Happy birthday to the apprenticeship levy. Starts may be down, but sound foundations mean we can focus on evolution.

The apprenticeship levy and associated reforms are now two years old. Many of you will be familiar with the “terrible twos”, and it’s easy enough to see the analogies.

Apprenticeship starts fell when the new system was introduced and, despite some ebb and flow since, have remained fairly flat. Beneath this lies a big change in the type of apprenticeships: in particular, growth (from a lower base) in higher apprenticeships, and falls in lower-level apprenticeships, particularly at level 2. Meanwhile, young people in this country remain far less likely to undertake an apprenticeship than in other countries.

The overall result is that we appear to be on track to both miss the government’s 3 million apprenticeship starts target and overspend the budget. This is quite the combination.

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Clear trade-offs

Most discussions about what to do next are underpinned by prior assumptions about what the apprenticeship levy is for. So let’s be clear about the trade-offs.

First, employer leadership is a good thing as we need employers to demand and utilise skills. However, this leadership needs to sit within a framework that supports public policy objectives and tackles market failure. And how do we balance the needs of employers today versus longer-term economic needs and what best improves an individual’s life chances? Sometimes these all happily elide, but sometimes they don’t.

Second, I think the idea that there’s a trade-off between productivity and social justice is a false dichotomy. Some argue that lower-level apprenticeships are about social justice and higher apprenticeships are about productivity. In fact, there are clear productivity returns to many level 2 apprenticeships, and higher apprenticeships can offer new ways to gain higher skills. High-quality apprenticeships at all levels can help boost both economic growth and social justice.

Third, greater flexibility in the levy needs to be in a way that benefits individuals and the economy, as well as employers. It was both predictable and predicted that many employers, faced with a tough economic environment and a ring-fenced sum of money that can only be spent on apprenticeships, would look to see what existing training they could translate into an apprenticeship. There are lots of amazing apprenticeships, so we shouldn’t overplay this, but we need an overall approach to lifelong learning and skills including – but not limited to – apprenticeships. That’s why we and others have called for a lifelong learning strategy.

Fundamental problems to tackle

My personal view is that the levy should help to tackle two fundamental problems:

1. Historical underinvestment in skills has held back economic growth and social justice. The Learning and Work Institute’s recent report, Time for Action, showed the UK is on track to slip further down the international league tables by 2030. So, the levy should help to increase employer investment in skills.
2. Unequal access to learning also constrains both economic growth and social justice. For example, people with a degree are four times more likely to get training at work than those with no qualifications. So, the levy should help to reduce inequalities in access to learning.

On that basis, the levy offers a powerful opportunity. It has got more employers thinking about apprenticeships and has led to the expansion of higher apprenticeships that can contribute to widening access to higher education and improving leadership and management (which have held back productivity).

However, without changes, the levy risks exacerbating rather than tackling those challenges. Because the levy is a payroll tax, the amount it raises will fall in an economic downturn, just as employers are cutting their other training budgets. That’s why we’ve called for a minimum apprenticeship budget, both overall and for SMEs, to underpin the system.

Similarly, the levy clearly risks replicating, rather than tackling, existing inequalities in access to learning and work. You can see that in the data on apprenticeship starts by level and by age, comparisons with other countries and our analysis showing gender segregation, and that apprenticeship applications from people from BAME backgrounds are half as likely to be successful.

Levy on track to run out

This brings us to the crunch choice. The levy is on track to run out. Do we raise more money (either by increasing employers’ contribution rates or extending it to smaller firms), ask the Treasury for more (a bit of a stretch with a tough Spending Review ahead), or ration apprenticeships? There are good arguments for rationing purely according to employers’ choices, but it would mean no overall increase in employer investment in skills and no change in inequalities of access to skills. I’m not sure, in that scenario, what the point of the levy would be.

Should we instead restrict apprenticeships to young people, or ask for higher employer contributions to higher-level learning? Or go back to increasing the total funding pot?

I’m not sure what the right answer is. But this is the debate we need to be having. The apprenticeship reforms are welcome and the levy a bold step. But we need further changes for them to meet their ultimate objectives. Otherwise, there’ll be tears before bedtime.

Stephen Evans is chief executive of the Learning and Work Institute