The gloomy outlook for our economy risks reduced investment via the levy in apprenticeships when we need it most, says Stephen Evans
We all have times when we wake up and know it’s going to be a tough day ahead. Theresa May has perhaps had more than most since June’s general election, and the budget is going to be another such day for the chancellor, Philip Hammond.
We know it will be tough because a range of experts, including the Bank of England and Office for Budget Responsibility, have signalled they’ve changed their mind about the potential of our economy. They’re gloomier now, and think our economic growth speed limit has permanently fallen since the 2008 financial crisis.
This has profound implications for living standards and public services: if economic growth is slower, then wages and taxes (which pay for public services) will also rise more slowly. This is a big problem for a chancellor under pressure to loosen the purse strings and to balance the books – he can’t do both. It is a bigger problem for households across the country, who will find their living standards not improving as they’d hoped.
I want to focus on the impact on the apprenticeship levy, a payroll tax on large employers that’s ring-fenced for spending on apprenticeships, specifically on the amount it will raise, rather than how it is spent.
Last year, the amount the levy was expected to raise by 2020 was revised down by £200 million. This year at the Learning and Work Institute, we think there might be a further downgrade.
We all have times when we wake up and know it’s going to be a tough day ahead. Theresa May has perhaps had more than most
The amount the levy raises is determined by how many people are employed in levy-paying firms. Employment rates are at a record high and have been stronger than many forecasters have expected. So there’s unlikely to be an issue there.
But earnings growth has consistently been weaker than expected. And a permanent downgrade to the speed limit of the economy means a permanent downgrade to potential growth in earnings.
Which means, all else being equal, a downgrade to the amount the levy will raise.
We’ve crunched the numbers and think this could mean anything from a £50 million drop (based on the most recent Bank of England forecasts) to £100 million (based on more recent earnings growth levels). Taken with the previous £200 million downgrade, this would see the levy raising almost 10 per cent less than was originally forecast by 2019/20.
We don’t have long to wait to find out the answer – the budget will reveal all. And while the revisions may get lost in the roundings this time, particularly if employment is stronger than expected, but ultimately lower earnings growth will definitely mean the levy raises less.
This points to a bigger challenge for the levy than changes in economic forecasts. The way it is set up will cut investment in apprenticeships when the economy slows, arguably when we most need to increase investment in training. This would reinforce the falls we usually see in employers investing in training during a downturn. It could also mean too little resource for non-levy-payers, and put the government’s at risk three million apprenticeship starts target.
The Learning and Work Institute has argued that the overall apprenticeship budget should be guaranteed over the economic cycle. There should also be guaranteed levels of funding for non-levy-payers, who are as important to our economy as large employers.
One way to increase the speed of our economy is to invest in skills. We should protect investment so slower growth doesn’t become a self-fulfilling prophesy. The introduction of the levy is a good thing. To make it work, we need to guarantee investment in learning and apprenticeships.
Stephen Evans is CEO of the Learning and Work Institute