In the summer budget, George Osborne introduced an apprenticeship levy to ensure large employer contribute to the cost of training. Hilary Steedman argues that the levy has great potential, writing that greater employer ownership of apprenticeship should be easier to achieve once the levy is in place.

In his summer budget presented to Parliament on 8 July, the Chancellor George Osborne announced the introduction of a levy on large employers that is intended to provide an employer contribution to supplement government funding for apprenticeship training. Funds raised by the levy would provide apprenticeship employers with an electronic voucher that could be used to purchase training from recognised providers. Further details of the apprenticeship levy were then provided by the Treasury in their productivity plan.

Co-funding of apprenticeship by all the parties that benefit – the employer, the apprentice and the government – is the accepted financing model in all modern economies. But in England it has proved especially difficult to find a way of ensuring that employers make a contribution to the costs of apprentice training. The introduction of Modern Apprenticeships in 1994 committed the government to contributing to the financing of apprenticeship training. But these funds were routed exclusively to training providers, many of which then sold ‘cut-price’ apprenticeships to employers without requiring the employer contribution that government expected. Employers’ expectations of ‘free’ apprenticeship training became firmly established over the 25-year period that this system operated.

A survey of employers by the Department for Business Innovation and Skills (BIS) in 2012 found that if asked to co-fund apprenticeship training, nearly 60 per cent of employers would no longer train. A 2013 consultation on new arrangements requiring an employer cash contribution to apprenticeship training effectively rejected the government’s proposals.

Employer intransigence has created a serious dilemma for the Conservative government. Driven by their productivity agenda, the government is committed to pressing ahead with the introduction of more rigorous apprenticeship standards (The Trailblazer Initiative). Financing this commitment to a step change in the quality and standards of apprenticeship training would alone have been challenging enough. But it comes coupled with a high-profile Conservative manifesto commitment to provide three million apprenticeships over a five-year term of government – which would be 30 per cent more than were provided in the previous five years. As Alison Wolf points out in an environment of static budgets, the sums just do not add up and employers must accept that they too must make a larger contribution. The apprenticeship levy is, she argues, the logical solution.

An earlier levy/grant requirement covered most of British industry in the 1970s and was administered by tripartite bodies. It was greatly resented by large employers and – with the exception of two sectors that opted to retain the levy (Construction and Engineering Construction) – it was progressively legislated out of existence during the 1980s by the Thatcher government. Numbers of employees receiving training outside the workplace have fallen steadily since the early 1990s from 140,000 to 20,000.

In principle, a levy can contribute to increasing training volumes by reducing the effect of some of the problems facing employers and potential trainees, namely “poaching” externalities (the fear of losing training investment to other firms) and information imperfections (the lack of understanding of costs and benefits of training). It can also promote between-firm intra-sectoral coordination in important areas such as cost-sharing and the revision of training standards. Based on a literature review and small-scale survey, Gospel’s assessment of the impact of levy/grant on the sectors that continue to have a statutory body in place is broadly positive although with some important warnings about process and procedures.

Firms in the levy/grant sectors report doing more training than they would otherwise have done. They also claim to have been encouraged to think more strategically about their future skills needs. As Gospel points out, almost no independent evaluation of the impact of the existing levy/grant has been carried out so that the evidence basis for firm judgement is lacking. But serious skills shortages persist in the construction sector as in other sectors not covered by levy/grant. Whatever additional training may have resulted from levy/grant in construction has clearly not been enough. Setting the level of the levy, its collection and administration and targeting areas of greatest need will need to be priorities for BIS in the coming weeks.

France has a long-standing apprenticeship levy and a recent history of doubling the number of under 25s in apprenticeship to 400,000. But the increase in apprenticeship numbers has resulted from government legislation opening up the apprenticeship route to young people studying for qualifications at Baccalaureate level and above. While the apprenticeship levy has undoubtedly played a part, employers have been motivated to offer apprenticeships by the demand for apprenticeship from young people with higher levels of education.

Germany, the country with the largest number of apprentices in Europe, does not operate a levy/grant system specifically in respect of apprenticeship. The employer contribution to apprenticeship funding is made in kind. Employers bear the cost of the occupational element of the apprenticeship training programme which, as a rule, is provided by the firm’s staff and on the firm’s premises. But apprenticeship benefits from a wider payment from all firms in the shape of compulsory membership subscription to the local Chamber of Commerce. The Chamber of Commerce provides a wide range of business services to the local business community, which include finding apprenticeship places, contract administration and, most important of all, independent end-point assessment of apprentices’ skills and knowledge.

The Treasury’s productivity plan promises to put control of the funding raised by the levy in the hands of employers. This poses big questions. Will employers be willing to work to the government’s productivity agenda and distribute funding accordingly?  Will the large firms contributing to the levy turn out to be the main beneficiaries at the expense of smaller firms? And can the levy be set at a level sufficient to bridge the gap (currently rather large) between the government’s contribution and the cost of apprenticeship training?

Yet the levy also has great potential. Greater employer ownership of apprenticeship – which has so long been the goal of government – should be easier to achieve once the levy is in place. And inter-firm co-ordination of skills provision (Group Training Associations) and forward-looking sectoral skills planning could be the big winners from the introduction of the levy/grant in England.

Note: This article was originally published as part of the Centre for Economic Performance’s summer budget coverage.

About the Author

Hilary Steedman is Senior Research Fellow at the Centre for Economics Performance.