenn Withers is now CEO of Universities Australia. He also holds the post of Adjunct Professor, Australia and New Zealand School of Government, and is a CEDA Board member.