David Willetts: Apprenticeships and the ‘New Deal’ for young people

David Willetts is President of the Resolution Foundation and is a member of the House of Lords.

One of the strong themes on Conservative Home is the importance of the Conservative Party reaching out to younger voters.

So it is great to see the Conservative Party launching its New Deal for Young People which is a bold attempt to plug this gap. Any evidence of the party thinking beyond its core vote of pensioners is to be welcomed.

There are three particular proposals.

First Kemi caught the mood with her proposal to get rid of interest rates on graduate debt. That is certainly a hot topic at the moment. The terms of graduate repayment for the cost of their education should be open to change with proper political debate about the trade-offs. The interest rates have always been the most unpopular feature of the model so it is understandable to try to do something about them. Hitting RPI + 3 per cent when earnings go above £51,000 is a painful blow, especially after the replacement of maintenance grants with loans and then periods of high inflation mean that total graduate debt can now be much bigger than originally envisaged.

The Institute for Fiscal Studies has just done a useful analysis of this and other options and estimate that:

“For those who started courses in 2022/23, this proposal would on average reduce lifetime loan repayments by £11,000 in today’s prices on average. The 30% of graduates with the highest lifetime earnings could expect to save upwards of £20,000. Many low-earning graduates would never repay any less as a result of the Conservative proposal – with almost no change in lifetime repayments amongst the fifth of graduates with the lowest lifetime earnings.”

That is a significant boost for higher earning graduates. Once all graduates in Stage 2 are included the IFS estimate a “low-single-digit billions hit to government receipts each year, for the next 30 years.”

However this change does not affect monthly repayments – the gain comes in paying back sooner.

It you really want to help boost living standards of younger graduates you raise the repayment threshold, so their fixed monthly out-goings are cut. And it was of course the freeze of the repayment threshold which was the original trigger for the current political row.

There are tricky trade-offs here between size of debt, monthly repayment, and length of repayment period.  I continue to believe that every five years we should have a proper informed open assessment of the best way to make these trade-offs. Governments should then set the repayment terms in ways which make intuitive sense such as graduates only start paying back when their incomes are close to the average pay of non-graduates.

The Tory leadership have in their sights degrees leading to low salaries – and after long battles it is great that data is available. If those courses close then prospective students may choose a different university course instead rather than head to an apprenticeship instead. It would be wrong to stop them going to courses which appear to offer better value and I understand it is not Conservative policy to erect such barriers. Such a shift to a different course could however reduce loan write-offs which yields a type of expenditure saving.

Apprenticeships are always popular. But numbers of apprenticeship starts are falling.  The second proposal in the New Deal is to boost apprenticeships for 18–21-year-olds. This is well targeted. During the last years of Conservative Government apprenticeships moved a long way from their original purpose. They became predominantly higher-level qualifications for people aged over 25 (who are now half of all apprentices starts). It is right to refocus them on 18–21-year-olds.

There is a levy on employers to pay from apprenticeships though the intention is that these extra places should be financed differently. Nevertheless reform of the Apprenticeship levy should be on the agenda. Each employer gets first claim on the levy they have paid and understandably tend to use it on extra training for their current employees rather than new recruits. That is why the growth in apprenticeships has been in degree level apprenticeships for older employees whereas places for younger people at lower educational levels have been falling. There needs to be a strong financial incentive to get them to shift to younger people, new recruits, and perhaps a qualification at a lower education level such as A level equivalent rather than full honours degree. This could be delivered out of existing resources if degree apprenticeships were financed out of fees and loans like other higher-level qualifications.

The third proposal is a “£5,000 First Job Bonus, allowing young people to keep the first £5,000 of National Insurance they would have paid and placing it into a savings account for a first home or future security”

When we at Resolution Foundation looked at how best to help younger people we proposed a capital grant of £10,000. These types of schemes are in the tradition of council house sales and privatisation share sales as opportunities to spread ownership. But they are if anything more widely accessible.  It is a great way of helping young people build up assets. It has a cost of perhaps about £3b a year. We are entering an inheritocracy where building up assets out of income has got harder.

The real opportunity agenda is to spread property ownership and this proposal is an important part of that.