Bold and successful experiment comes to premature end with $2.2 billion university funding cut

by Andrew Norton

Published by The Age and Sydney Morning Herald, Wednesday 20 December

On New Year’s Day, a bold experiment in Australian university policy will end. It began six years ago, when the national government lifted most controls on undergraduate student numbers, triggering an enrolment boom and today’s highly competitive student market. But from January 1, 2018, this demand-driven system will be no more. Regardless of how many students they enrol, each university will be paid no more than their 2017 funding level.

Critically, this change does not need Senate approval. The government has hit an already-legislated fiscal panic button that lets it freeze demand-driven funding for bachelor degree student places. With some additional cuts to postgraduate places, the government estimates it will save $2.2 billion over the next four years.

Universities are understandably upset about this blow to their finances. But freezing demand-driven funding damages the higher-education system in ways that go well beyond the consequences of universities having less money than they expected.

As its name suggests, demand-driven funding let universities meet student preferences. Previously, they had to work within a fixed government allocation of student places.

The demand-driven transformation was most obvious in total enrolments. Domestic undergraduate numbers grew by a third between 2008, the last year before the phase-in of demand-driven funding, and 2016. By contrast, enrolments grew by only 5 per cent between 2001 and 2008, leading to many university applicants missing out on a place.

Rapid enrolment expansion ended in 2014, and most observers expect only modest demand growth in the next few years. Pent-up demand left over from the previous funding system has largely been met, and school-leaver numbers won’t grow significantly in the short term. So the immediate effects of the freeze on university participation rates should be small.

But this plateau in demand won’t last. The Costello-era baby boom generation is now at school and due to arrive at university in the early 2020s. They could easily add 20,000 to the number of people applying for higher education.

The government says student places will be able to expand at population-growth levels from 2020. But that is a maybe-perhaps promise, contingent on a purely administrative decision to set maximum university payments at a higher level. As it did this year, the government could change its mind with little notice and no parliamentary approval.

Adding to the uncertainty, additional funding will be available only to universities meeting bureaucratic performance criteria. Student demand has not been mentioned as one of the possible performance measures.

Universities are not going to invest in substantial new teaching capacity on such a weak basis. And that is one of the biggest problems with this week’s announcement. Until recently, bipartisan support for demand-driven funding provided a stable environment in which universities could make long-term plans. In a competitive market, universities had to think carefully about where, what and how students would want to learn in the coming years. Demand-driven funding encouraged innovation and an eye on the future.

But now the future will be 2017 with a few incremental changes. Some innovations we might have seen we will never know about. But the consequences of a growing gap between the demand for higher education and its supply will become apparent.

The funding freeze will most affect states with fast-growing populations, because they won’t be able to adjust to increased demand. Victoria will be disadvantaged, as it was under the previous funding scheme.

The funding freeze will most affect universities with expanding enrolments. Fewer students will get into their first-preference university than if demand-driven funding had continued.

The freeze will most affect disciplines that rely heavily on government funding. In engineering, science and most health courses, the government contributes two-thirds or more of the total funding rate. Universities will still receive a student contribution for each student they enrol in these fields, but that is a third or less of the total funding rate. Universities will be reluctant to expand enrolments in engineering, science or health courses, because they will almost certainly lose money.

In law and business courses, by contrast, the student contribution is more than 80 per cent of the total funding rate. If universities expand enrolments in these fields, they will still get most of their potential revenue.

These funding incentives conflict with the signals from student demand. Statistics for 2017 applications show that demand is falling slightly for law and business courses, while it is increasing in engineering, science, nursing and allied health courses.

The demand-driven system wasn’t perfect. But it was better than the system that went before it and the system that is coming after it. It was a bold and successful experiment in higher-education policy. But sadly, it was also short-lived.