We must not ignore the value of skills in economic growth

By Gerry McDonald, Group Principal and CEO at New City College

There is no denying that the government is in a bind. Pre-election promises on tax and spending are rubbing up against self-imposed fiscal discipline. A tricky enough maze to navigate through. Add in a cautious bond market, sticky inflation, lower growth estimates and a volatile geo-political landscape and the full extent of the challenges ahead become all too apparent.

It was all so much better in July. We felt the optimism, the sense of renewal and new opportunities. We lauded the missions-based approach that would bring focus to our collective national problems. It has turned out somewhat differently.

Of course, our exuberance should have been more guarded. The UK’s productivity problem didn’t emerge in the summer of 2024; neither did persistent low growth or troublesome inflation. The problems are not new.

Policy does, it would appear, seem to have been backed into a corner. With such a combination of headwinds and an overriding imperative not to push borrowing costs higher still, caution is understandable. Who would swap places with the Chancellor given a similar hand to play?

In such choppy waters, it is difficult to set a credible course to calmer seas. But there may be some beacons which show the way. And it is economic growth that shines most brightly. Growth means better standards of living, less poverty, better jobs, more investment in public services and infrastructure. The problem is how to stimulate the growth we need with so many avenues blocked.

It is a time for bold, clear thinking. My small contribution to the debate is twofold. First, we need to re-prioritise our national spending from a growth perspective. Easier said than done. But if we do so, we may look again at some emerging choices. In our sector, the news that we may face a cut to adult skills funding of 3% next year was met with understandable dismay. More than that, it appeared inexplicable. We are used to funding cuts. The sector has dealt with a decade and a half of downward pressure on adult skills funding. Here’s a quick reminder:

In 2023–24, the government spent about £4.3 billion on adult skills, which is a third less than the inflation-adjusted high of £6.3 billion in 2003–04.

Classroom-based learning has fallen by two-thirds, from £5.1 billion in the early 2000s to £1.7 billion in 2023–24.

The number of publicly funded qualifications taken by adults in England has fallen from 5.6 million to 2.3 million in the past two decades.

The proposed cut next year is something different, however. This time, the backdrop is a national mantra of growth, growth, growth. Reconciling the two is a challenge.

In the scheme of things, the cut is trivial. It would be a gross exaggeration to call it a rounding error in the national accounts. It’s a rounding error of the rounding error. The £50m reduction to skills funding, it if comes to pass, is about four hours’ debt interest. But at institution level, it could mean that we need to lower our capacity in line with new funding realities. That means fewer staff to train the next generation of skilled employees we so desperately need. And for individuals, we limit further still the opportunity to progress, re-train, move off benefits and, of course pay taxes.

There can be little doubt that a better skilled workforce is a necessity for economic growth. We need a system that fulfils the aspirations of individuals and employers and addresses our national priorities. We need to pull the levers available to us; this is no time to shortchange the means to our recovery.

Our ask is simple: that as a minimum, we protect the capacity of the economy to deliver skills. It’s not the only way out of the current malaise, but it deserves to be top of our list.

Second, I would like to argue for a return to that spirit of optimism. I feel we talk to ourselves too much of our troubles and our constrained room for manoeuvre. Maybe we should not. I am reminded of the concept of rational expectations, first suggested more than sixty years ago by the American Economist John Muth. To do him a terrible injustice, Muth suggested that we use all information available to us and act accordingly, and rationally, as we make our choices in the market. Simplistically, if we expect an economic downturn, we behave accordingly and so find ourselves in one.

We cannot fault the government for its honest appraisal of our current national finances. But maybe we need some optimism too; the sooner we see a way out, the sooner we start to believe it and make it a reality.