Scrap flight tax and watch economy take-off, suggests new analysis

June 10th, 2015

New independent analysis of the economic impact of Air Passenger Duty (APD) shows its abolition could boost economic growth, create up to 61,000 jobs, and pay for itself through higher revenues from other taxes. UK airlines have welcomed the findings which suggest that the tax currently suppresses demand for flights by 10%. They have long argued that APD is a tax on trade, productivity and investment, as well as the family holiday.

In 2013, PwC were commissioned by four major airlines – British Airways, easyJet, Ryanair and Virgin Atlantic – to conduct an independent assessment of the abolition of APD. In May 2015, PwC were asked to update this study following publication of new supporting evidence and subsequent public policy changes. Both reports use an economic model to simulate how changes in Air Passenger Duty would affect the rest of the economy. This “dynamic” approach to modelling tax impacts is used by the IMF and the World Bank.

The updated analysis takes into account APD policy changes since 2013 and evidence presented by the Airports Commission in their December 2013 interim report. As part of their assessment for the need for new runway capacity in the South East of England, the Airports Commission assessed the relationship between the aviation sector and GDP. Separately, it found a stronger link than in the evidence used by PwC in their modelling for the 2013 APD study. By factoring in this new evidence the revised APD analysis suggests that the benefits of abolition had been underestimated and are even greater than previously thought.

The economic model has been updated to reflect this new evidence and has produced a new set of results suggesting that:

• APD abolition could boost UK GDP by around 0.5% in the first year, with continuing positive benefits up to 2020;
• the economy could be 1.7% bigger by 2020 than would be the case if APD were to remain unchanged;
• the increased economic output associated with abolition could lead to the creation of 61,000 jobs by 2020 – 1,000 more than the 2013 report found despite recent policy changes; and
• more tax revenue would be raised from other taxes than is lost from abolition, with a net £570m in extra tax receipts in the first fiscal year, and positive benefits through to 2020 that could add up to as much as £2bn additional tax receipts in total compared with the status quo.

The modelling suggests that the boost to GDP from abolition would come from three main sources:

• airline investment to offer new routes and maximise existing capacity to meet an estimated 10% increase in the demand for flights;
• higher productivity, international trade and investment from increased business and leisure travel; and
• a 7% net increase in foreign inbound tourism passengers by 2020 – equating to approximately 200,000 extra inbound tourist arrivals in the UK.

With the Budget less than a month away, the finding that APD abolition could raise more than £350m net in extra tax receipts in each year up to 2020 should interest the Chancellor who will be considering measures to boost the economy, productivity and trade, without losing tax revenue.

Fiscal results for abolition of APD – source PwC

2015/16	2016/17	2017/18	2018/19	2019/20	TOTAL
+£570m	+£380m	+£360m	+£350m	+£370m	+£2.0bn

The UK is one of just a handful of European countries to levy an air passenger duty, and in recent years a number of countries have abolished their equivalent taxes to become more competitive. For example:

• Ireland abolished their air travel tax in 2014;
• the Netherlands abolished their air passenger ticket tax in July 2009;
• Belgium abolished its air travel tax in 2008; and
• Denmark phased out its air passenger tax in 2006-07.

Germany has the next highest tax in Europe, but its Aviation Tax raised just £745m in 2014. In contrast, UK APD raised £3.17bn for the Exchequer in 2014/15.

136 countries are more competitive than the UK when it comes air ticket taxes and airport charges according to the World Economic Forum’s biennial Travel and Tourism Competitiveness Report published on 6 May. The UK is ranked 137th out of 138 countries in the WEF’s global Travel & Tourism Competitiveness Index, with just Chad below, propping up the table. Britain trails behind European competitors such as Sweden (26th), Spain (55th), Italy (83rd), Germany (110th) and France (114th). Countries outside of Europe that are actively encouraging the development of their aviation sectors rank highly, including Qatar (12th), India (16th), Turkey (22nd), United Arab Emirates (25th) and China (38th).

Nathan Stower, Chief Executive of the British Air Transport Association, said: “Next month’s Budget must challenge the existing orthodoxy on Air Passenger Duty. The UK is an island trading nation yet we have the highest tax on flying in the world. This independent economic analysis, using methodology used in studies for the Airports Commission, suggests that the question for the Chancellor is not ‘can we afford to abolish Air Passenger Duty?’ it’s ‘can we afford not to?’”

Carolyn McCall, Chief Executive of easyJet, said: “Abolishing Air Passenger Duty would boost the UK economy by supporting tourism, investment and business activity. There is a real opportunity with this for the UK to be more competitive. The Government has already removed the tax for children and we hope that it will abolish this tax completely, helping to make travel more affordable for all passengers.”

Willie Walsh, IAG Chief Executive Officer, said: “APD is an out of control tax. The Government just keeps piling on increases. Despite compelling evidence, the UK Government continues to cling to the notion that short-term gains in taxation trump long-term gains in economic growth and productivity.  It is short-sighted and continues to erode the UK’s standing in a global economy.”

Craig Kreeger, Chief Executive of Virgin Atlantic, said: “APD is a tax on UK exporters, productivity and growth. While we welcomed the recent changes to APD, it is frustrating that it has been left to research from the private sector to conduct a detailed economic analysis of its impact.  It is time for the UK Government to recognise, fully review, and take action to reduce the highest travel tax burden imposed by any nation.”

ENDS

10 June 2015