If fees are deregulated, the more prestigious universities would charge higher fees than others. Schwartz suggests that if they did, their government subsidy should be reduced, and redistributed to other universities.
The reason is regulatory – the new Tertiary Education Quality and Standards Agency is imposing standards on all universities, but it is hard for the poorer universities to match the standards of the wealthier universities.
I doubt TEQSA will require all universities to be the same. A university licence to operate depends on meeting minimum standards, not being identical to all other universities. That said, there is a tendency in the standards released to date to codify common practices, some of which are of doubtful necessity. If this continues, the universities in the best financial position to try new things will tend to set the standards over the long term.
The most problematic current standards relate to research, though this is partly because their wording is so vague in parts that it is hard to know exactly what they mean. However meeting minimum research standards is much easier for the Group of Eight universities than others, because the federal research funding schemes favour universities with a strong research track record.
This makes student-driven research funding an attractive mechanism for allowing all universities to meet research standards. The higher-prestige universities can probably do it through the market by charging high fees. The less-prestigious universities are more likely to need government help. (Macquarie charges fees that are above the average, so it probably would not benefit from its VC’s proposal.)
One empirical unknown here is whether this would affect willingness to pay at the higher-prestige universities. There is criticism and resentment (eg international students complaining that they are ‘cash cows’) already that students are paying for research at the university they attend, but effectively paying for research at another university would surely make things worse. In an indirect way students hoping to buy prestige are getting what they pay for when they support prestige-promoting research at their own institution. But supporting regulatory tick-a-box research at some other university provides no such return on investment.
There are also normative issues involved. The usual argument for taxpayer-funded research is that research with general benefits should be financed from general revenue provided by all taxpayers, not the small number of people who enrol in courses in the institution conducting the research. From a libertarian perspective it is a voluntary transfer and students are always free to go elsewhere (the same argument that says universities should be allowed to bundle student services). But should the government encourage what appears to be an inequitable way of funding an activity of potential general benefit?