The apprenticeship overspend - what needs to happen

04 Dec 2018


The news that the Department for Education is heading for an overspend on its apprenticeship budget is a major concern but it is also not a surprise. This is an old story with a new twist. The UK Treasury runs a rigid and generally successful system for controlling budgets in twelve month blocks from April to the following March. Every time Ministers try to stoke up demand by offering more generous entitlements to education and training, it generally ends in a financial crunch. It happened in 1997, 2005, 2009 and 2014[i]. This time is a little different. 

We don’t know the full story about apprenticeship spending because the whole area is shrouded in secrecy. The Department for Education publishes very little budget data and, even when it does, it doesn’t provide explanations. We know that there are fewer new apprentices now than before the levy started but know little about where money is being spent. We know that the prices of some of the new standards are much higher (at £27,000) than the rates paid for older, lower level frameworks but, again, not much on the key trends. The biggest gap in information is on who pays and who uses the levy. For many years now, funding agencies have published information on colleges and provider allocations. But when it comes to the levy, HMRC insists on secrecy about individual employers because of the principle of taxpayer confidentiality. DfE recently published employer-level data as part of its publication on the public sector target but this lists numbers of apprentices rather than any financial data. We are thus in the extraordinary situation where almost nothing is known about who is using the £2 billion apprenticeship budget.

Trends in apprenticeship recruitment are only part of the story about apprenticeship spending. A bigger issue is the design of the scheme. When the Chancellor of the Exchequer announced the levy plan in July 2015, he also promised that levy payers could get their money back if they employed apprentices. This fulfilled an existing government proposal to give employers control of the training budget but it also makes control of spending very difficult. It turns 20,000 employers into funding managers but also means that officials have to second-guess their behaviour. Take-up on new schemes is always slow. There are new rules and systems to understand. In case of apprenticeships, there is wholesale change in curriculum – from frameworks to standards – and a 24 month deadline within which to spend the levy funds. It is inevitable that some large employers will have taken a wait-and-see approach but likely that activity will increase once the funding agency starts cancelling funds from May 2019 onwards.

This unpredictability is hard to manage but what makes things harder is the Treasury decision to manage the apprenticeship budget like any other spending budget. DfE has a consolidated budget which covers levy-funded apprenticeships, training for apprentices in small companies and carry-ins – those who started their training before May 2017 under the old rules. Any money left unused in levy accounts is swept up and used for everything else. The big downturn in levy activity in the first year contributed to an overall underspend in 2017-18. But, as activity starts to increase, budget limits will get breached. There are already signs of pressure. Colleges and providers with training contracts for apprentice training in small companies are facing strict cash limits on activity. Whereas levy funded training is open ended up to the total tax paid by the employer, the non-levy contracts are fixed. There are colleges now facing the choice between turning small employers away or taking on their apprentices in the hope of payment.  The system has been designed to use a levy underspend to fund training in small companies. Many of the most valuable aspects of the apprenticeship programme involve small employers. It’s not right that this part of the programme is funded from a swing budget.

Some of solutions to these spending issues lie with the Treasury. An early Treasury decision introduced a tax credit alongside the levy to sweeten the pill of a new tax. Later decisions insisted on managing these credits within a departmental expenditure limit. This isn’t a sustainable approach particularly in a training market that is so volatile. There are new providers, new degree apprenticeship products and new prices set by a third party – the Institute for Apprenticeships – that doesn’t directly control the budget. No-one really knows what’s going on and the people who’ll lose out are young people who can’t get apprenticeships at small companies. An accounting change would alleviate the pressure – by treating levy funded apprenticeships as annually managed spending – but it wouldn’t solve the underlying problem. Policy changes are also needed. The aims of the apprenticeship programme have been distorted by a chase to secure 3 million apprentices in five years and by the use of funds to train mid-career managers. Funding levels are too low when it comes to training young people but too high when it comes to certifying existing skills. The government should consider cutting funding for the over 25s and for standards at level 4 and above. But before it does anything it needs to open up to employers and colleges about what is actually going on with the budget and to allow an informed discussion about solutions.

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[i] For those interested in the history, the 1997 overspend related to a funding mechanism known as the demand-led element, the 2005 overspend related to the price and volume of apprenticeship frameworks, the 2009 overspend was in the Train to Gain budget and the 2014 overspend was in higher education maintenance grants.