11 June 2003
Speech by the Economic Secretary at the Learning and Skills Development Agency conference
Thank you for asking me to join you.
Glancing at a formidable programme - a thorough mix of practitioner and policy issues is hallmark of LSDA's unique contribution to post-16 education and training.
Chris, I've known and admired your work for some time. I've always liked the economic edge that LSDA often brings.
As the first Treasury minister to speak at your conference, I guess your invitation to me is recognition of the wider view we must all take of "skills, skills, skills".
Amongst the great and the good of the post-16 education world that you've assembled, I am almost hesitant about emphasizing my first point that skills are much more than a matter of education and training.
When one fifth of Britain's productivity gap with Germany is due to our skills deficit - skills is a central economic concern.
When people with poor literacy and numeracy are up to five times more likely to be unemployed or out of the labour market - skills is a mainstream employment challenge.
And when those who are part time, poorly paid or already poorly qualified are less likely to get training at work - skills is an important equality issue as well.
Starkly put, the UK economy will not maximize its long term growth or employment potential - and UK society cannot be inclusive - if over a third of the workforce has few or no skills and qualifications.
When I first got the job as Minister for Adult Skills in May 2001, I went into the MPs' tearoom in the House of Commons and another newly appointed minister asked what I'd got. I told him adult skills, at which point his eyes glazed over, he glanced around the room desperately looking for someone else to talk to.
We've come a long way since then, with skills, learning and workforce development more central to much of what government aims to do on the economy, public services, employment, business support and individual opportunity.
This year's Budget, like last year's Budget and spending review, had a strong skills dimension.
Even this week's Euro assessment, for those who haven't fully read the documentation, laid stress on "improving skills, particularly at the basic and intermediate level" as part of a package of measures to increase labour market flexibility.
And this conference could hardly have been more timely, as the DfES will shortly be publishing the Government's Skills Strategy - I spotted at least half a dozen old faces from the Department on my way in here. I guess, like me, they're on the look out for last minute good ideas we can use.
Treasury priorities
But you asked me to outline how skills figures in Treasury - and wider government - thinking on economic policy.
So let me try.
You can see clearly since 1997, two principal hallmarks of economic policy-making with Labour in government.
The first is macro-economic. Above all else, Gordon Brown's priority has been, is and will remain stability and steady growth - with the framework of low inflation, low interest rates, sound public finances and high levels of employment we have put in place since 1997.
As a government, this is the foundation for all our achievements to date and all our ambitions for the future.
We recognize that macroeconomic stability is a necessary but not a sufficient condition for business success, high employment levels and long-term prosperity for the UK.
Hence the relentless programme of micro-economic policy reforms - which is the second hallmark of the economic policy-making - focused on the five key drivers of productivity - investment, enterprise, innovation, competition and, crucially, skills.
The UK's performance on productivity has historically been weak, and there remains a significant gap between our economy and those of our major competitors.
In Britain, output per worker per hour is 16 per cent lower than in France and 31 per cent lower than in the United States.
And a major factor is the high percentage of our workforce with no or only basic qualifications.
There is evidence that in some sectors, British business can become trapped in a "low skills equilibrium", where employers believe there is a shortage of skilled workers so they adapt their production techniques to a low-skilled workforce, thereby reducing the number of jobs which require higher skills, weakening the incentive for workers to train and confirming their own perceptions - and so the cycle continues.
Corresponding evidence also shows that improvements in skills improve productivity, and that the most productive firms are often those that employ a higher proportion of better skilled workers.
So in setting out the "productivity challenge" - narrowing the gap between the UK and our major competitors - as a major economic priority in the medium term, the Government has confirmed its central concern for skills.
Treasury and the DfES now work much more closely than under previous Governments, and 18 months ago in November 2001 the two departments took the almost unprecedented step of jointly publishing a Pre-Budget report on "Developing Workforce Skills", which underlined the contribution skills levels play in economic growth.
At the same time, the Prime Minister gave his support to this effort by asking the Number Ten Strategy Unit to produce two reports on workforce development. These reports - for which I had the challenge of being sponsor minister - were titled "In Demand" and proposed a system that is strongly demand-led, in which the needs of employers and employees are decisive in determining the provision of learning.
