Australian universities will reduce their intake of domestic students over the next few years, as a historic rule change allows them to collect their full funding entitlements for fewer enrolments, policy expert Andrew Norton has predicted.

Mr Norton said ¡°financial logic¡± dictated that universities should take advantage of the removal of mandated minimum enrolments, a change made as part of the 2012 switch to demand-driven funding.

While there is no minimum enrolment, universities are capped on the maximum level of student funding they can receive.

¡°If you want to maintain your per-student revenue, the logic of the system is to slowly reduce the number of places each year,¡± said Mr Norton, ÖйúAƬ programme director with the Grattan Institute.

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¡°Because the underlying commonwealth contributions [public subsidy] are being indexed, you can deliver fewer places and still get your maximum entitlement.¡±

Before 2012, universities were required to meet minimum enrolment targets to earn their full funding allocations. Those who failed to do so incurred financial penalties.

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But minimum quotas were discarded when the former Labor government uncapped funding for domestic undergraduate places in 2012. And while overall funding envelopes were reimposed on universities in late 2017, with the Coalition government freezing teaching grants for the following two years, allocations per student have continued to be indexed at a rate of about 2 per cent a year.

However, minimum enrolment requirements were not restored. This means universities can reduce the number of domestic undergraduates by almost 2 per cent each year and still collect their maximum funding allotments.

Mr Norton¡¯s modelling, based on nursing enrolments, suggests that student numbers could decrease by up to 8.9 per cent between 2017 and 2022. Universities that successfully meet as yet unspecified performance targets, which will guide limited increases to teaching grants from next year, could pocket the extra money while allowing student numbers to drop by up to 5.6 per cent.

Mr Norton, who helped conduct a review of the demand-driven system for the government in 2014, said universities should ¡°think seriously¡± about reducing their student places. But he doubted institutions would follow the ¡°full financial logic¡± of the funding settings. ¡°Universities feel obligations to their students and communities,¡± he said. ¡°They¡¯ve got a long history of over-enrolling and mission-based decisions.¡±

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Community needs would mandate more rather than fewer enrolments, with the number of school-leavers spiking over the next few years. Population projections suggest the cohort of 17-18-year-olds will rise by about 2 per cent in 2022, 3 per cent in 2023 and 4 per cent in 2024, before growth rates decline in the following years.

Mr Norton said enrolment increases of this magnitude were unlikely. While education department projections suggested a ¡°slight increase in coming years¡±, these figures were based on universities¡¯ ¡°optimistic¡± indications of their planned intakes ¨C based on an assumption that demand-driven funding would be reinstated following a Labor victory in the May federal election.

He said universities had been prepared to admit unsubsidised students as ¡°a brief loss leader¡±, but that willingness would have subsided after the Coalition victory eliminated hopes of a removal of funding caps.

¡°I would not be in the least surprised if there was a drop-off in the number of student places in the next few years,¡± he?added.

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john.ross@timeshighereducation.com