The levy isn’t working – could Labour’s plans fix it?

If we’re going to scrutinise Labour’s plans for levy reform, we need to accept the policy’s failures and base our judgment on better maths

If we’re going to scrutinise Labour’s plans for levy reform, we need to accept the policy’s failures and base our judgment on better maths

26 May 2024, 5:00

It’s good we have an apprenticeship levy; many apprenticeships are great and quality has improved. But few would argue it’s working just fine and should stay exactly as it is.

Apprenticeship starts have fallen by one-third since the levy and other reforms were introduced, with even larger drops for young people. Completion rates are low, and higher apprenticeships have the same access issues as other higher education.

For many large employers, the levy has become their training budget, skewed to older workers and learning at higher levels. That’s important, but with a fixed pot of money it’s come at the expense of training for young people and at lower levels. This is training which would have huge productivity benefits too and where the UK’s historic underinvestment in skills is starkest.

And yet we have an employer-led system in which employers say they can’t get what they want and where they’re investing £3.5 billion (7 per cent) less in training.

The need for reform is clear. The question is what reform, particularly in a policy area beset by chop and change.

Labour proposes to replace the apprenticeship levy with a skills and growth levy, allowing employers to spend up to half their levy on training outside apprenticeships. A new body, Skills England, would help decide what training should be fundable.

The argument is that apprenticeships aren’t the answer to everything; the current system is like a golfer going out with just a putter. Greater flexibility could allow employers to hit a bigger range of shots.

Some argue this would halve the number of apprenticeships, with large employers spending far more of their levy funds and leaving little for apprenticeships at SMEs. But that’s both vanishingly unlikely and focused on the wrong question.

Improbable choices

First, it would mean some highly improbable employer choices. For apprenticeships to halve, large employers would have to keep spending what they are on apprenticeships and spend the rest of their levy on other training too. This doubling of training investment would be some reversal of the 26 per cent fall in training spend per employee since 2005.

It is far more likely that levy-paying employers would switch some higher apprenticeships to qualification-based training. That would be a good thing if that training better suited the needs of the business.

After all, our research shows some employers are shoehorning training into apprenticeships to use up their levy funds rather than because it’s right for them.

This switch could also reduce the average cost per trainee at higher levels, because many of the alternative training routes would be lower cost than higher apprenticeships. All else being equal, that could free up more funding for apprenticeships in SMEs and for young people.

Step by step

Second, rules for employers and growth in the levy budget can help. Rising employment and earnings mean the levy is projected to raise another £736 million by 2028-29. This will give headroom, even though some will be needed to increase apprenticeship standard rates to reflect rising costs.

And Labour’s policy is ‘up to 50 per cent’ flexibility. It would be wise to start with lower flex and build up over time, perhaps requiring large firms to invest more in young people to unlock that flex.

Step-by-step reform could limit any unintended consequences.

From start to finish

Third, our aim should be getting the right training for people and employers and focus more on apprenticeship completions than starts. The latter is not a particularly useful metric when only around half of starters complete their apprenticeship.

Just increasing the completion rate to the government’s target of 67 per cent would mean an extra 20,000 apprenticeship completions per year from the same number of starts.

Besides, apprenticeships won’t always be the right answer to training needs, as great as they are.

The impact of Labour’s policy depends on the rules it sets. We need to know more about those.

In the meantime, estimates based on simplistic maths that don’t account for likely employer behaviour don’t get us very far. Nor does arguing everything is fine now.

Our ambition must be to increase employer investment in training and reduce the current inequality where graduates are three times more likely to get training than non-graduates.

The apprenticeship levy isn’t working. It’s time to fix it.

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One comment

  1. For a think tank to make a statement ‘It’s good we have an apprenticeship levy’ when training investment in the workplace has fallen so sharply is an interesting thing.

    The levy was a Treasury accounting trick, to make money take a different journey through the balance sheet. No one seems to have the stomach to ask whether the levy has had a positive or negative overall effect on businesses investing in their workforce.

    Sectoral group think at it’s finest.