An upskilled workforce will help build a stronger tax base

Eventually, taxes will need to play their part in supporting future government funding needs. We would argue that well-directed incentives and investments directed at working people could help strengthen the tax base and generate other advantages. Investing in the skills people need for the jobs of the future—not just digital skills but also building up the capacity to learn and relearn over time—and encouraging businesses to do the same will help more people navigate a globally connected world, find good jobs and thereby increase the tax base.

For governments to rebuild their tax bases, they need to think about investing in the skills of their workforce, as well as how they fund that investment and where they need to focus it. This should be linked to the long-term industrial and economic strategy of the country and to meeting the needs of people who will make this happen. It’s an undertaking that requires not only developing a coherent strategy but mapping out clearly how it can be delivered.

Recent economic analysis by PwC and the World Economic Forum showed that upskilling could add US$6.5tn to world GDP and create 5.3m net new jobs. The biggest benefits would come in the business services and manufacturing sectors, but these benefits vary from region to region, with bigger boosts in the developing world. Government and business both need to play their part to realise these gains.

Building back

We know that in many cases COVID-19 has increased unemployment and lowered wages around the world as workers who lost their jobs took on any work they could find to make ends meet. Not all countries offered furlough schemes and not all employees were eligible. As a result, the tax revenues from personal income taxes and social security contributions, which on average account for half of tax revenues in OECD countries, are likely to be adversely affected. In many countries, the full impact of this shift is not yet known, as unemployment is likely to increase as financial support measures are gradually phased out.

This is all taking place at a time when the structure of the jobs market is changing. Many of those who have lost their jobs are likely to reenter the workforce in the not-too-distant future as economies recover, but the jobs they were doing at the start of 2020 may not be around in 2021 and beyond. The hospitality sector, for example, will take time to come back. And the acceleration of digital transformation, forced on companies because of the COVID-19 pandemic, may also see some routine and repetitive jobs disappear as technology takes over. Increased remote working will make geography less of a barrier to employing people with the right skills, wherever they are based. The rerouting of supply chains will also affect employment structures, as there is likely to be more on-shoring. Some countries that attracted business by relying on lower-waged workers, particularly in clothing production, will find themselves with unused capacity.

The priority for many of the recently unemployed, however, will be to get back to work as quickly as possible. We know that when people are pushed into finding work immediately, they tend to go into lower-paid work and the opportunity to retrain and develop new skills is missed. This is bad news not just for the individual who would benefit from developing digital skills to maximise his or her potential, but also for taxes, as lower-paid jobs are more likely to be below tax thresholds and bands.

From pilot projects to scale

So what can be done to help people not just get a job, but to get a good job that is better for them and society? We have already seen some governments developing schemes with business to address the need for upskilling: in Singapore, the SkillsFuture initiative financially helps mid-career employees retrain; and in Luxembourg, a skills bridge programme was piloted from 2018–19 that brought together government, industry and educational institutions to develop initiatives to increase the employability of people. Ireland partly funds upskilling through the National Training Fund levy (collected as part of the country’s employer social security contribution) and has been slowly increasing the level of contribution since 2018 as part of its broader implementation plan. Schemes such as Skills to Advance and Skillnet Ireland are provided under these initiatives.

These government-led initiatives may show the way but globally, they are outliers. The primary focus for upskilling through government programmes at present tends to be on training to address unemployment/skills shortfalls among those leaving school. There is no universally agreed way on what works best. In 2017 the UK government, for example, replaced a scheme that subsidised the cost of a significant number of apprenticeships with a levy that generates money to fund skills training by imposing a 0.5% tax on companies with a wage bill of more than £3m. In Germany, apprentices train at vocational schools and work in companies part-time with companies bearing some of the costs alongside the government.

Prioritising young people is important, as economically they have been hit harder than many by the pandemic. But the upskilling and reskilling of employees in sectors undergoing rapid change, as well as for those whose jobs may be permanently lost due to COVID-19, also requires sustained focus. Everyone should have a chance to improve his or her employability.

Employers have an important role to play here, too. They will need to invest in upskilling to ensure they have the talent they need to succeed in a rapidly changing marketplace. For instance, Australian supermarket chain Woolworths recently announced a AU$50m investment programme to upskill existing staff in tech-related skills; Amazon has set aside US$700m to upskill 100,000 employees by 2025; and PwC is committing US$3bn over four years to upskilling, primarily in training its global workforce, and to support clients and communities.

But private-sector initiatives alone will not cover entire working populations and may not deliver a joined-up strategy in the way that governments have the potential to do. Given the positive economic, social and fiscal benefits of upskilling, governments need to play a significant role in ensuring that everyone has the chance to participate fully in the workforce.

Governments may feel that they already support employers directly through training grants and other schemes, or indirectly through the tax deductibility of training costs. Tax deductions are naturally less effective in lower tax rate regimes or where companies are suffering losses (not least during the current pandemic). What appears to be missing are coherent initiatives that link specific funding strategies to defined and targeted outcomes that provide lifelong learning/upskilling linked to labour market needs.

Well-directed economic planning, incentives and investments in upskilling could meet the skills needs of both individuals and businesses, and broaden the tax base by increasing access to higher-paid jobs. The tax contributions from these higher-paid jobs are essential, and governments may look for more specific ways to use their tax systems to make sure the training exists to help more people move into these jobs. This could be done indirectly, through the tax deductibility of self-funded business upskilling schemes, or via direct interventions, such as grants and subsidies or targeted funds like those generated out of social security contributions (similar to the programme in Ireland). Whether these direct interventions are funded from general taxation, employer or employee tax/social security contributions, or specific levies will be a matter for individual governments. However, it will be essential that they are focused on incentivising employers, the self-employed and educational institutions to commit to upskilling.

The biggest challenge will be setting up such initiatives at scale in a post-pandemic world. The effort will require governments to cooperate closely with business and the education sector. The potential benefits are substantial for individuals, for business and for governments. And at a time of great uncertainty—at time when it is hard to know what to do next—investing in upskilling your workforce will pay dividends, whatever the future holds.