Demand for cuts deals death blow to Australia’s demand-driven system

Australia’s experiment with demand-driven university funding is over, with government cash frozen for two years from 1 January. Increased funding from 2020 will be distributed by the government without reference to student demand.

The demand-driven system was not a failed experiment. But it was a costly one, as it funded universities for unlimited numbers of bachelor’s degree students. The consequent enrolment boom pushed up teaching grants to universities by 50 per cent. That left higher education vulnerable in a time of large budget deficits.

Despite financial pressures, education ministers from both of the main political parties protected the demand-driven funding’s policy architecture for a long time. Several ministers tried to reduce per-student funding rates rather than reduce student numbers. The May 2017 budget was no exception, with the governing Liberal Party proposing a cut in per-student government funding partly offset by higher student charges.

I believe that was the right trade-off. In 2014, I co-authored a review of the demand-driven system that was commissioned by Christopher Pyne, who was the education minister at the time. We concluded that demand-driven funding had had significant successes, but recognised that its costs needed to be managed.  

The system’s most obvious success was increased participation, especially for students from disadvantaged backgrounds; their numbers continue to grow more quickly than enrolments generally. Other benefits were less evident but also important. Demand-driven funding gave universities the capacity to expand in areas of labour market need. In 2008, 40 high-skill occupations typically filled by graduates had a skills shortage. In all jobs for which there is matching course enrolment data, the demand-driven system responded. Only a handful of these occupations still experience shortages.

Although prestigious universities still reject many applicants, students overall became more likely to get into their preferred institution. Their chances of getting on to their first-choice course also increased, even if it wasn’t at their preferred university. And university leaders report being more focused on student interests, as they need to be when teaching funding depends on attracting and retaining students.

Although there were issues over admission requirements and graduate employment outcomes, parliamentarians, policymakers and universities have generally supported demand-driven funding. Unfortunately, debate about the per-student spending cuts proposed in May was conducted around a false set of alternatives – students paying more versus paying the same as now, rather than students paying more versus a return to centralised control of teaching funding.

The real alternative was always sitting there in the funding legislation. A fiscal panic button legislated for in 2011 lets the government freeze – although not cut – total funding for demand-driven student places at each university. But a freeze quickly turns into declining per-student funding in real terms, because of inflation and the fact that extra students are funded only via their own contributions – which, on average, make up only 42 per cent of the total funding rate of courses.

Perhaps misreading the alternatives, in October, a small populist party in the Senate decided that it would vote against the higher education per-student spending reductions. With Labor and the Greens already opposed, the government’s legislation was lost.

The freeze was one of the few ways that the government could save money without Senate approval, and that measure was adopted in December’s Mid-Year Economic and Fiscal Outlook announcements. But the demise of demand-driven funding was not the main policy goal of any of the political players and its replacement will not be stable. The next two years will be a less well-funded version of 2017 that pleases nobody outside the Department of Finance. From 2020, additional funding will go to universities meeting bureaucratic performance targets. But this provides no guarantee that new money will go to the regions, universities or courses experiencing growing demand. The failings and frustrations that led to demand-driven funding will re-emerge.

Intellectually, demand-driven funding has no alternatives that provide answers to basic questions about how universities will adapt to an ever-evolving society and economy. But Australia doesn’t have enough of a consensus around higher education revenue – whether from taxation or student charges – to put demand-driven funding on a stable financial footing.

Andrew Norton is the higher education programme director at the Grattan Institute thinktank. With David Kemp, he was the co-author of the 2014 government review of the demand-driven system.