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Otago attracted about $28,000 per equivalent full-time student (eft) place in government tuition subsidies, student fees and research income, he said in a statement to appear in the university's 2009 annual report.
The figure was almost half the $NZ50,500 funding the University of Western Australia received from the Australian Government.
The universities, which worked closely together, both had about 21,000 students and a strong research focus.
The relatively low level of government funding was the most serious problem New Zealand universities faced, Prof Skegg said.
"Unless this gap in funding can be narrowed, it is hard to see how New Zealand universities can continue to attract and retain staff and students of the highest calibre."
He was "especially perplexed" the Government had decided to cancel a grant to increase salaries to ensure they did not fall too far below Australian levels.
Funding for student scholarships had also been markedly reduced.
"No-one expects universities to be immune from the financial crisis that has affected New Zealand and other countries. Nevertheless, we hope the Government will recognise that investments in education and research produce large benefits for the economy as well as society."
A study published in Australia last year concluded investment in higher education, taking account of all costs and benefits, produced a real economic rate of return of 14%-15%, more than double the benchmark 6%-7% set for good investment.
Otago's 2009 financial result was a "satisfactory" operating surplus of $21.2 million.
However, Prof Skegg said that was achieved only by constraining expenditure in nearly all activities.
"It is vital we maintain adequate operating surpluses in order to fund the infrastructure that is urgently needed, but this is becoming increasingly difficult, especially in the current financial environment."
The university is budgeting for an operating surplus of $18.9 million this year.
Despite the "challenging financial situation", Otago was in good heart, Prof Skegg said.
Among many 2009 achievements listed in his statement, enrolments had reached a record of 21,507 individual students, or 19,172 eft places. firstname.lastname@example.org