Lack of skilled workers in Australia is threatening the nation's future economic growth and prosperity and sweeping changes are needed to address the problem, according to the country's independent skills and workforce advisory body.

It is estimated that Australia will need an additional 2.4 million skilled workers by 2015, increasing to 5.2 million by 2025, to meet projected industry demand.

Presently, the projected supply of skilled workers is well short of this. Skills Australia has recommended a major overhaul of the country's vocational education and training (VET) system in order to help raise productivity in its national review of the system. In the landmark report, Skills Australia has recommended a series of reforms designed to produce a more flexible and market oriented education and training system, capable of addressing projected skills shortages arising from demographic and structural changes in the economy.

Philip Bullock, chair of Skills Australia said the report examines how the sector can be best developed, organised and financed to support higher level skills and improved workforce participation.

'Australia's VET system has served the nation well but we now need to take some large strides along a path of reform that will help position the sector to meet the needs of individuals and enterprises in the future,' he said.

'The simple fact is that we need more people with higher-level skills. Without significant reform, we risk missing out on many of the opportunities presented by the resources boom, and face the prospect of becoming less competitive in the global economy,' he added.

A key recommendation is more money for those who take up training. The report says that there should be full public subsidy for those undertaking vocational courses up to and including Certificate III, and all foundation skills courses. For Certificate IV and above, a partial public subsidy, with co-funding between individuals and governments, supported through an income contingent loan is suggested.

It also recommends an extension of Student Start Up Scholarships to VET students on Youth Allowance, Austudy and Abstudy, and the creation of an industry led 'Enterprise Skills Investment Fund' that would consolidate a number of existing funding streams and is available to enterprises on a shared cost basis for skills and workforce development.

Other suggestions are a better targeting and prioritisation of financial incentives for employers, apprentices and trainees so funds are linked to sustainable careers, or equity or priority economic objectives, and linked to workforce development outcomes and a workforce development programme to lift the professionalism and skills of the VET workforce.

The report also recommends improved transparency and availability of user friendly information, a shift from input based to output and outcomes based funding of training providers, including a funding model which rewards course completions.

Support for a National Foundation Skills Strategy through additional funding of language literacy and numeracy programmes is mentioned along with the rregulation of apprenticeships and traineeships by the Commonwealth, and the establishment of a high-level apprenticeship advisory body to provide independent leadership and expertise.

The report says that the reform agenda outlined will require additional funding of 3% per year, or an average of $310 million each year from 2012 to 2013 accumulating to an estimated $12 billion in 2020.