It is rare for a PowerPoint presentation from the Institute for Apprenticeships to go viral on social media.

But that is precisely what happened when a slide from the institute’s chief operating officer, Robert Nitsch, flashed up on our screens recently, suggesting that the £2.45 billion pot raised from the apprenticeship levy could soon be overcommitted.

Indeed, the worst-case projections are suggesting a future Treasury liability of £4 billion per annum to fund in excess of 500 new standards. It has led to some controversy about a “middle-class grab” on apprenticeships and whether the whole policy is about to go bust.

It may be that we are looking at the funding of apprenticeships in completely the wrong way. Yes, it is true, the levy introduced in April 2017 is a form of hypothecated taxation.

‘Just a form of general corporate tax’

Although collected from only 2 per cent of firms with payrolls in excess of £3 million; in practice, it is there to meet the needs of all firms both large and small.

The political rhetoric around the levy has been unhelpfully presented as purchasing power monies that is “an individual pot” for employers to spend. In practice, it is just a form of general corporate taxation that goes to fund the government’s overall apprenticeship ambition.

Indeed, where some critics are way off the mark is to view the “levy pot” as some kind of finite cash-limited budget that needs to be managed in the same way FE colleges have to deploy other cash limited budgets handed to them by the taxpayer.

In the case of the levy, we are in danger of misunderstanding how fiscal policy of this nature is supposed to work.

Move between surplus and deficit 

Let me explain what I mean by way of the example of national insurance contributions (NICs) and the payment of welfare benefits.

When the economic cycle is in a downturn, tax receipts go down and unemployment rises. In this scenario, the Treasury deploys a tool that is known in the jargon as the “automatic stabilisers”.

In other words, the government doesn’t do a crude calculation of how much NICs were collected in a single year and then set this as a cash-limited sum that the Department for Work and Pensions can pay out in social security.

Instead, it takes the view that these automatic stabilisers are there to kick in when certain conditions in the labour market demand such a response. In periods of low unemployment, the NICs budget will be in surplus and in times of a recession, like after the financial crisis in 2008, the budget spirals into deficit.

‘Apprenticeships are demand-led’

So, let’s now take this example and apply it to apprenticeship funding. Apprenticeships are ultimately a demand-led labour market programme.

It is only possible to draw down funding for an apprentice if an employer is prepared to create a designated role in their organisation that is eligible for funding.

At present, approximately 2 per cent of the workforce are apprentices - a figure, naturally, we could expect to fluctuate depending on the relative strengths of the domestic economy.

Because apprenticeships are demand-led, in theory, it should be no problem for Treasury to write as many cheques as are necessary to subsidise the training element since the return on that investment to the economy is between £23-35 for every public pound allocated to the programme, according to a 2012 National Audit Office study.

A move away from the original policy intent?

In other words, securing productive roles for people in the labour force, with them paying tax and national insurance, is preferable to having them sitting around idly on the dole.

This is fundamentally why all the current hysteria about the apprenticeship scheme running out of money is pretty misguided when you go back to first principles of how fiscal labour market policy works and the role these so-called automatic budget stabilisers are meant to play.

Where arguably there is a need for more concern about the current funding trajectory is whether the apprenticeship policy itself is suffering from a degree of mission drift.

The problem in England is that the creation of new occupational standards and recent trends in take-up suggest a move away from the original policy intent set out in 2013.

The 67-year-old apprentice

The Richard Review made a critical observation that “not everything can be an apprenticeship” and that the key purpose of a well-designed scheme should be to enable access to entry-level roles and that these occupations, by definition, were more suited for younger people at the start of their careers.

However, in over six years of reform, we have witnessed the reverse of this happening. English apprenticeships are in danger of becoming the preserve of senior managers and senior citizens.

Most people would have no issue of promoting a culture of lifelong learning across all the age groups. But to celebrate a recent apprentice that had started a scheme at the age of 67 is a complete anathema to the term “apprenticeship”.

Particularly when the latest statistics on starts show a worrying collapse in 16 to 18 apprenticeships and a noticeable decline in entry-level, so-called, level 2 occupations. Meanwhile, levy employers are helping to fuel a fifth of all new starts on standards in highly expensive management apprenticeships. It reminds me of my days at university studying labour market economics and learning about the Matthew Effect - the phenomenon, first observed in the Bible, “to those that hath, shall hath more”.

‘Time to take stock’

The institute and the Treasury needs to more clearly intervene and redefine what and whom apprenticeships are actually for - for the purposes of public funding - and what therefore it is not appropriate for the levy to be used for.

It is time to take stock and to go back to some of the first principles originally set out in the Richard Review, by restricting the levy funds to the following:

• 16- to 24-year-olds up to degree level attainment who have not already received financial support from the student loans company.
• Capping the number of roles that can attract funding for apprenticeships on new standards for pre-existing employees (i.e. by incentivising new recruits).

That does not mean discontinuing management apprenticeships or banning over-25 provision. The Education and Skills Funding Agency just need to make it clear to employers that they will not in future be eligible for funding from the 0.5 per cent levy pot if they solely use it for management roles or older workers.

Instead, firms could be invited to top-up their digital levy accounts with additional funds where they want to train up more senior staff using the apprenticeship route.

Too many standards?

There is one final thing that the Department for Education should look to urgently address. Compared to Switzerland and Germany, the institute is set to put in the marketplace up to 200 more apprenticeship standards than these other leading systems have done thus far.

True, our economy is more service orientated than manufacturing giants like Germany, which might be one reason for a need to adopt a more expansive approach.

But still, there has been no independent evaluation commissioned as to whether we are creating “too many standards”, whether they compare favourably to leading international systems, or if the degree of occupational granularity involved in some of the new standards is detracting away from the whole purpose of industry-wide and transferable skills. This is an area the government should invite the OECD to investigate further.

As we head into the busy festive season only one thing is certain: Ministers have their work cut out fine-tuning an apprenticeship policy that is in danger of spinning out of control.

Tom Bewick is chief executive of the Federation of Awarding Bodies