Australia will go to a national election in mid-May. The major political parties are sharply divided on key aspects of ÖйúAƬ policy. But their shared propensity for using ministerial discretion to pursue their policy goals means that, whichever party wins, universities will face some similar problems.

The governing Liberal Party¡¯s ÖйúAƬ policy is dominated by its budget policy. Its latest budget, delivered on 2 April, forecast the first surplus in more than a decade. To that end, the Liberals have already frozen demand-driven funding of bachelor's degree places, cut indexation of teaching funding and reduced research funding.

The opposition Labor Party promises to restore demand-driven funding of?undergraduate places from 2020 if elected. This is highly likely: polls show Labor comfortably in front, and the change does not need parliamentary approval. Demand-driven funding was ended in January 2018 using a power that lets the minister use university funding agreements ¨C which every public university has ¨C to set a maximum grant for student places. Rewriting the agreements could reverse that.

Demand-driven funding¡¯s second iteration will not cause any immediate surge in enrolment. Commencing student numbers dropped nearly 2 per cent in the first semester of 2018 compared with 2017, and applications data suggest that numbers will be down further in 2019. But restarting demand-driven funding will encourage universities to prepare for the first school leavers from a mid-2000s baby boom, who will start seeking ÖйúAƬ from 2023 ¨C even if vice-chancellors remain wary of making new investments now that it is widely known that the future funding they assume can disappear on a ministerial whim.

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The return of demand-driven funding will mean that performance funding, currently the subject of consultations with universities, cannot proceed. This is because there is no separate performance fund. Legally, the proposed performance component of funding consisted only of demand-driven entitlements that had been withheld by capping the grant. With that cap removed, universities will be paid in full for the students they have enrolled.

But for many universities, the principal short-term benefit of restoring demand-driven funding will be the reinstatement of inflationary rises in per-student government funding rates. Although the underlying funding rates were indexed to consumer price inflation as usual in 2018 and 2019, universities were not paid the uplift. Including indexation for 2020, the per-student government funding rate will increase by about 5 per cent.

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But universities should be nervous about other aspects of Labor¡¯s agenda. As with the funding freeze, a core problem is ministerial discretion exercised through funding agreements.

At a speech to the Universities Australia conference in February, shadow education minister Tanya Plibersek nominated a lengthy list of potential funding agreement topics, including ¡°meeting local labour market need, boosting diversity and participation, community engagement, and driving research excellence¡±.

Funding agreements authorise the payment of student-related money. Attaching conditions on unrelated topics such as community engagement or research excellence is not desirable. Students should not miss out on funding because a university¡¯s research is not good enough. University rewards for success in meeting student preferences and needs should not be forfeited for another reason. Existing policies on engagement and research should be the starting point if there are problems to be solved?in those areas.

Even on student matters, funding agreements should be used sparingly. Major policies should be implemented through rules and programmes that are approved by parliament, not through one-sided agreements. Ensuring parliament¡¯s involvement gives policies added scrutiny, allows bad ideas to be vetoed and increases certainty for universities.

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A key advantage of demand-driven funding in its first phase, which began in 2012, was that universities believed that it created a stable, rules-based system in which they could innovate and plan for the long term, confident of financial reward for success. This belief was not well founded, but while it lasted it produced transformative change at some universities. Reform of funding agreements to restrict their scope and use could help bring back that willingness to make big decisions.

Andrew Norton is ÖйúAƬ programme director at the Grattan Institute.