Solving the UK’s skills shortage

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The UK is facing a skills shortage and a productivity problem. A key driver of this stagnation has been the decline in both state and private sector investment in skills. Alongside austerity-era cuts to state spending on adult education, total employer investment in skills declined 19% per employee, in real terms, between 2011 and 2022, with sharper declines in larger businesses (-35%), primary (-44%), and public (-38%) service sectors, as well as the north east (-27%) and south west of England (-32%). While the support available to workers wishing to upskill has rolled back, the wider economic context has made participation harder. The high cost of living, matched by the proliferation of low-security work, means few workers can embrace the risk presented by mid-career upskilling. An under-equipped workforce leaves businesses heavily reliant on migration to fill surging rates of skills-shortage vacancies.

Facing significant international competition in emerging green industries and an urgent need to decarbonise the economy, we identify two key areas in which the UK lags behind its international competitors in supporting large-scale upskilling. The first, in providing adequate support to workers with the subsistence costs of upskilling and an upskilling offer sufficient to persuade workers with financial and caring responsibilities to engage. The second, in providing incentives which de-risk skills investment for businesses against the backdrop of high-frequency job switching.

The government is at a key stage in designing the next generation of upskilling support: the Lifelong Learning Entitlement. A process is underway to reform the student finance system into something more akin to a personal/​individual learning account. In this working paper, we propose, and seek feedback on, the introduction of a new overarching principle of the government’s upskilling offer. The proposed framework is based on a simple commitment to a National Skilling Wage (NSW). Important both for the message it sends, and its potential to boost productivity, the NSW would provide workers and businesses with the financial stability, and confidence, to commit to (re)training. We propose a role for the NSW in supporting both those in and out-of-work, upskilling via two core reforms to the government’s support for upskilling:

1. Switching state support from corporation tax relief to a payroll tax credit at the National Skilling Wage. Current corporation tax relief on training investment should be scrapped. Its design, which is untargeted, profit-contingent, and opaque, and favours large businesses training already highly skilled workers, does not serve the needs of present skills challenges. Instead, we propose a new, flat-rate payment at the NSW to all employers for every hour a worker spends on an approved training course. This payment would take the form of a tax credit, similar to the concept of a human capital tax credit proposed by others, but made via payroll taxes instead of corporation tax. This credit would increase the level of state support for upskilling, allow targeting of additional incentives at key skills-shortage courses, increase the incentive for businesses to upskill lower-paid workers, and expand support to all employers irrespective of their profitability (including charities and other non-profit-motivated organisations).
2. Reforming student finance into an Personal Learning Account which pays the National Skilling Wage. Student finance is due significant reform as the new Lifelong Learning Entitlement is designed and rolled out. In its current design, the student maintenance loan will not prove to be an adequate incentive to attract mid-career workers and workers with financial and caring responsibilities to undertake independent upskilling during a cost-of-living crisis. A Personal Learning Account model, providing a simple drawdown facility throughout a learner’s career should expand uptake, but critically, the account should pay the NSW, equivalent to at least the real living wage, on an hourly basis for every hour of total qualification time studied on an approved qualification.

A key priority of our proposed policies is to de-risk skills investment for both the business and the individual. This should include individuals who are unemployed and/​or in receipt of means-tested benefits. The NSW should also benefit this group, but further work is required to understand how these reforms would interact with the benefits system.

Alongside our proposed reforms we consider issues of state costs and revenue raising. We first consider the potential for the government to apply an additional charge to employers’ national insurance on the trained worker in the months following completion of their training course. This charge, illustratively representing 50% of the total hourly tax credit, could mean businesses partially repay the state support received. We also consider revenue-raising options such as widening the uses of the apprenticeship levy funds, replacing corporation tax relief on skills investment, and clawing back the productivity gains which will result from boosted skills investment via corporation tax.

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