This a pre-released chapter from the forthcoming IFS Green Budget 2017. The IFS Green Budget publication, produced in association with ICAEW and with funding from the Nuffield Foundation, will examine the issues and challenges facing Chancellor Philip Hammond as he prepares for his Budget in March. This will be launched at an event at 10:00 on Tuesday 7 February.
This pre-released chapter focuses on the new apprenticeship levy and apprenticeship policy.
The 2015 Conservative general election manifesto contained a commitment to ‘support three million new apprenticeships, so young people acquire the skills to succeed’. To help deliver this pledge, the then Chancellor George Osborne announced a new system of apprenticeship funding in the 2015 Summer Budget, with further proposals detailed in the government’s five-year plan for apprenticeships published in December 2015. A desire to expand the system of apprenticeships has been expressed by all major UK political parties and the current government’s focus on apprenticeships builds on commitments under the previous coalition and Labour governments.
The government is committed to 3 million apprenticeship starts in England in the five years from 2015 to 2020.
Apprenticeships are full-time jobs with an accompanying skills development programme, which includes both on- and off-the-job training. The target of an average of 600,000 new apprentices a year in this parliament represents an increase of 20% on the level in 2014–15.
From April 2017, the government is introducing an ‘apprenticeship levy’, which is a 0.5% tax on employers’ paybill above £3 million per year.
The Office for Budget Responsibility (OBR) estimates that the levy will raise £2.6 billion in 2017–18, rising to £2.8 billion in 2019–20. Most of the increase in revenue will not be used to fund apprenticeships. In England, apprenticeship funding is set to increase by £640 million in cash terms between 2016–17 and 2019–20.
We estimate that at least 60% of employees work for an employer who will pay the levy.
This is despite the fact that, as the government highlights, only 2% of employers will pay the levy (because they have large paybills). We would expect a payroll tax such as the apprenticeship levy to result in lower wages for employees. The OBR estimates that the levy will reduce aggregate wages by 0.3% by 2020–21.
Government will pay over 90% of off-the-job training costs for apprenticeships, up to certain price caps.
This will significantly increase the incentive to employ apprentices – particularly those aged 19 or over, for whom the government subsidy was previously 50% or lower.
The increased subsidies will incentivise employers to relabel existing training schemes as apprenticeships.
This is one form of ‘deadweight’, with the government funding some training that would have occurred anyway. Such relabelling is made easier by the fact that employers can be funded to provide some training themselves.
Significant expansion of apprenticeships could come at the expense of quality.
The new Institute for Apprenticeships may be under pressure to approve new apprenticeship standards quickly. An expanded role for Ofsted is welcome, but it has already expressed concerns about the quality of some of the apprenticeship schemes created more recently.
The government has set all large public sector bodies legally binding targets for apprenticeship starts each year.
All public sector employers with at least 250 employees in England must employ new apprentices amounting to 2.3% of their headcount each year. This potentially costly policy is largely designed to hit the government’s target for 3 million new apprentices, not as a way to increase the quality of public services. It should be removed.
There might be a strong case for expanding apprenticeships but the government has failed to make it. There has not been the collapse in training by employers that the government claims and the returns to public investment in apprenticeships are not nearly as high as the government suggests. However, young people in England are comparatively low skilled and research has found higher returns to apprenticeships than to other forms of vocational education. There is a good case for expanding apprenticeships, but perhaps more gradually and where we can ensure high-quality provision.