Education minister Christopher Pyne has given his strongest indication yet that university fees will be deregulated, removing the cap on what universities can charge students.

In a speech at The Policy Exchange in London, Minister Pyne declined to pre-empt any budget announcements, but emphasised the deregulatory nature of the Liberal government and insisted universities need more autonomy.

Pyne said the government had already started this process by removing “burdensome” regulations and reporting requirements, and assured they would continue steps to “set higher education providers free”.

Speculation has grown that the government will remove caps on students fees since the release of a report by David Kemp and Andrew Norton, which said the demand-driven system for university places was a net positive, but continued funding may require a rise in student fees.

“Government investment alone is not enough to ensure a well-functioning higher education sector,” Pyne said.

He said Australia’s universities had much to learn from those in the US, with uncapped student fees meaning greater competition and thus higher standards in the sector.

He said the competitive nature of US universities bred a focus on competition for students and student loyalty towards the institutions, which he said often translated into philanthropic donations after graduation.

He quoted University of Adelaide Vice-Chancellor Warren Bebbington who said Australia’s higher education system has the opportunity to be as diverse as the States’, but “without the crippling debts”.

Putting students further into debt and decreasing the equity of the system are the main reasons for opposition to fee deregulation, but Pyne said providing tertiary education at a high standard with a competitive approach meant students would “win out”.

La Trobe University Vice Chancellor John Dewar said given that the government was unlikely to increase spending on higher education, an obvious source of funding would be to increase the proportion of cost that students contribute themselves.

Over the last 20 years, government investment per student has steadily declined under both parties in government, Dewar said.

Universities have managed this by expanding rapidly, he said, first, on the back of the boom in international enrolments during the 2000s; and then, from 2009 onwards, through the growth brought about by the demand driven system.

“This dynamic of growth cannot continue – there is now very little unmet student demand locally; the international market is unpredictable; and increased government investment in higher education per student does not seem likely.

"So, the reality is that something has to give if universities are to serve the national interest effectively,

"A deregulation of fee setting is an obvious next step for a government with a deregulatory agenda,” he said.

Dewar said if this was to take place it was vital there was a comprehensive scholarship scheme in place for students who might otherwise be deterred from coming to university by increased charges.

Vice-Chancellor of Queensland University of Technology Peter Coaldrake said the US system illustrated both the promises and pitfalls of deregulation.

“It is not itself a deregulated system, instead it is a sprawling mix of different types with persistent problems with quality alongside the strongest research institutions in the world.

"The task for us is to take what can be beneficial and to avoid the downsides,” Coaldrake said.

He said the emphasis in reform should not be on what institutions or even policy makers might want the sector to look like, but on what present and future students needed.

Co-author of the demand driven system review Andrew Norton said it looked like a key recommendation of his review, to open eligibility to Commonwealth supported places to all domestic students wherever they study, would be accepted.

One reason for implementing that recommendation, Norton said, was to encourage competition between higher education providers should fees be deregulated.

“While average fees will almost certainly increase if their current legal maximum levels are lifted or abolished, it is important that reasonably priced options remain available.

"While some students may be happy to pay a premium to attend a top 50 global research university, there is no evidence that research-intensive universities in Australia do a better job with teaching.

"Students should carefully compare the costs and benefits of different higher education options,” he said.

Higher education policy analyst Hamish Coates said pricing was a complex issue personally, socially and financially, and the higher education sector needed to “unlock new dollars” to be internationally competitive.

How this is managed is where it would get difficult, he said, because a close eye had to be kept on equity.