The Treasury needs to get serious about skills

As the Chancellor delivered his spring budget this week, the elephant in the room was there for all to see — the UK has a growth problem.

Public services are buckling under demand and resource constraints. Deep income, wealth, and opportunity inequalities are holding swathes of the UK population back. And employers’ investment in skills and training has declined over the past half a decade.

Jeremy Hunt articulated those challenges and made some necessary steps to address them. Plans to introduce “returnerships” and expand skills bootcamps to help the over-50s to retrain and get back into work are important but small steps in plugging our chronic skills gap and returning to pre-pandemic employment levels.

It’s all about skills

Yet, the truth is more collective energy will be needed to resolve these grand challenges and their root causes. How? The Chancellor must rebuild confidence in the British economy by placing skills and training at the forefront of his agenda, not just for today but for the next decade.

Here’s the problem. The UK has a chronic skills deficit. Despite historically high levels of net migration, we still have over a million vacancies across employers. According to The Skills Network, 22 per cent of British workers lack basic digital skills, and over the last five years, there’s been a 142 per cent increase in the demand for green skills. The skills gap is also particularly prominent when it comes to developing leaders, with one in three job postings directly related to leadership. Without good managers and leaders, all those skills in these various sectors will not be harnessed in order to boost Britain’s productivity. One thing that skilled managers and leaders do is develop others, of course.

Given the significance of the challenge and the nature of the gaps we face, the Chancellor needs to think longer term and put the skills system centre-stage over the next decade. This must include a plan for all elements of our system, including higher education, further education, apprenticeships, all adult education, and private training provision. Despite their mutual dependencies, the relationship between these critical institutions feels very fragmented and hardly system-like at all.

Barely a decade goes by without a Nobel Prize in Economics being awarded for linking improved skills and productivity, and growth. And while today’s announcements are welcome, alongside broader reform efforts and the widening investment in high-quality apprenticeships over the past few years, fundamental shortfalls in UK investment in skills still persist.

What we could have won

If the UK were to increase its investment in line with the top ten OECD countries, it would need to invest an additional £10 billion-plus in training and skills per annum. The skills gap has a metric, and that metric is £10 billion — the £10 billion mission.

This £10 billion shows how the hot debate of the moment, the way in which the Apprenticeship Levy turns over £3.5 billion a year and how those funds are spent, is largely missing the point. This is not least because Chartered Managament Institute modelling has shown that the existing levy is making a significant contribution to productivity. Moreover, the UK has a quantum challenge that cannot be addressed by repurposing existing expenditure. The ceiling must be raised, and realistically, that means a series of interventions to increase government, employer, and individual investment over time.

If this mission is to get off to a flying start, there are immediate things the UK government can do to increase investment in high-quality skills – and could have done this week:

• New tax allowances would encourage investment in skills, and if employers could claw back tax where a worker leaves before the employer has seen the return on investment, that would provide further incentives.
• A £500 cash grant to support early adopters of the lifelong loan entitlement, where employers are also willing to contribute, would increase take-up of high-level skills training.
• An options analysis of apprenticeship levy rates and coverage could be undertaken to consider how a different structure post-2025 could increase investment in high-level skills rather than simply diverting existing resources between different forms of training through the existing levy. Jo Johnson had some interesting ideas on this last week. Any levy reform would be matched by more flexibility and the ability for employers to claim back training investment against the levy in the future as part of new tax allowances.
• A network of apprenticeship accelerators within sectors and in local economies should be established to support onboarding SMEs onto apprenticeships, and an apprenticeship opportunity fund should be established to support those struggling financially or practically with completing their apprenticeship.
• New regional skills deals could give local employers, skills providers, and local and regional government stakeholders more discretion over the use of all funding for higher education, further education, apprenticeships, and other adult education.

It’s also worth adding a sixth: chronic underfunding of the further education sector really does need to be addressed to provide more pathways into higher technical and vocational learning.

Taken together, there is a deliverable mission here. And the focus is the workforce of now, not the “workforce of the future”, while that’s critically important. There are many highly skilled roles in health, care, green transition, distribution, digital, project management, creative design, and, yes, management and leadership.

Lying right before us is a politically benign, completely practical set of productivity interventions.

The alternative? Bumpy growth at best; continued stagnation at worst.