I am glad that Margaret Hodge was able to speak to you yesterday and underline challenge of supply-side reform and raising standards.
But in our drive to improve skills, the demand-side is equally important. Raising the UK's level of performance on skills requires concerted and coordinated effort from all stakeholders - a theme we're likely to see running strongly through the forthcoming skills strategy.
So Government must play its part to deal with market failures, and support individuals and employers in their efforts to increase skill levels.
Employers must take responsibility for the training and development of all their staff to ensure that business needs are met
Individuals must take responsibility for their own personal career development, and be prepared to learn new skills.
And from all three sources, we must increase levels of demand and investment.
In Government, we have now begun to back our skills priority with record levels of resources for investment.
Over the next three years, education and skills spending will grow by 5.9 per cent a year in real terms, raising education spending in the UK as a percentage of GDP from 4.5 per cent in 1997 to 5.6 per cent by 2005.
And within this, we are making an unprecedented investment in learning and skills, with £9bn a year for the LSC by 2005-06.
Rationale: Market failure and lower/intermediate skills
With powerful competing demands on the public finances, a central issue is not only how much the Government invests but how we determine what we prioritise for spending, and where we expect a greater contribution from employers and individuals.
Once again, you can anticipate this as a theme throughout the skills strategy.
Our general approach to such questions in the Treasury was set out in the 2001 Pre-Budget Report, which analysed a number of problems with skills in the economy, including clear market failures - where the rational choices individuals or employers make, produce outcomes that put the economy as a whole at a disadvantage.
I've mentioned the low skills equilibrium, with over a third of our workforce having poor skills and qualifications, compared to under 20 per cent in Germany, and around 10 per cent in the United States.
Now, some of the critical UK skills shortages and gaps are at higher levels. But the benefits of learning beyond level 2 become much clearer and much more direct, both to the individual and the employer.
It is right therefore, I believe, to demand a different balance of investment between individual, employer and state for such learning.
This economic rationale reinforces the basic fairness case that has let Government to target our intervention on basic and level two skills.
Basic skills for adults are vital - and the fact that between April 2001 and July 2002 over 300,000 adults improved their literacy and numeracy levels is a tribute to the colleges and other providers who have responded so positively to the challenge by increasing the number of learners participating in literacy, numeracy and language training over the last two years. And I hope the policy seminar you held at this conference yesterday was a useful session that will help that on.
Overall, at the basic, lower and intermediate stages, the Government has set itself targets:
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to reduce the number of adults without basic skills by 1.5 million by 2007;
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to reduce by 40 per cent the number of adults in the workforce who lack level 2 qualifications by 2010;
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and to ensure that by 2004, 28 per cent of young people will start a Modern Apprenticeship.
Level 2 is increasingly seen as the base level for successful participation in the labour market. And if the UK is to realize and sustain full employment and increase rates of productivity gain, we must work towards the policy goal of fully funded, flexible opportunities for every adult to learn to level two.
Beyond this, evidence shows that employers are much more likely to invest in training for staff who already have Level 2 skills, and that such staff are also more likely to seek or continue training on their own initiative.
But we also know that there are other real barriers to the efficient functioning of the learning market.
For staff, securing the necessary time out of work for learning can be hard. For employers, the cost of allowing their employees time off for training may be prohibitive, particularly for smaller firms.
This was why we launched the programme of Employer Training Pilots in the 2001 Pre-Budget Report. So that, in addition to entirely free level 2 training provision and advice, employers that give staff leave to learn, in return receive compensation from Government - geared especially to support small companies.
As the Chancellor announced in this year's Budget, with a total £170 million behind them, the pilots will be extended and increased in number from 6 to 12, and covering a quarter of Learning & Skills Council areas.
It is still very early days, but so far: 72 per cent of participating firms have fewer than 50 employees and, of the 10,000 learners who have signed up, fewer than 1% have quit - a drop-out rate to die for in general FE or work based learning.
