Universities with lower student demand will have places cut in 2014 and beyond to reward more popular institutions, the government has signalled.

The Department for Business, Innovation and Skills released its annual grant letter on 14 January, unveiling funding and policy priorities for 2013-14.

The letter, sent to the ����Vlog Funding Council for England by Vince Cable, the business secretary, and David Willetts, the universities and science minister, confirms that the grade threshold for unlimited recruitment will be lowered to ABB next year - not BBB or below, as some in the sector had urged.

Mr Cable and Mr Willetts write that “given the pattern of recruitment in 2012-13”, the government has “the flexibility to apply student number controls less rigidly in 2013-14”.

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The underspend from 2012-13, when there was a shortfall in student numbers, is being reinvested to fund extra places in 2013-14, the letter suggests.

On 5,000 core-and-margin places, previously expected to be deducted from universities’ existing allocations then reallocated, the letter advises Hefce that “you do not need to make a corresponding cut to the core” to create the places.

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The letter also eases the punishment facing universities that recruit too many students. For 2013-14, institutions will be allowed “to recruit up to 3 per cent above their total recruitment of Hefce fundable students”, the ministers write.

“This buffer zone would allow institutions to avoid grant reductions for minor over-recruitment.”

Libby Hackett, chief executive of the University Alliance, said she was “really pleased with the emphasis on both stability and flexibility, flexibility in particular”.

Andy Westwood, chief executive of GuildHE, said the 3 per cent buffer zone was “sensible”.

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He added: “What it does is it allows successful institutions attracting lots of demand to not be paralysed by fear of fines. Just look back at the past 18 months of language around over-recruitment. It has been quite punitive.”

Mr Cable and Mr Willetts also say that they would like Hefce “to further liberalise the system from 2014-15”, advising it “to consider increasing the flexibility for those institutions that have shown strong recruitment patterns in 2013-14 and taper this away from institutions enjoying less demand”.

Dominic Shellard, vice-chancellor of De Montfort University, said on Twitter that the letter was “highly significant”. “It confirms the ever more Darwinian direction of the sector in terms of admissions. Problematic,” he posted.

Ms Hackett said that BBB might be the “next step down the ladder”, or there “might be other ways” of relaxing student number controls for institutions with higher demand. Ideas were being discussed in the sector on continuing “the principle of ABB in opening up the market, but perhaps finding a more flexible and sophisticated way of doing it”.

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Meanwhile, there is bad news for higher education staff hoping for a pay rise that breaks the recent trend for below-inflation settlements.

“We expect the sector to continue to operate restraint in relation to staff pay,” write Mr Cable and Mr Willetts. They also call for “further efficiencies”.

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john.morgan@tsleducation.com.