How to Unlock Business Investment in Skills

Improving the UK’s skills base is a vital part of achieving the wider objectives of boosting productivity. But it is well known that, driven by underinvestment, the UK underperforms when it comes to technical skills. Robert West considers how we might start to address some of the skills challenges that limit business investment in skills.

The Skills Challenge in the UK

We have been aware for some time that there is an issue surrounding investment in skills. Business investment has flatlined over the past decade with government figures stating that total UK training expenditure has decreased 9.3% in real terms, from £59.1 billion in 2011 to £53.6 billion in 2022.

There are good reasons for this. Businesses are straining to survive, let alone thrive, in an economy that has struggled for some time now with little or no growth. In the context of a situation exacerbated during the pandemic, firms have found addressing skills shortages particularly challenging. Resources are sparse and limited, so the effort for firms to commit to training, especially where return on investment is uncertain, cannot be underestimated.

Businesses are Still Investing in Skills

We need to be careful and avoid putting this all at the door of business. Employers are still major investors in learning and skills. Data from the Learning & Work Institute claim that 61% of businesses in the UK invested in skills by providing training, a higher proportion than in many European countries.

Ministers and officials are quick to criticise businesses for their lack of investment, but have the government really done much better? Government spending in this space is predominantly focussed on their flagship apprenticeship programme. Meanwhile even commitments made in more recent Spending Reviews still fall short of reaching the adult education spending levels observed in the early 2000s.

Lack of Awareness is a Barrier to Engagement with Government Skills Programmes.

Employers are often unaware of government support available to help firms train their workforce and those entering the world of work. SMEs tend to struggle to find the resource and time to engage with the government’s qualification-driven skills offer, meaning government funding that could reduce firms’ training costs is often left unspent.

We hear employers talking about tax relief for skills, and so maybe more awareness needs to be made of what already exists in this space. How many of us spotted the line in the most recent budget that HMRC has published new guidance around the tax deductibility of training costs for sole traders and the self-employed? That said, the tax relief only applies where firms are making a profit and therefore does little to support investment in skills as a recovery or growth strategy for many firms.

Driven by Underinvestment, The UK Underperforms When it Comes to Technical Skills, but What About Other Countries?

We often come across underinvestment by both business and government relative to international counterparts, but here again we need to be careful that we aren’t comparing apples with oranges. Denmark, France, and the Netherlands outperform the UK on multiple metrics, but with a heavier weight placed on adult education through their government’s education budgets, as well as there being higher investment by businesses in lifelong learning.

Unlike the UK, skills policy in countries like Singapore, Austria, and Belgium does seem to have helped address some common market failures. No doubt the UK could learn lessons from these countries, but we must avoid ‘cherry-picking’ one part of a country’s skills system. One might argue that education and skills systems in these countries are more integrated and coherent. With funding better targeted towards tackling barriers that we seem to shy away from such as truly addressing urgent recruitment and retention of teachers and lecturers to deliver all these skills programmes.

How might we start to address some of the skills challenges and incentivise stakeholders to invest more in skills?

The key to unlocking investment in skills is by making the system more employer responsive. That means getting better at making the business case for investment in skills to employers. The main reason employers invest is to meet business needs and deliver business strategies. We seem to forget that sometimes. Therefore, we need to highlight where businesses have had a success in investing in training.

The key to unlock business investment for growth is in acknowledging employers as major investors in learning and skills. We must do more to remove the barriers keeping businesses from easing the most acute skills gaps and shortages.

Here are three things that might help unlock business investment in skills:

1. Introduce a broader more flexible mix of training solutions: The government have bet their house on apprenticeships and T levels as being the answer to the skills crisis, but we need to consider options that allow for more flexibility. There needs to be more flexible training provision for both new entrants and adults already in work. Provision that sees apprenticeships as part of – but not the entire – solution. Businesses know what their skills needs are, so why do we seem so intent on trying to impose what they invest in?
2. Address cost barriers to skills investment, particularly for SMEs: Cost is often cited as the largest barrier to skills investment for firms, and this is exacerbated for SMEs who lack the scale and capacity to engage in workforce training. Here again, some of the changes announced in the Spring Budget 2023 such as scrapping SME co-investment for young apprentices aren’t really going to shift the dial for UK businesses that have been hammered by inflation. We must go further to address the full costs of training for SMEs.
3. Focus on productivity-enhancing skills: Skills demands of the future including digital and green skills are changing. To remain competitive, it is imperative we build on the UK’s skills base in these areas. This will be particularly important if the UK is to bridge the current innovation gap with other countries. 

Unlocking skills investment will help to build an economy where we can open the door to growth.

By Robert West is Head of Education & Skills at the CBI