Universities in Australia are bracing themselves for a round of savage cuts in federal spending on higher education within two years.

The government is under enormous pressure to reduce its outlays, following a slump in the country's current account to an almost Aus$2.4 billion (Pounds 1.1 billion) deficit in December - the worst monthly result on record.

But if higher education does lose out in the May budget, it would be the first time since Labor was elected in 1983.

The Australian Vice Chancellors' Committee and the National Tertiary Education Union have been forced to revise their lobbying strategies given the government's determination to make savings.

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Both organisations were seeking to persuade it to increase spending on higher education over the next three years and, in the union's case, to allocate an additional $250 million to meet the cost of a federally-funded 8 per cent pay rise for all staff.

But senior ministers have indicated that cuts will be the focus of the budget so as to bring it back to surplus by 1997. Finance minister Kim Beazley said last week he believed there was room for a substantial cuts. His department would be circulating all other departments with a set of suggestions on reductions.

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A key problem confronting academics and the vice chancellors is the startling fall-off in demand for university places. For the second year running, applications from would-be students have fallen - in some states by as much as 10 per cent.

The AVCC and the academic union fear the government will use the decline as an excuse to slash spending.

"It is going to be a tough budget and we are concerned by that," said AVCC executive director, Frank Hambly. "But we will be telling the government not to be deluded by what might be an aberration in the fall-off in demand for university places this year. We will be saying, 'Do not cut back just because this year's figures point to a decline in enrolment when there is, in fact, still a considerable level of unmet demand'."

Mr Hambly said the impact of any budget cuts on universities should not be immediate given that the government had already committed more than $10 billion for higher education this year and next. Any reduction in this promised allocation would destroy the universities' capacity for forward planning.

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NTEU president Carolyn Allport said all groups relying on the Commonwealth for funding would be affected by the budget. Mention of cutting the welfare budget was an alarming sign of what higher education could be facing, Dr Allport said.

Despite announcing its higher education outlays for 1995 and 1996, the government could offset expenditure by changes to the Higher Education Contribution Scheme under which students are able to defer payment of tuition fees until they graduate.

This could include another one-off increase in the HECS charge (as occurred in 1992 when students were forced to pay an extra $144 a year), lowering the salary threshold for repayment or introducing differentials for repayment that relate to course costs, time taken or whether the degree is a first qualification.

Receipts from HECS, through discounted payments on enrolment and the graduate tax levy, totalled almost $800 million three years ago and are expected to exceed $1 billion this year.

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