The apprenticeship levy risks being “poor value for money” as it draws an additional £2.8 billion from private business but yields just a £640 million rise in government spending, according to a report by the Institute for Fiscal Studies.

Employers with a paybill over £3 million will have to pay the 0.5% levy from April as part of a bid to to help the government meet its commitment that there will be three million apprenticeships starting in England between 2015 and 2020.

But the IFS found that, while businesses will pay-in £2.8 billion in 2019–20, spending on apprenticeships in England is only expected to increase by £640 million over the same period, with “most of the revenue raised being spent elsewhere”.

It said in a statement: “The significant expansion and design of the new system risks it being poor value for money. Specific elements of the system could end up being particularly damaging to the public sector.

“It is already the case that 44% of new apprentices are aged 25 and over and the new target is likely to increase this fraction. There is a risk that the apprentice ‘brand’ is becoming just another term for training.”

The conclusions come from new analysis of reforms to apprenticeship funding by IFS researchers, which forms part of the forthcoming IFS Green Budget 2017, produced in association with ICAEW and funded by the Nuffield Foundation.

The analysis found that employers will have to pay nothing, or at most 10%, of off-the-job training costs for apprentices, up to certain price caps set by the government, increasing the incentive to employers to hire apprentices, particularly those aged 19 and over for whom employers paid at least 50% of training costs prior to 2017.

It stated that this “zero or near zero” cost of training poses considerable risks to the efficient use of public money.

Jonathan Cribb, one of the report’s authors, explained: “With the subsidies for apprentices’ training costs at 90% or 100%, employers are encouraged to take on more apprentices. But this also provides them with little or no incentive to choose a training provider with a lower price. In addition, the specific targets for most public sector employers in England to employ apprentices could lead to costly, and potentially damaging, re-organisations, and should be dropped.”

The IFS also suggested that the large expansion in apprenticeships planned by the scheme risks increasing quantity at the expense of quality, the Institute for Apprenticeships coming under pressure to approve new apprenticeships quickly.

The apprenticeship levy will also put downward pressure on wages, it said, stating: “The Office for Budget Responsibility assesses that it will reduce wages by about 0.3% by 2020–21. While only 2% of employers will pay the levy, at least 60% of employees work for employers who will pay the levy.”

The government has set every public sector employer with at least 250 employees in England a target that 2.3% of their workforce must start an apprenticeship each year.

The IFS argued that this takes no account of big differences between organisations, however.

Neil Amin-Smith, an author of the report, said: “We desperately need an effective system for supporting training of young people in the UK.

“But the new apprenticeship levy, and associated targets, risk repeating the mistakes of recent decades by encouraging employers and training providers to relabel current activity and seek subsidy rather than seek the best training.

“There is a risk that the focus on targets will distort policy and lead to the inefficient use of public money.”