Funding Apprenticeships After Levy Overspend

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Until recently, the prevailing wisdom was that the introduction of the levy had led to a fall in apprenticeship numbers. Moreover, the large sums raised by the levy were mostly unspent. Then the Institute for Apprenticeships’ (IfA) presentation at Exeter College on 30th November brought the shock news that, in this and subsequent years, the levy would be overspent.

But is this accurate? And if it is, how will the government respond?

As I write, the full IfA presentation is yet to be released, but there does appear to be some substance to the claim. Just look at the trends. Overall starts are lower. But the drop has been in the lower levels, which cost less. Degree apprenticeships have been rising, and as we show elsewhere in this newsletter, higher-level apprenticeships cost more. So the figures may be right.

We’re unlikely to see this current government drawing back from its commitment to rein in the public purse, particularly with the financial burdens of Brexit. So how are they likely to respond?

 

Policy intent

Much depends on policy intent. And policy intent is tough to decipher when governments are preoccupied with other crises.

If the government takes the view that high-quality vocational training is an inherent good – and there are plenty of economics to back this up – then there will be no rationing and funds will be found for all programmes that meet the quality requirement.

If its primary aim is social mobility for the most marginalised in society, then we might see the rolling back of a commitment to degree apprenticeships in favour of L2/3 apprenticeships.

If the priority is national wealth, then the focus will be on higher-level apprenticeships, because these programmes deliver higher productivity gains. Indeed, the more complex the skills being delivered, the greater the consequent economic value.

But it’s not just about policy.

 

Student debt

At the end of 2018, the Office for National Statistics (ONS) recommended that the government should include student debt unlikely to be repaid by the end of the 30-year loan period in government debt. Given that the Institute for Fiscal Studies calculated that this shortfall could affect up to 83% of graduates who will not have fully paid off their loans in the loan term, it’s a sizable addition to the deficit (around £12 billion).

Successive governments have been attracted to the idea of student loans because, much like PFI, it allows them to exclude the cost of higher education from the deficit – at least in the present day.

Of course, the government may respond by cutting HE numbers. But it seems likely that the government will look for other ways to deliver on the economic need for skills training while not adding to the deficit. Degree apprenticeships, paid for by employers and with the added benefit that the learner is a tax-paying worker, may start to look increasingly attractive.

 

 

Where should the axe fall?

Assuming the government won’t want to roll back on its skills training agenda, what are the options for funding?

There is some wriggle room for the government that doesn’t involve significant cuts. For example, levy paying employers currently receive £15k credit. Removing this benefit will raise an additional £300m without creating material pain for these £3 million plus payroll employers. Employers could also be asked for an additional contribution for more expensive programmes (such as the Master’s or Chartered Management degrees). The logic is that the employer receives considerable benefit from staff receiving this training and therefore can and should pay a bit more.

Funding bands can be cut and, by lowering the costs of training, it can reduce the overall pressure on the levy pot. To some extent, this is already happening. The Chartered Manager (degree) standard, currently funded at £27k, will be funded at £22k from March. The risk is that this cut will affect the quality of training as training providers trim the curriculum in line with the reduced payments.

Then there are the more ambitious funding changes. For example, the government might consider including sub-£3 million employers as levy payers. It would vastly increase the pot. But many SMEs have few employees and may not have the opportunity to avail themselves of apprenticeship training, so it may well be a harder decision for politicians. And given that the government recently announced a cut in the non-levy payer contribution from 10% to 5%, this option seems less likely in the short term.

Finally, there is the option of increasing the levy percentage. Each 0.1% added to the existing 0.5% contribution will raise £500 million for the levy. There may be complaints, particularly from staff-intensive, low- margin sectors, such as retail, hospitality and care (not to mention the NHS), but politicians may find this a relatively easily justified tax increase.

 

The politics of chaos

Politicians and civil servants aren’t always rational. Political crises, like Brexit, can easily distract ministers from crucial policy agendas. Ministerial reshuffles can result in decisions being made by people with limited knowledge of the sector and its idiosyncrasies. Trade-offs made elsewhere can ripple into departments, such as Department for Education (DfE). Logic is not always the victor.

It is vital the government gets this right. Brexit, if it goes ahead, will bring huge skills gaps, adding to the woes of the economy. Recent policy announcements show a government at least in principle committed to delivering a broad range of apprenticeship programmes. And while some cash can be freed by tinkering at the edges, I’d argue the most likely outcome will be increased levy contributions. Watch this space.

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