While he believed the Budget contained some good news for tertiary institutions, Prof Skegg was disappointed universities would not receive adequate adjustments for inflation, and there was not more provision for the growth in student numbers.
This would force universities to consider some "unpalatable" financial decisions over coming months, he said.
"The University of Otago is already carrying unfunded students this year, and the situation is likely to become more difficult in future," he said.
The most serious adverse effect of the Budget on the University of Otago was the removal of the Tripartite Adjustment Fund from 2011.
"The tripartite money was provided to help increase university salaries, but much of the money required is now going to be withdrawn.
"These negative budgetary changes will force all universities, including Otago, to consider some unpalatable decisions.
"Having said that, we fully recognise that the Government is facing fiscal challenges that have been unprecedented in recent decades.
"Universities cannot expect to be immune from these pressures.
"We want to work with the Government to preserve the best of tertiary education and research."
Prof Skegg said as New Zealand's most research-intensive university, Otago was delighted the Government was making significant increases to the Marsden Fund and the Health Research Council, as well as a smaller increase to the Performance-based Research Fund.
"While the increases are not as large as indicated in the National Party manifesto, this is understandable given the economic crisis that has unfolded since the election.
"The increases to the Marsden Fund (by 24%) and the Health Research Council (by 13%) demonstrate that the Government is committed to scientific excellence and creativity, and recognises the importance of basic research."
Prof Skegg said full funding for the genomics initiative, announced by the previous government, had been confirmed and was also "very good news".
This would be led by the University of Otago.
"We are pleased that the first stage of the increase in medical student numbers has been confirmed.
The Universities of Otago and Auckland have made it clear that we can prepare to accept these students, but the details of government plans have not yet been revealed."
Labour Party Tertiary Education spokeswomen Maryan Street and Carmel Sepuloni were was critical of the budget and said the cuts to education and training would do nothing to pull New Zealand out of the recession.
Ms Street said a 1.95% adjustment for a CPI increase for universities and polytechnics was actually a funding cut when inflation - now running at 3% - was considered.
"How can a university or polytechnic cater for growth when their future funding is being cut? We are seeing more people enrol in tertiary study as they seek to upskill in the wake of redundancies and an increasing dole queue.
"The institutions will simply have to turn people away, because the Government is not funding them adequately. This is a terrible waste and takes the country in exactly the wrong direction."
Ms Sepuloni said youth training programmes such as Skill Enhancements, Youth Training and Nga Kaiarakati Pathfinders were also being cut back.
The programmes helped young people who had not done well at school to pick up skills and build their way into tertiary education courses.
