The report from the National Skills Task Force says that the United Kingdom lags well in terms of skill levels.
Among those companies employing more than five people there were 560,000 job vacancies in England. Around 20 per cent were described as "hard to fill vacancies due to a lack of skill. In addition, more than 20 per cent of firms considered that a significant proportion of their employees were not fully proficient to do their current job."
Chris Humphries, chairman of the taskforce, said skill shortages were having an impact on firms' ability to compete, and acted as a drain on business productivity. The jobs most affected by skill shortages were in craft and technical areas.
The report said that all young people under 25 should be entitled to free education and training leading to their first level 3 (equivalent to A-level) qualifiaction, possibly with loans for living, study and travel costs.
Priority should be given to developing a cadre of IT trainers to help adults take part in a range of e-commerce learning programmes.
The report also says that the Government should encourage all young people pursuing a non-vocational route post-16 to study a broader range of studies, including English and maths, and support the progressive introduction of a baccalaureate-style qualification or level 3 by 2006.
Understanding of maths is a real problem. Less than half of young people achieve a good GCSE in maths, and the deficiency continues at the higher level. Only 10 per cent of students go on to study maths at A-level.
Mr Humphries said that 32 per cent of the workforce had no basic qualifications. "Those who have not had training already are not likely to get it in future.
"Less than one in five companies has no personnel training offices, so no structure." He suggested that small companies should collaborate and form "clusters" so that they could offer training opportunities.
Mr Humphries said he was confident the Government would keep its word on on tackling social exclusion. Its record was "second to none", he said.
Education Secretary David Blunkett said dramatic action had to be taken for the teaching necessary in basic skills. This generation had to be prevented from failing in the ways others had.
The priority was to solve the basic skills problem, and in a clear hint about the findings of the comprehensive spending review to be published in July, he said: "I have been in poltics for the past 30 years and I cannot remember any spending review where the Government has said one of the priorities is in basic skills. That will be the case in July."
He also announced a "Don't Quit Now" publicity campaign to to encourage 16-year-olds to stay on in some form of learning, at school or work.