Key Points:

Labour has fired its first major shot of the election campaign with leader Helen Clark announcing the party will phase in universal student allowances by 2012.

Miss Clark announced the $210 million a year policy at a Otago University student rally today - overshadowing an earlier campaign pledge by National leader John Key to put an extra $47 million a year into a "crusade on literacy and numeracy".

Miss Clark said a return to across the board allowances had always been her "dream" and the parental income test would be phased out by January 1, 2012, benefiting 50,000 students aged 18-23.

"Most of these students would receive no allowance under the current rules and need to borrow, receive help from their parents or work part-time, to make ends meet."

Mr Key said the announcement was "an interesting idea" and his party would announce its student loan policy in the coming weeks.

"We will indicate a more generous scheme but it won't be universal at this time," he told reporters.

His deputy, Bill English, said Miss Clark needed to explain how it was going to be paid for.

"Helen Clark has decided she is going to spend her way to the election," he said.

Miss Clark said the phasing would kick in on January 1 next year, when the threshold will rise from $46,000 to $50,000, but the first substantial movement - to $70,000 - would not occur until the start of 2010.

In 2011 it would rise to $100,000 and would be abolished altogether in 2012.

Miss Clark said 20,000 fulltime students would be better off by 2010, 30,000 by 2011 and 50,000 by 2012.

Universal allowances would assist Labour's goal of creating a "knowledge-led society", she said.

"This policy means that students will be borrowing less and will be able to move on more quickly from the costs incurred in getting tertiary education to set up their own homes and establish their careers."

Miss Clark received a rapturous reception from over 1000 students who had waited for over an hour in the stifling campus hall after her flights to Dunedin were delayed by fog at Christchurch airport.

The campaign announcement follows Labour's 2005 blockbuster announcement to scrap interest on student loans.

That policy was a big winner, not only with students and graduates, but also with parents and grandparents worried about their children's debt levels.

Although much narrower in nature, Labour insiders believed this policy would have a similar appeal.

Miss Clark later told reporters many families were still worried about their children's student debt which was a "monkey on their back".

The 2005 loans policy had gone a long way to cutting that debt and the allowance policy would mean students would only have to borrow for their fees.

She acknowledged the policy was expensive but said Labour had chosen to prioritise it as university students were the only group in society expected to borrow for their living costs, which were a barrier to study.

The current economic slump meant the policy had to be phased, but she expected economic growth to be much healthier by the time of its full implementation in 2012.

Miss Clark said other restrictions on the student allowance would remain including the student's own earnings, a requirement they study fulltime and that they pass over half their courses.

The allowance also has a limit of 200 weeks.

The announcement was welcomed as "brilliant news" by the New Zealand University Students Association.

Earlier Mr Key used a visit to the decile one Kaiti School in Gisborne to announce National would pump an extra $47 million into boosting literacy and numeracy amongst primary and intermediate aged school children.

Mr Key said schools would have the option of using the new targeted funding as they saw fit.