Delivery of learning
The Government's responsibilities, of course, go beyond setting a framework of learning priorities and providing resources.
In this context, let me draw attention to three areas in which the direction of policy and delivery is now emerging but in which we still have much further to go.
Increasing and responding to demand
First, as I've argued, we can only meet the UK's skills and productivity challenge if it is genuinely demand-led.
This means we must raise the level of demand for learning among employers and employees where information failures, along with labour market and credit market imperfections have led to under-investment in skills.
We must also ensure that the system of provision responds better to the particular needs of local employers and the local economy.
There are some exceptional examples of this across the country. But too often the department, learning centre, college or other provider is just that - "exceptional".
This was a major reason for the programme of Centres of Vocational Excellence which establish firm links between employers and high quality training providers - a programme, incidentally, that the Government couldn't have got off the ground without the LSDA.
It is also part of our rationale behind Employer Training Pilots.
But the broader drive for closer links between training provider and employer lies, of course, in the system for planning and funding provision.
So building on the process that Regional Development Agencies have led through their Frameworks for Regional Employment and Skills Action, four of the nine English RDAs will run pooled budgets with their LSCs to strengthen both the coordination of local skills policy and its alignment with regional economic strategy.
Learning through the workplace
Second, I would stress the importance of learning within the workforce and via the workplace.
Two thirds of Britain's workforce in 2020 are already at work today - and currently 8 million of them do not even have the intermediate-level learning they need to succeed in an increasingly knowledge-driven economy, let alone the new skills that will be required of them during the next two decades.
So you see us as a Government stepping up the attention we give to this through a range of routes - from Sector Skills Councils to Modern Apprenticeships to Learndirect to trade union learning reps and the trade union learning fund.
There is no doubt there is more we can do but all emphasise the growing relevance of the workplace as both a route and a location for learning.
The new localism
Third, I want to underline the far-reaching consequences of the regional framework for economic policies we're putting in place, an approach that can be termed 'a new localism'.
In this second term of a Labour government, there is a much greater focus on strategic decision-making and policy innovation at the regional and local level. This is true for economic development, business support, labour market programmes, planning, transport - and it is also the case for skills.
Candidly we recognise better the limits to what national government can do. Varying local needs expose the contradictions of the old-style centralisation.
Today it is simply not possible either to run economic policy or deliver strong public services that meet people's expectations using the standard-size fits all solutions of the past.
And this is certainly true of skills.
We have established an important approach to this with the RDAs:
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Objectives set by elected government at national - but perhaps in future in some areas regional - level.
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Strategic planning and operational management to meet these objectives are devolved to the responsible agency.
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Full funding flexibility - with one funding pot.
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Three-year budgets allocated and full end of year flexibilities.
It is possible to apply - and we are - much of this approach to our sub-regional agencies, with the clear expectation that their own approach to the bodies or providers they support is consistent.
There is, I have to say, a temptation to reach for the command and control approach. You want to get things done, and central direction or guidance can often seem the simplest and speediest way. And it is also true that ministers remain accountable to parliament, public and press for how well public money is spent - even where we had nothing to do with the decisions taken.
Developing local planning and collaboration is likely to be a further theme in the skills strategy, but as Ivan Lewis - who is doing such an excellent job in pulling the many strands of the strategy together - has said, expectations of better central coordination in government will be just as strong.
He has said: "We will make changes where they are needed but our priority will be to join up policies across the skills agenda, and across government, and fill any gaps in existing provision. The Skills Strategy will be a strategy for the whole government".
Conclusion
In this audience, you've lived with many of these issues for very much longer than I have, and some of you I know have championed them for longer than I have.
But I hope you see, like I do, that:
Skills is now central to many mainstream concerns of government.
Skills is now top of the problem list for UK company directors.
And skills is now of increasing interest to individuals, with more adults learning in this country than ever before.
In these circumstances, I hope you therefore believe, like I do, that there's a greater momentum and opportunity to tackle our skills challenges than there has been for a generation.
And finally, I hope you welcome that fact that the Treasury is playing a very active part in the government's drive to do so.